0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 6 MONDAY, JUNE 25, 2007 § 7 8 COMMISSION MEETING 9 MONDAY, JUNE 25, 2007 10 11 BE IT REMEMBERED THAT on Monday, 12 the 25th day of June 2007, the Texas Lottery 13 Commission meeting was held from 9:00 a.m. to 14 p.m., at the Offices of the Texas Lottery 15 Commission, 611 East 6th Street, Austin, Texas 78701, 16 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONER C. 17 TOM CLOWE, JR. The following proceedings were 18 reported via machine shorthand by Aloma J. Kennedy, a 19 Certified Shorthand Reporter of the State of Texas, 20 and the following proceedings were had: 21 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER: Mr. C. Tom Clowe, Jr. 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO ASSISTANT DIRECTOR: 9 Mr. Philip D. Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE NO. 3 AGENDA ITEM NO. I - Meeting Called to Order.. 9 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on the 5 implementation of recommendations contained in the Internal Audit Report on 6 bingo audit services, including development of rules......................... 9 7 AGENDA ITEM NO. III - Report, possible 8 discussion and/or action on 1st quarter calendar year 2007 bingo conductor 9 information.................................. 10 10 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action relating 11 to the continuation of the Bingo Advisory Committee.................................... 14 12 AGENDA ITEM NO. V - Consideration of and 13 possible discussion and/or action, including proposal of repeal, on 16 TAC §402.102 14 relating to Bingo Advisory Committee......... 16 15 AGENDA ITEM NO. VI - Consideration of and possible discussion and/or action, 16 including proposal, on new 16 TAC §402.102 relating to Bingo Advisory Committee......... 16 17 AGENDA ITEM NO. VII - Consideration of and 18 possible discussion and/or action, including adoption or withdrawal, or 19 proposal on new rule 16 TAC §402.305 relating to progressive bingo................ 18 20 AGENDA ITEM NO. VIII - Consideration of and 21 possible discussion and/or action, including adoption of amendments, on 16 TAC 22 §402.300 relating to pull-tab bingo.......... 21 23 AGENDA ITEM NO. IX - Consideration of and possible discussion and/or action, 24 including adoption, on new 16 TAC §402.204 relating to prohibited price-fixing.......... 63 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. X - Consideration of and possible discussion and/or action, 4 including proposal, on amendments to 16 TAC §402.100 relating to definitions......... 66 5 AGENDA ITEM NO. XI - Consideration of and 6 possible discussion and/or action on a petition for rulemaking relating to 7 conflicts of interest among persons within the bingo industry..................... 68 8 AGENDA ITEM NO. XII - Report, possible 9 discussion and/or action on Bingo indirect and administrative expenses.......... 69 10 AGENDA ITEM NO. XIII - Report by the 11 Charitable Bingo Operations Director and possible discussion and/or action on the 12 Charitable Bingo Operations Division’s activities.................................... 69 13 AGENDA ITEM NO. XIV - Consideration of and 14 possible discussion and/or action, including proposal of amendments, on rule 16 TAC 15 §401.310 relating to Payment of Prize Payments Upon Death of Prize Winner........... 70 16 AGENDA ITEM NO. XV - Consideration of and 17 possible discussion and/or action on the use of IRS Form 5754.......................... 73 18 AGENDA ITEM NO. XVI - Consideration of and 19 possible discussion and/or action on the development of rule(s) relating to model 20 pooling or group purchase agreement........... 76 21 AGENDA ITEM NO. XVII - Consideration of and possible discussion and/or action, including 22 notice of intention to review (proposed review), on 16 TAC Chapter 403 relating to 23 General Administration........................ 79 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XVIII - Report, possible discussion and/or action on lottery sales 4 and revenue, game performance, new game opportunities, market research, and trends.... 82 5 AGENDA ITEM NO. XIX - Report, possible 6 discussion and/or action on research conducted regarding lottery sales trends...... 107 7 AGENDA ITEM NO. XX - Report, possible 8 discussion and/or action on transfers to the State.................................. 107 9 AGENDA ITEM NO. XXI - Report, possible 10 discussion and/or action on the FY 2008-09 Legislative Appropriation Request............. 109 11 AGENDA ITEM NO. XXII - Report, possible 12 discussion and/or action on the 80th Legislature.............................. 113 13 AGENDA ITEM NO. XXIII - Report, possible 14 discussion and/or action on the agency’s contracts............................ 114 15 AGENDA ITEM NO. XXIV - Report, possible 16 discussion and/or action on the procurement of consulting services to analyze and 17 explore options available for the delivery of core lottery business services............. 115 18 AGENDA ITEM NO. XXV - Report and possible 19 discussion and/or action on the agency's HUB program and/or minority business 20 participation, including the agency's Mentor Protégé Program........................ 116 21 AGENDA ITEM NO. XXVI - Consideration of 22 and possible discussion and/or action on external and internal audits and/or reviews 23 relating to the Texas Lottery Commission and/or on the Internal Audit Department’s 24 activities.................................... 121 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XXVII - Report, possible discussion and/or action on the status 4 of management responses to the State Auditor’s Office Audit Report of Texas 5 Lottery Commission Workforce Management Audit......................................... 122 6 AGENDA ITEM NO. XXVIII - Report, possible 7 discussion and/or action on the Mega Millions game and/or contract................. 124 8 AGENDA ITEM NO. XXIX - Consideration of and 9 possible discussion and/or action on the lottery operator contract, including whether 10 the negotiation of the lottery operator's contract in an open meeting would have a 11 detrimental effect on the Commission's position in negotiations of the lottery 12 operator contract............................. 125 13 AGENDA ITEM NO. XXX - Report, possible discussion and/or action on GTECH 14 Corporation................................... 129 15 AGENDA ITEM NO XXXI - Report, possible discussion and/or action on Scientific 16 Games Corporation's (SGC) acquisition of Oberthur Gaming Technologies (OGT)............ 133 17 AGENDA ITEM NO. XXXII - Report, possible 18 discussion and/or action regarding agency action in response to allegations of 19 possible misconduct........................... 134/155 20 21 22 23 24 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XXXIII - Consideration of the status and possible entry of orders in: 4 A. Docket No. 362-07-2363 – Country 5 Food and Gas B. Docket No. 362-07-1613.B – Removal 6 of Person’s Name from Registry of Bingo Workers: Christopher Van Ness 7 C. Docket No. 362-07-9990424PM.B — Refusal to Add Names of Certain 8 Persons to the Registry of Bingo Workers: Raymond E. Barnes, Lisa E. 9 Garcia, Chris F. Rodriguez, and David Rodriguez.................... 138 10 AGENDA ITEM NO. XXXIV - Report by the 11 Executive Director and/or possible discussion and/or action on the agency’s 12 operational status, activities relating to the Charitable Bingo Operations 13 Division, agency procedures, and FTE status.................................... 144 14 AGENDA ITEM NO. XXXV - Public comment......... 157 15 AGENDA ITEM NO. XXXVI - Commission may 16 meet in Executive Session: 17 A. To deliberate the duties and evaluation, including an increase to 18 the annual salary, of the Executive Director pursuant to Section 551.074 19 of the Texas Government Code B. To deliberate the duties and evaluation 20 of the Deputy Executive Director pursuant to Section 551.074 of the Texas 21 Government Code C. To deliberate the duties and evaluation 22 of the Internal Audit Director pursuant to Section 551.074 of the Texas 23 Government Code D. To deliberate the duties and evaluation 24 of the Charitable Bingo Operations Director pursuant to Section 551.074 of 25 the Texas Government Code 0008 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 E. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 4 the Texas Government Code F. To receive legal advice regarding pending 5 or contemplated litigation pursuant to Section 551.071(1)(A) and/or to receive 6 legal advice regarding settlement offers pursuant to Section 551.071(1)(B) of the 7 Texas Government Code and/or to receive legal advice pursuant to Section 8 551.071(2) of the Texas Government Code, including but not limited to: 9 Cynthia Suarez v. Texas Lottery Commission 10 Shelton Charles v. Texas Lottery and Gary Grief 11 Stephen Martin v. Texas Lottery Commission 12 First State Bank of DeQueen et al. v. Texas Lottery Commission 13 Employment law, personnel law, procurement and contract law, 14 evidentiary and procedural law, and general government law 15 Lottery Operations and Services contract 16 Mega Millions game and/or contract Use of IRS Form 5754 17 Model Pooling Agreement G. To deliberate the negotiation of the 18 lottery operator's contract pursuant to Section 467.030 of the Texas Government 19 Code................................... 158 20 AGENDA ITEM NO. XXXVII - Return to open session for further deliberation and 21 possible action on any matter discussed in Executive Session.......................... 159 22 AGENDA ITEM NO. XXXVIII - Adjournment......... 162 23 24 REPORTER'S CERTIFICATE........................ 164 25 0009 1 P R O C E E D I N G S 2 MONDAY, JUNE 25, 2007 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. I would 6 like to call this meeting of the Texas Lottery 7 Commission to order. Chairman Clowe is here. I'm Jim 8 Cox. It's 9:00 a.m., June 25, 2007. 9 AGENDA ITEM NO. II 10 CHAIRMAN COX: Agenda Item No. II, 11 report, possible discussion and/or action on the 12 implementation of recommendations contained in the 13 Internal Audit Report on bingo audit services, 14 including development of rules. 15 Mr. Sanderson. 16 MR. SANDERSON: Good morning, Chairman, 17 Commissioner. For the record, Phil Sanderson, 18 Assistant Director of -- I'm sorry -- Director of the 19 Charitable Bingo Operations Division now. 20 CHAIRMAN COX: Congratulations, Phil. 21 MR. SANDERSON: Thank you. In your 22 notebook is the spreadsheet that updates the 23 implementation schedule for developing the rules and 24 other items related to the implementation of the 25 Internal Audit Report. Additionally, I've attached a 0010 1 Gantt chart at your request that lays out the 2 timelines for the activities. We're currently still 3 on schedule to have the rules finalized or submitted 4 to Legal for distribution to publish and hopefully in 5 the Texas Register for public comment by the end of 6 July. 7 The other items are continuing to work 8 as far as the reorganization and the development of 9 the audit workplan. And I'll be glad to answer any 10 questions that you may have at this time. 11 CHAIRMAN COX: Phil, this Gantt chart 12 is excellent, and I want to commend you for learning 13 to use Microsoft Project to develop that with. I know 14 how arcane that program is. It's very difficult to 15 use. And I appreciate your commitment to quality. 16 MR. SANDERSON: Thank you, sir. 17 AGENDA ITEM NO. III 18 CHAIRMAN COX: Item III, report, 19 possible discussion and/or action on 1st quarter 20 calendar year 2007 bingo conductor information. 21 Ms. Shankle. 22 MS. SHANKLE: Good morning, 23 Commissioners. For the record, my name is Terry 24 Shankle. The presentation this morning contains 25 figures reported by our licensed authorized 0011 1 organizations for the first quarter of 2007. I would 2 like to thank Susan Beasley of the Office of the 3 Controller for preparing the statistical analysis that 4 is included in your notebook. 5 This gross receipts and graph shows the 6 first quarter of 2007, regular and electronic card 7 sales totaling $99.8 million. Of that total, 8 $73.5 million were for prizes awarded to winners, 9 which equates to 73.6 percent of regular and 10 electronic sales. Instant pull-tab sales were 11 $71.9 million, with prizes being paid out of 12 $52.2 million, or 72.6 percent of pull-tab sales. 13 CHAIRMAN COX: Terry, let's go back. 14 There was a time when, if I recall correctly, the 15 pull-tab prize payout percentage was higher than that 16 for the regular game. And it looks like now, since 17 overall it's higher than pull-tabs, that certainly the 18 regular game is paying back more than pull-tabs. 19 MS. SHANKLE: Yes, sir. 20 CHAIRMAN COX: Is that a function of 21 smaller participation with fixed prizes? 22 I see Mr. Heinlein shaking his head 23 "Yes." 24 MS. SHANKLE: Yes, I believe -- they 25 are paying out more than what they are bringing in. 0012 1 CHAIRMAN COX: Okay. Thank you. 2 MS. SHANKLE: As revealed on this cash 3 disbursements graph, rent payments, as indicated by 4 the blue column, continue to be the largest expense, 5 at $9.9 million, or 21.6 percent of net receipts, with 6 salaries for callers, cashiers and ushers following at 7 $9 million, or 19.5 percent of net receipts. 8 This pie chart shows expenses as a 9 percentage of total expenses but does not include 10 charitable distributions. When expenses are compared, 11 salaries represent 40 percent of total expenses. And 12 when rent payments are added to salaries, the two 13 categories make up 69 percent of total expenses. 14 The pie chart, "Gross Receipts By Type" 15 reflects the three different products that make up 16 gross receipts. Pull-tab sales have done better than 17 regular card sales three out of the four last 18 quarters. This quarter shows the largest margin of 19 difference, showing pull-tab sales outselling regular 20 cards by $11.1 million. 21 The average number of players per 22 occasion compares the first quarters of 2005, 2006 and 23 2007. The average number of players per occasion of 24 128 for the first quarter of 2007 shows a decline of 25 9 percent from the previous year. 0013 1 From 2003 to 2007, the first quarter 2 pull-tab net receipts show a continual increase. The 3 increase between the first quarter of 2006 to the 4 first quarter of 2007 is one million dollars and is a 5 much smaller increase than the prior first quarters. 6 This could be an indication that pull-tab sales are 7 beginning to level off. 8 Regular bingo net receipts, as 9 indicated by the red line, are down approximately 10 $2.8 million from the first quarter of 2006. Net 11 receipts, as indicated by the green line, are down 12 $1.8 million when compared to the first quarter of 13 2006. 14 As shown on this "Prize Payout 15 Percentages" chart, regular bingo payout percentages 16 continue to increase the first quarter of each year, 17 while pull-tab payout percentages have decreased the 18 first quarters of 2006 and 2007. 19 CHAIRMAN COX: So that's responsive to 20 my question. And the answer is "both"? 21 MS. SHANKLE: Correct. 22 CHAIRMAN COX: Pull-tab payout 23 percentages are down -- or up in the regular game. 24 Okay. Thank you. 25 MS. SHANKLE: Historically, gross 0014 1 receipts, net receipts, attendance and the number of 2 occasions are the highest the first quarter of each 3 year. Since the third quarter of 2002, this is the 4 first quarter that gross receipts have not shown an 5 increase over the same quarter in the previous year. 6 That concludes my report. Thank you. 7 CHAIRMAN COX: Any questions? 8 COMMISSIONER CLOWE: No. 9 CHAIRMAN COX: Thank you very much, 10 Terry. 11 AGENDA ITEM NO. IV 12 CHAIRMAN COX: Agenda Item No. IV, 13 consideration of and possible discussion and/or action 14 relating to the continuation of the Bingo Advisory 15 Committee. 16 Mr. Sanderson. 17 MR. SANDERSON: Commissioners, in your 18 notebook is historical information that's been 19 utilized in the past in your deliberations on whether 20 or not to continue the Bingo Advisory Committee. The 21 current rule has an expiration date of August 31, 22 2007. And without your vote to continue, the BAC 23 would be abolished at the end of August. 24 I have handed out to you this morning 25 the workplan that they worked off of for 2006, as well 0015 1 as the draft workplan for 2007, which will be on the 2 agenda item in July for your consideration. As you 3 can see, the workplan that they had for 2006 4 encompassed various activities, which I believe that 5 they have been instrumental in discussions as it 6 relates to comments on the rules and helping develop 7 some of the rules, providing comments on the 8 alternative styles of bingo games as well as one other 9 item that they worked on this last year, was assisting 10 the Media Relations with a public service announcement 11 and taking that and distributing it to local TV 12 stations in their markets. And the reports that we've 13 gotten back from some of the areas, it's getting a lot 14 of play time. 15 With that, I would -- my staff 16 recommendation would be that you go ahead and continue 17 the existence of the BAC for one more year. And I'll 18 be glad to answer any questions you may have. 19 COMMISSIONER CLOWE: No questions. 20 CHAIRMAN COX: Are you recommending 21 that we take that action at this time? 22 MR. SANDERSON: Yes, sir, so that we 23 can move on to the other agenda items. 24 CHAIRMAN COX: I move we adopt the 25 staff recommendation. 0016 1 COMM. CLOWE: Second. 2 CHAIRMAN COX: Motion made and 3 seconded. All in favor, say "Aye." 4 Aye. 5 COMMISSIONER CLOWE: Aye. 6 CHAIRMAN COX: Motion passes 2-0. 7 AGENDA ITEM NOS. V AND VI 8 CHAIRMAN COX: Item V, consideration of 9 and possible discussion and/or action, including 10 proposal of repeal on 16 TAC 402.102 related to Bingo 11 Advisory Committee. 12 Mr. Sanderson -- Ms. Kiplin. 13 MS. KIPLIN: Mr. Chairman, with your 14 permission, I would like to take this item up as well 15 as the next item. They're companion items. The first 16 one that you just called is the proposal of the repeal 17 of the Bingo Advisory Committee rule. The next one 18 would be the proposal of a new rule. 19 CHAIRMAN COX: Okay. So we'll also 20 take up Item VI, consideration of and possible 21 discussion and/or action, including proposal on new 16 22 TAC 402.102 relating to Bingo Advisory Committee. So 23 now we have before us a proposal of repeal and a 24 proposal of a new rule. 25 MS. KIPLIN: Thank you, Mr. Chairman. 0017 1 The staff is recommending proposing the 2 existing repeal of the Bingo Advisory Committee 3 {rule}, because the staff is also recommending 4 proposing a new Bingo Advisory Committee rule. And 5 the reason for that is because the format of the new 6 rule is changing significantly so that just doing 7 amendments we think would cause confusion to the 8 public. 9 The new rule is also incorporating the 10 issues that have been discussed at previous Commission 11 meetings in terms of process on nominations and 12 appointments. And we are recommending that both of 13 these proposals be published in the Texas Register for 14 a 30-day public comment period. And we're also 15 including a public comment hearing of July 16th. 16 COMMISSIONER CLOWE: No questions. 17 CHAIRMAN COX: Okay. So these two 18 would run concurrently. So we would vote at a future 19 meeting to both repeal one and adopt the other, so 20 that at all times there will be a rule in place? 21 MS. KIPLIN: Yes. 22 CHAIRMAN COX: Okay. I move the 23 adoption of staff recommendation on Items V and VI. 24 COMMISSIONER CLOWE: Second. 25 CHAIRMAN COX: Motion is made and 0018 1 seconded. All in favor, say "Aye." 2 COMMISSIONER CLOWE: Aye. 3 CHAIRMAN COX: Aye. 4 Motion carries 2-0. 5 AGENDA ITEM NO. VII 6 CHAIRMAN COX: Item VII, consideration 7 of and possible discussion and/or action, including 8 adoption or withdrawal, or proposal on new rule 16 TAC 9 §402.305 relating to progressive bingo. 10 Ms. Kiplin and Mr. Sanderson. 11 MS. KIPLIN: Commissioners, at the time 12 that the open meetings notice had to be filed, the 13 staff did not know what was going to be occurring with 14 legislation that had existed but had not yet been 15 considered by the Governor. That legislation has now 16 been vetoed, and so that played a part in terms of 17 trying to get this item prepared for you. So that's 18 why there were so many actions on the open meetings 19 notice. 20 Staff at this time is recommending 21 withdrawing the rule that was proposed for public 22 comment. You-all proposed this rule back in December, 23 and public comment was obtained. The reason for that 24 is because at the time, while there was no 25 legislation, the staff thought that there would be a 0019 1 need to proceed with a progressive bingo rule and, in 2 light of the comment, does not believe that that is 3 necessary. 4 Staff is aware, as I understand it, 5 that there are some progressive bingo games that are 6 currently being played, even without the benefit of a 7 rule. But certainly within the four corners of the 8 authority of the Bingo Enabling Act and that the only 9 aspect that the staff would want to pursue has to do 10 with recordkeeping matters, and the staff believes it 11 would be better for all to have one rule on 12 recordkeeping matters so people aren't having to go 13 back and forth through different rules. 14 And so with that, at this time the 15 staff is recommending withdrawing the proposed 16 rulemaking. 17 CHAIRMAN COX: Okay. Now, you tell me 18 that there are existing progressive games that are 19 within the law and within other rules? 20 MS. KIPLIN: Yes. As I understand, 21 that is correct. 22 CHAIRMAN COX: So the legislation that 23 the Governor vetoed had to do with higher limits on 24 these games and not the fact that they're conducted? 25 MS. KIPLIN: Yes, that is correct. It 0020 1 had to do -- as I understand it, it had to do with 2 increased prize amounts that were beyond those that 3 currently exist in the statute. 4 CHAIRMAN COX: Okay. Any questions? 5 COMMISSIONER CLOWE: None. 6 CHAIRMAN COX: Okay. I move the 7 withdrawal of this new rule. 8 COMMISSIONER CLOWE: I don't think it 9 requires a motion. 10 CHAIRMAN COX: Does it require a 11 motion? 12 MS. KIPLIN: We have a T-bar memo, 13 because it's y'all's rulemaking, and we would like to 14 have a document. 15 COMMISSIONER CLOWE: Did we approve the 16 rule? We haven't approved the rule for publishing, 17 have we? 18 MS. KIPLIN: You did vote to propose 19 that rule in December. It was published. 20 COMMISSIONER CLOWE: We did? 21 MS. KIPLIN: You did. And so what the 22 staff is wanting to do is file notice with the 23 Register to withdraw that rulemaking item. 24 COMMISSIONER CLOWE: I was incorrect. 25 Thank you, sir. 0021 1 CHAIRMAN COX: Okay. I move the 2 adoption of the staff recommendation to withdraw the 3 proposed new rule. 4 COMMISSIONER CLOWE: Second. 5 CHAIRMAN COX: Motion is made and 6 seconded. All in favor, say "Aye." 7 COMMISSIONER CLOWE: Aye. 8 CHAIRMAN COX: Aye. 9 Motion passes 2-0. 10 Mr. Chairman, before we take up Item 11 VIII, would you mind if we took a short recess? 12 COMMISSIONER CLOWE: Not at all. 13 (Off the record: 9:15 a.m. to 9:19 14 a.m.) 15 CHAIRMAN COX: Let's come back to 16 order. 17 AGENDA ITEM NO. VIII 18 CHAIRMAN COX: Item No. VIII, 19 consideration of and possible discussion and/or 20 action, including adoption of amendments, on 16 TAC 21 §402.300 relating to pull-tab bingo. 22 Ms. Kiplin, Mr. Sanderson. 23 MS. KIPLIN: Commissioners, what you 24 have before you today is a rulemaking item, and it is 25 a consideration of adopting the amendments to the 0022 1 pull-tab bingo rule. At an earlier Commission 2 meeting, you-all voted to propose amendments to that 3 rule, and those amendments were published in the Texas 4 Register. A comment period was held. It was a public 5 comment hearing as well as an opportunity to provide 6 written comments. 7 The comment was received and it was 8 considered. And at this time, the staff is 9 recommending proceeding to adopt -- pardon me. Do you 10 want me to start over? 11 I'm sorry. My microphone was off. And 12 I'm looking to the Court Reporter to indicate whether 13 she was able to pick up my comments. 14 THE REPORTER: Yes, I got it. 15 MS. KIPLIN: Okay. The staff is 16 recommending adopting the amendments but with changes 17 to that which was proposed, which was part of the 18 proposed rulemaking that was published for public 19 comment. 20 At issue in the main has to do with the 21 language regarding video confirmation. There was 22 comment that was received on that. The concern from 23 the people that provided comment opposed to the 24 inclusion of video confirmation had to do with the 25 concern that including that within the pull-tab bingo 0023 1 rule would be beyond the statutory and constitutional 2 authority of the agency, in that it would be 3 electronic pull-tab bingo. 4 The staff made changes to that which 5 was proposed, to indicate very clearly that the video 6 confirmation feature has nothing to do with the play 7 of the game. As I understand it, the outcome has 8 already been determined and all that is being 9 presented is the outcome. 10 And at this time staff is recommending 11 adopting the proposed rulemaking, with changes. 12 COMMISSIONER CLOWE: The only question 13 I have, Mr. Chairman, is: Are the proposed changes 14 within the scope of the published notice? 15 MS. KIPLIN: Yes, I believe they are. 16 It was on the subject of video confirmation. Staff 17 listened to those comments and made changes based on 18 the concern that was expressed. 19 COMMISSIONER CLOWE: No further 20 questions. 21 CHAIRMAN COX: And I may be asking the 22 same question, Ms. Kiplin, but you've made some 23 changes based on public comment. And in some cases, 24 the changes are so significant that you have 25 recommended to republish. In this case you're not 0024 1 doing that? 2 MS. KIPLIN: That is correct. 3 CHAIRMAN COX: Okay. Chairman Clowe, I 4 and we -- you and I have received several letters on 5 this subject. We've received letters from Reps. 6 Goolsby and Haggerty, from Chairman Flores, from Sen. 7 Nelson and from seven legislators on the letterhead 8 Texas Conservative Coalition. Sen. Nelson has 9 requested that her letter be read into our record. 10 And I think that if we do that, we should, as a 11 courtesy, read the other letters into the record as 12 well. 13 But before I respond to that request, I 14 would like to ask Ms. Kiplin whether we can 15 appropriately receive -- appropriately read these 16 letters into the record without their being considered 17 comment on the rule? 18 MS. KIPLIN: I think you can read it if 19 you are able to acknowledge that it is not comment, 20 you're looking at that as a courtesy on the 21 legislative branch. The comment period is over. If 22 you decide to open the comment period and receive 23 comment, then the staff will need to summarize that 24 comment and make it part of this rulemaking matter. 25 The Register has a rule that once a 0025 1 rulemaking is proposed, then the agency must do 2 something with that rulemaking within six months or it 3 is withdrawn by operation of law. This rulemaking was 4 proposed in December, and so the six-month deadline is 5 this Friday, just to put that out there so that 6 you-all know. We will certainly do whatever the 7 Commission wants, if the Commission wants to entertain 8 comment. 9 CHAIRMAN COX: So I hear you saying 10 that this might not be characterized as comment, this 11 might be characterized as respect for the legislators' 12 request? 13 MS. KIPLIN: Yes. 14 COMMISSIONER CLOWE: Well, I understand 15 that answer, but it begs the question of if you allow 16 the reading of those letters in the minutes, I think I 17 see people in the audience who I assume want to 18 comment. I haven't seen any -- oh, I see now an 19 appearance form. How is your opinion about that 20 aspect of keeping within the record and the comments 21 recorded today? 22 MS. KIPLIN: I think it becomes very 23 challenging. I think that is comment. I think the 24 witness affirmation that I tendered to Chairman Cox is 25 to comment on this item, and it will need to be 0026 1 summarized and be incorporated into the record and 2 into the preamble. 3 CHAIRMAN COX: Okay. Now, summarized 4 is one thing; considered is another. 5 MS. KIPLIN: It will need to be 6 summarized. And if the agency disagrees with the 7 comment, an agency response will need to be provided 8 as part of the preamble to the adoption of the 9 rulemaking. 10 CHAIRMAN COX: Okay. Now, but what if 11 there are people here who thought the comment period 12 was over -- or not here that thought the comment 13 period was over and think that someone is getting a 14 third or fourth bite at the apple that they didn't 15 get? 16 MS. KIPLIN: I think that's why 17 agencies establish comment periods and expect people 18 to comply by submitting comment within a comment 19 period so that agencies can proceed with their 20 consideration of the comment in the particular 21 rulemaking item. 22 CHAIRMAN COX: Okay. And to be 23 specific, Mr. Kohler has requested an opportunity to 24 comment. 25 Has he commented previously and has his 0027 1 comment been considered? 2 MS. KIPLIN: Yes. And I'm looking at 3 Mr. Sanderson to correct me if I'm misstating. 4 MR. SANDERSON: That is correct. 5 CHAIRMAN COX: Okay. This one is 6 neutral, and this is also Item VIII. This is Michele 7 M. Clark. 8 Has Michele M. Clark had an opportunity 9 to comment previously? 10 MS. KIPLIN: I do not know. 11 MS. CLARK: Commissioner, I personally 12 have not, but the organization that I represent has. 13 CHAIRMAN COX: Okay. I'm going to 14 count that as a "Yes." 15 What's your pleasure? 16 COMMISSIONER CLOWE: Mr. Chairman, it's 17 up to you. I think the question in my mind that I 18 would like your leadership on is: Are you going to 19 read letters from legislators into the record which, 20 obviously, we are receiving for the first time and 21 have not been a part of the record? And if you do 22 that, how are you going to treat these people who are 23 part of the record and apparently want to make a 24 statement by filing an appearance form? 25 CHAIRMAN COX: Counselor, do you have a 0028 1 recommendation on that? This is certainly a dilemma. 2 MS. KIPLIN: Yes, it is. From a pure 3 legal position, to make the record pure, it's comment 4 that's being received -- if you're going to 5 characterize it as comment as untimely, falling 6 outside the comment period. It is from the 7 legislative branch of state government. You can 8 characterize it as not comment but a courtesy to the 9 legislative branch. 10 I'm not aware of a -- I'm just 11 thinking -- I'm not aware of any case that has dealt 12 with this particular issue in terms of whether that 13 should have been treated as comment and, therefore, 14 should have fallen within the procedure in the 15 Administrative Procedure Act, summarize and include it 16 in the record. 17 CHAIRMAN COX: Chairman Clowe, I'm 18 going to step out there and say that I believe that we 19 owe a different duty to members of the Legislature 20 than we owe to the members of the public, who have 21 already had an opportunity to comment. I'm going to 22 ask Ms. Trevino to read those letter from the 23 legislators into the record. And then if we have 24 questions regarding those, of the staff, or if the 25 staff wants to clarify for us how those positions have 0029 1 already been addressed, then we'll listen to that. 2 COMMISSIONER CLOWE: That's fine with 3 me. And you might consider, for those people who are 4 here and want to make comments to the Commission, 5 allowing them to do that, but at the same time 6 instructing them to stay within their comments that 7 have been made which are part of the record. 8 CHAIRMAN COX: Excellent idea. That's 9 exactly what we'll do. 10 Okay. Nelda, got your reading glasses? 11 MS. TREVINO: Yes. 12 CHAIRMAN COX: Okay. 13 MS. TREVINO: Mr. Chairman, 14 Commissioners, for the record I'm Nelda Trevino, the 15 Director of Governmental Affairs. And, Chairman Cox, 16 as you have asked, I'm going to read several letters 17 that the Commission has received throughout this last 18 week. And I thought I would read these in date order 19 as we received them. 20 CHAIRMAN COX: Good. 21 MS. TREVINO: The first letter I'm 22 going to read is dated June 12, 2007. It is addressed 23 to Chairman Cox, and it is signed by Chairman Kino 24 Flores, the House Licensing and Administrative 25 Procedures Committee Chairman. 0030 1 "Dear Chairman Cox, I am writing to 2 support the Commission's adoption of the published 3 changes to Pull-Tab Rule 16 TAC 402.300. In 4 particular, the language allowing a charity to use 5 video confirmation of an event pull-tab ticket will 6 give charities more flexibility and options and I 7 believe help charities raise funds for their 8 charitable endeavors. This proposed rule language 9 does not in any way expand gaming, and the language 10 ensures that the video confirmation will not affect 11 the results of an event ticket or game. 12 "As I understand it, some charities 13 already utilize a form of video confirmation. The 14 Commission should allow them to continue to do so, 15 while ensuring that the video confirmation will have 16 no effect on the play or results of any event ticket 17 or game. The published language allows a bingo player 18 to choose a particular prize utilizing the video 19 confirmation which will allow (sic) the event tickets 20 more interesting to the bingo customer. 21 "Furthermore, other language in the 22 proposed rule will help ensure the integrity of 23 pull-tab products, clarify when charities can sell and 24 redeem pull-tabs and clarify and expedite the approval 25 process of pull-tab products. 0031 1 "Again, I support the adoption of the 2 published changes to the Pull-Tab Rule 16 TAC 402.300. 3 Please do not hesitate to contact me if you have any 4 questions or need additional information. Thank you. 5 "Sincerely, Kino Flores, Chairman, 6 House Licensing and Administrative Procedures 7 Committee." 8 The next letter is dated June 14, 2007. 9 Again, it's addressed to Chairman Cox. And this is 10 signed by Rep. Tony Goolsby. 11 "Dear Chairman Cox, It is my 12 understanding that the Commission will consider the 13 adoption of proposed rule changes to the Pull-Tab Rule 14 16 TAC 402.300 at its meeting later this month. I 15 support the adoption of the proposed rule changes as 16 currently drafted. It offers charitable organizations 17 greater flexibility and more options related to games 18 on its premises which will result in charities being 19 able to raise more funds for their charitable 20 endeavors. 21 "The video confirmation language will 22 offer charities a unique opportunity to increase the 23 sales of existing event style pull-tab tickets. I 24 appreciate the Commission drafting the language to 25 make it clear that the video confirmation will not 0032 1 affect the results of an event ticket or game. 2 "Please do not hesitate to contact me 3 if you have any questions or need additional 4 information. Thank you. 5 "Sincerely, Tony Goolsby." 6 The next letter is dated June 19, 2007. 7 It is addressed to Chairman Cox, and this is signed by 8 Rep. Pat Haggerty. 9 "Dear Chairman Cox, It is my 10 understanding that the Commission will consider 11 adoption of proposed rule changes to the Pull-Tab Rule 12 16 TAC 402.300 at its June meeting. I support the 13 adoption of the published changes to this rule. 14 Through its adoption, charitable organizations will 15 have more flexibility and options related to games on 16 its premises which will result in charities being able 17 to raise more funds for their charitable activities. 18 "The video confirmation language is an 19 innovative step that offers charities an opportunity 20 to increase the sales of existing event style pull-tab 21 tickets. The proposed language ensures that the video 22 confirmation will not affect the results of an event 23 ticket or game. It also addresses when charities may 24 sell and redeem pull-tabs as well as clarifies the 25 approval process of pull-tab products. 0033 1 "Please do not hesitate to contact me 2 if you have any questions or need additional 3 information. Thank you for your time. 4 "Sincerely, Pat Haggerty." 5 The next letter actually was 6 received -- I received it this morning through a test 7 spam e-mail. However, it appears that the letter was 8 sent on Friday, June 22, 2007, at 4:55. And it's 9 addressed to Chairman Cox and Commissioner Clowe. And 10 again, this is by e-mail. And the e-mail message 11 says, 12 "Dear Commissioners, Please see the 13 attached letter from several State Representatives who 14 serve on the Board of Directors of the Texas 15 Conservative Coalition, the {conservative} caucus of 16 the Texas Legislature. 17 "Sincerely, Brent Connett," for the 18 Texas Conservative Coalition. 19 This letter is dated June 22, 2007. 20 And, again, it's addressed to Chairman Cox and 21 Commissioner Clowe. This letter is signed, as the 22 e-mail indicates, {by} several members of the Texas 23 Conservative Coalition, and that is the logo on the 24 letterhead. And the signatures include Rep. Wayne 25 Christian, Rep. Linda Harper-Brown, Rep. Corbin Van 0034 1 Arsdale, Rep. Phil King, Rep. Dan Flynn, Rep. Leo 2 Berman and Rep. Jodie Laubenberg. 3 "Dear Commissioners, We urge you to 4 reject proposals that would allow the outcome of 5 pull-tab bingo games to have electronic or digital 6 representation. We are also concerned that you should 7 resist proposals to allow the flare used in bingo 8 halls to promote pull-tab games to incorporate some 9 form of electronic or digital representation. 10 "Adopting rules that incorporate either 11 of these proposals would allow digital screens that 12 could look and operate in a way that is very familiar 13 (sic) to slot machines to exist in bingo halls in 14 Texas. This would likely contravene Article III, 15 Section 47(b) of the Texas Constitution, which 16 describes the types of lottery games that are 17 prohibited in the State of Texas. The Constitution 18 makes no provision for the adoption of rules 19 permitting electronic or digital representation of the 20 outcome of pull-tab games or for the electronic or 21 digital promotion of such games in bingo halls. 22 Article III, Section 47(a), however, asserts that: 23 "The Legislature shall pass laws 24 prohibiting lotteries and gift enterprises in this 25 State other than those authorized by Subsections (b), 0035 1 (d), and (e) of this section. 2 "For its part, the Legislature, in 3 Section 2001.002 of the {Texas} Occupations Code, 4 describes permissible pull-tab games as follows: 5 "(24) 'Pull-tab bingo' means a form of 6 bingo played using tickets with perforated break-open 7 tabs, made of paper or paper products" -- that is 8 emphasized and underlined -- "the face of which is 9 covered or otherwise hidden from view to conceal 10 numbers, letters, or symbols, some of which have been 11 designated in advance as prize winners. The term 12 includes games only (sic) known as 'instant bingo' and 13 'break-open bingo." 14 CHAIRMAN COX: Nelda, let me correct 15 what you just said there. The letter reads "games 16 commonly" rather than "only known as 'instant bingo' 17 and 'break-open bingo.'" 18 MS. TREVINO: Thank you, sir. 19 "The only statutory provision allowing 20 electronic devices to be used in conjunction with 21 pull-tab games relates to the method by which pull-tab 22 bingo tickets are dispensed. 23 "(25) 'Pull-tab dispenser' means an 24 electronic or mechanical device that dispenses a 25 pull-tab bingo ticket after a person inserts money 0036 1 into the device and includes a device commonly known 2 as a 'ticket dispenser.' 3 "It is clear from these definitions 4 that" -- and then emphasize -- "the Legislature has 5 made no provision for the adoption of rules that would 6 permit electronic or digital pull-tab games, the 7 electronic or digital promotion of such games, or the 8 electronic or digital representation of the outcome of 9 such games. 10 "Aside from these constitutional and 11 statutory objections, it is apparent that digital 12 representation of the outcome of pull-tab games 13 undermines the social interaction function that bingo 14 games have been found to fulfill in Texas. In an 15 April 2007 opinion, the Attorney General of Texas, 16 Greg Abbott, specifically noted that: 17 "A 1980 report by the House Study Group 18 on the proposed bingo amendment describes bingo as 19 involving social interaction. 'Bingo is a social 20 function. It brings people together who want to be 21 together. Its social nature is one of the ways it 22 differs from games like roulette or slot machines.' 23 "The Attorney General's opinion goes on 24 to assert that: "This [social interaction] aspect of 25 the bingo indicates that...the game of bingo was 0037 1 understood to be the game of bingo described in 2 Amvets, and not a game played electronically. The 3 social interaction present in traditional bingo is 4 diminished, if not eliminated, in a game played by an 5 individual on a computer monitor. 6 "Although it may be possible to attempt 7 to draw a distinction between playing a game of bingo 8 electronically and playing a game of bingo that 9 displays its outcome electronically, neither are 10 permitted by the Constitution or by existing statute, 11 and have been rejected by the Attorney General. In 12 closing his opinion, the Attorney General explicitly 13 held that: 14 "The constitutional authorization for 15 charitable bingo does not include 'electronic pull-tab 16 bingo.' 17 "We strongly urge you to reject the 18 adoption of rules permitting the electronic or digital 19 display of the outcome of pull-tab bingo games or the 20 electronic or digital promotion of such games for the 21 reasons outlined above. We believe that the legal 22 basis against such rules is sound and that the Texas 23 Lottery Commission should not adopt rules that would 24 be so patently unconstitutional and so clearly 25 contrary to the collective will of the Legislature and 0038 1 opinions rendered by the Attorney General." 2 The last letter that I'll read was 3 received this morning by fax. It is dated June the 4 25th. It's addressed to Chairman Cox and it is signed 5 by Sen. Jane Nelson. 6 "Dear Mr. Cox, I wrote the Texas 7 Lottery Commission in December 2006 regarding proposed 8 rules being considered relating to electronic pull-tab 9 bingo. In the letter, I expressed my profound 10 concerns with the Commission's actions and requested 11 the Commission cease consideration of the rules in 12 anticipation of a related Attorney General opinion 13 that I had requested to clarify the uncertainty 14 surrounding this issue and in anticipation of the 15 upcoming legislative session. 16 "Since that time, the Attorney General 17 issued opinion GA-0541 declaring that the 18 constitutional authorization for charitable bingo does 19 not include 'electronic pull-tab bingo.' Further, the 20 Legislature adjourned the session without passing one 21 bill related to electronic pull-tab bingo. In fact, 22 no related legislation was passed out of a legislative 23 committee. I believe there is no question that the 24 Legislature's decision not to act on introduced 25 legislation indicates clear intent not to move forward 0039 1 on this issue. 2 "In the aftermath of the Attorney 3 General's opinion and the lack of legislative action, 4 I was stunned to learn that the Lottery Commission has 5 now chosen, less than one month since the end of the 6 session, to consider adoption of a related rule that 7 is very likely to become saturated in controversy and 8 that lacks certainty regarding its constitutionality. 9 "I strongly encourage the Commission to 10 pull down this proposed rule and to halt further 11 consideration at this time. I understand the 12 Commission's possible belief that the rule would not 13 violate the Attorney General's finding. However, any 14 refusal to take all necessary steps to ensure its 15 constitutionality would appear to represent a flagrant 16 disregard for the positions recently voiced on this 17 issue by both the Attorney General and the Texas 18 Legislature. 19 "Thank you for your attention to this 20 request. Please do not hesitate to contact me if you 21 have any questions or need further information." 22 And again signed by Sen. Jane Nelson. 23 CHAIRMAN COX: Thank you, Nelda. 24 COMMISSIONER CLOWE: So how do we 25 interpret the intent of the Legislature? 0040 1 CHAIRMAN COX: Ms. Kiplin, we've talked 2 a lot about that. 3 MS. KIPLIN: Commissioners, what you 4 received are letters from individual legislators. One 5 was a collective group of legislators. I think that 6 expresses those individuals' intent. Legislative 7 intent actually is construed by the record itself, not 8 what individual legislators may think but what's part 9 of the record in terms of legislative history. So 10 with that, what you're hearing are concerns expressed 11 by individual members of the Legislature. 12 COMMISSIONER CLOWE: But those 13 individuals members are saying that they speak the 14 will of the Legislature. And there have been 15 interpretations of the Attorney General's opinion that 16 are diametrically opposed, expressed in those letters. 17 MS. KIPLIN: Yes, sir, that's correct. 18 COMMISSIONER CLOWE: So my question is, 19 how does the Commission interpret that? 20 MS. KIPLIN: I think at face value with 21 the individual members. 22 COMMISSIONER CLOWE: Thank you. 23 Thank you, Mr. Chairman. 24 CHAIRMAN COX: In the letters from 25 Chairman Flores and from Reps. Goolsby and Haggerty, 0041 1 the emphasis was on video confirmation. And in all 2 stated cases, it seemed to indicate it doesn't affect 3 the results and doesn't affect the way the game is 4 played. So what I'm hearing there is something like 5 this, that we decide on Lotto Texas, rather than to 6 announce the winning numbers by television, we decide 7 to announce them by radio. 8 Is that a good analogy, Ms. Kiplin? 9 MS. KIPLIN: I think that's a fair 10 analogy. And Mr. Sanderson can correct me if he 11 disagrees. 12 MR. SANDERSON: No, I agree. I believe 13 it's a fair analogy. 14 CHAIRMAN COX: Okay. The emphasis in 15 the other letters, the ones from the Conservative 16 Coalition and from Sen. Nelson, seem to fall heavily 17 upon how the game is played but then throw in that, by 18 the way, we're also concerned about how its winners 19 are disclosed. 20 Now, there was a question at one point 21 about whether your rule, our proposed rule, Phil, 22 affected how the game was played. And you have 23 amended the rule to clarify that. Is that correct? 24 MR. SANDERSON: That is correct. The 25 rule, as published in December of 2006, indicated in 0042 1 the definition of "flare," the term "digital 2 representation," which would allow for the flare 3 that's using a pull-tab game to be an electronic 4 version. That has come out of the proposed rule. 5 Additionally, we removed the definition 6 of "face" and "reverse" as it relates to the pull-tab 7 ticket, which could have given someone an impression 8 that we're doing away with the paper ticket, which we 9 were not. So we have inserted those definitions back 10 into the rule and added the appropriate language 11 elsewhere in the rule that relates to what's required 12 to be on the face and on the reverse side of the 13 ticket. 14 The rule had a definition for "video 15 confirmation" that included also a sentence that said 16 it may include a system to allow a player to choose a 17 prize or a payout, and we removed that language out of 18 the definition of "video confirmation." So we have 19 made amendments to the rule as it was originally 20 published back in December. 21 CHAIRMAN COX: And it sounds like, from 22 what you just said, that the writers of some of these 23 letters may not be aware of changes that you've 24 already made? 25 MR. SANDERSON: That is correct. We 0043 1 made those changes sometime in the middle of last week 2 or first part of last week. And once we started 3 receiving these letters, we circulated that draft copy 4 to the members that requested it and also to some 5 members of the industry for them to look -- review. 6 CHAIRMAN COX: So if those had been 7 sent to the Texas Conservative Coalition and to Sen. 8 Nelson, there might have been some changes to the 9 letters that they sent? I know that's speculation. I 10 just heard you say something about a flare, for 11 instance. 12 MR. SANDERSON: Yes, sir. 13 CHAIRMAN COX: Specifically wanted to 14 resist proposals that allowed a flare, and you have 15 changed that? 16 MR. SANDERSON: We have, yes, sir. 17 CHAIRMAN COX: Okay. 18 MS. TREVINO: Chairman Cox, I would 19 just say that in regards to the letter that we 20 received from Sen. Nelson, I did have numerous 21 conversations last week with staff in her office and 22 made them aware of what the staff was looking to 23 present today. So they are aware that the language 24 that was going to be laid out or that is going to be 25 laid out today did not -- deleted all references to 0044 1 digital representation. We had lots of discussions 2 about what the staff's interpretation was of video 3 confirmation. So I just want to be very clear that as 4 far as Sen. Nelson's office goes, they are well aware 5 and have the most updated version of what the staff is 6 going to be presenting today. 7 With regard to the members who signed 8 the letter from the Texas Conservative Coalition, 9 those seven members, we have not had any direct 10 communications with any of the members that signed 11 that letter. 12 CHAIRMAN COX: Okay. Phil, Kim, is 13 there anything in any of these letters that you have 14 not previously considered? And, secondly -- this 15 probably is for you, Kim -- do you have any concern 16 that the proposed rule is outside of either the 17 constitution or statute? And you can take those in 18 any order that you care. 19 MS. KIPLIN: I'll go first. I have 20 taken a look at the comment. I've also looked at the 21 Attorney General opinion that's been referenced. I 22 looked at the floor amendment that seemed to initiate 23 the Attorney General opinion request, Floor Amendment 24 No. 24 to House Bill 3 from last session. I don't 25 have a concern, because my understanding is, there is 0045 1 still a break-open pull-tab ticket, paper. The 2 outcome is determined by that break-open pull-tab 3 ticket, paper, and that the only thing that's being 4 displayed is a video confirmation of an event that has 5 already occurred. 6 CHAIRMAN COX: Phil? 7 MR. SANDERSON: And I concur with her 8 statement. The video confirmation also is displayed 9 on monitors similar to the TV monitors that are in the 10 auditorium. They're not on any electronic card- 11 minding device or any computer monitor that's in the 12 location. So it's just a video of the bingo ball draw 13 that determines the event ticket winner for a pull-tab 14 game. 15 CHAIRMAN COX: Do you have something? 16 COMMISSIONER CLOWE: No, sir. 17 CHAIRMAN COX: All right. The witness 18 affirmation forms, I have two, one from Rob Kohler and 19 one from Michele Clark. 20 Mr. Kohler, you heard what Chairman 21 Clowe said about how we might receive your comment. 22 With the understanding that you will stay within the 23 boundaries of comment that you have previously 24 submitted, would you like to make public comment. 25 MR. KOHLER: Yes, sir. Good morning, 0046 1 Commissioners. My name is Rob Kohler, and I'm here 2 representing the Christian Life Commission of the 3 Baptist General Convention of Texas. And I'm here 4 testifying against the adoption of this rule. 5 We would respectfully ask the 6 Commission to pull this rule down and, to be on the 7 safe side, ask the Attorney General to review to make 8 sure that your rationale is correct and absolutely 9 correct. Really, the question is, is whether you have 10 the authority to introduce games that allow players to 11 play the graphic and dynamic representation of an 12 electronic -- the outcome of an electronic bingo event 13 ticket. 14 And, Commissioners, we would echo, as 15 we did in our comments, that you're being asked to 16 approve a rule with video confirmation language that 17 is at the heart, is the essence of what it means to 18 play electronic pull-tab bingo. Without it, you have 19 no electronic pull-tab bingo. 20 We feel very strongly that this issue 21 and this topic has been the subject of serious vetting 22 during the 79th and 80th legislative sessions, as well 23 as Attorney General Abbott's opinion and the amendment 24 that was referenced in that opinion. The heart of 25 that amendment is the graphic and dynamic 0047 1 representation of an outcome of the electronic 2 pull-tab game. 3 And it's important to note that the AG 4 opinion pointed out that not only does this Commission 5 have the authority to do it, but the Legislature can't 6 do it without two-thirds of the members as well as the 7 folks, the citizens that get an opportunity to take a 8 swing at it. 9 Now, last Friday we were contacted by 10 the Lottery Commission to discuss our comments, and we 11 provided -- we had good, frank conversation. The 12 first thing I would like to talk about is, we asked 13 what changed in the proposed rule regarding our 14 comments to them? And we were told that digital 15 representation was removed. 16 And, Phil, please feel free to jump in 17 if I say anything wrong. But we were told digital 18 representation was removed, because it may have gotten 19 too close to that line that you don't want to cross, 20 and we appreciate that 21 But, Commissioners, please consider 22 this: If digital representation of the graphic -- of 23 the outcome of an electronic event ticket is too close 24 to the line, then how can -- and we can't reconcile a 25 graphic and dynamic representation of a pull-tab 0048 1 electric -- the outcome of an electric bingo event 2 ticket. 3 My point is, is that if digital 4 representation was too close for Phil and this 5 Commission and staff recommendation to you, there is 6 absolutely no difference in a graphic and dynamic 7 representation. 8 I would like to also comment on other 9 aspects of the rule and echo previous comments that 10 we've made. When staff was asked why would it hurt 11 anybody to make sure that this is all correct when 12 we're looking at this question, to have the Attorney 13 General look at this issue again to make sure that, 14 you know, you're dead right, we were told, "Well, what 15 would we ask them? We're not doing a new game, Rob. 16 We're doing the same game. In fact, the one that 17 we're all seen, if you come to these meetings, has 18 been on the street for three years nearly. And what 19 we would -- so the argument very simply is, is that 20 there is not a new game here. It's just a video 21 confirmation, a graphic and dynamic representation of 22 the outcome of the game." 23 But please don't let it be lost on you 24 that what the players play is the graphic and dynamic 25 representation. You could have the selection of that 0049 1 electronic pull-tab all day in the server or anywhere 2 else, but if it wasn't videographically displayed, 3 players wouldn't know it was happening. So the game 4 in essence is that video confirmation language. 5 This is not unlike arguments that we've 6 seen in the expansion of gambling, which in our 7 comments we are very concerned about. The arguments 8 are very similar to video lottery terminals. Their 9 argument at a point in time was very simply, "All we 10 want to do is offer lottery games that were 11 pre-approved by this state, or by a state, and offer 12 them electronically." 13 When they were put in, we found out 14 that they weren't lottery games, that actually they 15 were slot machines. And you see the same thing in the 16 bingo product where across the country, very similar 17 to the expansion of video lottery terminals, that 18 bingo products has been introduced electronically and 19 the argument made that, "We're not changing anything. 20 Very simply, all we're doing is offering an existing 21 game." And we would certainly represent to every -- 22 to the majority of the folks when they see it, that 23 it's just not a regular game. 24 Like lottery and bingo sweepstakes, 25 regular old sweepstakes, this same argument is made. 0050 1 And the Commission really has the benefit to look at 2 that, to look at and see what words can be interpreted 3 and what can be done with the language that's 4 currently in the video confirmation. And in specific, 5 the Commission can look at Iowa where, very similar, 6 the same argument was made that's been made to us in 7 our rulemaking process, that this is not a new game. 8 As we present our comments, we would 9 encourage the Commission not to be blinded about the 10 absence of terms like "random number generators." 11 That's old terminology. And the industry has 12 certainly advanced since that was the bellwether to 13 whether it was an illegal gambling device or not. 14 If you'll indulge me just a second. 15 And we point out in our comment that a 16 traditional slot machine really has three 17 characteristics. It's a consideration; folks got to 18 pay to do it. There's chance. And what you see in 19 the old-timey machines is, that was a random number 20 generator, even though -- even in VLT's that central 21 determined system to games like that have changed. 22 But then you also have prizes with pay. 23 And it's important to know that in our state, that the 24 absence -- that really what determines whether it's a 25 gambling device or not is how prizes are paid. Now, 0051 1 the industry has taken the model and, we would point 2 out, broken it down. 3 Where you have consideration one place, 4 it's not all in one terminal anymore. You have 5 chance, which is another place which we would argue, 6 and we do argue in our comments, that that is an 7 indefinite number of electronic bingo event tickets. 8 There are pre-determined winners, then the video and 9 then the prizes. 10 So if you look at any one of these 11 individually, which in our comment we argue that 12 that's what's happening, is that it does look 13 harmless. But when you look at it in the totality, 14 which I think it's fair to say that is happening, that 15 it is what it is. 16 Members, in closing, I truly do believe 17 in the product of healthy disagreement and a healthy 18 discussion. I've heard Commissioner Clowe say many a 19 times that good things come out when people disagree. 20 A good friend of mine from Sterling City told me once 21 upon a time, said, "Rob, after a heated discussion, 22 that that's why they make vanilla and chocolate," and 23 I truly believe that. 24 And this issue does boil down, in my 25 view, to vanilla and chocolate. And it's ultimately 0052 1 up to you two to decide. And we would encourage you 2 to take the most cautious, the most careful road that 3 you can take to put this agency as far beyond reproach 4 as you can. 5 Now, you're not going to change the 6 naysayers and the second guessers and the folks that 7 are out there that will question every one of your 8 moves, and both of you handle it very well. But what 9 you can change is creating more naysayers. So we 10 would ask that you pull this rule down -- and it's no 11 skin off anybody's back -- and give the AG an 12 opportunity to make sure you're absolutely right. 13 So thank you for this opportunity. 14 CHAIRMAN COX: Thank you, Mr. Kohler. 15 Phil, did you find that that discussion 16 was within the comment that Mr. Kohler had previously 17 made? 18 MR. SANDERSON: My recollection of the 19 comment that was received from the Christian Life 20 Coalition, I believe it was. There were a couple 21 references to electronic pull-tabs that I don't think 22 were in the original comment. But -- 23 CHAIRMAN COX: Okay. Now, I have some 24 questions based on what Mr. Kohler just said. Is it 25 appropriate for me to ask those, Ms. Kiplin? 0053 1 MS. KIPLIN: Yes. 2 CHAIRMAN COX: Okay. Mr. Kohler said 3 that originally -- as I understand what he said, that 4 originally there was provision for a digital 5 representation and that that was taken out in favor of 6 a graphic and dynamic representation. Is that -- 7 MR. SANDERSON: That is incorrect. The 8 terms "graphic and dynamic representation" were in the 9 previous version of the definition of "video 10 confirmation" -- 11 CHAIRMAN COX: Okay. 12 MR. SANDERSON: -- and it remains in 13 the definition of "video confirmation." 14 CHAIRMAN COX: So they were there all 15 along. But what now my interpretation is, that it 16 originally said digital, graphic and dynamic, and you 17 took out the word "digital"? 18 MR. SANDERSON: The digital 19 representation was referenced in the definition of the 20 flare, which is part of an event ticket game, which 21 would have allowed it to have been played somewhat 22 electronically. And that's why we decided to take 23 that out and keep it clear, that the flare is still 24 the paper product of the event tickets and pull-tab 25 tickets. 0054 1 CHAIRMAN COX: And, Mr. Kohler, I don't 2 think we're going to be able to have a debate here. 3 MR. KOHLER: I'm sorry. I didn't want 4 to debate you, Commissioner. I just thought I might 5 make myself available if you had any questions. 6 CHAIRMAN COX: Okay. Good. That will 7 be just fine. 8 And then I have written down here 9 "video confirmation." And then I have written down 10 here, "When is the winner known?" Now, as I heard 11 this, I got a different picture than I had previously 12 gotten. I had previously gotten the idea that I buy a 13 paper pull-tab, I open it up and I say, "Oh, I won" 14 or, "Oh, I lost" and, "Oh, I won five dollars." The 15 impression I got, from what Mr. Kohler said, was that 16 whether I won and how much I won only becomes 17 available when the video confirmation is shown. Is 18 that true or not true? 19 MR. SANDERSON: That is not the case in 20 the pull-tab ticket game. When you open the pull-tab 21 ticket -- and the video confirmation is primarily with 22 a type of play which is the event ticket -- when you 23 buy a pull-tab ticket, paper ticket, there's three 24 potential results: It's a losing ticket; it's an 25 instant winning ticket -- you might win five or ten 0055 1 dollars -- or it is what they call a hold ticket that 2 you keep and you play when the event occurs, whether 3 it be the opening of additional tabs on a flare of the 4 game or when it comes to the drawing of a bingo ball 5 or in conjunction with a regular bingo game. 6 And most of the hold tickets have ball 7 number representations on them from 1 to 75. And as 8 the bingo balls are drawn -- and your card has 9 anywhere from one to five to 10 numbers on it -- if 10 you get those numbers, then you say you have a winning 11 ticket. And when they validate it, they would scan it 12 or they would punch in the win code off that ticket 13 and it would display that that is a valid winning 14 ticket. 15 The other activities, some of the video 16 confirmation, is a game called Horse Race which, as 17 the bingo balls are drawn, the flash board, the 18 numbers on the flash board light up. And after the 19 ball is drawn and placed in the bingo board, the horse 20 on the monitor will take one step forward towards the 21 finish line. And it just shows that horse progressing 22 to the finish. The activity, the playing of the game 23 all takes place before the video is displayed. 24 CHAIRMAN COX: So I guess my question 25 is, is it solely video confirmation or is there 0056 1 something that comes up on that screen where I can 2 look at that and get information I didn't previously 3 have: "Oh my goodness! I won"? 4 MR. SANDERSON: No. It's strictly a 5 video confirmation. 6 CHAIRMAN COX: So the amount that I can 7 claim is exactly the same whether there is video 8 confirmation or not video confirmation? 9 MR. SANDERSON: That is correct. The 10 game itself has set prize limits and set prize 11 payouts. And if you hold the winning event ticket, on 12 the face of the ticket it will show what that prize 13 is, you know, irregardless of whether it's confirmed 14 with video confirmation or not. 15 CHAIRMAN COX: Okay. So this is -- I'm 16 not sure I understand what the concern about all of 17 this is. 18 MR. SANDERSON: Mr. Kohler in his 19 statement made several references to electronic 20 pull-tabs, electronic bingo and servers. And nothing 21 in this rule allows electronic bingo, electronic 22 pull-tabs or server-based games. It's still played 23 strictly with the paper product. 24 CHAIRMAN COX: Okay. Phil, is there 25 any provision in this rule for our prior approval of 0057 1 any devices used for the purpose of video 2 confirmation? 3 MR. SANDERSON: The rule requires the 4 Commission to approve video confirmation. As 5 previously stated in some of the comments, video 6 confirmation is being used today in the bingo halls. 7 There are several games that it's played with. 8 At this point in time, we really have 9 no statutory authority over it, unless it's something 10 that is against the law. And by adding it into the 11 rule, we have made it clear that it's permissible and 12 gives us the regulatory oversight to ensure that it is 13 in compliance with our statutory authority as well as 14 constitutional authority. 15 CHAIRMAN COX: So let me feed that back 16 to you. What I heard you say is that right now video 17 confirmation is out there and being used in some 18 halls. And no law enforcement agency has chosen to 19 take, including our agency, has chosen to take that 20 on, because we have no indication that it's unlawful? 21 MR. SANDERSON: That is correct. 22 CHAIRMAN COX: So what we're doing is 23 reaching out and saying, "Okay. This is a legal 24 activity clearly, because it hasn't been prosecuted. 25 And we can't find any reason to say it's illegal." 0058 1 Counselor, you've done research in that 2 matter. 3 What we're doing is bringing this 4 inside the tent so that we can make sure it stays that 5 way? 6 MR. SANDERSON: Yes, sir. 7 CHAIRMAN COX: And any video 8 confirmation that were to come to us has to have our 9 approval before it can be put into place, if this rule 10 is passed? 11 MR. SANDERSON: Yes, sir. 12 CHAIRMAN COX: So what we're doing is 13 putting video confirmation, which is already out there 14 outside of our regulatory authority, within our 15 regulatory authority? 16 MR. SANDERSON: Yes, sir. 17 CHAIRMAN COX: Ms. Kiplin, do you agree 18 with that? 19 MS. KIPLIN: Generally, yes. I think 20 that it's within our regulatory authority if it's part 21 of the bingo game. It's not being played. It's a 22 confirmation. I think putting in a rule, it clarifies 23 and lessens confusion about this particular feature. 24 CHAIRMAN COX: Okay. So it's within 25 our authority. But with this rule, we are 0059 1 specifically taking on regulating it? 2 MS. KIPLIN: We're trying to clarify 3 for the industry video confirmation and what it means 4 and lessen any confusion about whether it's 5 permissible or not and make it clear it doesn't have 6 anything to do with the outcome of the game. It's not 7 an interactive feature of the game. 8 CHAIRMAN COX: Okay. 9 COMMISSIONER CLOWE: No questions. 10 CHAIRMAN COX: Okay. Michele Clark. 11 Ms. Clark, have you previously submitted comment? 12 MS. CLARK: I have not previously 13 submitted comments. I am here at the request of 14 Stephen Fenoglio. 15 I have not previously submitted 16 comments. I'm here on behalf of Stephen Fenoglio, who 17 represents one of the members in the industry and 18 other organizations and on behalf of Aces Wired today. 19 And I am prepared to repeat only those comments that 20 have been submitted by Mr. Fenoglio. 21 MS. KIPLIN: On behalf of the entities 22 that are identified? 23 MS. CLARK: Correct. 24 CHAIRMAN COX: Okay. So you are -- 25 MS. CLARK: Excuse me. I'm not sure -- 0060 1 the green light is on. Is that better? I don't want 2 to pop. 3 CHAIRMAN COX: Okay. Was there 4 anything you would like to have repeated? 5 THE REPORTER: No. 6 CHAIRMAN COX: Okay. Ms. Kiplin, is 7 that okay? 8 MS. KIPLIN: Yes. What I understand is 9 that while she has not testified, the people for whom 10 she represents, those comments have been summarized, 11 and she's not making a comment that's inconsistent for 12 those entities. 13 CHAIRMAN COX: You're enlarging on 14 those, but you're staying totally within the 15 boundaries of the paper that you have in front of you, 16 which has previously been submitted to us? 17 MS. CLARK: Yes, sir. 18 CHAIRMAN COX: Good. Go ahead, please. 19 MS. CLARK: First of all, I would like 20 to thank staff, thank Mr. Chairman, Mr. Commissioner, 21 on the very extensive work that's been done in this 22 regard. The comments received by Mr. Fenoglio, by you 23 in the past, reiterated what has been stated here 24 today, which is that the video confirmation of the 25 outcome of pull-tab or instant bingo does not expand 0061 1 gambling or pull-tab bingo the way it is played and 2 authorized by both rule and by statute. 3 The video confirmation rule does not 4 allow the dispensing of an event ticket. It does not 5 alow the acceptance of dispensing of cash, and it does 6 not create a new event game or interact in any way in 7 that regard. But bingo continues to be played on 8 paper products and only portrays on something similar 9 to a television screen the outcome of that game, 10 making it more interesting and interactive in terms of 11 the players being able to watch movement and a dynamic 12 representation of that outcome. 13 The proposal was originally suggested 14 in light of the decline in participation and gross 15 receipts of instant bingo. And it is the belief of 16 our clients that this type of modernization, bringing 17 into the technological era the ability of graphic 18 displays will increase the interest of participants in 19 the game and increase also the gross receipts prizes 20 and profits and distributions to charities. 21 That's all I have. I would be happy to 22 answer any questions. 23 CHAIRMAN COX: Thank you very much, 24 Ms. Clark. 25 MS. CLARK: Thank you. 0062 1 CHAIRMAN COX: So this is like the dot 2 race at UT football games. Nothing happens. It's 3 interesting, it's fun, but nothing happens as a result 4 of it. 5 MR. SANDERSON: Yes, sir. 6 CHAIRMAN COX: You don't go to UT 7 football games? 8 MS. KIPLIN: Well, I have to tell you, 9 I don't know what a dot race is. 10 CHAIRMAN COX: My kids love the dot 11 race. 12 MS. KIPLIN: I'm showing my ignorance. 13 CHAIRMAN COX: Okay. Where are we, 14 Chairman Clowe? 15 COMMISSIONER CLOWE: I have no further 16 questions, Mr. Chairman. 17 CHAIRMAN COX: Do you have a 18 preference? 19 COMMISSIONER CLOWE: No, sir, not 20 stated. I'm looking to you for a motion. 21 CHAIRMAN COX: I have a great deal of 22 respect for everyone who has commented and all that's 23 been said. And I appreciate your advocacy of your 24 position or your clients' position. I am persuaded 25 that with all your help -- and thank you very much for 0063 1 it -- that the staff recommendation is a sound one and 2 I move its approval. 3 COMMISSIONER CLOWE: Second. 4 CHAIRMAN COX: All in favor, say "Aye." 5 COMMISSIONER CLOWE: Aye. 6 CHAIRMAN COX: Aye. 7 Opposed, no. 8 Motion passes 2-0. 9 MS. KIPLIN: Commissioners, I have an 10 order adopting the rule, for your signature. 11 Why don't we take about a 10-minute 12 break. 13 (Off the record: 10:19 a.m. to 10:35 14 a.m.) 15 CHAIRMAN COX: Let's come back to 16 order, please. 17 AGENDA ITEM NO. IX 18 CHAIRMAN COX: Item IX, consideration 19 of and possible discussion and/or action, including 20 adoption, on new 16 TAC §402.204 relating to 21 prohibited price-fixing. 22 Ms. Kiplin and Mr. Sanderson. 23 MS. KIPLIN: Commissioners, what's 24 before you today is consideration of adopting a new 25 rule on prohibited price-fixing. You-all, in an 0064 1 earlier Commission meeting, voted to post this rule 2 for public comment, and that rulemaking was published 3 in a prior issue of the Texas Register. We did have a 4 comment hearing on May 2nd. There was no comment 5 provided during that hearing. There was one written 6 comment that was received during that comment period. 7 Commissioners, if you'll recall, this 8 is the rulemaking matter where the incorrect version 9 of the rule was published earlier from what you-all 10 voted. And we did have public comment, and we so 11 indicated that that comment would be received into the 12 record on this particular rulemaking, and it was. 13 The staff is recommending adopting, 14 with changes, to the proposed text as it was 15 published, and it had to do with addressing a 16 particular term, "supplier," which is used in the 17 price-fixing section of the Enabling Act. Staff 18 considered that comment and made a change based on 19 that. 20 And the change, because of the current 21 statutes that set thresholds for persons who are 22 required to be identified in an application, the 23 definitions of "supplier" set a different ownership 24 threshold, and we made that consistent. So where in 25 the rule it did say a supplier is somebody who has a 0065 1 five percent or greater interest, we have changed that 2 to be a 10 percent or greater interest, to make that 3 consistent with current statutory language. 4 CHAIRMAN COX: You don't consider that 5 to be significant enough to republish? 6 MS. KIPLIN: No, sir, I don't. It's 7 right on point on comment. It's addressing comment. 8 I don't think the change would be a notice issue 9 whatsoever. At this point, staff does recommend 10 adoption, with the changes. 11 CHAIRMAN COX: So you do recommend 12 adoption with changes? 13 MS. KIPLIN: Yes, to address the 14 supplier. 15 COMMISSIONER CLOWE: No questions. 16 CHAIRMAN COX: Move approval of the 17 staff recommendation. 18 COMMISSIONER CLOWE: Second. 19 CHAIRMAN COX: All in favor, say "Aye." 20 COMMISSIONER CLOWE: Aye. 21 CHAIRMAN COX: Aye. 22 Motion carries 2-0. 23 MS. KIPLIN: Commissioners, I have an 24 order. 25 AGENDA ITEM NO. X 0066 1 CHAIRMAN COX: Item X, consideration of 2 and possible discussion and/or action, including 3 proposal, on amendments to 16 TAC §402.100 relating to 4 definitions. 5 Ms. Kiplin and Mr. Sanderson. 6 MS. KIPLIN: Commissioners, staff is 7 recommending for your consideration that you vote to 8 propose for public comment amendments to this existing 9 rule relating to definitions. And the purpose is to 10 include a definition for the term "bingo chairperson." 11 Currently underway are other rules that the Bingo 12 Division is working on, and they use that term. And 13 it was a good opportunity to try to get this squared 14 away before moving forward on those other rulemaking 15 matters. 16 Staff is recommending that you vote to 17 propose this for public comment, for a 30-day comment 18 period, and we are also including a public hearing on 19 this proposal. With that, we will take any questions. 20 COMMISSIONER CLOWE: No questions. 21 CHAIRMAN COX: Move approval of the 22 staff recommendation. 23 COMMISSIONER CLOWE: Second. 24 CHAIRMAN COX: All in favor, say "Aye." 25 COMMISSIONER CLOWE: Aye. 0067 1 CHAIRMAN COX: Aye. 2 Motion carries 2-0. 3 MS. KIPLIN: Commissioners, I have a 4 T-bar memo. I have one here I will fish out. 5 CHAIRMAN COX: I have one here I'll 6 fish out. 7 MS. KIPLIN: Okay. Thank you. 8 CHAIRMAN COX: Phil, some months ago -- 9 maybe a year ago -- we appeared before Chairman Flores 10 and his committee, and the members of that committee 11 expressed concern about delays in addressing important 12 areas and in passing rules in certain areas. And 13 after that, there was a flurry of activity, and we 14 introduced a lot of rules and now we have passed a lot 15 of rules and got them in the pipeline. 16 Would you go back to the record of that 17 meeting when we went before Chairman Flores and be 18 sure that we've got them all. And would you report 19 back to us at the next meeting of the ones that were 20 specifically addressed at that meeting and where we 21 are on them? 22 MR. SANDERSON: Yes, sir, I will. I 23 believe you're talking about the November -- I believe 24 it was in November of 2006. 25 CHAIRMAN COX: I believe that's right, 0068 1 because we did a lot in December and more in January. 2 And I was hoping we have covered everything, but let's 3 just be sure. 4 MR. SANDERSON: I'll go back and check. 5 But I believe we have, yes, sir. 6 CHAIRMAN COX: Thank you. 7 AGENDA ITEM NO. XI 8 CHAIRMAN COX: Item XI, consideration 9 of and possible discussion and/or action on a petition 10 for rulemaking relating to conflicts of interest among 11 persons within the bingo industry. 12 Ms. Kiplin and Mr. Sanderson. 13 MS. KIPLIN: Commissioners, this matter 14 is now moot. This was a petition for rulemaking that 15 had been filed that has since been withdrawn by 16 petitioner. And just for purposes of the record, the 17 petition for rulemaking addressed a desire to have 18 rulemaking on conflicts of interest between bingo hall 19 managers and bookkeepers. 20 In the administration of the financial 21 affairs of a bingo hall and I believe in the interest 22 of having internal controls, as I understand it, 23 Mr. Sanderson had an opportunity to meet, along with 24 Ms. Joseph of the Legal Division, to meet with the 25 petitioner and inform him that there is a draft rule 0069 1 that's currently underway in our Bingo Division on 2 internal controls. And with that, the petitioner 3 withdrew his petition but would like to participate in 4 any of those groups on a go-forward basis. 5 CHAIRMAN COX: Thank you for that 6 report. 7 AGENDA ITEM NO. XII 8 CHAIRMAN COX: Chairman Clowe, with 9 your permission, I would like to pass on Item XII. 10 COMMISSIONER CLOWE: Certainly. 11 AGENDA ITEM NO. XIII 12 CHAIRMAN COX: Item XIII, report by the 13 Charitable Bingo Operations Director and possible 14 discussion and/or action on the Charitable Bingo 15 Operations Division's activities. 16 Mr. Sanderson. 17 MR. SANDERSON: Commissioners, in your 18 notebook is the monthly update of the activities of 19 the Bingo Division as well as an updated chart 20 graphing the charitable distributions since 1982. 21 The next BAC meeting is tentatively 22 scheduled for July the 17th, which I believe is the 23 day before, or the day after the public hearing that 24 we scheduled for these rules. The allocations went 25 out on May the 15th. 0070 1 And then we've updated our website. We 2 now have included a section on pull-tab games. Once 3 or twice a month we will update that section with the 4 most recently approved pull-tab games where 5 organizations or players can go view the game and what 6 the prize payout and the cost of the ticket is. 7 And with that, I'll be glad to answer 8 any of the questions you may have. 9 COMMISSIONER CLOWE: No questions. 10 CHAIRMAN COX: No questions, 11 Mr. Sanderson. Thank you. 12 MR. SANDERSON: Thank you. 13 CHAIRMAN COX: I believe that concludes 14 the bingo section of the agenda. 15 AGENDA ITEM NO. XIV 16 CHAIRMAN COX: Item XIV, consideration 17 of and possible discussion and/or action, including 18 proposal of amendments, on 16 TAC §401.310 relating to 19 payment of prize payouts upon death of prize winner. 20 Ms. Kiplin. 21 MS. KIPLIN: Yes. Commissioners, this 22 matter was presented for your consideration to propose 23 these amendments at the last Commission meeting. And 24 just to go back to that Commission meeting, this is an 25 existing rule that was adopted by the Commission in 0071 1 1997, and it was intended to allow for the 2 acceleration of the installment payments to an 3 individual prize winner to be accelerated to go to the 4 estate of the deceased prize winner only in the 5 circumstance where it was the sole asset of the prize 6 winner's estate and it was necessary to accelerate to 7 pay for the net present value and try to avoid the 8 penalties and interest that were being assessed as a 9 result of the IRS's treatment of this particular asset 10 and requiring taxes be paid on present value. 11 So that rule was adopted in 1997. Time 12 has gone by. We've had the opportunity, the recent 13 opportunity to apply this rule to a pretty complicated 14 estate. It was a common law wife with heirs at law 15 and no will. During that application, we recognized 16 that there is a need to try to refine and tighten the 17 language, if you will. And that's why we proposed the 18 amendments to you last Commission meeting. 19 Commissioner Clowe had a question, and 20 the question had to do with, "Well, what do other 21 states do with the estates of the deceased prize 22 winners?" We since have gone back and collected that 23 information, sent out a survey. We did receive 24 responses. We sent to 31; we received response from 25 16. Of those, five responded that they do allow the 0072 1 acceleration of the installment lottery prize payments 2 upon the death. None of them limit it to the sole 3 reason of trying to help the estate not have the sole 4 asset be, if you will, diminished by having to pay 5 penalties and interest. 6 The staff recommends staying with the 7 sole narrow application, being for estate taxes, to 8 avoid the application of the federal Internal Revenue 9 Service's rule on constructive receipt. And the 10 reason for that is, as I understand it, if (1) the 11 state, for whatever reason, is able to accelerate the 12 installments, then the IRS will treat that similarly 13 for those that did not make that election nor wanted 14 it, and the impact would be that that asset would be 15 valued at present value, notwithstanding the fact that 16 the winner would not receive those except for as the 17 year the annual installments become due. 18 One other proposed amendment is to 19 remove the imposition of administrative costs for 20 these petitions to be filed, and the staff would 21 process the petitions on acceleration of the prize. 22 Case law has been developed that indicates if you 23 don't have clear authority, you should not be doing 24 that. And so we decided that it would be a good 25 recommendation to remove that provision. 0073 1 With that in mind, staff is 2 recommending you-all propose amendments to this rule 3 for public comment. 4 COMMISSIONER CLOWE: No questions. 5 CHAIRMAN COX: I heard you say that you 6 have addressed Chairman Clowe's concern that we 7 consider other states and be sure that we're within 8 the bounds of best practices. And you have done that; 9 you believe we're there? 10 MS. KIPLIN: Yes. 11 CHAIRMAN COX: Move approval of staff 12 recommendation. 13 COMMISSIONER CLOWE: Second. 14 CHAIRMAN COX: All in favor, say "Aye." 15 COMMISSIONER CLOWE: Aye. 16 CHAIRMAN COX: Aye. 17 Motion carries 2-0. 18 MS. KIPLIN: Commissioners, I have a 19 T-bar memo for you. 20 AGENDA ITEM NO. XV 21 CHAIRMAN COX: Item XV, consideration 22 of and possible discussion and/or action on the use of 23 IRS Form 5754. 24 Ms. Woelk. Hi, Sarah. 25 MS. WOELK: I'm Sarah Woelk, Special 0074 1 Counsel. 2 At Tab XV, there is a pretty lengthy 3 memo with a lot of attachments. And a number of 4 questions had been raised about the federal tax 5 requirements in connection with IRS Form 5754. And I 6 did a pretty lengthy analysis of the relevant federal 7 statutes, rules, guide, forms, and reached the 8 conclusion that the best practice is that in a claims 9 process we should -- we are required to accept Form 10 5754 and to issue withholding and winnings statements 11 on Form W2G, based on the information provided to us 12 on a Form 5754. There's a lot of views held here if 13 you're interested in the whole -- 14 COMMISSIONER CLOWE: No questions. 15 CHAIRMAN COX: Okay. You're 16 recommending that we accept these forms on a 17 prospective basis? 18 MS. WOELK: Yes. 19 CHAIRMAN COX: And that we begin 20 accepting them today? 21 MS. WOELK: As part of the claims 22 process if people -- I'm not really providing a larger 23 context. But this is when someone comes in and says, 24 "My group won. I'm going to claim for the group. I'm 25 sharing with other people" -- 0075 1 CHAIRMAN COX: Yes. 2 MS. WOELK: -- that they will provide 3 those names, and we will then follow the IRS guidance 4 on what we do with that information. 5 CHAIRMAN COX: Okay. Ms. Pyka, would 6 you be prepared -- I guess it would be in the month of 7 January 2008 -- to issue any W2Gs that would come from 8 these Form 5754 filings? 9 MS. PYKA: For the record, Kathy Pyka, 10 Controller. 11 To respond to that question, we are 12 currently working with our IR team to make 13 modifications to the ProSys system that we use 14 in-house and that provides the reporting tool for 15 W2Gs, and so we're working towards that. 16 CHAIRMAN COX: Excellent. 17 Sarah, do you need a motion or is this 18 a report? 19 MS. WOELK: No. This is a report. 20 This is just to let you know we're doing some work. 21 CHAIRMAN COX: Okay. Thank you very 22 much. 23 24 25 0076 1 AGENDA ITEM NO. XVI 2 CHAIRMAN COX: Item XVI, consideration 3 of and possible discussion and/or action on the 4 development of rules relating to model pooling or 5 group purchase agreements. 6 Ms. Kiplin. 7 MS. KIPLIN: Commissioners, during the 8 recently ended legislative session, at a Senate 9 Finance Committee hearing, a member of that committee, 10 Sen. Robert Duncan, queried Executive Director 11 Sadberry regarding why the Commission has not 12 developed a model agreement for use by group 13 purchasers as provided in the State Lottery Act. 14 Executive Director Sadberry responded 15 that the statute authorizes rulemaking but doesn't 16 require it but that legal advice would be provided to 17 the Commission and staff regarding the issue. 18 And, Commissioners, we have undertaken 19 that analysis regarding the model pooling agreement. 20 We've also sent a survey out to the other state's 21 lotteries to find out about the other practices 22 regarding group or pooling agreements. There are two 23 states that actually do provide some type of form or 24 model agreement. That's Oregon and California. 25 Based on the legal review, the legal 0077 1 analysis, the staff is recommending not moving forward 2 to develop a model pooling agreement on the overall 3 analysis, but we do recognize that it would be helpful 4 to assist our players in terms of issues for 5 consideration that they ought to consider when they 6 come together to form a pool. And our plans are to 7 move forward to develop that type of information and 8 put it up on our website and find other means, if 9 practical, to disseminate that information. 10 I will be glad to answer any questions 11 you have. 12 COMMISSIONER CLOWE: Mr. Chairman, I'm 13 in support of the staff recommendation. I'm 14 respectful of the question that Director Sadberry was 15 posed regarding a model being established. But my 16 feeling is that it's not the role of the state agency 17 to offer up a legal arrangement in the case of a 18 winner and, by so doing, sponsors that model and, 19 therefore, be responsible for its implementation and 20 its defense if it's attacked or if there is some 21 opposition to it in regard to the claimant group. 22 I think it's fine to offer up a 23 suggested model to the extent that the counselor has 24 laid out. But going beyond that I think takes us in a 25 place we don't want to be. So I'm responsive to the 0078 1 staff recommendation and would be happy to support 2 that if you make a motion. 3 CHAIRMAN COX: I'm in total agreement. 4 Does this need a motion, Ms. Kiplin? 5 MS. KIPLIN: No, sir, it doesn't. 6 We're making a recommendation. We can certainly 7 develop a T-bar memo to document that, though, and 8 bring that back to you at another time. 9 CHAIRMAN COX: So you're just asking 10 for our thoughts on whether this is an area where we 11 should get real involved or just be a little helpful? 12 MS. KIPLIN: Yes. And specifically 13 where you have the authority -- it's discretionary; 14 it's not mandatory -- is to move forward to adopt a 15 rule to develop or to have a model pooling agreement. 16 And we're not recommending that the Commission move 17 forward to adopt a rule that would then lead to the 18 development of this model pooling agreement. 19 COMMISSIONER CLOWE: And I think it's 20 important, and the Commission arriving at that 21 decision, through Director Sadberry and his staff, to 22 go back to the Senator and explain the results of the 23 research and the record that we've created here this 24 morning and why the Commissioners feel the way they 25 do, and have that senator's feedback in regard to this 0079 1 subject. 2 CHAIRMAN COX: Excellent. 3 Does that get you to where you need to 4 be, Kim? 5 MS. KIPLIN: Yes. Thank you. 6 CHAIRMAN COX: Okay. 7 AGENDA ITEM NO. XVII 8 CHAIRMAN COX: Item XVII, consideration 9 of and possible discussion and/or action, including 10 notice of intention to review (proposed review), on 16 11 TAC Chapter 403 relating to General Administration. 12 Ms. Woelk. 13 MS. WOELK: For the record, I'm Sarah 14 Woelk, Special Counsel. 15 This is an item we're asking you to 16 take action on. We're asking you to propose a rule 17 review for publication. This is slightly different 18 from standard rulemaking. State law requires that 19 every four years a state agency review each of its 20 rules to determine if the reason for the rule 21 continues to exist. So this is -- I think the main 22 purpose of this is to make sure the rules don't stay 23 on the books after they have served their purpose 24 The Secretary of State has set out a 25 process by which you do this rule review. And the 0080 1 first step is, we have proposed a rule review. And 2 then after -- and that runs through a 30-day comment 3 period, just like proposing a new or amended rule. 4 Then we will come back to you and propose one of three 5 things: That you re-adopt the rule without changes, 6 which you can then do immediately because this process 7 allows you to simply re-adopt without change. If we 8 are recommending changes or repeal, however, then we 9 will propose another action. You do it for a new 10 proposed rule, to incorporate the amendments or the 11 appeal. And that then goes through the regular 12 rulemaking process. 13 This doesn't necessarily require that 14 we perfect our rules. It requires that we make sure 15 they serve some purpose. So we will definitely make 16 some changes if there is out-of-date language and 17 things that needs to be changed. As you know, often 18 getting a single rule amended, though, can be quite a 19 lot of work. So there will be rules that we ask you 20 to re-adopt, not because you think the rule is perfect 21 but because we need the rule to continue doing 22 business. And then over the course of time, we'll 23 continue to look at rules individually to make 24 changes. 25 So what we're asking you to do today is 0081 1 propose the review of Chapter 403 of our rules. Our 2 rules are set out in three different chapters of the 3 Administrative Code, and this is the first chapter, 4 possibly the simplest chapter. And we would like you 5 to propose that, and then we will likely come back in 6 August with the results of our review. 7 COMMISSIONER CLOWE: So move. 8 CHAIRMAN COX: Second. 9 All in favor, say "Aye." 10 COMMISSIONER CLOWE: Aye. 11 CHAIRMAN COX: Aye. 12 Motion carries 2-0. 13 Sarah, I have one request. 14 MS. WOELK: Okay. 15 CHAIRMAN COX: We're going to be 16 discussing in maybe the next agenda item some 17 inconsistencies in some rules in matters that seem to 18 be very similar. And I ask you, as you do this rule 19 review, to consider every rule carefully, not only on 20 its own but as it may relate to other rules. 21 MS. WOELK: We'll do that. 22 CHAIRMAN COX: And be sure that 23 everything we're doing is needed and consistent and 24 appropriate. 25 MS. WOELK: Okay. 0082 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN COX: Item XVIII, report, 3 possible discussion and/or action on lottery sales and 4 revenue, game performance, new game opportunities, 5 market research and trends. 6 Ms. Pyka and Mr. Tirloni. 7 MS. PYKA: Thank you, Mr. Chairman. My 8 name is Kathy Pyka, Controller of the Lottery 9 Commission. With me to my right this morning is 10 Robert Tirloni, our Products Manager. 11 Our first chart that we have for you 12 this morning reflects revenue from sales and net 13 revenue to state through the week ending June 16, 14 2007. Total sales through this 42-week period 15 amounted to $3 billion, while estimated net revenue to 16 the state for this period was $780.9 million. Net 17 revenue to the state reflects a 3.3 percent decline as 18 compared to the 669.3 figure for the same period in 19 Fiscal Year 2006. And our prize expense as a 20 percentage of sales has gone up slightly from the same 21 period in Fiscal Year 2006. 22 Our next slide summarizes the change in 23 sales by game from Fiscal Year 2006 to 2007. As noted 24 before, the decline from Fiscal Year 2000 (sic) sales 25 is 2.3 percent. And I want to note that this is a 0083 1 significant drop in that decline from Fiscal Year 2006 2 sales. 3 The overall $71.5 million decline 4 includes $36.3 million in instant tickets, or 5 1.6 percent, and $35.2 million, or a 4.7 percent 6 decline, in on-line games. Our Pick 3 and our Texas 7 Two Step games continue to reflect a positive growth 8 over Fiscal Year 2006 and 2005 sales. And I probably 9 should restate that. Pick 3 continues to reflect a 10 gain year-over-year from the beginning of the game. 11 Our Texas Two Step game again shows a positive gain 12 over both Fiscal Year 2006 as well as Fiscal Year 2005 13 sales. 14 Our next slide -- 15 CHAIRMAN COX: Ms. Pyka? 16 MS. PYKA: Yes, sir? 17 CHAIRMAN COX: Now, there was a lot in 18 the papers and on television and all over the place 19 last week about one of those -- I thought it was the 20 Texas Two Step game. 21 MS. PYKA: Yes, sir. 22 CHAIRMAN COX: And it was about robbing 23 school children of Texas to pay prizes and the game is 24 sick. And what you're showing me here is, the game 25 isn't sick. In fact, it's one of the games that we 0084 1 can point to with pride as being up over last year. 2 So do you understand what was going on in the press 3 and how it jibes with this information? 4 MS. PYKA: No, I do not. The fiscal 5 Year 2007 gain over Fiscal Year 2006, as you see here, 6 is 5.2 percent, or $2 million. We also experienced an 7 overall growth in the game in Fiscal Year 2006 over 8 2005 sales, of five percent as well. We had one of 9 our largest jackpots at the end of Fiscal Year 2006 in 10 this game. 11 CHAIRMAN COX: Okay. Well, I think 12 that the confusion or that the explanation as to 13 what's different from what's in the paper and what's 14 on that screen is confusion. And I think the source 15 of that confusion is our rule with respect to Texas 16 Two Step. Are you going to comment on that? 17 MS. PYKA: I certainly will. The end 18 of this presentation will also include the game 19 performance data related to the reserve funds for both 20 Lotto Texas and Two Step, as well as Mega, which does 21 not have a reserve fund. So I'll note where we stand 22 on those reserve fund balances in the slide here 23 probably about four or five slides away. 24 CHAIRMAN COX: Okay. Thank you. 25 MS. PYKA: And then our next slide 0085 1 provides you a summary of our Fiscal Year 2007 year to 2 date sales by game. As showed on this slide, 76 3 percent, or $2.3 billion, of total sales is from 4 instant tickets, with 8.3 percent of sales, or 5 $247.8 million, from Pick 3, followed by 6.3 percent 6 and $188.6 million from Lotto Texas and 4.7 percent 7 and $139.9 million from Mega Millions. 8 CHAIRMAN COX: Okay. So if you take -- 9 what is the prize percentage payout and the other 10 expenses that you would apply to that $39.7 million 11 sales from the Texas Two Step to determine what its 12 contribution to the net revenue is? 13 MS. PYKA: The prize expense is your 14 standard 50 percent, as we look at that. 15 CHAIRMAN COX: Okay. 16 MS. PYKA: And then 12 percent reserve 17 for administrative as well as retailer commissions. 18 And so you're looking at a 62 percent share for those 19 two items, with the balance going to the Foundation 20 School Fund. 21 CHAIRMAN COX: Okay. So about what 22 percentage would that be going to the Foundation 23 School Fund? 24 MS. PYKA: 38 percent. 25 CHAIRMAN COX: Okay. So let's call it 0086 1 40 percent. So about $16 million from the Texas Two 2 Step has gone into the Foundation School Fund so far 3 this year. It is not taking money out of the 4 Foundation School Fund; it is making a substantial 5 contribution to the Foundation School Fund? 6 MS. PYKA: Yes, sir. 7 CHAIRMAN COX: Thank you. 8 MS. PYKA: And our next slide provides 9 a graphical chart of the year to date sales by game, 10 which is information that we just reviewed. 11 And with that, now Robert will provide 12 an overview of our sales by price point. 13 MR. TIRLONI: Good morning, 14 Commissioners. For the record, my name is Robert 15 Tirloni. I am the Products Manager for the 16 Commission. 17 Commissioners, this slide shows our 18 Fiscal year to date sales broken down by price point, 19 and this represents the $2.3 billion in instant sales 20 that Kathy just talked about. Our five dollar price 21 point continues to be our leading price point, 22 followed by the two and then the 10 and then the one. 23 You will notice for the first time this 24 month there is a new slice of the pie, so to speak, 25 and that is the $50 price point. The $50 game started 0087 1 on Monday, May 7th. So this represents about six 2 weeks of sales. And in that time period, the game has 3 brought in just under $49 million. And we have a few 4 more slides following this slide that shows the impact 5 that the $50 has had on our instant and our total 6 sales. 7 So this next chart is a comparison of 8 weekly sales. And we're comparing 2007, our current 9 fiscal year, to the previous fiscal year, 2006. So 10 the left side of our chart is instant sales broken 11 down by week. And the right side of the chart is 12 total sales. 13 It's important for me to note that Week 14 37 is the week in which the $50 game started. So, as 15 I said, it started on Monday, May 7th. Week 37 is the 16 week ending Saturday, May 12th. And you'll notice 17 since the introduction of the $50 game in Week 37, we 18 have had six consecutive weeks in which our instant 19 sales and in which our total sales have reflected 20 positive gains over Fiscal Year 2006 21 CHAIRMAN COX: So, Robert -- 22 MR. TIRLONI: Yes, sir? 23 CHAIRMAN COX: -- what this is telling 24 me is that trend that we were so concerned about back 25 in February and March has reversed? 0088 1 MR. TIRLONI: It seems that way, yes, 2 sir. 3 CHAIRMAN COX: And as you reviewed that 4 downturn, if you will, as you look back at it now and 5 see that it has turned up, is that something that was 6 unique or is that something that's taken place a 7 number of times throughout our history? 8 MS. PYKA: What you see here is, you've 9 got six consecutive weeks of positive sales growth. 10 And we'll see that actually when we look at the 11 cumulative chart on the next chart where, since the 12 introduction of the $50 game, we are showing positive 13 trends six weeks in a row. 14 Prior to that, there were only eight 15 weeks in the fiscal year in which we had a positive 16 gain over Fiscal Year 2006 sales in Fiscal Year 2007. 17 So the introduction of the $50 price point has 18 definitely reversed that sales trend decline that 19 we've experienced in the majority of Fiscal Year 2007. 20 CHAIRMAN COX: I recall an appearance 21 we made early in the legislative session before the 22 Senate Finance Committee where we reported that our 23 sales were down somewhat. Was it about four percent 24 at that time? 25 MS. PYKA: Yes, it was. 0089 1 CHAIRMAN COX: And that it was very 2 possible that we would not recover from that. 3 MS. PYKA: That is correct. 4 CHAIRMAN COX: What I see now is that 5 with the $50 ticket, we may recover from it, or we 6 will certainly come closer than we would have thought 7 at that time. 8 MS. PYKA: We'll certainly come closer 9 to where we were at that point in time, and I think 10 you'll see that on this next chart. 11 CHAIRMAN COX: Okay. 12 MR. TIRLONI: So this next chart is 13 laid out much the same way the previous chart was, 14 except this is a comparison of cumulative sales again, 15 '07 to '06, the left side of the chart again being 16 instant sales, the right side of the chart being total 17 sales. 18 As Kathy noted, our overall decline in 19 total sales from FY 2006 is now 2.3 percent, and it is 20 1.6 percent for instant sales. Again, on the same 21 week, Week 37, that is the week that the $50 was 22 introduced. You'll notice in Week 36, our instant 23 ticket decline was 3.1 percent, or $60.7 million. And 24 that's, of course, compared to 2006. The decline has 25 now been reduced to 1.6 percent, or $36.3 million, and 0090 1 that's through the current week. 2 In terms of total sales, if you look 3 back in Week 36, our decline was 3.5 percent, or 4 $93.3 million. And now about six weeks later in Week 5 42, the decline is 2.3 percent, or $71.5 million. To 6 give you a perspective, we have provided Week 26, 7 which is what we call the low point for the year when 8 the difference or percentage change was 4.6 percent. 9 So, as Kathy has said, staff realizes 10 the game has been out for six, now seven weeks, but 11 the $50 has had a definite impact on instant and 12 overall sales, and staff is pretty pleased with the 13 performance thus far. 14 CHAIRMAN COX: So what I'm seeing there 15 is, for both instants and sales from Week 26 to Week 16 42, we've cut the percentage down from last year in 17 half? 18 MR. TIRLONI: That's correct. 19 CHAIRMAN COX: That's excellent. 20 MR. TIRLONI: That's correct. And 21 we'll continue to give you updates on the performance 22 of the $50, you know, along with our other price 23 points, as we do every month. 24 And I believe Kathy has one additional 25 slide to cover for you today. 0091 1 CHAIRMAN COX: Robert, let me ask you 2 something about history here -- 3 MR. TIRLONI: Sure. 4 CHAIRMAN COX: -- and Kathy. What I 5 see here is that we had a downtrend that was reversed 6 by the introduction of a new product. Has that 7 happened before? And, in fact, is that not typical of 8 what we do? We address downturns by introducing new 9 products or changing old products to adapt them to 10 current market conditions? 11 MR. TIRLONI: I think that that's 12 definitely true. I mean, that's certainly true, has 13 probably been more true for us on the on-line side. 14 You know, we've had quite a few years now of 15 increasing instant sales. 16 So I think this is the first example 17 where we've introduced a game that's had such a 18 dramatic impact on sales in such a short time period. 19 But you are correct, in that we are constantly looking 20 at those products, evaluating them, seeing how we can 21 change them or seeing what we can do that's new, to 22 have an impact on either product specific sales such 23 as instant or on-line and, obviously, with the intent 24 to increase total sales. 25 CHAIRMAN COX: Excellent. 0092 1 MS. PYKA: Commissioners, the next 2 slide includes our Lotto Texas and Texas Two Step 3 reserve balances, beginning at the beginning of Fiscal 4 Year 2007, 9/1/06 through June 19, 2007. The Lotto 5 Texas reserve balance is currently $11.9 million. And 6 as you note there, we started the fiscal year with a 7 balance of $13.8 million. 8 Under our Lotto Texas on-line rule, 9 game rule effective April 23, 2006, there are no 10 longer any allocations from the Lotto Texas ticket 11 sales that are being deposited to the Lotto Texas 12 prize reserve fund. The rule provides that if sales 13 proceeds in the Lotto Texas prize reserve are not 14 sufficient to pay the Lotto Texas jackpot prize, the 15 Commission shall use funds from other authorized 16 sources, including the State Lottery Account 17 identified in the State Lottery Act under Section 18 466.355. 19 Our lotto game, on-line game rule, also 20 states if 4.02 percent of the proceeds from Lotto 21 Texas ticket sales and the Lotto Texas prize reserve 22 fund are not sufficient to pay all of the fourth 23 prizes, the guaranteed prizes for the draw, the 24 Commission, too, shall use funds from other authorized 25 sources, including the lottery account, as outlined in 0093 1 Section 466.355. 2 Then moving to our Texas Two Step 3 on-line game, the on-line game rule for that is 4 effective May 4, 2004. The Texas Two Step prize 5 reserve fund is two percent of the prize pool in that 6 game rule. The rule provides that of the Two Step 7 prize reserve fund, it may be increased or decreased, 8 while the difference between the first prize 9 advertised jackpot as well as the sixth and seventh 10 prizes that are actually won and their respective 11 share of the prize pool. 12 As you'll note there, the Texas Two 13 Step reserve balance as of June 19th was in a deficit 14 situation of $4,520. And we started the fiscal year 15 with a balance just over $520,000. Because the prize 16 reserve went into a negative status with a draw on the 17 18th of June, the $4,520 difference is going to be 18 funded out of the State Lottery Account, in accordance 19 with Commission statute. 20 CHAIRMAN COX: Okay. Now, are you 21 ready for me to start asking about this, or do you 22 have some more to say? 23 MS. PYKA: Well, I'm just going to 24 summarize. We've got three on-line games with really 25 three different mechanics of prize reserve structure. 0094 1 We've got the Lotto Texas rule, which there are no 2 allocations going into prize reserve; but, yet, they 3 definitely have the use for the guaranteed jackpot as 4 well as the fourth tier. 5 Two Step, we've got an allocation going 6 into the prize reserve. We're using it for jackpot as 7 well as the guaranteed tiers. And when we look at the 8 Mega game, another on-line game structured similar to 9 these two, we don't actually have a prize reserve or 10 an allocation. 11 So we've got three different on-line 12 games and three different prize reserve structures 13 going here. So I wanted to update you on that and 14 would be happy to answer any questions that you might 15 have. 16 CHAIRMAN COX: Well, fortunately, I'm 17 an accountant, so I understand what you said. But 18 it's very easy for me to see how people who are not 19 accountants could be very confused by all of this. 20 First of all, as you point out, we've got three stakes 21 games. We've got other on-line games, but we've got 22 three stakes games, and our rule for each of them is 23 different. You have to -- they are not different. 24 These are games where we ante up to make the game 25 attractive, to get it started. And we may increase 0095 1 the stake. We may ante again if nobody wins when the 2 game can't pay the winner if it's hit. 3 Now, you said, Kathy, I believe, when 4 you were reading that language, that money could be -- 5 if there wasn't enough from sales, money could be paid 6 from the prize reserve fund? 7 MS. PYKA: The prize reserve fund or 8 other authorized sources, including the State Lottery 9 Act, as outlined in the statute. 10 CHAIRMAN COX: Okay. So what we have 11 done here, obviously to the tune of $2 million on 12 Lotto Texas and $524,000 on Texas Two Step is, we have 13 made a bookkeeping entry, but it doesn't have anything 14 to do with where the money is coming from? 15 MS. PYKA: That's correct, sir. 16 CHAIRMAN COX: The money is coming from 17 the Texas lottery fund. What's the name of it? 18 MS. PYKA: State Lottery Account. 19 CHAIRMAN COX: State Lottery Account, 20 no matter what? 21 MS. PYKA: Correct. 22 CHAIRMAN COX: This is nothing but a 23 bookkeeping entry. 24 MS. PYKA: Correct. 25 CHAIRMAN COX: It doesn't affect by one 0096 1 penny how much money we win and how much money the 2 school children of Texas get? 3 MS. PYKA: That is correct. 4 CHAIRMAN COX: Okay. Now, these 5 reserves are liabilities or are they part of the 6 capital account? 7 MS. PYKA: The Lotto Texas prize 8 reserve is held as a designated fund balance on our 9 balance sheet; whereas, the Two Step prize reserve is 10 held as a liability on the balance sheet. And -- 11 CHAIRMAN COX: And from Mega Millions, 12 which is just like it, there is no reserve? 13 MS. PYKA: Correct. 14 CHAIRMAN COX: Okay. Well, I think 15 we've got some work to do here, don't we? 16 MS. PYKA: Yes, sir. 17 CHAIRMAN COX: Okay. 18 COMMISSIONER CLOWE: Good luck! 19 CHAIRMAN COX: I think the -- 20 COMMISSIONER CLOWE: Going to owe the 21 school on this? 22 CHAIRMAN COX: I probably will, 23 off-line though. 24 COMMISSIONER CLOWE: Off-line. 25 CHAIRMAN COX: I think that -- the 0097 1 problem is obvious, and I think the solution is 2 obvious, too. I don't think, at least for 50 years in 3 the private sector, appropriations of retained 4 earnings for contingency or catastrophe reserves has 5 been inappropriate. If the government's standards are 6 behind that, maybe they should catch up. 7 I can't understand why one would be a 8 liability reserve, because we're not going to pay 9 anything out of it. There's no funds behind it. It's 10 just an empty account. So let's get these the same 11 and let's get them where anybody can understand them. 12 And I think what anybody can understand 13 is, you take in money and sometimes you win, sometimes 14 you lose. At the end of the day, since we run the 15 game -- got a big advantage -- we're the winner. 16 Every now and then somebody else wins. But, by golly, 17 of the end of the day, the school children of Texas 18 win, and we should have a rule that helps people 19 understand that that's the way it is, not confusing 20 them into believing that we're losing money. 21 COMMISSIONER CLOWE: You're 100 percent 22 correct. But there are those in this state who oppose 23 gaming. And you choose, by perception, to make an 24 issue of this. I don't think you're ever going to 25 convince those people that there's something here that 0098 1 they don't like. 2 And I recall Auditor Keel saying that 3 his auditors felt that our practice, in the case of 4 Lotto Texas, was not a good one and that it was 5 risking state funds and that was not a good practice. 6 He also stated that we have the right to do what we do 7 and we have the rules to codify and support what we 8 do, and that was all he said. 9 And we have that practice and we 10 continue it, as you have said. So I just think you 11 have to be aware that there is opposition to what this 12 agency does. And those people who are in opposition 13 will take the opposite point of view. You won't ever 14 really put this issue to rest, because it's a 15 philosophic difference, not an accounting difference. 16 And so it's good to make every effort, 17 but be aware that we're dealing here with a point of 18 perception, a state of mind. And when you give the 19 opportunity to those who are critical to make the case 20 in the media, you're going to have to deal with it. 21 That's never going to go away, in my opinion. 22 I also think that in the long term, 23 we're dealing with, now in the instants, an elephant 24 sitting in the front room and that elephant is 25 76 percent of the operation. It continues to grow. 0099 1 And you put a party hat on the elephant with a $50 2 ticket. There was a lot of negative publicity about 3 that, that I read in the media, regarding the $50 4 ticket. And there again is the element of those who 5 are opposed to gaming in this state, and they made 6 their point. 7 I didn't see any media coverage of the 8 points that have been made here in this meeting this 9 morning. In the past, you've dealt with some of the 10 low trends, Robert. You tried once giving away 11 tickets, if I recall correctly, and I don't think that 12 had any positive impact. Didn't you have a ticket 13 giveaway at one point? 14 MR. TIRLONI: In the past on on-line 15 we've done free ticket promotions, yes, sir. 16 COMMISSIONER CLOWE: Yes. And I just 17 think if you step back and look at it from a long-term 18 perspective, we need to be telling the Legislature, we 19 need to make people aware that we're dealing with a 20 product that has been on the market for a number of 21 years; it is, on the on-line games, continuing to lose 22 ground, except when you have a really big jackpot. 23 Those are the exceptions now. 24 We've got a 76 percent segment of our 25 product which is -- that's not good from any 0100 1 manufacturer's standpoint. I mean, no manufacturer of 2 any product wants to get where 76 percent of their 3 product is one item or a mix of items. And we keep 4 trying to tweak it, and we tweaked it successfully 5 with the $50 ticket. But to me, that's like a new 6 restaurant opening. You know, it's going to get its 7 play for a period of time and then people are going to 8 say, "Well, what's new? What's different?" And 9 they'll move away from that. I don't see that as a 10 long-term beneficial item. 11 We're capped on advertising. If this 12 were private enterprise, we would be spending a lot 13 more money on the advertising of these games and we 14 would be changing the whole thing constantly. I just 15 think that we shouldn't get a mindset of we're going 16 to beat $3.7 billion or $3.8 billion, whatever the 17 number is, and that's our goal. And if we make it, 18 we've won; if we fall short of it, we've failed. 19 We need to do the best job we can and 20 understand we're operating in a controlled 21 environment. It's a monopoly. It's controlled by the 22 Legislature and the statute and our rules, and we have 23 to stay within that. And then you've got half of the 24 people in the State of Texas that don't want it, and 25 that is a very large and important factor. 0101 1 And those are sort of the overall 2 perspectives that I see as I listened to this 3 discussion. It doesn't say anything about the kind of 4 job that the folks in this agency are doing. It 5 speaks to the larger issue of gaming in a state that 6 has the kinds of divergent opinions that we have and 7 where the Legislature is telling you what you should 8 do, what you can do and what you better not do. 9 Do you-all understand that or agree or 10 disagree with it? 11 MS. PYKA: Certainly agree. 12 MR. TIRLONI: We agree, sir. 13 COMMISSIONER CLOWE: Thank you, 14 Mr. Chairman. 15 CHAIRMAN COX: And I agree as well. 16 And as with the earlier agenda item where we had a lot 17 of discussion, we respect all of those views, and we 18 do what we're here to do, which is try to run the best 19 lottery we can possibly run. 20 Anything else Ms. Pyka, Mr. Tirloni? 21 MS. PYKA: That's all that we have for 22 y'all this morning on this item. 23 CHAIRMAN COX: Okay. And, Ms. Nettles, 24 you wanted to comment on this item? Please. 25 MS. NETTLES: Good morning, 0102 1 Commissioners. For the record, my name is Dawn 2 Nettles. I'm with Lotto Report out of Dallas. And as 3 I listened to you-all talk about the Two Step, I am 4 the one who brought this to the attention of the media 5 with regard to the deficit to have funded the winners. 6 First of all, I want to make it real 7 clear that I'm not opposed to gaming. I voted for it; 8 I'm in favor of it. But when the lottery came in, it 9 was described to me and explained to me that each game 10 was like a separate entity and it was supposed to pay 11 for itself and it operates within its own revenue. 12 Well, Texas Two Step, where you pointed 13 out a while ago that Texas Two Step is two percent or 14 something in sales up from '06. Commissioner Cox, you 15 weren't here, I don't think, when Two Step came in. 16 Texas Two Step sales the first year, which was just a 17 partial year, was $32.9 million. It grew to 18 $82.9 million. And it was a game that offered the 19 guaranteed prize of $200,000 starting out. There were 20 sufficient revenues to fund that, based on these 21 sales. 22 But sales started out at 80 -- or was 23 82.9. They fell to 72.3. Then they fell to 49.1. 24 Then they fell to $45.0 million. Well, there is a big 25 difference in what can be afforded on these prizes. 0103 1 And I've watched the reserve come from -- I believe it 2 was something like $1.5 million all the way down. 3 Reserve fund is the part that I object 4 to on these games, and I objected to it on Lotto 5 Texas. You-all tell people that they get 50 percent 6 of sales from -- well, that they just get -- 7 50 percent of sales is returned to the people by way 8 of prizes. That has never been true, and it is not 9 true on Texas Two Step. 10 If you add up the allocations for the 11 seven prizes, they only equal 98 percent of that 12 50 percent of sales. Two percent of that, just 13 straight off the player share, is held in reserve. 14 Well, that's the part that I object to, is telling 15 people that they get 50 percent of sales returned by 16 way of prizes when, in fact, they don't. They never 17 have. 18 So when you look at Texas Two Step and 19 you see the decline in sales from what it was to where 20 it is today, with the jackpot starting out at 21 $200,000, and then you look at the AG ruling that he 22 did last year over my complaint on this game -- and I 23 brought it to your attention, too, and I believe I 24 brought it to the attention back in 2002 at the time 25 that the reserve was dangerously low. And last year 0104 1 when I did it, it was when it was at $200,000 because 2 I knew if it was hit, that would wipe out the 3 reserves. 4 My opposition on this is that reserve. 5 And it was my understanding through the Legislature 6 that we were supposed to change the game and do away 7 with reserves, guarantee that the people get their 8 share of money, and that did happen on Lotto Texas. 9 When you were talking about the on-line 10 games, you said Lotto Texas, Texas Two Step and Mega 11 Millions, and y'all went through the reserve there. 12 Well, you left out Cash Five. And Cash Five is the 13 fairest game that Texas offers, because it does 14 guarantee the people that they get 50 percent of 15 sales. It does that because it does offer a 16 guaranteed prize, but it comes straight -- whatever 17 the winners amount to comes straight out of the prize 18 pool. Then the balance of the prize pool is divvied 19 up pari-mutuelly. That's a very fair way to do it. 20 I am only suggesting and recommending 21 to this Commission that they operate that each game is 22 its own little business and it should never operate in 23 the red, and it doesn't have to. What wasn't reported 24 was that California is a state who has all 25 pari-mutuel-based games, and that's what I'm 0105 1 suggesting on this Two Step. 2 Two Step sales have increased a little 3 bit, and that's because Lotto Texas has declined so 4 greatly. And the people are over there because on 5 Lotto Texas, the best you can win is three dollars. 6 At least if you get three numbers or two numbers, 7 three numbers, whatever it is on Two Step, you're 8 going to win a minimum of five or seven dollars just 9 for matching the bonus number, which is greater than 10 Lotto Texas. So the Lotto Texas players have sort of 11 kind of moved over to Texas Two Step, but it has not 12 been sufficient to guarantee that $200,000 starting 13 jackpot. 14 At no time did I ever say that the 15 Commission was broke or going broke. I'll make it 16 very clear, y'all make lots of money. And staff does 17 do an excellent job. They could do better if they 18 would just give the people of Texas the games that 19 they want. And I still contend that you could 20 increase your on-line sales just with the games that 21 you offer. 22 And that's all I wanted to say on the 23 Two Step. 24 CHAIRMAN COX: Thank you very much, 25 Ms. Nettles. We appreciate your interest. 0106 1 Ms. Pyka? 2 MS. PYKA: Yes, sir? 3 CHAIRMAN COX: Do we operate any games 4 at a deficit? 5 MS. PYKA: No, we do not. 6 CHAIRMAN COX: Long before a game 7 became unprofitable, we would have recognized where it 8 was going and taken it down. Is that not the case? 9 MS. PYKA: That is the case. 10 CHAIRMAN COX: Now, we operate some 11 games that are declining games, and we look often at 12 how we should change those. Certainly when Lotto 13 Texas declines, sales decline, we have to look at that 14 $4 million and say, "Is it still appropriate to put up 15 an ante of $4 million to get this game started?" And 16 what I hear each time is that if you want to see this 17 game decline, you lower the ante and you'll really see 18 this game decline. 19 MS. PYKA: Correct. 20 CHAIRMAN COX: So our marketing people 21 are very good, and the GTECH marketing people are very 22 good. And I have confidence that all the things that 23 Ms. Nettles mentioned are being considered, and I want 24 to reassure her on those things. I want to be sure 25 that you take into account the things -- as you 0107 1 rewrite these rules, you take into account the 2 suggestions that Ms. Nettles had. 3 MS. PYKA: Will do, Mr. Chairman. 4 CHAIRMAN COX: Thank you. 5 COMMISSIONER CLOWE: And you're going 6 to get help from the Legal Department in rewriting 7 those rules, aren't you? 8 MS. PYKA: That's why I'm sitting next 9 to Sarah today. 10 AGENDA ITEM NO. XIX 11 CHAIRMAN COX: Okay. Chairman Clowe, 12 Item XIX, as I looked at it, was repetitive of Item 13 XVIII. 14 COMMISSIONER CLOWE: Yes, sir. 15 AGENDA ITEM NO. XX 16 CHAIRMAN COX: So let's go on to Item 17 XX, report, possible discussions and/or action on 18 transfers to the State. 19 Ms. Pyka. 20 MS. PYKA: For the record, Kathy Pyka 21 Controller. 22 Tab XX includes information on the 23 agency's financial status. The first report in your 24 notebook includes the transfers and allocations to the 25 Foundation School Fund and the allocation of unclaimed 0108 1 prizes as of May of this year. Our total transfers to 2 the state amounted to $790.2 million for the first 3 nine months of Fiscal Year 2007. And this does 4 represent a minimal decline from the amount 5 transferred in May of 2006. 6 The second page of your notebook 7 includes a detailed information on the transfers. Of 8 the $790.2 million transferred to the state, 9 $744.5 million was the amount transferred to the 10 Foundation School Fund, with a balance of 11 $45.7 million transferred from unclaimed lottery 12 prizes. 13 And then last, the final document in 14 your notebook includes our cumulative transfers for 15 Fiscal Year 1992 to date, and this amount represents 16 $9.4 billion. 17 I would be happy to answer any 18 questions, Commissioners. 19 COMMISSIONER CLOWE: No questions. 20 CHAIRMAN COX: No questions. 21 MS. PYKA: Thank you, Commissioners. 22 CHAIRMAN COX: Okay. I think you can 23 stay there. 24 25 0109 1 AGENDA ITEM NO. XXI 2 CHAIRMAN COX: Item XXI, report, 3 possible discussion and/or action on the Fiscal Year 4 2008-2009 legislative appropriation request. 5 MS. PYKA: Again, for the record, Kathy 6 Pyka, Controller. 7 This morning I have a brief report -- 8 and it will actually be our final report -- on the 9 Fiscal Year 2008-2009 legislative appropriations 10 request. I updated for your notebook a summary of the 11 final action taken by the 80th Legislature. And last 12 night when I presented the status report, we were 13 still awaiting action on two pending items by our 14 Budget Hearing Oversight, the first being on the 15 exempt salary request and the second being on Rider 2 16 related to the bingo indirect and administrative 17 expenses. 18 First, on the salary request, I wanted 19 to note that the Commission's bill pattern was adopted 20 reflecting an exempt position salary at $135,000 21 within a Salary Group 6. This is capped at $135,000 22 in Article VII. But we do have a provision in Article 23 IX under Section 3.05(c)(4) providing that the 24 governing board does have the authority to request 25 that of the LBB and Governor's budget office an 0110 1 increase to the Executive Director's position within 2 the full range of Salary Group 6, and that range does 3 go up to just over $214,000. If the proposed rate 4 increase is not responded to, we shall consider it to 5 be approved if we do not receive a response, if we 6 were to ask for this within 10 days of submitting the 7 request to both the LBB and the Governor's budget 8 office. 9 COMMISSIONER CLOWE: And, Kathy, you're 10 saying a request. Is that the correct terminology? 11 Or is it a letter of intent? 12 MS. PYKA: The actual rider -- Section 13 (c) states that an agency whose exempt position is 14 listed may request to set the rate of compensation for 15 the agency's exempt position. 16 COMMISSIONER CLOWE: So it is a letter 17 requesting? 18 MS. PYKA: Yes. 19 COMMISSIONER CLOWE: And then if there 20 is not a negative response, then the agency can go -- 21 the governing body can go forward with consideration? 22 MS. PYKA: That is correct. 23 COMMISSIONER CLOWE: Thank you. 24 MS. PYKA: And then the second item on 25 the Commission's Rider 3 relating to the funding of 0111 1 certain bingo indirect overhead costs and 2 administrative expenses, that item was not adopted. 3 It was contingent upon the passage of legislation, 4 specifically an amendment to the State Lottery Act, 5 and that did not happen. 6 And then I also wanted to note that our 7 office prepared an overview of all the changes and 8 modifications to Article IX included in the General 9 Appropriations Act, and I gave you a copy of that 10 document this morning. I just wanted to highlight a 11 couple of the items for you. They're significant to 12 us. 13 Section 2.01 of Article IX modifies the 14 classified position schedule by either adding, 15 deleting position types. There's 34 positions within 16 our Commission that will have a change to their 17 classification structure, whether it be the class 18 code, the title, the salary group, effective 19 September 1. And then also Section 19.62 provides a 20 2 percent or a minimum of $50 salary increase for our 21 Commission employees, effective September 1 of 2007 as 22 well as September 1 of 2008. 23 Section 3.09 of Article IX requires the 24 State Auditor to conduct a study to review the 25 compensation of exempt positions in the State of 0112 1 Texas, and this study is to be submitted to the LBB 2 and the Legislature no later than September 1 of 2008. 3 That is something new in Article IX. 4 Section 7.03 includes a new provision 5 stating state agencies are not allowed to use funds 6 appropriated to close a field office, unless the 7 agency provides notification to the Legislature prior 8 to the public announcement of closing the field 9 office. 10 And then last, there is a new 11 provision, Section 19.68, which requires a review of 12 background check procedures in the State of Texas, and 13 it requires that all state agencies currently 14 conducting background checks submit to the State 15 Auditor's office, the Department of Licensing and 16 Regulation, the Department of Public Safety and the 17 Legislative Budget Report a review on the agency's 18 background check procedures by November 1 of this 19 year. And the SAO, the State Auditor's office, will 20 determine the form in which agencies are to supply 21 this information. 22 That concludes my overview, and I would 23 be happy to answer any questions. 24 CHAIRMAN COX: Thank you very much. 25 MS. PYKA: You're welcome. 0113 1 AGENDA ITEM NO. XXII 2 CHAIRMAN COX: Item XXII, report 3 possible discussion and/or action on the 80th 4 Legislature. 5 Ms. Trevino. 6 MS. TREVINO: Good morning again, 7 Commissioners. For the record, I'm Nelda Trevino, the 8 Director of Governmental Affairs. 9 The last day of the regular session was 10 May 28th, and we had begun our process as it relates 11 to the agency's legislative implementation project. 12 Melissa Villasenor serves as the project coordinator. 13 And in your notebooks, she has provided you with 14 several documents. 15 During this legislative session, the 16 Governmental Affairs Division tracked 154 bills and, 17 as noted in your notebook materials, 28 of these bills 18 passed the Legislature. In addition to the 19 appropriations bill that Kathy just discussed with 20 you, there are two additional bills with direct impact 21 on the agency, which passed the Legislature. However, 22 these bills were vetoed by the Governor. 23 These include House Bill 1179 by Rep. 24 Kino Flores and House Bill 2265 by Rep. Pat Haggerty. 25 We have provided you copies earlier of The Governor's 0114 1 veto proclamations on these two bills. 2 As part of the legislative 3 implementation project identified, bills have been 4 assigned to division directors, based on subject 5 matter, for a review and determination of what, if any 6 action, the agency may need to take to implement 7 provisions of the bills. 8 Included in your notebooks materials is 9 a project timeline. And you will note division 10 directors will provide progress reports to Melissa, 11 where she will then compile an implementation report 12 to be provided to executive management and the 13 Commission. We will continue to provide you updates 14 at future Commission meetings on this project. 15 And that concludes my report, and I 16 will be happy to answer any questions. 17 CHAIRMAN COX: Thank you, Nelda. 18 AGENDA ITEM NO. XXIII 19 CHAIRMAN COX: Item XXIII, report, 20 possible discussion and/or action on the agency's 21 contracts. 22 Mr. Jackson. 23 MR. JACKSON: Good morning, 24 Commissioners. For the record, my name is Tom 25 Jackson. I'm the Purchasing and Contracts Manager for 0115 1 the Commission. 2 Commissioners, in your notebook under 3 Tab No. XXIII, there is a report on prime contracts. 4 That has been updated for your review. 5 I would be happy to answer any 6 questions. 7 COMMISSIONER CLOWE: No questions. 8 CHAIRMAN COX: No questions. Thank 9 you, Tom. 10 AGENDA ITEM NO. XXIV 11 CHAIRMAN COX: Item No. XXIV, report, 12 possible discussion and/or action on the procurement 13 of consulting services to analyze and explore options 14 available for delivery of core lottery business 15 services. 16 Mr. Fernandez. 17 MR. FERNANDEZ: Good morning, 18 Mr. Chairman and Commissioner Clowe. For the record, 19 my name is Mike Fernandez. I'm the Director of 20 Administration. 21 This item is to advise you of the 22 staff's intent to release a request for proposal for 23 the acquisition of consulting services. The 24 consultant, once acquired, will be used by staff to 25 work with us to develop an RFP and to release that RFP 0116 1 for the acquisition of lottery operator services. 2 If you have any questions, I would be 3 happy to answer them. 4 COMMISSIONER CLOWE: I guess I don't 5 have any questions. 6 CHAIRMAN COX: Okay. Thank you, Mike. 7 MR. FERNANDEZ: Yes, sir. 8 AGENDA ITEM NO. XXV 9 CHAIRMAN COX: Item XXV, report and 10 possible discussion and/or action on the agency's HUB 11 program and/or minority business participation, 12 including the agency's Mentor Protégé Program. 13 Ms. Bertolacini. 14 MS. BERTOLACINI: Good morning Chairman 15 Cox and Commissioner Clowe. For the record, my name 16 is Joyce Bertolacini, Coordinator of the TLC's 17 historically underutilized business program. 18 A copy of the agency's April HUB 19 minority contracting activity report has been provided 20 to you today in your notebook. This report includes 21 all Fiscal Year 2007 expenditures paid from 22 September 1, 2006, through April 30, 2007. 23 Our total qualifying expenditures as of 24 April 30th were approximately $106.1 million, and our 25 estimated HUB and minority utilization was 0117 1 $25.5 million, which equates to 24.03 percent. 2 Regarding the agency's Mentor Protégé 3 Program, to date we have four eligible mentor 4 companies available, and I have received a group of 5 applications, approximately 12, from potential 6 protégés, and I'm still receiving responses 7 periodically. All of the protégé applications that 8 I've received, I have screened for eligibility. And 9 the approved applications will be sent to the mentor 10 companies within the next week. Mentors will then be 11 instructed to contact all of the potential protégés in 12 an effort to determine which company will be the best 13 fit for a mentor protégé relationship. 14 Did you have any questions before I go 15 on? 16 Okay. And, finally, I'm currently 17 involved in planning the agency's annual HUB forum 18 which will take place on Tuesday, July the 31st, from 19 1:00 to 4:30 p.m., here in the auditorium. A special 20 mentor protégés presentation will be included as part 21 of this forum agenda. All four of the mentor 22 companies are scheduled to provide information about 23 their companies and what they have to offer to 24 potential protégés. 25 In addition, we will have a legislative 0118 1 update, a presentation on our procurement processes. 2 And again, we will have roundtable networking sessions 3 this year. We are looking forward to having another 4 successful event. 5 And that's all I have today, but I 6 would be happy to answer any questions you might have. 7 COMMISSIONER CLOWE: Joyce, I'm glad to 8 hear that report, and it's good progress. I'm 9 particularly encouraged by the results on the Mentor 10 Protégé Program. And I'm glad to see that that 11 program is being nurtured and supported. I think 12 that's extremely important as part of our overall HUB 13 and minority activities, and I'm glad to see that 14 you're engaged in that and encourage you to continue 15 that so that this agency maintains a high level of 16 participation. 17 MS. BERTOLACINI: Thank you. 18 CHAIRMAN COX: I have a question, 19 Joyce. You indicate you have four mentors and 12 20 applications for protégés. Are these mentors willing 21 to take on more than one protégé? 22 MS. BERTOLACINI: It's possible that 23 they could. What my process is, is to look at the 24 areas that the protégés indicate that they need 25 assistance in. And if they have any area that 0119 1 overlaps with any of the areas the mentors have 2 indicated they can provide assistance in, even if it's 3 just one area out of 25, then I provide that 4 application to the mentor company. In the past, we 5 have had some companies -- some mentors that have done 6 more than one relationship, so I would assume that it 7 could happen again. 8 CHAIRMAN COX: And again, who are the 9 four mentors? 10 MS. BERTOLACINI: That would be GTECH, 11 Scientific Games, Davila, Bushhorn -- don't say that, 12 because last time I messed up -- Davila, Bushhorn & 13 Associates -- and, you know, I'm forgetting -- Tracey 14 Locke, yes. 15 CHAIRMAN COX: Thank you. 16 MS. BERTOLACINI: Thank you. 17 COMMISSIONER CLOWE: In light of 18 Commissioner Cox's question, if you have more 19 applicants than any one of the four mentor companies 20 can handle, I would suggest that you might examine the 21 idea of a common effort on behalf of one or two or 22 three or four of the mentor companies in a group 23 environment towards a group of protégés. Let's don't 24 let those protégés get away. 25 MS. BERTOLACINI: Okay. 0120 1 COMMISSIONER CLOWE: Do I make myself 2 clear? 3 MS. BERTOLACINI: Yes. And there's 4 also the possibility of sharing our applicants with 5 other state agencies as well. But I understand, your 6 focus is our agency. 7 COMMISSIONER CLOWE: Have a class. 8 MS. BERTOLACINI: Yes. 9 COMMISSIONER CLOWE: You know, conduct 10 a class and keep them coming. 11 MS. BERTOLACINI: Okay. 12 COMMISSIONER CLOWE: Don't tell a 13 protégé, "We don't have a mentor for you. We're 14 sorry. Go away" -- 15 MS. BERTOLACINI: Right. 16 COMMISSIONER CLOWE: -- if you can 17 avoid that. 18 MS. BERTOLACINI: Okay. I'm also 19 expecting from our forum that we may get some 20 additional interest from some of the people that 21 attend, so I don't think that we're limited to 12 22 possible applicants. There were some applicants that 23 also came in that were not eligible, for various 24 reasons, one of them being that you must have a 25 current HUB certification. And one of the other items 0121 1 requires that they not be delinquent with any taxes 2 due to the state. And some actually neglected to 3 indicate what areas they would be interested in 4 getting assistance in. So I'm trying to go back to 5 those applicants and make sure they understand what 6 they need to do. 7 COMMISSIONER CLOWE: And I'm sure 8 you're not surprised by that. These are companies 9 that are trying to learn how to do this business. 10 MS. BERTOLACINI: Yes. 11 COMMISSIONER CLOWE: And to help them 12 is, in my mind, part of the nurturing that you and 13 your staff need to participate in to make this 14 successful. 15 MS. BERTOLACINI: I agree. 16 CHAIRMAN COX: Thank you, Joyce. 17 MS. BERTOLACINI: Thank you. 18 AGENDA ITEM NO. XXVI 19 CHAIRMAN COX: Item No. XXVI, 20 consideration of and possible discussion and/or action 21 on external and internal audits and/or reviews 22 relating to the Texas Lottery Commission and/or on the 23 Internal Audit Department's activities. 24 Ms. Melvin. 25 MS. MELVIN: For the record, Catherine 0122 1 Melvin, Internal Audit Director. 2 Mr. Chairman, Commissioner Clowe, I 3 have no items of update at this time but am happy to 4 answer any questions you might have. 5 CHAIRMAN COX: Thank you, Catherine. 6 MS. MELVIN: Thank you. 7 AGENDA ITEM NO. XXVII 8 CHAIRMAN COX: Item XXVII, report, 9 possible discussion and/or action on the status of 10 management responses to the State Auditor's Office 11 Audit Report of Texas Lottery Commission Workforce 12 Management Audit. 13 Ms. Kiplin. 14 MS. KIPLIN: Commissioners, 15 Mr. Chairman, I believe you asked that this item be 16 added to the agenda. 17 CHAIRMAN COX: I did, in fact. 18 MS. KIPLIN: And it had to do with a 19 spreadsheet I believe that you get that showed three 20 items that appeared to be within the Commission 21 purview that were indicated as ongoing, and so the 22 item was added to the agenda. 23 Last night, late last night I completed 24 two documents that I have distributed to each of you, 25 as well as some other members of the staff, Executive 0123 1 Director Sadberry. And so if you-all believe that you 2 have not had sufficient time to review -- and I 3 certainly apologize for the lateness in getting those 4 to you -- it's really within your purview if you would 5 like to pass this item. 6 CHAIRMAN COX: I think, Mr. Chairman, 7 what I would like to do here is, you have an 8 opportunity to read Ms. Kiplin's documents. 9 COMMISSIONER CLOWE: I came in this 10 morning and she briefed me on it. And I feel like I 11 have not only read it, but I've been briefed on it and 12 I understand. 13 CHAIRMAN COX: Okay. And I feel the 14 same way. 15 So, Kim, what action would you like 16 here? 17 MS. KIPLIN: I really don't know that 18 it's an action item. I was asked to prepare a 19 document for y'all's review, and I'm happy to go 20 through that. And that really had to do with 21 addressing the three issues that were shown as 22 outstanding. 23 CHAIRMAN COX: Well, I think we can 24 probably at this point say we've read it, we agree 25 with it. Why don't you -- and, Director Sadberry, why 0124 1 don't you incorporate that into our response to the 2 State Auditor's Office and let's show them that we 3 were responsive to that item. 4 MR. SADBERRY: Okay. 5 AGENDA ITEM NO. XXVIII 6 CHAIRMAN COX: Okay. Item XXVIII, 7 report, possible discussion and/or action on the Mega 8 Millions game and/or contract. 9 Director Sadberry. 10 MR. SADBERRY: Good morning, 11 Mr. Chairman, Commissioner. My name is Anthony 12 Sadberry, Executive Director. 13 The North American Association of State 14 and Provincial Lotteries conducted its 2007 spring 15 directors' meeting last week, June 18 through 21, in 16 Annapolis, Maryland, which was hosted by the Maryland 17 Lottery. Attending that meeting were the national 18 member lotteries' directors and the two basic groups 19 conducting multi-state lotteries, which is the MUSL 20 directors group, which operates Power Ball, and the 21 Mega Millions directors group, which you're familiar 22 with, Texas being a member of that group. 23 So there was a combined meeting of that 24 group as well as Mega Millions conducting business 25 matters for both groups individually, including future 0125 1 business activities, budget and financial matters and 2 related activities for the NASPL group. The Mega 3 Millions group met separately from the MUSL directors 4 group. 5 The Mega Millions group conducted 6 general business matters, including budget and finance 7 matters and other projected game opportunities related 8 to the Mega Millions group activities. This meeting 9 is in preparation for the general meeting of all NASPL 10 lottery operations in which other members of 11 management and staff should anticipate attending, 12 including the Texas Lottery. 13 And we look forward to continuing to 14 work with the Mega Millions directors on innovations 15 and game trends and opportunities to have help set 16 that governance structure. 17 CHAIRMAN COX: Thank you. 18 AGENDA ITEM NO. XXIX 19 CHAIRMAN COX: Item XXIX, consideration 20 of and possible discussion and/or action on the 21 lottery operator contract, including whether the 22 negotiation of the lottery operator's contract in an 23 open meeting would have a detrimental effect on the 24 Commission's position in negotiations of the lottery 25 operator contract. 0126 1 Mr. Fernandez. 2 MR. FERNANDEZ: Again, for the record, 3 my name is Mike Fernandez. I'm the Division Director 4 for Administration. 5 What I would like to do is to provide 6 status on proposed amendment to the GTECH contract, 7 which I know you're familiar with as Contract 8 Amendment No. 9. At your April meeting, we brought an 9 informational item to you regarding this proposed 10 amendment. 11 COMMISSIONER CLOWE: I don't think 12 that's the subject of this agenda item, is it? The 13 question I have, Mr. Chairman, is that this agenda 14 item is posted as whether or not a discussion of the 15 contract in the open meeting would have a detrimental 16 effect on negotiations with the operator. 17 CHAIRMAN COX: Well, I see that as part 18 of it. But what I thought was going to be reported 19 here is the status of Amendment 9. 20 MR. FERNANDEZ: Yes, sir. 21 COMMISSIONER CLOWE: Is that covered in 22 this agenda item legitimately? 23 MS. KIPLIN: Yes, sir. This notice has 24 been carried on the lottery operator contract itself. 25 But the other part has to do with the decision that 0127 1 you-all need to make about whether the negotiation of 2 that contract in the public -- 3 COMMISSIONER CLOWE: Right. 4 MS. KIPLIN: -- would have a 5 detrimental effect. 6 COMMISSIONER CLOWE: And we haven't 7 addressed that issue, Mr. Chairman. 8 CHAIRMAN COX: Okay. So -- 9 COMMISSIONER CLOWE: I wonder if we 10 shouldn't do that first. And then, if it's decided it 11 won't have a negative effect, Mike can make his report 12 if it's included -- if his report is included in the 13 general notice. 14 CHAIRMAN COX: Thank you, Chairman 15 Clowe. 16 MR. FERNANDEZ: I apologize. 17 CHAIRMAN COX: Do you have any concern 18 about discussing this in an open meeting? 19 COMMISSIONER CLOWE: Absolutely none. 20 CHAIRMAN COX: Nor do I. 21 MR. FERNANDEZ: All right. I apologize 22 for getting the cart before the horse. 23 CHAIRMAN COX: That was my -- 24 COMMISSIONER CLOWE: I just want to be 25 sure we're doing what we need to do. 0128 1 MR. FERNANDEZ: Again, Commissioners, 2 at your April meeting, we brought an informational 3 item to your attention, which was proposed Amendment 4 No. 9 to the GTECH contract. Now, that particular 5 amendment had three different sections. Two of the 6 sections dealt with language changes proposed by our 7 Controller's office that would standardize our 8 contract language across our amendments and the 9 contract, which I believe both of you concurred with. 10 The third item had to do with 11 background checks and the employment of staff by GTECH 12 prior to having a background check completed. And 13 what the amendment dealt with was allowing GTECH, 14 which was different language from Amendment 8, to hire 15 staff in the State of Texas prior to having a 16 background check, although those staff would not be 17 allowed to have access to or to work on the Texas 18 account. And I believe Commissioner Clowe had a 19 couple of questions and Mr. Sadberry also had comments 20 regarding that issue. 21 Subsequent to that, the staff went back 22 and took a look at that, as did GTECH. And after 23 additional review and discussion, GTECH requested that 24 that amendment, that portion of Amendment 9, be 25 withdrawn, which staff concurs with. So I wanted to 0129 1 let you know the status of that particular issue. 2 And if you have any questions, I would 3 be happy to answer them. 4 CHAIRMAN COX: No questions. Thank 5 you, Mike. 6 AGENDA ITEM NO. XXX 7 CHAIRMAN COX: Item XXX, report, 8 possible discussion and/or action on GTECH 9 Corporation. 10 Mr. Sadberry. 11 MR. SADBERRY: Good afternoon, 12 Mr. Chairman and Commissioner. Again, for the record, 13 my name is Anthony Sadberry, Executive Director. 14 On Friday, June 8th, Chairman Cox, Gary 15 Grief and I met with senior management of GTECH 16 Corporation, including Jaymin Patel, recently named 17 President and Chief Operating Officer; Alan Eland, 18 Senior Vice President of the Americas; Scott Gunn, 19 Regional Vice President of the Western Region; and 20 Ramon Rivera, GTECH Texas Account General Manager. 21 The meetings was offered by Mr. Patel 22 in his new capacity as a newly created GTECH position 23 of President and COO, reporting to Lottomatica Chief 24 Executive Officer, Bruce Turner, who previously, as 25 you know, has appeared before the Commission and had 0130 1 certain interaction with regard to the expectations of 2 the Commission. 3 In the meeting, we established new 4 lines of communication, with Mr. Eland designated by 5 Mr. Patel as the primary contact at GTECH for both 6 Chairman Cox, Gary Grief and myself. Chairman Cox, 7 Mr. Grief and I had the opportunity to lay out the 8 expectations for the new GTECH management team and 9 provide Mr. Patel with the vision of going forward 10 with regard to the Texas Lottery. 11 I would be happy to answer any 12 questions. 13 COMMISSIONER CLOWE: Mr. Chairman, I 14 would be interested in your reaction in your 15 attendance in that meeting and how you felt about the 16 questions that were answered that I'm sure you posed. 17 And we've done quite a bit of research on this 18 emerging corporation, I might call it. And I'm glad 19 that you had this meeting. And I would be interested 20 in what reflections you might want to comment on. 21 CHAIRMAN COX: Okay. The discussions 22 were in no way related to issues of governance. I 23 believe that that has been thoroughly covered, is well 24 covered on a continuing basis, and I don't need to get 25 involved in that. We receive periodic reports from a 0131 1 very competent and vigilant team, and I'm comfortable 2 with that side of things. 3 As I expressed to Mr. Turner some 4 months ago when he appeared here, however, I do have 5 operational concerns, and this centers around a couple 6 of things. One is bombs that continue to blow up in 7 our face that I know have happened other places. And 8 I asked GTECH, "Please let us know what bombs are out 9 there, what mines are out there that we're about to 10 step on, so that we can avoid them. Bring us whatever 11 you have from other jurisdictions and apply it to what 12 we're doing and tell us where we have risks of making 13 mistakes." And they were very receptive to that and 14 agreed that they would begin doing that immediately. 15 The other area that I asked them to 16 look at was, "Hey, we've got awfully good management 17 here. We run a good lottery, but we want to run the 18 very best lottery in the world. And you serve a lot 19 of other lotteries. And what we would like for you to 20 do is bring us best practices in every area possible 21 and let us look then at those, look at what we do and 22 make a determination as to what is best for the people 23 of the State of Texas." 24 The only other area was, "Ramon runs a 25 very good shop. Give him all the help you can from 0132 1 the experience that you have in running other 2 jurisdictions so that he can run the best operation 3 that GTECH has." And in all cases, the answer was 4 "Yes, we will," and, "We're on it." 5 COMMISSIONER CLOWE: Good. I am 6 constantly told that GTECH holds the Texas Lottery 7 operation up as an example to other lotteries as being 8 exemplary in performance. And if that is true, we're 9 appreciative of that. I think you're absolutely on 10 the right track to get best practices from GTECH that 11 might improve our operation. 12 And I was on the verge of a question 13 about the consultant for operator practices. Does 14 that deal strictly with operating issues or does it go 15 into some of the philosophic problems that I 16 highlighted in comments I made with Kathy and Robert 17 earlier in this meeting? I guess my base question is, 18 are we drawing on every resource we can to understand 19 what we're doing? 20 CHAIRMAN COX: I think there are other 21 resources that we could call on, but I think we're 22 calling at this point on the appropriate resources; 23 and that is, an excellent staff and the resources of 24 GTECH primarily. Certainly we also call on Scientific 25 Games, and they provide us with very helpful 0133 1 information. So I think between our staff and our 2 vendors, we have the kind of expertise that we need to 3 make this the best lottery in the world. 4 COMMISSIONER CLOWE: Great. Thank you. 5 CHAIRMAN COX: Thank you, Director 6 Sadberry. 7 AGENDA ITEM NO. XXXI 8 CHAIRMAN COX: Item No. XXXI, report, 9 possible discussion and/or action on Scientific Games 10 Corporation's acquisition of Oberthur Gaming 11 Technologies. 12 Ms. Kiplin. 13 MS. KIPLIN: Commissioners, this is 14 just a notification to you-all. It doesn't require 15 any action. Scientific Games announced an acquisition 16 of Oberthur Gaming Technologies recently. Following 17 that, the agency was contacted by the Federal Trade 18 Commission to arrange an interview regarding this 19 acquisition. It's a post-merger review, as I 20 understand it, that's occurring. 21 The FTC is conducting a non-public 22 investigation involving the Scientific Games 23 acquisition of Oberthur and would like to speak with 24 representatives of the Texas Lottery. 25 Last week we had an opportunity to meet 0134 1 with key members of the staff, and we also had joining 2 us Mark Tobey, who is the Division Chief of the Anti- 3 Trust Division of the Office of the Attorney General, 4 in terms of whether to participate with regard to this 5 interview. 6 And based on that, we will be 7 participating in this interview. And that should be 8 occurring I believe at the end of next week. 9 Be glad to answer any questions that 10 you have. 11 COMMISSIONER CLOWE: No questions. 12 CHAIRMAN COX: Thank you, Kim. 13 AGENDA ITEM NO. XXXII 14 CHAIRMAN COX: Item No. XXXII, report, 15 possible discussion and/or action regarding agency 16 action in response to allegations of possible 17 misconduct. 18 Ms. Kiplin. 19 MS. KIPLIN: Commissioners, at the last 20 Commission meeting, you received information from Dawn 21 Nettles -- and she is still here -- that had to do 22 with issues -- she was commenting on another matter 23 but then spilled into putting on the record 24 information that had to do with the processing of a 25 prize winner and raised the issue of whether there was 0135 1 possible wrongdoing, criminal wrongdoing. 2 You asked that I follow up with 3 Ms. Nettles, and Ms. Melvin and I did so that day. 4 Since then, we have notified the Travis County 5 District Attorney's office. My understanding, that 6 they are reviewing the information. And we also are 7 reviewing the information that we have available. 8 And that's all I'm really prepared to 9 say publicly. I'm intentionally keeping my remarks 10 general in terms of the information that we received, 11 out of concern of not wanting to jeopardize any review 12 the Travis County District Attorney's office is 13 conducting or the issue here. 14 COMMISSIONER CLOWE: So what you're 15 telling us is, there is an investigation that's 16 underway? 17 MS. KIPLIN: Yes. I believe where the 18 Travis County District Attorney's office is -- and 19 this is public in terms of a report -- is they have 20 received the information and they're reviewing it. I 21 don't know that they've actually gone and said that 22 they have opened a case. But they are reviewing the 23 information, and I have been in contact with their 24 office. 25 I have just been handed a witness 0136 1 affirmation form I'm giving to the Chairman. 2 CHAIRMAN COX: Okay. Chairman Clowe, I 3 have a witness affirmation form from Ms. Nettles, who 4 wants to comment on this item. 5 Ms. Kiplin, do you think, given the 6 general nature of your report, that it's appropriate 7 to receive public comment on this item? 8 MS. KIPLIN: I think that you have set 9 a precedent of receiving public comment. It's hard 10 for me to say you should go against that precedent, 11 because I have no idea what Ms. Nettles intends to 12 say. You might want to question her before she puts 13 specific remarks on the record, as to the general 14 nature of her comments. 15 CHAIRMAN COX: If I did that, what 16 might I ask her? 17 MS. KIPLIN: "How specific do you plan 18 on getting?" I'm concerned, frankly, about 19 jeopardizing any kind of investigation that would 20 impact -- 21 CHAIRMAN COX: Ms. Nettles, why don't 22 you come on down, and Ms. Kiplin and you are going to 23 have a little discussion here, and then we'll see 24 where this goes. 25 (Laughter) 0137 1 COMMISSIONER CLOWE: Mr. Chairman, 2 before that takes place, can I make a comment? 3 CHAIRMAN COX: Yes, sir. 4 COMMISSIONER CLOWE: The situation 5 here, Counselor, is that any witness that appears 6 before this body is foreign. And this is a public 7 session so that any comment that's made is totally 8 open to the public. And you have informed us that 9 this is an ongoing investigation with the Travis 10 County District Attorney. 11 And, Mr. Chairman, I think, if I recall 12 history correctly, it has not been the Commissioners' 13 practice to question witnesses who appear before the 14 board in great detail, but more intake information and 15 try to not get into a give and take and a discussion 16 that is inappropriate. 17 CHAIRMAN COX: And certainly my intent 18 is to hear her comment, if Ms. Kiplin believes it's 19 appropriate for her to comment at all. 20 COMMISSIONER CLOWE: I think you're 21 right on target. And now that this matter is turned 22 over, been turned over to the Travis County District 23 Attorney, my view is, the Commission, the Board, 24 should put itself in the position of waiting for that 25 investigation to be conducted and follow that lead, if 0138 1 you're in agreement. 2 CHAIRMAN COX: I totally agree. 3 MS. KIPLIN: Well, Commissioners, one 4 thing I would like to make sure is clear, we also are 5 reviewing information within the agency, and we are 6 working in cooperation with the Travis County District 7 Attorney's office. Any information we have we are 8 providing them. 9 COMMISSIONER CLOWE: This may be a 10 criminal matter, it may be a civil matter, but it's 11 not this board's position to pursue these types of 12 matters actively but, rather, to turn them over to the 13 proper entity, whether that be a law enforcement 14 agency or whomever it might. 15 CHAIRMAN COX: Absolutely. 16 COMMISSIONER CLOWE: I just want to 17 make sure we stay where we ought to be. 18 CHAIRMAN COX: Thank you. 19 Go ahead, Ms. Kiplin. 20 MS. KIPLIN: Ms. Nettles, I have no 21 idea what you want to say. So, you know, my caution 22 would be, I'm intentionally being general in my 23 remarks because I don't want to do anything that might 24 jeopardize an investigation the Travis County District 25 Attorney's office and this agency are conducting. And 0139 1 so that's -- I would say the same -- 2 MS. NETTLES: Okay. For the record, my 3 name is Dawn Nettles. I'm with the Lotto Report out 4 of Dallas. 5 MS. KIPLIN: Is your microphone on? 6 MS. NETTLES: Well, it's the green 7 light. Can you hear me? Hello. You can hear? 8 Good-bye. 9 (Ms. Nettles switches microphones) 10 That's better. For the record, my name 11 is Dawn Nettles. I'm with the Lotto Report out of 12 Dallas. And I, too, have no intentions of 13 jeopardizing the investigation. Okay? 14 When I came here for today is due to 15 the fact that I did mention it last month and so much 16 has transpired. I did bring, that I would like to 17 give to you-all, a letter that I sent to the District 18 Attorney of Travis County. I have a redacted copy 19 where I redacted some things that were in the e-mail. 20 But because I believe that you-all questioned the 21 validity of my having received the allegation in the 22 first place, I wanted to share with you what I did, in 23 fact, give to the District Attorney. 24 As far as an investigation goes, I told 25 Kim last month and I told the District Attorney when 0140 1 they called that this investigation is relatively very 2 simple to conduct. All it would basically entail is 3 contacting those winners who appear here without 4 representation, to get to the bottom of it, to prove 5 or disprove the allegation, and that's all it takes, a 6 review of the records to see who has the same 7 representation. 8 I have in this letter the e-mails -- 9 well, I've actually brought you a copy of the e-mails, 10 so I only have one copy. I have redacted the 11 information so that my source, whose livelihood is at 12 stake, where he is not revealed at this time. 13 However, he is willing to come forward to the District 14 Attorney. At this time, the District Attorney has 15 told me he does not need him. 16 So if I may walk up there -- you will 17 have to make copies. You will have to make copies of 18 this for all four of you. 19 CHAIRMAN COX: Ms. Nettles, I have no 20 need to receive that information. I appreciate your 21 offering it. 22 MS. NETTLES: Okay. 23 CHAIRMAN COX: But, as Chairman Clowe 24 says, we are going to leave this to the investigative 25 bodies, and you're working with them. And that's 0141 1 where we want to stay with regard to this. 2 MS. NETTLES: Okay. I was surprised 3 last week when this agency revealed to the media that 4 this even occurred. I was really caught off guard. 5 CHAIRMAN COX: That what occurred? 6 MS. NETTLES: That these comments and 7 this allegation was made. 8 CHAIRMAN COX: It was a public record. 9 MS. NETTLES: Yes, it was. 10 CHAIRMAN COX: You made it. 11 MS. NETTLES: Yes, it was. But they 12 hadn't read it, sir. But it doesn't matter. I was 13 just surprised. I was just surprised that it was 14 called to the attention of them. So I hadn't said 15 anything. So be that as it may. So y'all do not want 16 these? 17 CHAIRMAN COX: Thank you. No. 18 MS. NETTLES: Okay. Thank you very 19 much. 20 AGENDA ITEM NO. XXXIII 21 CHAIRMAN COX: Item XXXIII, 22 consideration of the status and possible entry of 23 orders. 24 Ms. Kiplin. 25 MS. KIPLIN: Sorry I'm rummaging 0142 1 through documents. 2 Commissioners, you have three matters 3 before you today. The first matter is a 4 recommendation from the State Office of Administrative 5 Hearings Administrative Law Judge in connection with a 6 retailer, lottery sales agent, and it has to do with 7 insufficient funds. The ALJ has recommended revoking 8 this license for violation of the State Lottery Act 9 and not having funds available at the time that the 10 lottery swept the account. And the staff would 11 recommend that you adopt the proposed findings and 12 conclusions and revoke the retailer's license. 13 COMMISSIONER CLOWE: So move. 14 CHAIRMAN COX: Second. All in favor, 15 say "Aye." 16 COMMISSIONER CLOWE: Aye. 17 CHAIRMAN COX: Aye. 18 Motion carries 2-0. 19 MS. KIPLIN: Commissioners, the second 20 case that you have is a registry worker case against 21 an individual who did actually appear at the hearing, 22 put on evidence. It's a misdemeanor involving moral 23 turpitude, and it is a disqualifying criminal 24 conviction. And the ALJ has recommended removal of 25 this individual from the registry. 0143 1 The staff recommends you adopt the 2 proposed findings and conclusions and the entry of the 3 order. 4 COMMISSIONER CLOWE: So move. 5 CHAIRMAN COX: Second. All in favor, 6 say "Aye." 7 COMMISSIONER CLOWE: Aye. 8 CHAIRMAN COX: Aye. 9 Motion carries 2-0. 10 MS. KIPLIN: Commissioners, the third 11 case in your notebook is what we consider to be a mass 12 docket, and that is a number of folks that are 13 similarly situated being taken up at one time. And it 14 once again has to do with the registry of workers. 15 And these have to do with the agency's refusal to add 16 their names to the registry for disqualifying criminal 17 convictions. 18 The hearing was held at the State 19 Office of Administrative Hearings. The Administrative 20 Law Judge did propose findings and conclusions and 21 recommend that the agency not add their names to the 22 registry. And the staff recommends that you adopt 23 these recommendations. 24 COMMISSIONER CLOWE: So move. 25 CHAIRMAN COX: Second. All in favor, 0144 1 say "Aye." 2 COMMISSIONER CLOWE: Aye. 3 CHAIRMAN COX: Aye. 4 Motion carries 2-0. 5 MS. KIPLIN: I have three orders for 6 you. 7 CHAIRMAN COX: Okay. 8 AGENDA ITEM NO. XXXIV 9 CHAIRMAN COX: Item XXXIV, report by 10 the Executive Director and/or possible discussion 11 and/or action on the agency's operational status, 12 activities relating to the Charitable Bingo Operations 13 Division, agency procedures, and FTE status. 14 Director Sadberry. 15 MR. SADBERRY: Mr. Chairman and 16 Commissioner, Anthony Sadberry, Executive Director. 17 I have a report that was prepared by 18 Mr. Grief, at the request of Chairman Cox, regarding 19 the British Columbia Lottery Corporation, information 20 that has been provided to the agency. 21 On October 25, 2006, the Canadian 22 Broadcast Corporation televised a news story on the 23 Canadian television documentary show, The Fifth 24 Estate, regarding the British Columbia Lottery 25 Corporation, or BCLC as it's known. The story, 0145 1 entitled Luck of the Draw, concerned a lottery player 2 in Canada who was allegedly cheated of his lottery 3 winnings by a lottery ticket retailer and his 4 subsequent experience going through a three-year legal 5 dispute with BCLC after the allegation was made. 6 Since this broadcast, the Ombudsman of 7 Ontario investigated the situation and issued a report 8 in March of 2007 containing 23 recommendations for the 9 BCLC for the purpose of addressing the issues found in 10 the investigation. 11 GTECH Corporation has raised this 12 Canadian issue to our attention and, as globally 13 requested by Chairman Cox on a go-forward basis, is 14 developing a list of suggestions and/or best practices 15 for our agency to consider in our relationships with 16 retailers to mitigate the risk of similar problems 17 occurring in Texas. 18 I have requested Mr. Grief to handle 19 this matter, and I understand Chairman Cox has also 20 confirmed that request. And it is our expectation 21 that GTECH and our agency staff will make a joint 22 presentation on this matter at the next Commission 23 meeting. 24 On that, I can address any additional 25 questions. We have some additional matters to discuss 0146 1 with you. Okay. I anticipate that being brought 2 before the Commission at the July Commission meeting. 3 At the May Commission meeting, which I 4 was not in attendance -- we were at the Legislature 5 providing testimony as a resource -- certain 6 discussions occurred regarding the ombudsman position. 7 And information was conveyed to me at your request, 8 which I have received. I'm prepared to report to you 9 that the process of selecting the ombudsman has 10 continued, with your views being kept in mind and with 11 the objectives of that office under consideration and 12 is near completion. 13 Janine Mays, HR Director is here. And 14 if you wish, we can give you as much detail about that 15 process as you would like at this time. Or, 16 otherwise, I can address any questions. 17 COMMISSIONER CLOWE: I would like for 18 Janine to tell us what she wants to say about that 19 process. I visited with her earlier this morning and 20 we talked about it. And I would like to have her 21 comments made in the public for Commissioner Cox and 22 maybe ask her a question or two. 23 CHAIRMAN COX: Okay. 24 MS. MAYS: Janine Mays, the HR 25 Director. 0147 1 We had a search committee that 2 consisted of John Shaw who works in HR, Beverly 3 Reeves, who is the AISD ombudsman, and Anthony as the 4 Chair, to review applications that were presented -- 5 that were given to us. And a selection was made for 6 the ombudsman. The offer was made. We believe that 7 this applicant was the best applicant of the applicant 8 pool and is very in tune to the goals and objectives 9 of the agency with the ombudsman position. 10 Dale will be assisting that person in 11 making the transition. He's been very helpful and 12 open to that transition and understands the need for 13 that. So the next step will be to work with the 14 applicant after we've completed the offer and to 15 actually choose a start date and start with the 16 transition of the duties -- Dale's duties to the new 17 ombudsman. 18 COMMISSIONER CLOWE: And, Janine, how 19 much of the information you gave me this morning is 20 public relative to where you are in that process with 21 any individual that you may be talking with? 22 MS. MAYS: Well, we're working out some 23 details with the actual job offer now. So the details 24 are not completely final as of yet but should be by 25 the end of the day. 0148 1 COMMISSIONER CLOWE: Well, then, 2 Mr. Chairman, I would like to make a comment. 3 And I'll keep it general because I 4 think some of the things you told me this morning are 5 not appropriate at this time. 6 And I would like to include you, 7 Director Sadberry, in the scope of this comment. 8 I see this role as extremely important 9 and one that can move this agency forward in achieving 10 the level of communications that I know you aspire 11 to -- and you as well, Janine -- and that which was 12 directed by the audit that was so beneficial to this 13 agency in regard to the improvement of employee morale 14 and esprit de corps, a positive attitude. It's very 15 sensitive in my mind when you designate someone as an 16 ombudsman, because it's necessary to clearly define 17 what their role is. 18 MS. MAYS: Yes. 19 COMMISSIONER CLOWE: And if you don't 20 start on the right foot and you don't begin the 21 process positively, it can turn out to be a less than 22 satisfying experience. I speak from experience. 23 Now, what I am told about the process 24 is that you have designated this as a part-time 25 role -- 0149 1 MS. MAYS: Right. 2 COMMISSIONER CLOWE: -- and that you're 3 speaking to people -- I'll make this part generic -- 4 applicants who perhaps have some experience in this 5 area and are doing other things, and just a little 6 unsure, maybe, is the right word, about the attention 7 that can be put in place in regard to this process. 8 And I would like to just say a word of 9 caution, that whomever is selected and engaged in this 10 role needs to feel a part of this agency, needs to 11 feel tied in to these employees, needs to have their 12 best interest in the way that an ombudsman performs, 13 clearly defined, have your support, Director Sadberry, 14 and those of your senior staff that that person will 15 be interacting with, so that you come through the 16 establishment of this process with a positive result. 17 This is extremely important. It can be 18 very beneficial. But it's going to take a real 19 concerted effort to make certain a person starts 20 right, you select the right person to begin with and 21 then begin to see the results that we hope will be 22 achieved. 23 MS. MAYS: And balance, that's 24 something that I think is very, very, important. Dale 25 Hernandez, the current ombudsman that we're using now, 0150 1 she and I have had some extensive discussions about 2 exactly what you talked about and about the balance 3 and how important that transition will be, because 4 Dale is credited for helping this agency to embrace 5 the concept of an ombudsman and to embrace all the 6 things that come with that: Trust and communication 7 and another source for employees to use. 8 So her transition with the new 9 ombudsman, whoever that may be, will be critical in 10 helping to address some of the concerns that you just 11 talked about, and the balance. You know, this is an 12 agency that's, like we talked about this morning, 13 we're at a very pivotal point. We're transitioning 14 into growth. We're looking at new ways of doing 15 business. We're looking at new forms of 16 communication. We're developing trust and stronger 17 communication. And this person will be very 18 instrumental in helping that to take place. 19 So I think their relationship at the 20 start is going to be very important in helping that 21 new person to grasp that and to help the agency to 22 continue to embrace that concept. And, like you said, 23 it's critical. It's very -- 24 COMMISSIONER CLOWE: And we want our 25 employees to feel and be genuinely treated -- 0151 1 MS. MAYS: Yes. 2 COMMISSIONER CLOWE: -- with dignity 3 and respect. 4 MS. MAYS: Yes. 5 COMMISSIONER CLOWE: Now, that doesn't 6 mean that everybody is going to be happy every minute 7 of the day. And, you know, we're -- 8 MS. MAYS: That's the balance. 9 COMMISSIONER CLOWE: -- not running a 10 popularity program here. 11 MS. MAYS: That's right. 12 COMMISSIONER CLOWE: But we want the 13 sense of fairness, the open communication and the 14 opportunity to have whatever problem exists in an 15 employee's work situation, properly addressed. 16 And, you know, I think Director 17 Sadberry, you've done an excellent job of that in your 18 tenure here, and I know that you'll continue. I hope 19 you'll view this as an additional mechanism by where 20 for one of many reasons a person might want to talk 21 with an ombudsman, you can use that. 22 And, Janine, you're an ombudsman, in a 23 manner of speaking, every day as well. I see this as 24 a real opportunity 25 And, Chairman Cox, I know that you'll 0152 1 be oversighting this and making certain that we 2 achieve the goals that were laid out for us in the 3 process. 4 MS. MAYS: That's an excellent example 5 of the balance that I'm referring to. 6 MR. SADBERRY: Commissioner, I 7 appreciate those comments. If I may, I did review the 8 transcript in detail that you made at the last meeting 9 and viewed your interest and concerns about that and 10 took those very seriously into account. 11 I participated in the interview 12 process. I found Ms. Reeves' assistance -- and that 13 was one of the recommendations of the State Auditor, 14 is that because of the importance of this position, is 15 that we not rely upon our own internal resources in 16 making the selection process, that we go externally as 17 much as possible. 18 And Janine did a good job of getting 19 candidates outside the agency who were willing to 20 assist us. And Ms. Reeves, who actually participated, 21 she was so committed to the process -- and we met with 22 her on more than one occasion -- that she took 23 personal vacation time from AISD in order that she 24 would assist this agency in that process. 25 And her comments, as you pointed out 0153 1 about it being a part-time position and et cetera, 2 were helpful to us. That determination was made, at 3 my request, by Mr. Grief, Ms. Melvin, I think, and 4 Ms. Hernandez and Janine participated in making the 5 determination of what should be the level of time that 6 is attributed to, whether it's full-time or part-time 7 position, et cetera, and going forward after we came 8 to the considerations that related to selection 9 processes. 10 With a particular individual again, I 11 met last Friday, extensively, to go over the points 12 you've raised here, including looking directly at the 13 State Auditor's Report and getting into the specifics 14 of the concerns that the State Auditor raised that 15 should be addressed by this ombudsman position, which 16 was to be, according to the State Audit Report, a 17 newly created position with certain direct report 18 responsibilities, et cetera. 19 And in conjunction with my meeting last 20 Friday, we then met jointly with Ms. Mays with this 21 individual to go further into the depth of the 22 arrangements, et cetera. So I certainly understand 23 and agree with the importance of starting the process 24 off with a clear understanding of direct communication 25 and time commitment to it, to make certain that it's a 0154 1 mutual agreement, that it is of mutual benefit both to 2 the ombudsman as well as to the agency that we get off 3 on the right foot and that we have a clear and correct 4 understanding and that we demonstrate the support of 5 the importance of this position. 6 I want to say, if I may, that -- and I 7 think I would be remiss if I did not -- with the 8 support of our Internal Auditor, Catherine Melvin, and 9 at the recommendation of both the State Auditor's 10 Office and the Chairman of the Legislative Oversight 11 Committee, that we implement this function immediately 12 before we got to the posting process, that I have high 13 compliments and a deep appreciation for the services 14 Ms. Hernandez has given to us while she carried out 15 her full duties as part of the Internal Audit and the 16 support that she's received by Ms. Melvin and others 17 in the Internal Audit Division, which has been of 18 great benefit to this agency 19 And Ms. Hernandez has agreed, at my 20 request, that she will work in cooperation with any 21 new selection of an ombudsperson, including making an 22 introduction at an all-staff meeting to the agency 23 staff so that it's clear that it's a seamless 24 transition with full support and understanding upon 25 the selection of a new agency ombudsman. So we 0155 1 certainly -- I understand and agree with and 2 appreciate the critical significance of this position. 3 I know how it was generated, as a result of an audit, 4 and know how it has functioned since that time and 5 know the potential and the importance of it on a 6 going-forward basis. 7 CHAIRMAN COX: Thank you. 8 Thank you for your comments, Chairman 9 Clowe. 10 COMMISSIONER CLOWE: Yes, sir. 11 Mr. Chairman, with your permission, I would like to 12 return to Item No. XXXII briefly. 13 AGENDA ITEM NO. XXXII (continued) 14 CHAIRMAN COX: Yes. Item No. XXXII, 15 report, possible discussion and/or action regarding 16 agency action and response to allegations of possible 17 misconduct. 18 COMMISSIONER CLOWE: Yes. It occurred 19 to me that a note of clarification might be beneficial 20 in regard to your comment to Ms. Nettles that you had 21 no need of the documents that she offered up in this 22 meeting. My sense was, as I sat here, that it was not 23 a lack of interest or a concern on your part but one 24 of not wishing to inject yourself improperly into an 25 ongoing investigation where, as a member of this 0156 1 board, there might be a need to deal with some kind of 2 disciplinary action as a result of that investigation. 3 That was my sense of the basis of your comment. 4 CHAIRMAN COX: My comment was based on 5 my complete agreement with you, that this isn't 6 something for us to get involved in at this time. And 7 I think the less I know about it, the better. If 8 there are accusations against one of our employees 9 specifically by name, I don't want to know it until 10 such time as it's gone a lot further than it being 11 just an accusation. 12 COMMISSIONER CLOWE: And in that 13 spirit, I think we should ask the General Counsel to 14 inform the District Attorney of Ms. Nettles' 15 appearance here today and to inform the investigator 16 that some documents were offered up and what our 17 response was. And if the investigator needs any help 18 from anyone in this agency in regard to any of these 19 matters, be told that we stand to support in any way 20 we can that need. 21 CHAIRMAN COX: Absolutely. 22 COMMISSIONER CLOWE: I just didn't want 23 a spirit of us not being concerned or not caring about 24 it to be a misconception that might leave this 25 meeting. I think we're trying to stay in our role as 0157 1 members of the Board, and we want to communicate that 2 with the investigators. 3 CHAIRMAN COX: I think that's very 4 important. I don't want anything we do to be 5 construed as a lack of interest or a lack of concern. 6 It's just not our job. 7 COMMISSIONER CLOWE: At this time. 8 CHAIRMAN COX: At this time. As such 9 time as it becomes our job, or it may become out job, 10 we'll do our job. 11 COMMISSIONER CLOWE: Yes. And so would 12 you do that, Counselor? 13 MS. KIPLIN: Yes, I will. 14 COMMISSIONER CLOWE: Thank you, 15 Mr. Chairman. 16 AGENDA ITEM NO. XXXV 17 CHAIRMAN COX: Okay. I guess we're now 18 at public comment, Item No. XXXV. Is there any 19 additional public comment? 20 Okay. I don't believe I see any public 21 comment. 22 Okay. Ready for executive session? 23 COMMISSIONER CLOWE: Yes, sir. 24 25 0158 1 AGENDA ITEM NO. XXXVI 2 CHAIRMAN COX: At this time, I move the 3 Texas Lottery Commission go into executive of session: 4 A. To deliberate the duties and 5 evaluation, including an increase to the annual salary 6 of the Executive Director, to deliberate the duties 7 and evaluation of the Deputy Executive Director, 8 Internal Audit Director and Charitable Bingo 9 Operations Director and to deliberate the duties of 10 the General Counsel, pursuant to Section 551.074 of 11 the Texas Government Code; 12 B. To receive legal advice regarding 13 pending or contemplated litigation pursuant to Section 14 551.071(1)(A) and/or to receive legal advice regarding 15 settlement offers pursuant to Section 551.071(1)(B) of 16 the Texas Government Code and/or to receive legal 17 advice pursuant to Section 551.071(2) of the Texas 18 Government Code, including but not limited to: 19 Cynthia Suarez v. Texas Lottery 20 Commission 21 Shelton Charles v. Texas Lottery 22 Commission and Gary Grief 23 Stephen Martin vs. Texas Lottery 24 Commission 25 First State Bank of DeQueen, et al v. 0159 1 Texas Lottery Commission 2 Employment law, personnel law, 3 procurement law, contract law, evidentiary and 4 procedural law, and general government law. 5 Is there a second? 6 COMMISSIONER CLOWE: Second. 7 CHAIRMAN COX: All in favor, say "Aye." 8 COMMISSIONER CLOWE: Aye. 9 CHAIRMAN COX: Aye. 10 The vote is 2-0. We will go into 11 executive session. The time is 12:37 p.m. Today is 12 June 25, 2007. 13 (Off the record for executive session: 14 12:37 p.m. to 2:06 p.m.) 15 AGENDA ITEM NO. XXXVII 16 CHAIRMAN COX: The Texas Lottery 17 Commission is out of executive session. The time is 18 2:06 p.m. 19 Is there any action to be taken as a 20 result of executive session? 21 I move to approve the settlement 22 agreement in the Stephen Martin versus Texas Lottery 23 Commission lawsuit. Is there a second? 24 COMMISSIONER CLOWE: I second that, 25 Mr. Chairman. And it might be that if Mr. Deane is to 0160 1 inclined, he might like to talk to us about that 2 before we vote on it. 3 CHAIRMAN COX: Okay. Would you like 4 to, Mr. Deane? 5 MR. DEANE: Yes, if you wish. 6 CHAIRMAN COX: Please. 7 MR. DEANE: My name is William T. 8 Deane. I'm an Assistant Attorney General representing 9 the Texas Lottery Commission in the case that is 10 presently pending against this filed by Stephen 11 Martin. This is an FMLA claim under the Family 12 Medical Leave Act. 13 Mr. Martin asserted that while he was 14 out on medical leave, that he was terminated. And 15 he's claiming a violation of federal law, based on 16 taking a personnel action while he was out on FMLA 17 leave. 18 On investigation of the claim, we 19 discovered that he had not actually notified the 20 agency of the FMLA leave at the beginning of the 21 period that he was out sick on but, rather, notified 22 us later. However, because of the issue of when the 23 agency received notice of the FMLA claim that he was 24 going to make, combined with the fact that the 25 termination did occur while he was out on leave, I 0161 1 believe that there was some risk and some reason to 2 propose settlement with the plaintiff in this case. 3 The settlement agreement will recite 4 that there is no liability to this agency and 5 certainly none implied to the plaintiff, and it is 6 simply a device to eliminate risk, which is the sole 7 reason that we're recommending settlement at this 8 point. 9 COMMISSIONER CLOWE: I'm ready to vote. 10 CHAIRMAN COX: Okay. A motion has been 11 made and seconded that we approve the settlement. All 12 in favor, say "Aye." 13 COMMISSIONER CLOWE: Aye. 14 CHAIRMAN COX: Aye. 15 The vote is 2-O. The motion passes. 16 COMMISSIONER CLOWE: Thank you, 17 Mr. Deane. 18 MR. DEANE: Thank you. 19 CHAIRMAN COX: Thank you very much, 20 Mr. Deane. 21 MS. KIPLIN: Mr. Deane, I know that we 22 have documents that we need to provide your office. 23 MR. DEANE: Yes. 24 MS. KIPLIN: And we will follow up with 25 you with that. 0162 1 MR. DEANE: Thank you, gentleman. 2 COMMISSIONER CLOWE: Thank you. 3 CHAIRMAN COX: Secondly, I move the 4 approval of the evaluation of the Executive Director. 5 Is there a second? 6 COMMISSIONER CLOWE: Second. 7 CHAIRMAN COX: All in favor, say "Aye." 8 COMMISSIONER CLOWE: Aye. 9 CHAIRMAN COX: Aye. Vote is 2-0 in 10 favor. 11 I move to increase the annual salary of 12 the Executive Director to $135,000, effective 13 September 1, 2007. Is there a second? 14 COMMISSIONER CLOWE: Second. 15 CHAIRMAN COX: All in favor, say "Aye." 16 COMMISSIONER CLOWE: Aye. 17 CHAIRMAN COX: Aye. The vote is 2-0 in 18 favor. 19 AGENDA ITEM NO. XXXVIII 20 CHAIRMAN COX: Counsel, my record 21 indicates that we have completed the agenda. Do you 22 agree with that? 23 MS. KIPLIN: Yes, sir, I do, unless you 24 want to go back to any agenda item. 25 CHAIRMAN COX: Are there any? 0163 1 Meeting is adjourned. 2 COMMISSIONER CLOWE: Thank you, Madam 3 Recorder. 4 CHAIRMAN COX: Thank you very much. 5 (Meeting adjourned: 2:10 p.m.) 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0164 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified 5 Shorthand Reporter in and for the State of Texas, do 6 hereby certify that the above-mentioned matter 7 occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings 9 of such were reported by me or under my supervision, 10 later reduced to typewritten form under my supervision 11 and control and that the foregoing pages are a full, 12 true and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set 14 my hand and seal this 9th day of July 2007. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/08 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25