0001 1 * * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 JULY 29, 2004 8 9 * * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 BE IT REMEMBERED that the TEXAS LOTTERY 17 COMMISSION meeting was held on the 29th of July, 2004, 18 from 8:00 a.m. to 1:20 p.m., before Kelly E. Fisher, 19 CSR in and for the State of Texas, reported by machine 20 shorthand, at the Offices of the Texas Lottery 21 Commission, 611 East Sixth Street, Austin, Texas, 22 whereupon the following proceedings were had: 23 24 25 0002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Mr. Rolando Olvera Mr. James A. Cox, Jr. 6 General Counsel: 7 Ms. Kimberly L. Kiplin 8 Executive Director: Mr. Reagan E. Greer 9 Charitable Bingo Assistant Director: 10 Philip D. Sanderson 11 Deputy Executive Director: Mr. Gary Grief 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX Page 2 Appearances............................ 2 3 AGENDA ITEMS 4 Item No. 1............................. 4 Item No. 2............................. 4 5 Item No. 3............................. 5 Item No. 4............................. 6 6 Item No. 5............................. 7 Item No. 6............................. 8 7 Item No. 7............................. 10 Item No. 8............................. 37 8 Item No. 9............................. 53 Item No. 10............................ 64 9 Item No. 11............................ 67 Item No. 12............................ 73 10 Item No. 13............................ 114 Item No. 14............................ 119 11 Item No. 15............................ 120 Item No. 16............................ Passed 12 Item No. 17............................ Passed Item No. 18............................ Passed 13 Item No. 19............................ 121 Item No. 20............................ 130 14 Item No. 21............................ 139 Item No. 22............................ 140 15 Item No. 23............................ 140 16 Reporter's Certificate................. 141 17 18 19 20 21 22 23 24 25 0004 1 JULY 29, 2004 2 3 CHAIRMAN CLOWE: Good morning. It is 4 8 a.m., July 29, 2004. Commissioner Cox is here. 5 Commissioner Olvera is here. My name is Tom Clowe. 6 We will call this meeting of the Texas Lottery 7 Commission to order and begin with the agenda. 8 First item: Consideration of the 9 possible discussion and/or action, including adoption, 10 on amendments to 16 TAC 402.580 relating to bingo 11 reports. 12 Ms. Joseph, good morning. 13 MS. JOSEPH: Good morning, 14 Commissioners. For the record, my name is Sandy 15 Joseph, assistant general counsel in the Legal 16 Division. Before you is a copy of a draft final 17 amendment that changes the due date of bingo quarterly 18 reports from the 15th to the 25th of the month. This 19 amendment conforms the due dates in the rule with 20 Occupation Code 2001.504. This statute was amended by 21 the 78th Legislature to change the due date of 22 quarterly reports from the 15th to the 25th. 23 At a previous commission meeting you 24 voted to propose the amendment. The Texas Register 25 published the proposed amendment for public comment on 0005 1 June 11, 2004. No comments were received. 2 Mr. Sanderson has the staff recommendation. 3 MR. SANDERSON: Good morning, Chairman, 4 commissioners. The staff recommends that the 5 commission adopt this rule, without changes, as it was 6 published in the Texas Register. 7 CHAIRMAN CLOWE: Are there any 8 questions? Is there a motion? 9 COMMISSIONER COX: I move. 10 COMMISSIONER OLVERA: Second. 11 CHAIRMAN CLOWE: All in favor, please 12 say aye. Opposed, no. The vote is three-zero in 13 favor. 14 Thank you, ma'am. 15 Next item, 3: Report, possible 16 discussion and/or action on lottery sales and trends. 17 Mr. Deviney, good morning. 18 MR. DEVINEY: Good morning, 19 commissioners. I'm Lee Deviney, financial 20 administration director. If you'll refer to tab 3 in 21 your notebook, you'll find the report on lottery sales 22 and trends. This morning I've provided you with three 23 summary memos dated July 29, 2004. The memo 24 summarized recent lottery sales and fiscal year sales 25 to date. 0006 1 The first memo indicates the unaudited 2 fiscal year 2004 sales through July 24th amounted to 3 $3.136 billion. This is a 10 1/2 percent increase 4 over fiscal year 2003 sales for the same time period. 5 Our weekly sales average at $66.7 million, which 6 compares to fiscal year 2003 weekly average of $64 7 million through this time period. 8 The second memo describes fiscal year 9 2004 sales by product compared to fiscal year 2003 10 sales for the same time period. And you'll note that 11 instant tickets and Pick 3 are posing the largest 12 year-to-year sales increases. 13 Finally, the third memo compares sales 14 of the last two full weeks ending July 24, 2004, and 15 July 17, 2004. Total lottery sales decreased by 16 eight-tenths of a percent. This is primarily due it a 17 slight drop-off in ticket sales. We don't have the 18 large jackpots during this time period. That 19 concludes my report on lottery sales and trends. 20 CHAIRMAN CLOWE: Are there any 21 questions? 22 MR. OLVERA: No questions. 23 CHAIRMAN CLOWE: Thank you. 24 Next: Report, possible discussion 25 and/or action on HUB and/or minority business 0007 1 participation, including the agency's mentor/protege 2 program. 3 MR. DEVINEY: Again, I'll be delivering 4 the report today. Joyce Bertolacini is at a meeting 5 off site today. 6 Included in your notebook is a June 7 2004 historically underutilized business coordinator 8 activity report. This includes all fiscal year 2004 9 expenditures from September 1, 2003, through June 30th 10 of this year. Our total qualifying expenditures as of 11 June 30th were $119. Our estimated HUB utilization is 12 $35.1 million, which equates to 29.5 percent. We have 13 no updates regarding commission's mentor/protege 14 program at this time. And I'll try to answer any 15 questions, if you have any, regarding this report. 16 CHAIRMAN CLOWE: Are there any 17 questions? 18 COMMISSIONER COX: No, sir. 19 COMMISSIONER OLVERA: No, sir. 20 CHAIRMAN CLOWE: I think you have the 21 next item as well, Mr. Deviney: Report, possible 22 discussion and/or action on the agency's contracts. 23 MR. DEVINEY: Yes, sir. If you'll 24 refer to tab 5, you'll find the weekly status report 25 on Lottery Commission contracts that have an estimated 0008 1 value of $25,000 or more. If you have any questions 2 regarding the contracts, we have representatives of 3 the administration division, as well as myself, to try 4 to answer them. 5 CHAIRMAN CLOWE: Are there any 6 questions? 7 COMMISSIONER OLVERA: No questions. 8 CHAIRMAN CLOWE: Thank you. 9 Next, Mr. Deviney: Report, possible 10 discussion and/or action on the agency's financial 11 status. 12 MR. DEVINEY: Yes, sir. You'll find 13 that under tab 6 of your notebook. The first report 14 is our monthly report on transfers made to the 15 Foundation School Fund and allocations of unclaimed 16 prize money. The June transfer of the Foundation 17 School Fund amounted to $136.4 million. 18 Behind the transfer report you'll find 19 a report on lottery revenues, expenditures, and 20 transfers from fiscal year 1992 to date. Total 21 transfers to the state so far have amounted to $11.65 22 billion through June of this year. 23 Then I believe you've find an orange 24 divider page, and behind that you'll find the budget 25 reports. My budget report for this month is that both 0009 1 the charitable bingo operations and division and 2 lottery operations are trending on budget or slightly 3 below budget. So we're in good shape this year. That 4 would conclude my report on the budget. 5 CHAIRMAN CLOWE: So you expect us to 6 end up under budget for the fiscal year? 7 MR. DEVINEY: Yes, sir. 8 Very good. Any questions? 9 COMMISSIONER COX: You think bingo is 10 going to be okay? 11 MR. DEVINEY: Yes, sir. Yes, sir. 12 It's always tight, and it's going to be -- it will 13 probably be tougher the next biennium. But we're 14 finding efficiencies, and I think it will be okay. 15 MR. GREER: Mr. Chairman, we're going 16 to roll out next week a figure on a projection for the 17 new year transfer to the Foundation School Fund at the 18 legislative briefing. I wanted Lee to touch on that 19 briefly of what our projection for this year is. 20 MR. DEVINEY: On the transfer of the 21 Foundation School Fund? I don't have that figure off 22 the top of my head. 23 MR. GREER: The number I've seen and 24 the number that we're going to throw out on August the 25 4th will be over a billion dollars, which will be our 0010 1 second-best year in the history of the lottery. 2 CHAIRMAN CLOWE: Very good. 3 COMMISSIONER OLVERA: The best year 4 having been '97? 5 MR. GREER: Yes, sir. 6 CHAIRMAN CLOWE: Thank you, Mr. 7 Deviney. Next item, 7: Report, possible discussion 8 and/or action on the commission's on-line lottery 9 games. 10 Good morning. 11 MR. TIRLONI: Good morning. 12 MS. JAMBOR: Good morning. 13 MR. TIRLONI: Good morning, 14 commissioners. For the record, my name is Robert 15 Tirloni. I am the on-line product marketing 16 coordinator for the Texas Lottery. 17 MS. JAMBOR: Good morning. I'm Liz 18 Jambor. I'm the instant product marketing coordinator 19 and the acting senior region specialist. 20 MR. MARTIN: And Steve Martin, 21 marketing director. 22 MR. TIRLONI: Commissioners, this 23 morning we're back with our monthly update. We're 24 going to go through our presentation, and then towards 25 the end of the presentation I have some follow-up 0011 1 slides based on some questions that were asked in last 2 month's meeting. 3 So last month when we were together, 4 the news was the large jackpots that were achieved on 5 Lotto Texas and on Mega Millions. This month we're 6 kind of at the other end of the spectrum, talking 7 about the number of wins, especially on Mega 8 Millions. 9 Since we last met, on Lotto Texas we 10 had a ticket sold in Dallas for an advertised $9 11 million jackpot. That happened at the beginning of 12 the month, on Wednesday, July 7th. Since the June 13 meeting, on Mega Millions we've had three jackpot 14 tickets sold: $290 million jackpot ticket sold on 15 Friday, July 1st, in Massachusetts; there was a $47 16 million jackpot ticket sold just last week in 17 Michigan; and then just this Tuesday the jackpot was 18 hit in New York at $10 million, which is the starting 19 jackpot amount. 20 COMMISSIONER COX: What kind of 21 coverage did they have on that $10 million jackpot? 22 MR. TIRLONI: There's no way to know 23 the coverage for Mega Millions as a whole, because 24 each state is running its own independent gaming 25 system. Our coverage for the Mega Millions drawing on 0012 1 Tuesday was less than one percent in Texas. I don't 2 know what the total combined coverage was for the 3 draw. As I said, it's all independent. 4 I think what this shows is while both 5 games are quite capable of reaching large-level 6 jackpots, I think it also shows that they obviously 7 are both winnable as well. So the best of both 8 worlds. 9 Last month I showed this pie chart to 10 give you an idea of what our best sales week ever 11 looked like. I'm giving you a snapshot of the most 12 week ending, which is the week that ended last 13 Saturday, the 24th of July, to kind of show you how 14 each product is represented in the total sales 15 picture. 16 As you see, instants, obviously, and 17 usually, takes up what accounts for the biggest 18 amounts of sales in a week. I think the most 19 interesting thing on this chart is a product that Lee 20 referenced a little bit ago, and it's not a product 21 that we talk about regularly, because it's not a 22 jackpot game. If you notice Pick 3 sales, at $5.3 23 million, actually very close to our Lotto Texas 24 sales. One, Lotto Texas is that it's a lower-starting 25 level jackpot. I just think it's interesting to point 0013 1 out, because we have built a very strong daily numbers 2 game here in Texas over the years. I just wanted to 3 point that out to you: Pick 3 is a strong product in 4 our overall portfolio. 5 Again, another snapshot, last month I 6 explained that I was showing you figures for Lotto, 7 Mega Millions, and Megaplier on a calendar 8 year-to-date basis. The reason for that is just 9 because Mega Millions and Megaplier started in 10 December. So it would be unfair to do a comparison on 11 fiscal year-to-date sales. Lotto would have about 12 three extra months if we did a comparison in that 13 form. 14 If we just look at calendar 15 year-to-date, you'll see Lotto Texas is at about $314 16 million. Mega Millions is right at about 151, 17 slightly underneath 151, and Megaplier is accounting 18 for $35 1/2 million at this point in time. 19 Quick update on Mega Millions sales. 20 Since it did start in December, total Mega Millions 21 sales are over $175.3 million. Total Megaplier sales 22 are almost $42 million, giving us a grand total of 23 $217.2 million combined between Mega Millions and 24 Megaplier. 25 We keep having a decent amount of 0014 1 winners in Texas on Mega Millions. We have 62 2 second-tier winners thus far. This is through this 3 past Tuesday's drawing, the 27th. Out of those 62, 12 4 have Megaplied. We have quite a few number of 5 third-tier winners. That's a $5,000 prize. 312 of 6 those in Texas, and 77 of those have Megaplied. 7 This is a chart we have been looking at 8 pretty regularly. This is for -- there's pretty much 9 two complete roll cycles on this chart. The roll 10 cycle that started at 10 and took us all the way up to 11 the $290 million jackpot. 12 And then the next complete roll cycle 13 that started at 10 and goes up to 47, and that was the 14 ticket that was sold last Friday. See a nice, large 15 spike for Mega Millions and Megaplier, for that 16 matter. You see it follows the same pattern. 17 This week for the Tuesday/Friday draw, 18 this was a $20 million sales week for Mega Millions. 19 And on Megaplier side, when you look at the two draws 20 that week, that was a $3.2 million week for 21 Megaplier. So that roll-up was a good roll-up for us 22 in Texas. 23 COMMISSIONER COX: Robert, on that 24 chart, how hard would it be to put that on log scale? 25 MR. TIRLONI: I'm sure we can do that 0015 1 for you. 2 Another update on Megaplier sales as a 3 percentage of Mega Millions sales, Megaplier is 4 accounting for 19.3 percent of sales. Little lower 5 than we've seen. We're attributing that to that $290 6 million jackpot. In the past we've discussed that as 7 the jackpot rises, players tend to shift their money 8 to the base game and off of the add-on feature. 9 Still managing to fit all of our roll 10 cycles on this chart. It's a great chart because you 11 get to see some good history. This is the roll-up 12 we've just been discussing on Mega Millions that goes 13 up to 290. Backing up a little, this is the Lotto 14 roll cycle that went all the way up to the record 15 jackpot of 145. And as we discussed early on, both 16 games are won or hit: Lotto, again, climbs up to a $9 17 million jackpot before being hit. And starting again 18 with the roll cycle at four. And you see Mega 19 Millions roll cycle up to 47, then back down to 10. 20 And as we just discussed, there was a winner at that 21 $10 million starting jackpot amount, so they are still 22 at 10. 23 COMMISSIONER COX: That last one would 24 be a great candidate for a log scale too. 25 MR. TIRLONI: We can do that. 0016 1 This is the -- to give you an idea of 2 where we are in terms of all the participating states 3 in Mega Millions and draw sales. Again, I've got the 4 two last roll cycles on here, the 10 all the way up to 5 the $290 million jackpot, and then the roll cycle that 6 starts at 10 and takes us through 47. So you can see 7 we continue to stay in second place pretty much in 8 terms of sales. 9 Then when we get up to the mid-$100 10 million mark, you see that some states, such as New 11 Jersey, Ohio, Illinois, start to edge ahead of us. 12 But this chart has remained consistent for quite some 13 time in terms of where we are in terms of sales for 14 the Mega Millions drawings. 15 COMMISSIONER COX: Robert, do you have 16 any idea why those other states pull ahead at that 17 point? 18 MR. TIRLONI: I would guess that it's 19 just because they've been in the game a lot longer. 20 They're more familiar with the game, and more people 21 start to spend on the game as it reaches those higher 22 level jackpots. 23 I think that will probably be the 24 answer for this next slide also. This is the -- 25 Commissioner Cox, you had asked about this a while 0017 1 back. I show this chart every time we complete a roll 2 cycle. This is for the $10 million through the $290 3 million roll cycle. This the per cap by state. We're 4 pretty much still in the same place, right above 5 Washington State. And again, I would say that that's 6 probably due to the fact that we've been in the game 7 for seven months and some of these states have been in 8 the Mega Millions game for years now. 9 COMMISSIONER COX: So that would tell 10 us if that is the correct reason, that we've got a lot 11 of room for growth in this game. 12 MR. TIRLONI: I feel that we do have a 13 lot of room for growth. There's a lot of education 14 that we need to continue to do and that we're working 15 towards. And I think as we continue to go down that 16 road, we'll hopefully see that per cap increase. 17 We also talked last month about the 18 fact that -- having a winner in the state. Other 19 states have had very positive experiences; once they 20 actually have a winner in the state, it usually gets 21 good media attention. Kind of serves as its own 22 educational process for the public once there is a 23 multistate winner in the state. 24 MS. JAMBOR: Another element that you 25 have asked us to continue to monitor month to month is 0018 1 the sales shift of Lotto Texas from last year to this 2 year. The first 47 weeks of each year with week 3 ending 7-24-04, we're seeing almost an eight percent 4 sales shift in Lotto Texas compared to FY '03. Last 5 month, because of the impact of the high jackpot, the 6 sales shift was 3.6 percent. 7 The thing I want to point out is we 8 projected a 21 percent sales shift. So that high 9 jackpot really has impacted Lotto Texas and has really 10 brought in higher sales. 11 If we look at pre- and post-Mega 12 Millions' start for Lotto Texas sales, again we're 13 seeing the impact of the higher level jackpot. We're 14 seeing an increase in Lotto Texas sales of the past 34 15 weeks of a little over 15 percent. 16 When we look at FY '03 compared to FY 17 '04 in the first 47 weeks, looking at on-line sales 18 and total sales, again we're still seeing increases 19 over FY '03. Even though we saw a greater sales shift 20 in Lotto Texas for this month, we saw a slight 21 increase in total sales. So even though we may be 22 seeing some dollars move from Lotto Texas, we're 23 seeing that made up in the other games. 24 Here we're seeing a comparison. Again, 25 like Robert said, still able to fit everything on one 0019 1 slide. Seeing Mega Millions jackpots, the sales 2 project compared to Lotto Texas. As we keep 3 mentioning, Lotto Texas -- if you look at Lotto Texas 4 having a week of a $7 million and $9 million jackpot, 5 and Mega Millions having a week of a $37 and $47 6 million jackpot, we're still seeing that loyalty, that 7 drive toward the in-state game at the lower-level 8 jackpot indicating the strength of Lotto Texas, also 9 indicating the differences that players still see in 10 the two games. 11 And as I have said before, as we 12 increase game variety, we increase sales. There are 13 more dollars that are -- there are more dollars being 14 generated with the inclusion of Mega Millions. The 15 more dollars that the lottery can generate means the 16 more money we can return to the state. 17 MR. TIRLONI: Commissioners, I wanted 18 to follow up on some information, some questions that 19 came up in the June meeting: The number of Lotto 20 Texas jackpot wins in the past 12-month period and 21 then some information on automated drawings. 22 Starting with Lotto Texas, before we 23 made the matrix change, the projection was that we 24 would have approximately three to four jackpots 25 between $65 and $100 million in a 52-week period. So 0020 1 I charted the jackpot hits with the jackpot wins from 2 June of 2003 through -- sorry -- May of 2003 through 3 June of 2004. And I've plotted where we've had our 4 jackpot hits. 5 You see early on in the matrix change 6 we had a 37 of 47. We had some hits at some of the 7 lower levels: 15, 16, 10, 29. We did have a 70, and 8 then of course our record 145. Worth noting, the 37 9 and $47 million hits, we experienced some of the 10 lowest interest rates ever at the mid to end of the 11 $37 million roll cycle and at the beginning of the $47 12 million roll cycle. So, you know, that is -- that 13 plays a role in this analysis. But overall, looking 14 at where we've had the jackpot hits over the past 56 15 weeks, approximately, I would say the matrix is 16 performing as we intended it to. 17 MR. GREER: What were those 18 percentages, just for the record? Weren't they about 19 1.5 percent, those low interest rates? 20 MR. TIRLONI: Yes. The interest rate 21 factors at the $37 million roll cycle and the $47 22 million roll cycle were approximately 1.51, 1.52. And 23 when the matrix was being developed by GTECH Lottery 24 Marketing, in early 2003, the interest rate factor 25 that they were using for their projections were 0021 1 approximately 1.65 and 1.7, because those were the 2 rates at the time. 3 COMMISSIONER COX: Robert, next 4 month -- you've got what on there? 13 months? 5 MR. TIRLONI: Yes, sir. 6 COMMISSIONER COX: 14 months? Could 7 you put on that the 13 or 14 months, whatever it is, 8 previous to that under the old matrix? 9 MR. TIRLONI: Absolutely. I'll do that 10 for you next month. 11 This is some information I got at the 12 beginning of the week from GTECH Lottery Marketing. I 13 wanted to share it with you because I thought it was 14 very interesting. This is the per cap ranking of 15 Lotto games in the United States. I think it's pretty 16 impressive for us in Texas. You'll see that we rank 17 third out of all the jurisdictions in our Lotto Texas 18 offering. 19 There's some things worth noting. 20 You'll notice that a lot of these states from '02 have 21 seen a decline in their per cap over the years, 78 to 22 64 cents in California down to 53. You'll notice that 23 we went down from '02 to '03, but we've seen a rebound 24 in '04. So we're kind of going against the trend this 25 year. 0022 1 The other thing I think worth noting, 2 we're quite close to being in second place with 3 California. That's a pretty big accomplishment. 4 California has had tremendous success with their Super 5 Lotto Plus offering. And the fact that we're a penny 6 off of their per cap is pretty impressive. It's one 7 of their highest sales products in the state. 8 Another thing worth noting is there's 9 really three contenders between Florida, California, 10 and Texas. As you'll notice, we're quite a bit ahead 11 of New York in terms of our per cap ranking. 12 COMMISSIONER COX: Is Florida in a 13 multistate game? 14 MR. TIRLONI: Florida and California 15 are not in multistate games. New York, of course, is 16 in Mega Millions. 17 CHAIRMAN CLOWE: Why don't you have 18 Massachusetts in there, Robert? 19 MR. TIRLONI: I just provided the top 20 ones. I can expand that next month, if you like. I 21 can expand this whole chart and give you a broader 22 picture. 23 CHAIRMAN CLOWE: Thank you. 24 MR. TIRLONI: Commissioner Cox, you had 25 some questions last month about our automated 0023 1 drawings, and I wanted to give you some background on 2 that. The lottery contracted with Battelle. Battelle 3 has been doing system evaluations for lotteries since 4 1977. They've done work for numerous jurisdictions in 5 the United States and for international lotteries as 6 well. Battelle does no work for vendors. They're not 7 associated with any vendors. They focus their 8 business on helping lotteries ensure the integrity of 9 their systems, their gaming systems, and automated 10 draw systems as well. 11 And so the -- when we decided to do our 12 Megaplier drawing as an automated drawing, we 13 contracted with Battelle to do an analysis and a test 14 of that system. This is a direct quote right out of 15 the Battelle report. And it's their system 16 certification. "The samples provided from the RADDS, 17 which is the Random Animated Digital Draw System, and 18 the statistical analysis performed on them by Battelle 19 indicate that these files appear to have been sampled 20 from random generation processes. We found no 21 evidence of nonrandomness." 22 I wanted you to know before Battelle 23 did their testing, their methodology was submitted and 24 preapproved by the lottery's independent statistician 25 or statistical consultant, Dr. Randall Eubank. And 0024 1 after their testing, their final report results were 2 also reviewed by Dr. Eubank, and he deemed their 3 report thorough and exhaustive. 4 COMMISSIONER COX: Robert, Dr. Eubank 5 does work on an ongoing basis on Lotto Texas about the 6 randomness of the drawing. Isn't that correct? 7 MR. TIRLONI: Absolutely. Lotto Texas 8 and all of the on-line game drawings, for that matter. 9 COMMISSIONER COX: Does he do it for 10 this as well, or is he going to? 11 MR. TIRLONI: I believe he's going to 12 at a later date, and I have a slide in a second that 13 will talk about some of the testing that the machine 14 does itself. I don't believe he's been doing the type 15 of testing that he does every month on the other 16 on-line games that are drawn with traditional ball 17 sets and the traditional drawing machines, because 18 there is some self-testing that takes place before 19 every automated draw. 20 COMMISSIONER COX: Maybe for a few 21 months, till we're real sure, it might be good to get 22 him to test those too. 23 MR. TIRLONI: Absolutely. We can have 24 that done. 25 COMMISSIONER COX: Maybe when he feels 0025 1 comfortable saying, "I don't need to do this 2 anymore." 3 MR. TIRLONI: Absolutely. 4 I wanted to give you a perspective on 5 some of the physical security regarding the automated 6 draw machines. The automated draw machines are 7 treated very much like our draw machines and our ball 8 sets. The automated draw machine hardware is in a 9 lockable steel cabinet within our drawing studio where 10 there's very limited access and 24-hour, 7-day-a-week 11 video-recorded surveillance. 12 The steel cabinet in which the ADM is 13 housed is locked when it's not in use, and it is 14 sealed with audit firm seals. And the opening and 15 closing of that cabinet and the associated seal 16 numbers are always logged. 17 Each automated draw machine is sealed 18 by the audit firm, and it is visually inspected by 19 Texas Lottery security and an auditor before each 20 automated drawing takes place. 21 The software that runs the automated 22 draw machine is burned into tamper-proof, 23 electronically-programmable, read-only memory referred 24 to as EPROM circuits. The EPROM cannot be altered or 25 have software loaded once it is installed. If the 0026 1 EPROM is removed, all the software on it is destroyed. 2 Commissioner Cox, this was the self- 3 diagnostic testing I was referring to a minute ago. 4 The automated draw machines run self-diagnostic 5 testing at each use, which is equivalent to over 6 500,000 draws. Or they're pretty much -- if we were 7 referring to our traditional drawings, they would be 8 considered pretests. So it runs 500,000 draws before 9 the actual draw. Basically, these tests comprise 10 patterning and statistical analysis and ensures that 11 the ADM is sound to perform, basically. 12 All of the automated draw machine users 13 have IDs and passwords to access the automated draw 14 machines, but the automated draw machines also have 15 special users referred -- what we refer to as 16 administrators that are not able to conduct a drawing; 17 however, that access does give them the ability to 18 perform some administrative functions. One of those 19 special users or administrators is our internal audit 20 director, Catherine Melvin. 21 That pretty much concludes our report 22 for today. I'd be happy to answer -- or we would be 23 happy to answer any other questions that you have, and 24 we'll be sure to take your comments back, and we'll 25 integrate your comments and questions into next 0027 1 month's presentation. 2 CHAIRMAN CLOWE: Where are we with the 3 ADM? We covered that in this presentation. What's 4 the status of that? 5 MR. TIRLONI: Last month I gave you an 6 update that the automated drawings for Megaplier have 7 been very successful, the drawing looks great, and 8 that we are considering down the road possibly 9 converting some of our other on-line games to ADM 10 drawings. 11 CHAIRMAN CLOWE: That's where I thought 12 we were. We're still in that position. This is just 13 additional information. There's no testing going on 14 here or no further involvement. We're just exploring. 15 Is that correct? 16 COMMISSIONER COX: I don't know. 17 CHAIRMAN CLOWE: Reagan, maybe you can 18 help me. 19 MR. GREER: Yes, sir. I've been very 20 involved in this. This is a trend within the industry 21 as a whole that more individuals are looking at the 22 automated drawing machines. There are a number of 23 issues that Robert touched on here today that we 24 continue to examine prior to getting into a game. 25 Right now it's just under consideration. As we get 0028 1 further along the road, I personally, as well as Gary 2 and the staff, have a higher level of comfort overall, 3 will be bringing you proposal in reference to where we 4 might go with this. 5 CHAIRMAN CLOWE: So this is a random- 6 number generating device that comes from software 7 performance, and it would do away with the mechanical 8 ball-dropping machines totally? 9 MR. GREER: Yes, sir. When we got into 10 Mega Millions with the Megaplier, that was one of the 11 things that was brought up right up front, that it 12 would give us a chance to test that new technology. 13 As Robert stated, and I've been personally pleased, 14 and I noticed that the drawing crew was back here as 15 well. We worked through that process and have had no 16 major issues. It's a major step, and we want to be 17 sure that we're very thorough in examining what's 18 taking place in other states and be sure we have 19 everything in place as far as our security aspects. 20 CHAIRMAN CLOWE: What would be the 21 reasons for doing this? 22 MR. GREER: There's cost implications 23 for the positive to the lottery, number one. Another 24 thing is it gives us more capability to change games 25 quickly. We could do some of our own automation, for 0029 1 instance, which, as you see, in all the reports we 2 talk about our on-line games. There's a trend that 3 the interest level tends to drop on a number of these 4 games. If you can create a freshness to the game, 5 there's a positive aspect of keeping people excited 6 about it and knowing what's going on. 7 CHAIRMAN CLOWE: People don't miss 8 seeing the balls come out of the machine 9 mechanically? 10 MR. GREER: They do. And that's one of 11 the things that we're going to have to overcome, which 12 is why we're taking baby steps on it and looking at it 13 across the board. What Robert and Gary and I have 14 discussed is all the different game mixes. We might 15 do it on one of our games as far as sales per week 16 that is a lesser amount so that we can begin that 17 education process and not apply it to any of our major 18 games like Lotto Texas right up front. 19 CHAIRMAN CLOWE: I'd like to see a lot 20 more practical demonstration or information so I, as 21 one of the commissioners, can better understand what 22 the implications are on this from a cost standpoint. 23 But from an attractiveness and the marketability of 24 it, it's interesting. But I'd like to get a lot more 25 information. 0030 1 MR. GREER: As we get closer to the 2 decision-making time -- which I don't think we've set 3 any drop-dead dates as far as where we're going with 4 this thing; sometime next year, possibly -- we'll do a 5 full presentation on that. I reflect back on when we 6 got back into the whole concept of Megaplier that we 7 showed the drawing from Minnesota with balloons and 8 the varying aspects of the seasons that they did 9 within their thing. We can have some examples like 10 that that will give you a better perspective of what 11 we might give consideration to. 12 CHAIRMAN CLOWE: My recollection is 13 that Megaplier is a random-number-generated number. 14 MR. TIRLONI: That's correct. 15 CHAIRMAN CLOWE: This is new. I want 16 to make sure I'm comfortable with it. 17 COMMISSIONER COX: Mr. Chairman, your 18 questions are very appropriate. I recall in Las Vegas 19 when the gaming devices, the slot machines, began 20 changing from electromechanical to video, people 21 wouldn't touch those video machines. It took years 22 before that transition was made. Of course now it's 23 all video. But 15 years ago, it was virtually all -- 24 20 years ago, it was virtually all electromechanical, 25 and that was a slow, gradual transition. 0031 1 CHAIRMAN CLOWE: I think that's exactly 2 the point that I had in my mind. I remember, as a 3 young person, seeing a slot machine where you pulled 4 the handle. That's an electromagnetic? 5 COMMISSIONER COX: Depending on how the 6 wheels are controlled. The initial machines were all 7 mechanical. Then they put in circuit boards that 8 connected with the reel, which remained mechanical, to 9 determine play out. Then they took the reel out and 10 replaced it with simulations, if you will, of symbols 11 that would come up from the random-number generator. 12 That's the step that they had to take very carefully. 13 CHAIRMAN CLOWE: Robert, you all should 14 read Commissioner Cox's Book "License To Steal", 15 because there are examples in that of where they got 16 in there and messed with those reels. I don't 17 understand all that I read about. 18 COMMISSIONER COX: There's an 19 opportunity for mischief. 20 CHAIRMAN CLOWE: Well put. I think 21 that today the slot machines are all -- you just push 22 a button, and you can feed one dollar or four dollars, 23 or whatever, and it requires a learning curve on the 24 part of the player and a level of comfort. And I 25 think, referring back to your statistics on Megaplier 0032 1 and Mega Millions and Lotto Texas, our players in this 2 state still have more comfort in Lotto Texas. 3 I hear that, when I'm out in places 4 where those tickets are sold, asking people just 5 one-on-one how they feel about it. So if we are 6 entertaining this kind of a change, I want us to 7 identify all the implications that are beneficial and 8 whatever negative implications are there as well. 9 MR. GREER: If I could add to that 10 point -- 11 CHAIRMAN CLOWE: I just add, Coca-Cola 12 thought they were doing a great thing when they 13 changed that formula, and they found out it wasn't a 14 great thing. They made a pretty good save on it, I 15 think, when they made the Classic Coke. Got to be 16 careful when you fiddle around with what people like. 17 MR. GREER: Yes, sir. I'd like to add, 18 one of the things about this whole process is that the 19 industry as a whole is looking at it as well, and a 20 number of other states are embracing it. We're 21 monitoring what's happening with them. As recently as 22 within the last few days we were looking at an e-mail 23 that came out of, I believe, Missouri. They were 24 looking at some things and some of the issues that 25 they encountered. 0033 1 Fortunately, we're not going to have to 2 invent the wheel. We're going to let others continue 3 to examine it. We are experimenting with it on the 4 Megaplier, which I stated. We're going to give it a 5 thorough overview to you as well as try to think of 6 anything that's coming out of any other states that 7 might apply to Texas. 8 COMMISSIONER COX: So your plan seems 9 to be that we'll let some other states put their foot 10 in this water and monitor their data before we step 11 into it. 12 MR. GREER: They're doing it now, as we 13 speak now. That would be a part of the overview that 14 we'd want to give, what other states have done, and 15 the issues that have come out of that. But a lot of 16 the things that Robert talked about, in reference to 17 how the security aspects of this apply, would continue 18 but just on a higher level. We want to examine it 19 thoroughly but just wanted to bring it to your 20 attention and follow up to what we touched on last 21 month. As we look at the future of the lottery and 22 where things are going and ways to be cost-effective, 23 this is certainly an issue that has validity. 24 CHAIRMAN CLOWE: I think it represents, 25 hopefully, an opportunity for us, but we've got to 0034 1 remember that our players are Texans, and we've got to 2 determine what Texans like and appeal to that. 3 I like the innovation of the Megaplier. 4 I think we did something there with Mega Millions 5 that was unique in Texas. Let's look at this. We're 6 going to consider some changes. Let's open the 7 thinking to a point where we might make something 8 that's even more attractive and beneficial. Let's do 9 some creative thinking and some investigation into the 10 future. And if we're going to consider change, what's 11 on the cutting edge that's really attractive to people 12 beyond what's out there now. 13 MR. TIRLONI: Commissioners, I can work 14 with our existing ADM vendor, Telecom, and perhaps get 15 some -- for the next meeting, perhaps get some clips 16 of the automated drawings that are running in other 17 states. It's been quite a while since we looked at 18 those. It was right before we started Mega Millions, 19 early in the fall. I'll try and get some clips of 20 some of those drawings in other states and perhaps 21 have them in time for the next meeting, and we can 22 look at those, see what some of the other states are 23 doing. 24 COMMISSIONER COX: That will be good. 25 CHAIRMAN CLOWE: Brings to mind a 0035 1 question regarding change regarding the SSTs. How are 2 those being accepted? 3 MR. GREER: Fortunately for us, as we 4 have those high jackpot rolls, people didn't want to 5 wait in line, and so they utilized the SSTs. But the 6 numbers continue to climb. The averages continued on 7 a positive direction. I think we've got almost 600 8 out of the 1,000 installed so far. 9 In our meetings with GTECH, we continue 10 to look at what's happening there. And it's a 11 positive trend that we see. But it's going to be 12 another scenario, just like the automated drawing 13 machines, that people have to get a familiarity to 14 them. I use the analogy similar to my flying 15 screens. When they wanted me to get my own boarding 16 pass, I thought, "I don't think so." And now I 17 wouldn't do it any other way. 18 We're introducing this through this 19 mentoring program that we discussed with the GTECH 20 representative there making sure the retailer is 21 comfortable with it along the way. It continues to be 22 another area of technology that people are becoming 23 more familiar with through other avenues. The airline 24 thing is one example of that. Finding a hotel or car 25 rental is another example. And we're going to take 0036 1 advantage of that. 2 CHAIRMAN CLOWE: So you consider that 3 as a building success? 4 MR. GREER: Yes, sir. They've just 5 been out a short time. In fact, probably it would be 6 worth -- we'll let a few more get out there, but it 7 would be worth doing an agenda item on SSTs to give 8 you an update, show you the trends and the numbers, 9 that I don't have off the top of my head, to give you 10 a better perspective on what's happening with that. 11 We'll do that next month. 12 CHAIRMAN CLOWE: Commissioner Olvera, 13 any comments or questions? 14 COMMISSIONER OLVERA: Along that line, 15 is it possible to get a video of the current usage of 16 someone using the SSTs so that we could see a live 17 scenario? 18 MR. GREER: One of the really neat 19 things about an SST -- and we have one over here in 20 the Austin claims that is getting used a lot, I might 21 add -- is that it has videos built into it. And if a 22 player wants to walk through something, you can click 23 on a screen, and it shows you how that takes place. 24 So I'm sure there's some clips and things that we can 25 put together to give you a better perspective on where 0037 1 we started and where we are now and what are some of 2 the positive aspects that we've seen since we've got 3 SSTs on the market. That would be great. Sure. 4 CHAIRMAN CLOWE: Anything further? 5 MR. TIRLONI: No, sir. 6 Anything to add, Steve? 7 MR. MARTIN: Just like to add that we 8 are working on a BA flash video for the website that 9 shows how to use an SST and physically play on the 10 machine. I also have a how-to-play brochure for SSTs 11 that we're developing right now. 12 CHAIRMAN CLOWE: Thank you all. 13 Next, Steve, is your item: Report, 14 possible discussion and/or action on lottery 15 advertising and promotions. What do you have for us 16 on that? 17 MR. MARTIN: Yes, sir. Good morning, 18 commissioners. Again, for the record, I'm Steve 19 Martin, marketing director from the Lottery 20 Commission. 21 I'd like to give you an update on 22 marketing and promotions activities. Marketing has 23 launched a revised winners' TV and radio advertising 24 campaign that features tags promoting the new Instant 25 Monopoly scratch game. The TV and radio spots began 0038 1 airing July 26th and will continue through August 2 16th. 3 Marketing has also just ended a flight 4 of the jackpot TV and radio advertising campaign 5 promoting the new draw days scheduled for the jackpot- 6 style games. The campaign has received very positive 7 feedback from both players and the media alike. We've 8 had radio stations call in and interview Reagan on the 9 spot on a commercial itself; they were so excited with 10 the commercial. We've had players call in and send 11 e-mails requesting that we keep the spot going and 12 requesting lyrics for the commercial and getting 13 copies of the music. Haven't given that to them. 14 They've been excited about it. 15 This September we're going to bring 16 that campaign back and tagging that with jackpot 17 ballots. It's a good spot, and we're looking forward 18 to being able to add some jackpot awareness with 19 that. 20 Other items I'd like to update you on: 21 Marketing is drafting an RFP for the player 22 demographic study. The demographic study involving 23 players is required by Texas Government Code Section 24 466.021. The next study is due to be completed prior 25 to the start of the next regular legislative session 0039 1 in January of 2005. 2 Beginning with the initial requirement, 3 the study has been conducted through an interagency 4 contract with the University of Texas/Cogent 5 Communications. The agency believes there is added 6 benefit to rotating the responsibility of the 7 demographic study among different vendors and has 8 initiated a competitive solicitation approach to 9 provide proposals to qualified vendors, both public 10 and private, to conduct a study moving forward. 11 Marketing is also working with media 12 relations on an education campaign to increase 13 awareness of the Latin Lotto scam activities in this 14 state. Several activities: a letter to the Catholic 15 Diocese, a brochure, posters, and a sticker to build 16 that awareness of those activities. 17 We've also received a legal referral 18 for revisions and proposed activities for Next Steps 19 and contributing to the Foundation School Fund and 20 Mega Millions Proceeds Benefit Texas campaigns. We're 21 working with Reagan for recommendations and will 22 update you as things progress. 23 That's my report for today. If y'all 24 have any questions, I'm here to answer them. 25 COMMISSIONER COX: Steve, on the 0040 1 demographic study, do we know whether there are firms 2 nationally that specialize in doing demographic 3 studies for lotteries or whether there are firms 4 nationally that have some significant experience with 5 this? 6 MR. MARTIN: I would say there's firms 7 that have a significant experience. I don't think 8 there's anybody specifically dedicated to lotteries. 9 COMMISSIONER COX: And we're going to 10 make sure that those folks get these RFPs? 11 MR. MARTIN: Yes, sir. 12 COMMISSIONER COX: Second question: 13 For some time now we've had outstanding the request to 14 DDB as to whether our advertising is cost justified, 15 and they referred that ages go to their matrix 16 consulting group. Where are we on getting some 17 information on that? 18 MR. MARTIN: I'm going to defer to Liz 19 on that one. 20 MS. JAMBOR: We have met with matrix. 21 They provided us a study. That study then has been 22 given to Drs. Huff at U.T. who are doing some lottery 23 efficiency study work for us. They're reviewing some 24 of the data right now. I should be getting their 25 response back within the next couple weeks. We all 0041 1 met so that U.T. could ask -- directly ask matrix some 2 very specific questions related to the data analysis 3 and the results, and so those two groups are in 4 communication along with us so that we can finally get 5 you the answer that you're looking for. So by the 6 August commission meeting, I'm hoping to be able to 7 give you a response to a question that you asked a 8 long time ago. 9 COMMISSIONER COX: These mills grind 10 exceedingly slow. 11 MR. GREER: I just want to reaffirm my 12 commitment to follow through on that processes. I 13 think the doctors have done a good job, and Liz has 14 kept me up to speed on that. I know it's frustrating 15 because it has been a lengthy process, but I think 16 we'll see a good, fruitful result. 17 COMMISSIONER OLVERA: Mr. Martin, you 18 mentioned the Latin Lotto scam. It's my understanding 19 some of the culprits may have been apprehended. 20 What's the update on that? 21 MR. MARTIN: I'm going to defer to 22 Reagan on that. 23 MR. GREER: Commander Pitcock has done 24 a great job of keeping me up to speed on that. And 25 the security has been on top of specifically an issue 0042 1 in Freeport, Texas, July the 15th. 2 There was two individuals that were 3 arrested that fit the description that had taken place 4 throughout the Houston area specifically. And, you 5 know, we're moving through a legal process now with 6 those two individuals. We put the information up on 7 our website. I sent a press release thanking the 8 Freeport police for their work on that matter. I was 9 going to touch on it, but I'd rather talk about it now 10 since it's a topic in my end-of-the-month report. 11 It continues to be a very serious 12 scenario that is popping up all the time. We had 13 three in the last two weeks. We're looking at an 14 amount over $3 million, probably around 3.7, $3.8 15 million. It's some pretty substantial amounts they've 16 been getting away with lately. For a while we saw 17 lower amounts. But I think in the last few there's 18 been an amount up to like $14,000 that they were able 19 to get away with. 20 That's why Steve touched on the fact 21 that we were going to relook at what we're doing. 22 We're doing a lot. We've obviously done a great job 23 in media relations on staying on top of it. Mike 24 keeps me in the loop. That's not enough. Because 25 it's still happening. We're going to reach out in 0043 1 some community-oriented scenarios, bingo halls. A lot 2 of the Catholic churches have bingo halls. Posters 3 that Steve touched on. Stickers. We're going to do 4 some PSAs. We've worked with Leti, specifically, out 5 in the media area. More information in Spanish. 6 I guess we can never do quite enough. 7 We're going to continue to keep that issue on the 8 forefront. Unfortunately, many Texans continue to be 9 duped by these people. 10 COMMISSIONER COX: Reagan, do you have 11 any idea how many teams statewide are pulling this 12 off? Is it one? Is it five? 13 MR. GREER: We do have an idea. I 14 think Mike may want to talk to that. What he brought 15 to my attention, which I thought was interesting, is 16 that there's crime rings in South and Central America 17 that basically plant these groups in Texas. They 18 start and then kind of work you through the process. 19 We think there's two or three groups in Texas right 20 now. 21 Mike, why don't you expand on that a 22 little bit. 23 COMMANDER PITCOCK: Mike Pitcock, 24 commander of Texas Lottery. Approximately two or 25 three weeks ago there was a 60 Minutes article about 0044 1 Latin scams particularly. It was estimated that 2 there's hundreds of groups that are in South America 3 that are put together in groups of two, three, or four 4 people and trained on different kinds of scams to 5 include the Latin Lotto scam. They start off 6 relatively small, shoplifting and different types of 7 situations. And if they're successful, they graduate 8 up to some of the more sophisticated-type scams. 9 Even before that, we received 10 intelligence from Houston that in the Houston area 11 there could be 100 groups working in that general area 12 in that type area. It's a matter of the saturation of 13 these people. 14 We've traveled to Florida and met in 15 Florida to try to talk amongst security people as to 16 what the right approach is -- at that meeting was 17 Tampa police and a bunch of different police 18 departments -- and trying to come together with ideas 19 of how to catch these people in law enforcement-type 20 circles. We realize that the enforcement side is 21 reactive to these scams that take place. 22 We had to state what was the best tools 23 out there in Florida where this was all started 24 because of all the elderly scams that go out there. 25 They've studied this in trying to figure out how to 0045 1 get ahead of the curve, as we call it in law 2 enforcement. 3 What they come up with was to get out 4 in the press and put the information out and warn 5 people as much as you can with the best deterrent to 6 this type situation. If you can get out there and 7 tell the elderly or tell the people what is 8 happening -- we found some success in Texas with this 9 already. If you get that out there and get the word 10 that -- somebody may hear or their family may hear, 11 and actually we've seen some bankers that have heard 12 it, that have seen people coming in, because that's 13 one of the M.O.s of these people is that they go into 14 a bank and get large sums of money and come out. 15 A banker in a couple of cases has seen 16 that this is happening and has warned them that this 17 is not right and has stopped that from happening. So 18 we've had success. But the number of groups that are 19 out there are large. The success of the scam dictates 20 more groups coming in. Because if you're successful 21 of any kind of crime, they're going to bring in more 22 people. 23 Based on the 60 Minutes article -- if 24 you want to read it, it's on their website -- it 25 talked about how they trained in South America. We 0046 1 received also intelligence that their training goes on 2 in New York, that a lot of these start up in the 3 Northeast doing different kind of scams and then move 4 back downwards. 5 We're in contact with all the different 6 states. Security directors meeting that we hold each 7 year in Nashville, this has been a topic for the last 8 two or three meetings, because it affects not only 9 Texas, California, Arizona, New Mexico. All of them 10 are having these scams. We've seen it now filtering 11 up to Colorado and headed up north as far as the 12 interstate corridors that these people are hitting. 13 I think our approach is excellent. I 14 think Mr. Greer has done an excellent job in getting 15 the word out. It's just that you wish you could do 16 more to get the word out. Because we keep hearing the 17 stories. The victims' stories, they do this so fast 18 that they get caught up in it, and they really don't 19 realize something's happening until it's over with. 20 Sad as it is, you wish they could tell them not to do 21 it. That's where I think he's trying to say we want 22 to get the word, as much as we can, to those people 23 and have them understand what's going on. 24 A lot of them -- there are language 25 barriers. There's other issues. They don't watch 60 0047 1 Minutes. That show would have not been seen by them. 2 They don't watch the evening news. But if they're at 3 church, bingo halls, wherever they go where the 4 message can be given to them, that's where we think we 5 should hit. 6 The investigators are always reactive. 7 It's a very difficult investigation, because usually, 8 I would say the high percentage of the time, the 9 victims have no information for us because these 10 people are so good at what they do, they leave no 11 trace. They're usually in the victim's car, no names 12 exchanged, no license numbers. And the description in 13 this last case in Freeport where they caught them, 14 they disguised themselves very well. If the victim 15 says, "Here's a description," it's usually a 16 description that's so generic that it's hard for us to 17 follow up in law enforcement. Our leads are very 18 slim. 19 In Freeport we were lucky. We've been 20 lucky several other places around the state. I still 21 think our best approach is to educate the public. 22 I think there's lots of these groups 23 out there, to answer your question. There's a lot out 24 there. And this latest rash is a new trend for us. 25 They apparently hit three or four or five days in a 0048 1 row, just as fast as they could hit. These are the 2 ones we know about. They hit, and then they 3 disappear, and hear later -- we find that they're 4 starting to hit up in North Texas again. 5 You think it's Houston; you think it's 6 Dallas; you think it's East Texas; you think it's a 7 small town. But they're very good in moving around. 8 I think they do that intentionally. To say it's the 9 same group, I don't think. We caught the group in 10 Freeport, and we had two or three right after that 11 while they were in jail. So we know there's different 12 groups. There's different groups and other people 13 doing this. I think they're filtering up because of 14 the success. I think in South America they've done 15 scams like this, pigeon drop-type scams, forever, and 16 now they're moving up into Texas because there's money 17 and success in doing this. 18 COMMISSIONER COX: Mike, what would be 19 the common characteristics of the victims? 20 COMMANDER PITCOCK: Usually they go to 21 these shopping centers. And I hate to list all the 22 stores, because they've gone to Home Depot-type stores 23 to Wal-Marts to clothing stores. They call it -- it's 24 a Latin Lotto scam, so they pray on -- the elderly 25 Hispanic is predominately the victim that they look 0049 1 at. I'd say from 60 to 70 years old. Female and 2 male. They don't try to go one way or the other. 3 They come out of the store like Home 4 Depot and they're out in the parking lot. That's 5 usually where they target. 6 Here in Austin we had a real aggressive 7 Austin investigator that sat out there and was 8 watching. They sat out there in the parking lot, just 9 as we would do in surveillance, and watch for 10 activity. They watch the activity of those stores and 11 how they come out, and then they select these victims 12 based on their clothing and their dress and the 13 likelihood that they will have money, and their 14 vehicles sometimes. Because if they get into a 15 brand-new vehicle or an SUV that's very expensive, 16 they know that they've probably got money somewhere. 17 So they target by sitting out in the parking lot and 18 watching the activity of what goes on. 19 COMMISSIONER COX: Are these people -- 20 do they tend to be people that don't speak English or 21 speak English as a second language, or is that even a 22 selection criteria for these rings? 23 COMMANDER PITCOCK: The ring usually 24 comes across that they're from South America. And the 25 scam starts off, "I'm here in the United States" and 0050 1 they'll lead you to believe that they're here 2 illegally -- "and I'm having trouble, and I've got a 3 winning lottery ticket." In the majority of the cases 4 -- not always. Because in a couple cases they spoke 5 English. But in most cases they speak Spanish to the 6 victims. That's why they pick the elderly Hispanic. 7 Because they find that language bond is easier for 8 them to communicate, and it leads to -- they bond 9 quicker in doing that. 10 It's traditional -- not just the 11 Hispanic. But Texans, we want to help people. It's 12 part of what our nature is. When you get somebody 13 that comes to you and says, "I need help," again, you 14 listen to the story, "I've got a winning ticket, but I 15 can't claim it, because when I go in there, I'm not 16 legally in the United States; I will have problems," 17 which is not true. But that's a story that is 18 believable to the victim that sounds reasonable. 19 Then another third party will come up, 20 hears the story and wants to buy in and shows the 21 victim. "I want to get in on this too." They show a 22 lot of money. Leads more to the victims want to get 23 into this situation. "Here's my share. Let's get 24 your share and put it together and go claim this 25 ticket." 0051 1 Psychologically these people have 2 studied the pigeon-drop theory. Get the buy-in. Once 3 you get the buy-in and the person gets the money from 4 the bank, the exit is -- the key thing is how do you 5 get away from this person and not get into any kind of 6 confrontation. One thing they don't do is violence. 7 They don't like to fight. They don't like to get into 8 any kind of violent confrontation with the victim. 9 So the exit is critically important. 10 What we find, the common denominator is that somebody 11 will either fake an illness or say, "I'm sick." 12 They'll stop on the way to the lottery to claim the 13 ticket, and they'll go in and -- to get medicine, and 14 the other person will get out to go check on them. 15 The victim's sitting there in the car. They don't 16 come back, and they've exited the premises. And 17 usually an elderly person will sit there for longer 18 than most. And once they start checking, it's too 19 late. They're gone. And they have their money. 20 Funny thing about it, to put pressure 21 on us, the first thing they do, of course, is call the 22 lottery and seeing if somebody's come to claim that 23 ticket. They still buy in that there was some kind of 24 winning ticket. That's how we sometimes get 25 involved. We refer it directly to the local law 0052 1 enforcement. 2 It's a sad situation. Because you've 3 got a person that's really confused on the other end 4 of the phone trying to figure out, "What just happened 5 to me? I gave up $10,000 or $20,000 to something." 6 We know readily what it is. But it's very difficult 7 to convince them that, "You've been conned." 8 That's the word that has to get out 9 through the press. The victims have to be educated to 10 know the signs. If there's any deviation in their 11 plan -- what we've found by these people, if there's 12 any deviation to the scam, they stop and exit. 13 They'll get out. If they say, "I want to call my son; 14 I want to call my wife; I want to check on this," if 15 they stay too long at the bank, anything that leads to 16 the suspicion that this is not going straight, as 17 planned, the suspects leave. 18 MR. GREER: We have had some successes 19 in reference to that as a result of our work. They 20 have called their husband and said, "Get away from 21 them" or something like that. We are having some 22 limited success in getting the word out to reinforce. 23 I think there's more we can do to pull marketing in 24 and reup the whole aspect of how we can get more 25 aggressive. 0053 1 COMMISSIONER COX: Are we working with 2 the Spanish language media? 3 MR. GREER: Yes, sir. 4 COMMANDER PITCOCK: I think it needs to 5 reach further. I think the media has to help us. I 6 think there's still a level of our population that 7 really doesn't read the Spanish media. I think it's 8 got to go to the church. It's got to get out there to 9 their circle of comfort and get to that -- get that 10 word to them. I think it's got to go a little bit 11 further. I think that's what Mr. Greer is saying. 12 We've got to reach a little bit further. 13 CHAIRMAN CLOWE: Any further 14 questions? 15 Steve, what is your anticipated 16 advertising budget to end up the current fiscal year? 17 MR. MARTIN: This current fiscal year 18 is a total of $34 million. 19 COMMISSIONER COX: Going to spend it 20 all? 21 MR. MARTIN: Pretty close. 22 CHAIRMAN CLOWE: Anything further? 23 Thank you all. 24 Next item, 9: Report, possible 25 discussion and/or action on the 78th Legislature 0054 1 and/or implementation of legislation affecting the 2 Texas Lottery Commission. 3 Ms. Trevino, good morning. 4 MS. TREVINO: Good morning, 5 commissioners. For the record, I'm Nelda Trevino, the 6 detector of governmental affairs. A very brief report 7 regarding the 78th Legislature. The house committee 8 on licensing and administrative procedures chaired by 9 Representative Kino Flores met on July the 14th to 10 further discuss the use of outside legal counsel in 11 connection with a video lottery system in Texas with 12 representatives of the Lottery Commission and 13 representatives of the office of the attorney 14 general. 15 The committee also heard testimony from 16 representatives of the state auditor's office 17 regarding their report on the review of the use of 18 outside legal counsel. Also in your notebook is a 19 copy of the agenda of our next legislative briefing 20 scheduled for August 4th at 10 a.m. That will be held 21 at the state capitol in Room E2.026. 22 That concludes my report on this agenda 23 item. And I'll be happy to answer any questions. 24 CHAIRMAN CLOWE: Are there any 25 questions? 0055 1 Reagan, do you have anything to add? 2 MR. GREER: I will have some things to 3 add, but I'll do it under Catherine's report in 4 reference to some issues that came out of the 5 hearing. We're going to discuss a couple of things 6 specifically about internal audit assisting some 7 issues that came out of that hearing. I'll have a 8 more detailed report under that agenda item. 9 CHAIRMAN CLOWE: I have subsequently 10 received a letter from the state auditor's office to 11 Chairman Flores dated July the 28th. I just read that 12 letter this morning. Do either of you have any 13 comment on that? 14 MS. TREVINO: Mr. Chairman, I don't. 15 MR. GREER: I too just received it 16 yesterday and reviewed what the auditor came back with 17 in reference to the overview that left some questions 18 of them. Nothing specifically to add at this time. 19 CHAIRMAN CLOWE: I think one area that 20 is of particular interest is the final paragraph in 21 that letter regarding the last issue that was brought 22 up in the hearing regarding the action in drafting or 23 contracting for drafting of legislation on a matter 24 that constitutes lobbying. I was interested in that 25 determination. 0056 1 From time to time, agencies are called 2 on by leadership offices or legislators to assist them 3 in the preparation of draft legislation or the 4 possible projection of revenue resulting from 5 legislation. My understanding of what this agency has 6 been involved in in regard to this hearing that we 7 appeared before Chairman Flores on is that activity. 8 Does this give the agency any different 9 guidelines than we have followed in the past based on 10 your initial reading? I understand the letter just 11 came in yesterday, and I've just read it this morning, 12 but are we getting any different direction than that 13 which we, as one of many agencies, has followed in the 14 past when we have had a request from a leadership 15 office or a legislator? And that's been, on my term 16 on this board, an occurrence that has happened during 17 the session and during off session with some 18 frequency. Are we receiving any different signal? 19 MS. TREVINO: Chairman Clowe, I would 20 say, as you indicated, we just received the letter, 21 and we haven't internally as a staff grouped together 22 to discuss the letter that the auditor's office sent 23 to Chairman Flores. 24 In my quick read of this, I don't think 25 we're receiving any other indication from what our 0057 1 practice of the agency has been. As you indicated, we 2 respond to requests from members of the legislature 3 whether it's in the assistance of legislation or 4 revenue projections. We do try to respond to these 5 requests that we might get. 6 CHAIRMAN CLOWE: I have urged and even 7 admonished, Reagan, you and your staff numerous times 8 about the prohibiting of any lobbying on the part of 9 the agency. And in regard to this situation, early 10 on, prior to any request whatsoever, it was my 11 instruction to you and of the staff to be a resource 12 only. 13 MR. GREER: Yes, sir. 14 CHAIRMAN CLOWE: This issue turns 15 around that type of activity. I want to make certain 16 that it's clear in your mind and the staff's minds 17 that we are a resource and we have been responsive in 18 the past, and I assume we will continue to be 19 responsive, to a leadership or legislative request. 20 But that is in the role of acting as a resource. 21 I would like for you to follow on this 22 letter and make certain that, as in the past, we have 23 done that, that's the path that we should stay on for 24 the future. My sense is that an agency should be 25 responsive to that type of request, but I want to make 0058 1 sure I understand that clearly. 2 Would you follow up on that? 3 MR. TIRLONI: Absolutely. 4 MR. GREER: And I agree. We, 5 throughout the process, reinforce the aspect of being 6 utilized as a resource. I think this letter goes into 7 some of that, and we'll be happy to discuss that 8 further with general counsel. There are some issues 9 we may want to touch on that. 10 CHAIRMAN CLOWE: My understanding of 11 this issue is that in the request that was made there 12 were intricacies and complexities that were beyond the 13 scope of the knowledge of this agency, and that 14 because of the delicacy of the issues, there was a 15 need to seek those people who had experience and 16 knowledge in this subject. And I understand 17 complexities of best issue and those people who are 18 concerned about it, and I'm very respectful of that. 19 We want to deal with that, and I think we have through 20 the state auditor's office and through appearing 21 before Chairman Flores. 22 I'm looking for a clear path for the 23 future and a determination that we are doing the right 24 thing in the future as requests are made on this 25 agency. 0059 1 I see this agency as a focal point of 2 this type of inquiry in the future. This agency 3 produces revenue for the state beyond what, if any, 4 other agencies produce. And there are opportunities 5 here that are being focused on almost in every session 6 since I've been on this board. And I'd like to see 7 some clarity about that so that we do what we're 8 supposed to do in the right way. This past situation 9 has not been comfortable for those of us in the 10 agency. And I think the best way to make certain we 11 don't suffer any discomfort in the future is to make 12 sure we're following the orders that we're given. 13 I'd like clarification. If you feel 14 this letter gives it, that's fine. If we need further 15 clarification, let's ask for it. 16 MR. GREER: We -- in fact, general 17 counsel and I have discussed on a couple of occasions 18 the possibility of including the attorney general in 19 this whole scenario. We may look at that. We want to 20 absorb the letter a little bit, look at the specific 21 aspects of what it looks for. We may want to seek an 22 outside opinion. And we'll keep you apprised of that. 23 COMMISSIONER COX: Mr. Chairman, I 24 totally agree with what you say. I want to lay it out 25 in my simple way as to how I see the problem. The 0060 1 questions that were raised involved a couple of levels 2 of issues. One, could we have an interagency contract 3 with the attorney general's office to engage outside 4 counsel to assist with the drafting of legislation. I 5 think what the state auditor said there as an 6 interpretation of the statute would say that's okay, 7 and perhaps another interpretation of the statute 8 might say it wasn't. 9 It seems that if you can't do that, 10 then it may not even be clear that you can assist -- 11 that you can use budget agency resources to assist 12 with drafting of legislation. If you can't do that, 13 it seems that Nelda and her department who work with 14 the legislature and assist them on matters that may 15 not go to the extent of drafting legislation but 16 certainly are in the same arena and further down the 17 line on the same continuum, is that okay. And I'd 18 really like to know where the bright line, as counsel 19 says, is on these things. Are any of these things in 20 any way or to any extent precluded from the agency's 21 authority? 22 CHAIRMAN CLOWE: I think that's exactly 23 my opinion. I believe in this agency it is -- I only 24 have experience in one or two agencies, so my 25 experience may be very limited. But in this agency, 0061 1 the complexity of these issues, as revenue generation 2 is examined, are very complex. It's not, in my 3 matter -- in my mind, a matter of raising a cigarette 4 tax a half a point or a half cent or raising a 5 gasoline tax a quarter of a point. It is the 6 interaction between many forces that are substantial 7 and real and great amounts of interest that these 8 groups have and in this agency has looked to for that 9 expertise. 10 If we're going to give an answer, it is 11 a very important and serious answer, and we want it to 12 be correct. That is a heavy burden, as I see it. 13 So I think, Commissioner Olvera, you 14 probably share in this concern on our part about 15 bringing any staff. 16 COMMISSIONER OLVERA: One hundred 17 percent, Mr. Chairman. Based upon my preliminary 18 review of this correspondence -- Ms. Kiplin, I think, 19 one of the key issues is the fact that there is no set 20 legal definition of the term "lobbying." With that 21 vagueness in mind and the fact that there is no 22 attorney general's opinion on that term, it leaves 23 open to interpretation various factors. 24 Perhaps that's something our legal 25 department may need to look at in terms of 0062 1 establishing a set term -- a set definition for the 2 term "lobbying," because I think the layman's 3 understanding -- even an attorney's understanding of 4 "lobbying" does not usually encompass drafting 5 legislation. It usually entails proposing or 6 negotiating votes from a congressman or a senator or 7 what have you. It could mean anything. 8 Ms. Kiplin, are you aware of any set 9 definition -- 10 MS. KIPLIN: No, sir, I'm not. 11 COMMISSIONER OLVERA: -- we can rely 12 on? 13 MS. KIPLIN: No, sir, I'm not. 14 Commissioner, I think that that's an examination of 15 the statutes under the ethics commission's 16 jurisdiction. I will tell you that based on the first 17 letter we received from the state auditor's office, a 18 copy of the letter that was directed to Senator Nelson 19 and Representative Flores. 20 I have had discussions with the first 21 assistant attorney general, Mr. McBean, regarding the 22 issue that you all are raising now, and we will 23 continue that discussion on how best to effect this 24 issue so that this agency is not in a position of 25 being in an uncertain legal arena and that it's 0063 1 hopefully more clear and precise, as Commissioner Cox 2 put it. 3 I will continue that dialogue. Reagan 4 Greer and I will continue that dialogue and keep each 5 of you individually informed until the next commission 6 meeting, if you'd like to discuss it in a more 7 collective fashion. 8 COMMISSIONER COX: The point that 9 Chairman Clowe made, Reagan, and Nelda, about the 10 complexity of the issues that we're dealing with here, 11 I clearly agree and I want to just ask that y'all do 12 everything you can to be sure people understand that. 13 I believe it was Chairman Flores who 14 asked the question, "How come 18 states can legalize 15 Class 3 Indian gaming without outside counsel, and we 16 can't do this without outside counsel?" It's a 17 legitimate and a very good question. 18 What we were trying to do here was 19 permit certain gaming without enabling Class 3. 20 That's a different question. But it's a subtle enough 21 difference that I think we just have to be sure that 22 people understand that there are some issues that are 23 probably pretty easy. 24 If you want to enable Class 3, that's 25 easy. There are all kinds of missteps and steps you 0064 1 can take to enable Class 3. But if you want to have 2 limited expansion without permitting Class 3, that's a 3 whole different animal. And I hope that we can get 4 from counsel the kind of information for y'all to help 5 people understand that these are very complex issues. 6 MR. GREER: Yes, sir. 7 MS. TREVINO: We'll continue to have 8 that dialogue. 9 CHAIRMAN CLOWE: Thank you, 10 Ms. Trevino. 11 Let's take a 10-minute break right 12 here, and then we'll come back to Item 10, which will 13 be your subject as well: Report and possible 14 discussion or action on the process of Sunset. 15 (Recess.) 16 CHAIRMAN CLOWE: We'll now take up Item 17 No. 10 on the agenda: Report, possible discussion 18 and/or action on the Sunset process involving the 19 agency. 20 MS. TREVINO: Commissioners, again, I'm 21 Nelda Trevino, the director of governmental affairs. 22 The Sunset Advisory Commission met on 23 July the 14th and adopted the Sunset staff 24 recommendations related to the Lottery Commission. 25 Included in your commission meeting notebook is a copy 0065 1 of the Sunset Commission's decisions document. You 2 will note that there are 20 recommendations that the 3 commission adopted. Two are management action 4 recommendations, and 18 are recommendations requiring 5 a change in statute. 6 The commission also adopted the 7 across-the-board recommendations applicable to all the 8 state agencies that are under the Sunset review. 9 Also, on page 19 of the decisions 10 document there is a listing of new issues. The Sunset 11 Commission did also adopt a modified version of USU8 12 to require the Lottery Commission to comply with and 13 adhere to existing relevant and applicable laws 14 regarding consumer information protection. The next 15 step in the agency's Sunset review process would be 16 for legislation to be filed. And all the 17 recommendations requiring a change in statute will be 18 considered by the legislature when it convenes in 19 January of 2005. 20 This concludes my report on this agenda 21 item. And I'll be happy to answer any questions. 22 CHAIRMAN CLOWE: Are there any 23 questions? 24 COMMISSIONER COX: Nelda, were there 25 any issues on which our recommendation differed from 0066 1 the staff's recommendation; and if so, how did those 2 come out? 3 MS. TREVINO: Commissioner Cox, there 4 was one. If you look in your notebook, the commission 5 decision document, that is going to be Issue No. 2, 6 and that is on page 5. And that's relating to the 7 size of the commission. And if you recall, the Sunset 8 staff recommendation was to expand the commission size 9 from three to five public members. And this 10 commission had that discussion, and it was concluded 11 that we did not concur with that recommendation. The 12 Sunset Commission did adopt the Sunset staff 13 recommendation to include the expansion of this 14 commission from three to five members. 15 COMMISSIONER COX: I was unable to 16 attend that meeting of the Sunset Advisory 17 Commission. Did the commission understand the reasons 18 that we recommended -- we, this board -- recommended 19 that the board stay at three members? 20 MS. TREVINO: Commissioner Cox, I'll 21 answer your question this way. There was not any 22 discussion specifically about any of the issues at the 23 July 14th hearing. I will say that I had an inquiry 24 from Chairman Solomon's office prior to the July 14th 25 hearing when -- after they received Chairman Clowe's 0067 1 letter indicating that the commission did not concur 2 with this recommendation. 3 COMMISSIONER COX: So they had a letter 4 from the chairman setting out our position? 5 MS. TREVINO: Yes. Not any detail in 6 the letter that was sent. But I did refer Chairman 7 Solomon's staff to the transcript of our last 8 commission meeting where the board did have some 9 discussion related to this recommendation, and she had 10 a copy of that transcript. And I know she's going to 11 be sharing that with Chairman Solomon. 12 CHAIRMAN CLOWE: Anything further? 13 Thank you. 14 The next item, 11: Consideration of 15 and possible discussion and/or action on the agency's 16 LAR. 17 Mr. Deviney. 18 MR. DEVINEY: Good morning, 19 commissioners. Again, I'm Lee Deviney, financial 20 administration director. Tab 11 is entitled 21 "Legislative Appropriations Request Update." There's 22 no -- I have no documents to provide to you. I'm just 23 going to give you a brief summary of where we are in 24 the processes and what you can expect going forward. 25 We're developing our legislative 0068 1 appropriations request for the 2006-2007 biennium, and 2 we're doing it pursuant to the budget structure that's 3 been approved by the Legislative Budget Board and the 4 Governor's office of budget planning. It's a new 5 structure. What it does is it simply expands on our 6 existing -- what are known as strategy line items. 7 What you'll be seeing is major 8 contractual obligations to the lottery as individual 9 line items. That makes the budget more transparent, 10 which was something that the Governor's office and the 11 LBB had indicated that they would look favorably 12 towards, so we're going to do that. 13 The LAR will be presented for your 14 review and approval at the next commission meeting in 15 August. As reported in the June meeting, the 16 commission is required to submit its budget request at 17 95 percent of our expected fiscal 2004-2005. Take 18 that total and multiply it by 95 percent, that's 19 what's known as our baseline budget request limit. 20 We're working to seek and ensure that when we submit 21 this LAR, that it will be within that 95 percent 22 limit. 23 One particular challenge is going to be 24 the charitable bingo operations because our base 25 includes the prize B allocations to local 0069 1 municipalities and counties. We've made the LBB aware 2 of that. They know that. So we're going to have to 3 figure out how we can fit that out into the budget and 4 make it work so that we're within the baseline. We 5 have the money available to go ahead and make those 6 statutorily required prize B allocations. 7 Beyond that, Financial Administration 8 Division and the other divisions in the agencies are 9 visually examining any efficiencies and potential cost 10 savings that we can employ during the next biennium to 11 stay within that baseline limit. We can request more 12 than the baseline, but our goal is to try to stay 13 within the baseline in our total request. 14 During the next month, probably around 15 the third week in August, or whenever it's convenient 16 for the commissioners, staff plans to offer an 17 individual detailed briefing on the budget with you, 18 because it's fairly voluminous. The actual submission 19 is in summary form to the LBB. We recognize that you 20 probably want to have an opportunity to go through the 21 details in the budget request, and so we're going to 22 offer that to you. 23 Last thing that you might want to be 24 aware of, when we submit the budget request for the 25 LAR, it's due August 27th. At the time we submit the 0070 1 budget, the chair and the agency director, Director 2 Greer, and myself, will all be required to submit 3 what's known as a dual certification. And you may 4 remember that when we turned in the fiscal year 2004 5 operating budget. All it is is a statement saying 6 that when we submit the paper copy of the legislative 7 appropriations request, we're also required to submit 8 the same thing electronically and that we're 9 certifying that the documents are the same, that the 10 electronic submission and the paper submission are the 11 same. This is something that we're required to do. 12 So I was going to make you aware of that. 13 CHAIRMAN CLOWE: The LAR is due August 14 27th? 15 MR. DEVINEY: Yes, sir. 16 CHAIRMAN CLOWE: We, therefore, have to 17 set the next commission meeting prior to that time. 18 MR. DEVINEY: Prior to that, yes, sir. 19 CHAIRMAN CLOWE: And you're going to 20 have individual meetings with the commissioners, if 21 they request them? 22 MR. DEVINEY: Yes, sir. 23 CHAIRMAN CLOWE: And I'll not be 24 available from the 15th through the 23rd. I don't 25 know about the other commissioners, but begin to work 0071 1 now on setting those meetings, if the commissioners 2 desire, so that we don't get up against the deadline. 3 My thought is we're going to need to have a commission 4 meeting just prior to the 27th. So I'm in a time 5 squeeze I can see already. I don't know about the 6 other commissioners. Don't drop that on us at the 7 last minute. 8 MR. DEVINEY: Okay. One other thing 9 you might want to be aware of, I believe September 10 13th is the date that's tentatively scheduled for the 11 joint budget hearing with the Legislative Budget Board 12 and the Governor's office of budget planning, and that 13 is an opportunity for the staff of the agency, and any 14 commissioner that cares to participate, to present the 15 budget request to the two budget offices and for them 16 to ask questions. This is something that's done every 17 two years. And tentatively that's going to be 18 September 13th, somewhere at the capitol complex. 19 CHAIRMAN CLOWE: Very good. Any other 20 questions? 21 Ms. Trevino, you mentioned the 22 legislative briefing on August the 4th. It slipped my 23 mind at the time, but I would like to comment that I 24 intend to be there. And I wonder if any other 25 commissioner intends to attend. 0072 1 COMMISSIONER COX: Can two of us be 2 there? 3 MS. TREVINO: I will defer to counsel 4 on that. 5 MS. KIPLIN: Let me review the 6 provision that came in the Open Meetings Act to 7 address forums of governing bodies appearing before a 8 legislative committee. I think it's more narrow. I 9 think it's at the request of that committee. But let 10 me take a look at it, and I'll get back with you on 11 whether there can be a quorum. I think it's the 12 Lottery Commission that's initiating this activity, so 13 I'm not sure if -- 14 CHAIRMAN CLOWE: That's fine. If we're 15 prohibited, perhaps Commissioner Cox and I can trade 16 off some time in your briefing. I think it would be 17 much better to have two commissioners and for us to 18 trade off than to have one. 19 MS. TREVINO: Just as a reminder, 20 Chairman Clowe, we're scheduled to begin at 10 21 o'clock, and we anticipate the briefing lasting 22 somewhere between an hour to an hour and a half. 23 CHAIRMAN CLOWE: Thank you both. 24 Next item, No. 12: Consideration of 25 and possible discussion and/or action on internal and 0073 1 external audits and/or reviews relating to the Texas 2 Lottery Commission and/or the Internal Audit 3 Department's activities. 4 Good morning. 5 MS. MELVIN: Good morning, 6 commissioners. For the record, my name is Catherine 7 Melvin. I am the director of the Internal Audit 8 Division. There's two things I'd like to talk about 9 today: the external audits of our agency, their status 10 from the last month that we discussed this and the 11 activities of the Internal Audit Division also. 12 Let me start with the external audits. 13 The state auditor's office has concluded their audit 14 of selected controls over instant tickets at the Texas 15 Lottery Commission. We have submitted -- or 16 management has submitted the final management 17 responses to their office. The state auditor is in 18 receipt of those. This afternoon we are scheduled to 19 have a final exit conference to go over the responses 20 and the final reports. 21 It is anticipated that that final 22 report will be issued sometime next week. This isn't 23 firm, but from our understanding, the state auditors 24 are anticipating providing the draft report to the 25 legislative audit committee. That's due, I believe, 0074 1 on Tuesday of next week, and then probably issue the 2 final report a couple days after that. 3 The second review -- 4 CHAIRMAN CLOWE: Let me comment that I 5 followed that process closely and appreciate the hard 6 work of everyone involved, our staff as well as the 7 auditor's staff. I think that was a big project, and 8 it hopefully has been successfully concluded. 9 MR. DEVINEY: Thank you, Commissioner. 10 The second was the state auditor's 11 office review of the Texas Lottery Commission's and 12 the office of the attorney general's procurement of 13 external legal services. That report was issued July 14 14th. Ms. Trevino briefed you regarding that report. 15 I'm happy to answer questions on either of those 16 reviews if you have any at this time. 17 CHAIRMAN CLOWE: Are there any 18 questions? 19 Thank you. 20 COMMISSIONER COX: One question. After 21 the report on the selected controls on the instant 22 ticket process is complete, I hope that we could ask 23 Ms. Melvin to give us a report next month on what that 24 says and what she believes the implications are and 25 what we're going to be doing about it, et cetera. 0075 1 MS. MELVIN: Absolutely. I'll plan to 2 do that. Regarding activities of the Internal Audit 3 Division, at the last commission meeting I mentioned 4 that I would be briefing you as to where we were at on 5 completing the approved fiscal year 2004 internal 6 audit activity plan. Before you is a manila folder. 7 I believe the first document in there is a copy of the 8 internal audit activity plan that was approved by this 9 commission. 10 On that document I've highlighted audit 11 projects that we will been deferring for inclusion in 12 next year's risk assessment and development of the FY 13 '05 internal audit activity plan. That's about four 14 projects. 15 The other four projects I'd like to 16 briefly discuss, the first is the bingo regulatory and 17 enforcement capabilities. Actually, Ms. Winkler, 18 who's here by my side, has been participating with a 19 working group that has been reviewing that process. 20 This working group is actually reengineering the bingo 21 enforcement processes. We expect this work to carry 22 over into the next fiscal year. So we'll still 23 participate and be a part of that. 24 Internal audit spent quite a bit of 25 time reviewing those provisions. We believe that some 0076 1 of these provisions will be incorporated in the 2 agency's business plan, and that will carry us forward 3 in the years to come as to how we'll implement those. 4 But we have some ideas on how to do that here in the 5 Texas Lottery Commission. State agencies, I believe, 6 are just now really studying those provisions and 7 saying, "How can we apply these good practices to the 8 governmental sector?" I think it's a good model to 9 look at. 10 Required transfers. The transfers to 11 the Foundation School Fund. The Internal Audit Review 12 statutorily require transfers to the state, including 13 transfers to the Foundation School Fund. That report 14 was issued earlier this year. 15 Then finally, let me jump back up to 16 price payments. Initially I was planning to defer 17 this review to the coming fiscal year. However, there 18 were some concerns expressed at the last meeting of 19 the Licensing and Administrative Procedures Committee. 20 The executive director has requested Internal Audit 21 consider whether the concerns expressed -- or to 22 consider those concerns and make recommendations as to 23 whether these issues should be reviewed again. 24 You may be aware that the prior 25 Internal Audit function review very similar concerns 0077 1 expressed regarding prize payments and presented their 2 report in the September '02 commission meeting. 3 Internal Audit is currently reviewing 4 the prior work performed and will make a 5 recommendation regarding whether additional work 6 should be performed and to what extent we should pick 7 that up. 8 Mr. Greer, you might not want to -- 9 MR. GREER: Yes, I do have some 10 comments. 11 CHAIRMAN CLOWE: Just a minute, 12 Reagan. 13 When might we expect that? 14 MS. MELVIN: Expect my recommendation 15 on this? By the next commission meeting. 16 CHAIRMAN CLOWE: Thank you. 17 MR. GREER: I do have some things to 18 get a little more specific on that that I wanted to 19 add for your information. And specifically Dawn 20 Nettles and a group of winners -- many of them, I 21 think, are here today -- at the Licensing and 22 Administrative Procedures Committee a few weeks ago 23 came forward with some issues. 24 There was an apparent new aspect to 25 prior findings that Catherine touched on that the 0078 1 prior internal auditor had looked at, including an 2 interest rate factor when setting jackpot amounts as 3 low as claims of over and underpaying winners with a 4 focus on the game Lotto Texas. 5 In reviewing the Internal Audit 6 investigation on this matter from the past, there was 7 some key points that I thought would be worth putting 8 to your attention. The first one in the investigation 9 objective out of the report in 2002 stated that the 10 Internal Audit was asked by the commissioners on 11 September 19, 2001, to perform this investigation 12 under the direction of general counsel. The scope: 13 The Internal Audit verified the calculation of the 14 amounts paid to Lotto Texas jackpot prize winners 15 during the period September 11, 1996, to March 9, 16 2002. 17 As far as the findings, there's a few 18 sentences worth noting. In the "Findings" section: 19 "There is no evidence that the exercise of Executive 20 Director's discussion was unlawful, arbitrary, or 21 capricious, or against any theory of administrative 22 law. There is no evidence that the exercise and 23 discretion regarding the varying interpretations 24 violated the administrative rule, particularly since 25 the administrative rule itself recognizes that the 0079 1 executive director is free to give additional 2 instructions and directives. The overriding statutory 3 authority is given to the commission and the executive 4 director to exercise discretion in paying lottery 5 prices. Absent an abuse of discretion or showing that 6 the actions were arbitrary or capricious, it was a 7 lawful act." 8 Keeping that in mind, those comments, I 9 did want to let you know, from my perspective as the 10 new executive director, this was a new issue for me. 11 We got a new internal auditor; we got a new finance 12 director. Those were the key players when that 13 investigation was done in 2002. Now we've got a new 14 group. I think it's worth relooking at the issue, and 15 I'm committed to doing that. I made that commitment 16 also to the committee. In working with Catherine, we 17 will keep you apprised of that and bring you a report 18 next month. 19 CHAIRMAN CLOWE: Very good. A question 20 at this point of Commissioner Cox. 21 COMMISSIONER COX: Reagan, the ending 22 date there that was in that report that's in '02, are 23 the current -- the items in question currently by 24 Ms. Nettles, do they go beyond that date? 25 MR. GREER: The primary focus was up to 0080 1 that date, but we're going to look at the overall 2 picture up to today. 3 COMMISSIONER COX: Are the items 4 specifically being questioned the same items that were 5 questioned before? 6 MR. GREER: My understanding is yes, 7 sir. 8 CHAIRMAN CLOWE: We understand the 9 scope of the internal review at this point on your 10 part will be all-inclusive. 11 MS. MELVIN: Yes, sir, if you wish. In 12 the coming month, just to give you an idea of our 13 plans to develop next year's Internal Audit activity 14 plan, we will embarking on the annual risk assessment 15 process. Similar to last year, we will seek the 16 assistance of management in defining where risk lies 17 within our agency and ensuring that Internal Audit 18 focuses its efforts on those areas of highest risk and 19 of highest importance to us. 20 Finally, Chairman Clowe, in the last 21 commission meeting you requested -- 22 CHAIRMAN CLOWE: Before you get into 23 that, Catherine, I want to go back to an earlier 24 comment you made. If I understood what you said 25 correctly, you're going to defer the four audit 0081 1 subjects that you have highlighted. 2 MS. MELVIN: Yes. 3 CHAIRMAN CLOWE: I have to tell you 4 that I'm a little concerned by Item No. 2 being 5 deferred, contract management. I think that's a very 6 important subject, as are the other three. But this 7 particular subject is being scrutinized, I think, 8 throughout the state. Governor Dewhurst made comments 9 which were in the media yesterday, and it's an ongoing 10 subject at this agency relative to the size of our 11 contracts and the discretion of the executive director 12 with commission oversight. 13 I would like to ask you to reexamine 14 the deferment of that audit, if at all possible. I 15 know that Commissioner Cox is the liaison for the 16 commission working with you. If there's any way that 17 you might get some additional help, and it involves 18 some expense that we could manage within our budget, 19 I'd like to see consideration to not deferring that at 20 this time. 21 MS. MELVIN: Absolutely. Chairman 22 Clowe, you're correct in that this is certainly an 23 area that is of great interest to state leaders. 24 We've all read recent articles in the paper 25 criticizing state agencies in general in their 0082 1 oversight of state contracts. Here at the Lottery 2 Commission this is certainly something we take very 3 seriously. 4 I have to say that one of the reasons 5 this is included in the plan was a very strong 6 referral from our legal counsel to say, "Hey, let's 7 just ensure that this is something that we do well." 8 Internal Audit supports that, and we want that on our 9 plan too. 10 We have one month left in this fiscal 11 year. So we can certainly pick up the project. I 12 think when we talk about the extent of reliance and 13 dollars that go into third-party services, it's 14 significant for the agency. And so that will always 15 be an area that we want to look at. 16 CHAIRMAN CLOWE: Thank you. Appreciate 17 your looking at that. 18 MS. MELVIN: Any other comments about 19 the Internal Audit plan? Chairman Clowe, in the last 20 commission meeting you asked Internal Audit to look 21 into a complaint that you had received. In your 22 packets the next two documents is -- the first 23 document is the letter addressed to Commissioner Cox 24 and the second is Chairman Clowe's response to that. 25 Internal Audit was asked to look at the 0083 1 Security Division's investigations of bingo-related 2 complaints. So our review really focused on the 3 processes, not answering the specific questions, 4 because your letter had done that. We focused our 5 efforts probably in about a two-week time period and 6 shut things down and said, "Let's focus our attention 7 here and review the processes." 8 The staff from my division, Brenda 9 Winkler and Greg Royal, performed this review. Brenda 10 is here to present the results of that review. 11 MS. WINKLER: Good morning, 12 commissioners. I'm Brenda Winkler with the Internal 13 Audit Division, and I'm here today to talk to you 14 about the security division investigation of bingo 15 cases. The first thing we did when we got this 16 assignment was we had to work with IT and security to 17 understand the data we were working with. And by the 18 shear volume of cases that are conducted, we decided 19 to limit our review to fiscal year 2003 and fiscal 20 year 2004 through June of this year. That gave us 21 1085 cases in our population. 22 But when we started looking through 23 those 1085 cases, we learned that a whole lot of the 24 cases involved employee and licensing background 25 investigations. We eliminated that from our 0084 1 population, because we really wanted to concentrate on 2 complaints, and that didn't have anything to do with 3 complaints. So that left us 596 cases in our 4 population. 5 We wanted to make sure that when we 6 used our population of 596, that we had a good random 7 sample that would represent that population, so we 8 used the toolbox from the state auditor's office on 9 their website that selects random samples for you. 10 And that toolbox instructed us that to have a 95 11 percent confidence level in our work, that we would 12 need to test 93 cases. 13 The first thing we did was we wanted to 14 find out, okay, how did the agency get those cases? 15 And we found out of our 93 sample that 55 came in as 16 complaints in a phone call, 18 were letters, and 20 of 17 our cases weren't complaints. So we had 73 complaints 18 in our sample of 93 cases. From those 73 complaints 19 we wanted to know what kind of violation codes those 20 were assigned when they came into the agency. And 12 21 percent were assigned criminal codes for violations, 22 and 88 percent were administrative. 23 Then we wanted to take our sample and 24 come up with the timeline: how long are these cases in 25 the agency before they resolved? And we used two 0085 1 pieces, because the assignment to close date, those 2 are the days that we report to the LBB. So we 3 included those days, and we also did the receipt, when 4 they come into the agency, until that assignment, and 5 we come up with a total of 48.75 days. I do want to 6 explain that that includes calendar days, so it's 7 holidays and weekdays, not just workdays. 8 Next we focused on the investigations 9 in our sample that were over 60 calendar days before 10 they were resolved. We used 60 calendar days because 11 that's the days that security has in their procedures, 12 that they would like all cases closed within 60 days. 13 We found that -- 18 cases in our sample, and we were 14 only using 90 closed cases, because three of the cases 15 in our sample were still opened at that time. So they 16 didn't work in the computations. And so 18 cases, or 17 20 percent, of our random sample were over 60 days 18 before completed, and the average of those 18 is 107 19 days. 20 We then took the 18 cases and we looked 21 at, okay, so how long were they open? And the 22 majority of those were closed within 60 to 90 days. 23 Then we wanted to look at the case 24 status codes, how were these closed, what codes were 25 they closed with after we had worked on them. And we 0086 1 have both criminal and administrative codes, and the 2 largest amount of these were closed with 3 administrative case insufficient evidence. 4 Then we went back to our original 5 sample of 93, which, again, really it's just 90, 6 because three cases were still open. And for our case 7 closures on our whole sample, 81 had been closed 8 within an administrative code and 9 with a criminal 9 code. And that's on the next page. So on the 10 administrative codes, 30 of our 81 were closed with 11 insufficient evidence. 12 On the nine cases that were closed with 13 criminal violation codes, it was three -- the biggest 14 majority was three where allegations were unfounded. 15 While we were conducting this review, 16 we looked at the security procedures, and we were 17 looking at how they were going to code their 18 procedures. Some of the violation codes, they had 19 listed that they would be an automatic referral to 20 Bingo Audit. We had seven cases in our 93 that should 21 have been referred to Bingo. We found that security 22 had actually worked these cases, but we just didn't 23 find the formal evidence that there had been any 24 coordination in the bingo division on those cases. 25 And that was kind of what we felt like 0087 1 was at the core of the issues with these bingo 2 investigations, that there may be some opportunities 3 for better coordination and communication between the 4 bingo division, and security. One of our examples of 5 that is that we found that security performs 6 compliance inspections, and those are very similar to 7 the bingo A and A inspections that are performed. And 8 we just believe that if these were coordinated a 9 little better, we might be able to avoid some 10 duplication of effort. 11 We also just wanted to mention some 12 things we saw that -- there were some areas that could 13 use some improvement. And one was the documentation 14 that is contained in the case files is inconsistent 15 between case to case, so some are much earlier to 16 follow in what happened in those cases than others. 17 So we would just like to see some standard 18 documentation requirements. 19 We also have talked to Investigations 20 about looking at that their priority codes, because 21 they have procedures for priority codes 1, 2, and 3, 22 but most of their cases are at 2, so that procedure 23 may not be working for them anymore. 24 We also had some issues with the 25 LOTRIS, which is their case management system they're 0088 1 using right now, and we noticed on some open reports 2 that are printed out that there are dates on the 3 reports that are printed out of LOTRIS, but then we 4 couldn't match those dates to the data that we had 5 when we looked at the automated data. So we just know 6 there are some issues there that probably could be 7 looked at. 8 Commissioners, that concludes all the 9 information I have for you today on bingo 10 investigations. I'd be happy to answer questions if 11 you have any. 12 CHAIRMAN CLOWE: Commissioners, I know 13 that you have some questions. I just wonder if you 14 might want to hear if Commander Pitcock or Phil from 15 the bingo division or Reagan as executive director, or 16 Kim from general counsel's office might want to make 17 some comments before we get into your questions. 18 Phil, I'll start with you. We'll start 19 with you. 20 MR. SANDERSON: Chairman and 21 commissioners, I don't have any additional comments to 22 their internal audit. 23 CHAIRMAN CLOWE: Reagan. 24 MR. GREER: I do. Gary, obviously, has 25 been called out on a family emergency, and he's been 0089 1 the point man on this over the last few days since 2 this came to our attention. There's some things in 3 here that I think give us an opportunity to relook at 4 the way the coordination aspects of what takes place 5 in that scenario with bingo operates. 6 To me, there is room for improvement. 7 I'm committed to work with Gary and Mike, Billy, and 8 Phil, specifically, in bingo to come up with some 9 recommendations on ways that we can have some 10 solutions that will embrace some of these concepts 11 that were laid out by Internal Audit. 12 I'm committed to taking an approach 13 that will be more in line with some of the things that 14 were pointed out by Internal Audit on this and will 15 continue to move forward on that and keep you apprised 16 on what we're going to do to be sure that this doesn't 17 take place in the future. 18 CHAIRMAN CLOWE: Kim. 19 MS. KIPLIN: Commissioners, I concur 20 with Mr. Greer. I think that the audit report 21 indicates that there are areas that certainly require 22 attention and improvement. I offer my services to all 23 three divisions. 24 I think that at least on an anecdotal 25 basis the divisions recognize that there were issues 0090 1 with regard to bingo investigations and bingo 2 enforcement. That really was the entire genesis of 3 creating this working group, to do a bottoms-up review 4 of bingo enforcement. The process is to make 5 recommendations to make it more efficient and to make 6 sure that there is improved coordination. 7 I think that this audit report reflects 8 what we thought among the three divisions. I'll speak 9 for my division. If I'm misspeaking for the other 10 two, I'm sure you'll correct me. 11 I think that we'll need to do a better 12 job in terms of coordination. I think we need to look 13 at the process and the structure and see if there are 14 ways that that can be improved. 15 CHAIRMAN CLOWE: Mike. 16 COMMANDER PITCOCK: Mike Pitcock, 17 Commander of the Texas Lottery. I concur with the 18 statements. I think that we saw this as some 19 excellent information that we needed to review our 20 process and make changes to our procedures and some of 21 our systems changes that are already in action that 22 need to be pushed forward. 23 I feel the Bingo Enforcement Committee 24 that is meeting are covering a lot of the issues that 25 are covered here and are going to come out with 0091 1 excellent recommendations for coordination of effort, 2 and I concur with what Kim said. I think the three 3 divisions will need to work closer together in 4 coordinating the activity. I think the CAMP system 5 that's going to come into effect in October will help 6 track cases better and help coordinate information 7 between the divisions where we know what each other's 8 doing, and I think that's a tool that will also help 9 in this process also. 10 MS. KIPLIN: Commissioners, Sandy 11 Joseph, assistant general counsel in the legal 12 division, I asked her, when she agreed to accept the 13 position in the legal division, to take this on and to 14 lead this project, the bingo enforcement review 15 project process. She's here in the audience, if you 16 have any questions regarding the work of that working 17 group and where they are in that process and in the 18 nature of any of the recommendations are that's 19 starting to gel together. 20 CHAIRMAN CLOWE: From my part, I think 21 this might be a little premature. I'd rather not get 22 into a work in process at this point. 23 Commissioners, if you'll allow me, 24 since I'm the one that called for this review, I'd 25 like to make my comments first. 0092 1 Brenda, thank you very much. And 2 Catherine, thank you very much for a very quick and 3 what appears to be a very important review of an area 4 that we began to look at specifically because of a 5 citizen complaint. And that is something that I think 6 every agency needs to be responsive to and reactive 7 to. 8 I certainly am, because I have been 9 regulated more than I've been a regulator. We cannot 10 comment on the substance of the complaint that came to 11 our attention, but the process makes me uneasy in that 12 this particular complaint has been under investigation 13 and consideration by this agency for an extended 14 time. And I'm sure it's complex. I'm sure that it 15 involves a great amount of work. 16 But a citizen came to meet with me here 17 and expressed frustration and a lack of communication, 18 which I think an agency should be responsive to. And 19 that's what brought about the work that you've done 20 for us here. 21 I think that you have opened up to us 22 some concerns that I certainly have that I'm glad that 23 you all have expressed a willingness to examine with 24 some degree of openness. And my comments are from a 25 policy level. The commissioners don't run this agency 0093 1 day to day. But I will tell you that I think we're 2 missing an opportunity here if we don't look at what 3 we're doing and examine how we can do it better. 4 It appears to me that we have come 5 right behind ourselves on some investigations. We've 6 heard that criticism in the bingo divisions in the 7 past, and I think it's validated here, the question of 8 coding of complaints, the question of communication, 9 the question of the number of complaints that are 10 administrative compared to those that are criminal in 11 nature and what our administrative function is 12 relative to the qualification of the people doing the 13 investigations. 14 The question comes to mind, you know, 15 should our security division be combined with our 16 legal division; should bingo have its own 17 investigative security people and its own lawyers and 18 to be more efficient and to do a better job in the 19 tasks of the bingo division and in the investigative 20 resources that are employed by the Lottery Commission 21 relative to criminal versus administration. 22 The issue of funding in the bingo 23 division is separate and apart and different from that 24 at Lotto. And we have to be careful about that 25 allegation of funding and control that. 0094 1 The job isn't being done, in my mind, 2 as best it can be. And I'm appreciative of the fact 3 that this has been called to our attention. I have 4 had concerns about our complaint procedure in this 5 agency for some time. But I think, just to put a fine 6 point on it, that we need to now step back and take a 7 clean, clear view of how efficient we are and see how 8 we can do it better. And I would like to urge those 9 of you involved, and I think that's Phil, you, and 10 Billy, Reagan, Kim, Mike, and whoever else can 11 participate in this, look at doing a better job. 12 Commissioners, I'd invite your comments 13 and see how you feel about it at this time. 14 COMMISSIONER COX: I'm in total 15 agreement with everything you said. Additionally, I 16 want to compliment everybody who was involved in 17 this. Catherine and Brenda, your work was very 18 professional. It was objective and it was 19 constructive. There wasn't a "gotcha" in there. It 20 was, "We looked at this. Here's what we found, and 21 here's how we think the agency can improve." 22 Phil and Reagan and your folks, the 23 response was positive, "We want to improve." That's 24 the way I like to see an audit process work, and I 25 want to congratulate all of you. 0095 1 COMMISSIONER OLVERA: Mr. Chairman, I 2 just want to reiterate those sentiments. I know that 3 I had an impromptu session with many of the players 4 yesterday afternoon and was up-to-date on this issue. 5 My only question, who's in charge of bingo audit right 6 now? Phil, do you know? 7 MR. SANDERSON: The senior audit 8 manager is Marshall McDade. He's been with us since 9 December 1st. 10 COMMISSIONER OLVERA: Once again, the 11 communication, coordination, and the improvements 12 needed, I think, speak for themselves. I don't want 13 to get into the policies or procedures that are being 14 implemented to obviously finalize these tasks, but 15 obviously, it's something that needs to be addressed 16 and not allowed to fall through the cracks. I 17 compliment you on this report. 18 CHAIRMAN CLOWE: Let's have clarity on 19 where we're going from here. Is Sandy Joseph heading 20 up this effort, or how is it going to be managed? And 21 give us an expectation on time. 22 MR. GREER: I'll let Kim talk to the 23 legal, and I'll talk from the Lottery side. 24 MS. KIPLIN: Commissioners, the work of 25 that group will continue until recommendations are 0096 1 made to those folks that are decision-makers. And the 2 real challenge, once the recommendations have been 3 made and those have been accepted, is to implement it 4 and stay on top of it. What I am envisioning is that 5 we will put together maybe a lesser group to monitor 6 and make sure that there's an action plan on getting 7 those implementations made. 8 As to the issues, Mr. Chairman, that 9 you raised on a restructuring of the activities 10 themselves and where they ought to be housed, in some 11 preliminary discussions I've had with Mr. Greer and 12 Mr. Grief, the deputy executive director, the aim and 13 the thought is to take a fresh look, look at other 14 models and other agencies and other lotteries and try 15 to figure out what will be best served here at this 16 agency. 17 I'd like to -- and this is impromptu, 18 so I hope I don't catch any internal audit people off 19 guard. I'd like to just run things by them just for, 20 if nothing else, reality checks as we go through. And 21 I'll leave that. I'm sure Mr. Greer and Mr. Sanderson 22 would concur with that. 23 MR. GREER: We in Lottery, specifically 24 being Mike and the deputy executive director and 25 myself, have discussed this. Gary and Mike have taken 0097 1 the lead on a couple of things as far as information 2 gathering. 3 We began placing phone calls yesterday, 4 as a matter of fact, to other states to see how their 5 security departments are set up and specifically what 6 they do, "Let's look outside what we do here in Texas, 7 see if there's some things that would be applicable to 8 what we're doing." Gary and Mike will be taking a 9 more objective approach at that side of it, and then 10 what I asked them to do was bring me some options and 11 give me an overview report, and then we'll move 12 forward from there. 13 Reflecting on your comment, Mr. Cox, 14 we're all very open to relooking at things. There is 15 a willingness to take a fresh approach and new 16 perspective that will help the agency as a whole, make 17 it better. I think that's a good thing and appreciate 18 the opportunity to work through this issue. 19 CHAIRMAN CLOWE: I want to be aware and 20 sensitive to the concerns of this examination. The 21 bingo division in a stand-alone entity is funded by 22 appropriations. The lottery is funded by income from 23 lottery sales. I want to make it clear that we're not 24 authorizing you to reach into bingo and do things to 25 it. 0098 1 Phil, you can tell Billy that we didn't 2 reorganize the division while he was gone. What 3 happens when you miss a meeting, you see, is sometimes 4 important. 5 But it's going to call for working 6 together. And what we're asking for here, I think, is 7 an objective view of how these activities can be 8 better performed. We have had complaints from bingo 9 operators that you had the auditors in here and then 10 the next week you have the security here. Why are you 11 doing that? And I think that's a valid question and 12 complaint. 13 I understand specifically on this 14 complaint that we received from Mr. Hieronymus that 15 has been referred to the legal division, so I assume 16 that you're taking charge of that now and you will 17 communicate back and see that there's a response on 18 that issue. 19 But it's important that this spirit of 20 cooperation and communication continue so that a plan 21 can be offered up that will be beneficial to 22 everybody, to the public, to those people who are 23 audited and investigated, to the state, to everyone. 24 And what kind of a time frame would you 25 give us? 0099 1 MR. GREER: What we had discussed was 2 moving forward immediately. As I mentioned, we 3 already made calls starting yesterday from a 4 gathering-information perspective. I think, 5 reasonably, we'll come back to you next month with an 6 overview and some conclusions. And we'll continue to 7 keep y'all in the loop on it. We had not specifically 8 stated a deadline at this point. I'm hoping we can 9 come up with something in the next couple of weeks. 10 CHAIRMAN CLOWE: Phil, how do you feel 11 about it? 12 MR. SANDERSON: I concur. We're moving 13 forward with some of the recommendations that have 14 already been made. The communication out in the field 15 offices is a lot better than probably here at the 16 headquarters. The investigators and the auditors see 17 each other. They're in the same office and the same 18 building. They see each other daily. They do discuss 19 some of the cases out there that are pending, and the 20 complaints. 21 The other area, I think the CAMP 22 Project, is also going to help benefit some of this in 23 keeping the overall tracking of the complaints when 24 they come in and how they're directed and assigned 25 throughout the divisions. I think that's going to 0100 1 help the process. Along with that, we're getting 2 consistency between priority codes. They're holding 3 meetings right now as far as what complaints carry 4 what priority or violations and also consistency in 5 the violation codes. 6 A lot of the process has already 7 started. I serve on the enforcement process review. 8 That committee is not only looking at the complaint 9 process but the overall enforcement process whether it 10 be from an audit, investigation, a licensing issue. 11 It's totally encompassing the enforcement process, not 12 just as a result of a complaint. 13 MS. KIPLIN: Commissioners, if I may, 14 the work of the bingo enforcement process review will 15 continue on. It will take longer than coming back in 16 a month. I think coming back in a month will be 17 recommendations, and I'll get with my colleagues in 18 terms of structuring an approach. I want to be clear 19 about that, because that work will continue. It's 20 very methodical. It's very deliberate. It's doing a 21 bottoms-up review of the bingo process. 22 Mr. Chairman, one other matter, the 23 complaint resulting in the investigation. That has 24 been referred to the legal division. The legal 25 division has been copied on that. Mr. Atkins will be 0101 1 the decision-maker on how best to proceed with that. 2 We, of course, will be giving legal advice to 3 Mr. Atkins. That was referred out July 22nd, so it 4 was last week. 5 CHAIRMAN CLOWE: I thought it had been 6 referred to you. It went back to Bingo? 7 COMMISSIONER OLVERA: The complaint 8 that's the subject that generated this is a good 9 example in that I think there need to be special 10 procedures in place when litigation is involved 11 vis-a-vis the fact that many of the cases that take 12 longer than usual. 13 There's a notation that litigation is 14 involved by third parties or other courts. And I 15 realize that attorneys and judges may complicate 16 things, but that does not mean it's a bar for the 17 investigation to go forward, unless it's a bankruptcy, 18 which would entail some kind of a stay. There need to 19 be special procedures in place when litigation is 20 involved, as it is in this case. 21 MS. KIPLIN: If I may, this 22 investigation did go forward, but because of the 23 issues of litigation, it slowed the investigation down 24 because we were -- I think his division, Mr. Pitcock's 25 division, was dealing with sealed records and 0102 1 third-party confidentiality rights. 2 CHAIRMAN CLOWE: Anything further? 3 MS. MELVIN: Commissioners, I just 4 wanted to reinforce Internal Audit's commitment to the 5 solutions focused. It's one thing to come here and 6 point out areas to improve or issues to improve, but 7 the Internal Audit Division is available to assist 8 management actually move forward. 9 And Kim, you mentioned surprising us. 10 But that's not a surprise. We're certainly available 11 to provide recommendations, assist in any way we can. 12 That concludes my report. 13 CHAIRMAN CLOWE: Any other questions? 14 Thank you all very much. 15 MS. KIPLIN: Commissioner, before you 16 call the next item, I might address the question on 17 whether you can attend the legislative briefing. I 18 don't believe the exception that was -- that was 19 written in to address that will cover that, because 20 it's attendance by quorum of a governmental body at a 21 meeting of a committee or agency of the legislation, 22 and that's not what will occur. So my opinion is that 23 you will only be able to have one commissioner, 24 because I don't think -- you will not be able to have 25 a quorum, unless noticed. And I think we're beyond 0103 1 the time by which -- or we could have noticed. 2 CHAIRMAN CLOWE: Ms. Trevino, will you 3 cover the agenda with Commissioner Cox and myself and 4 work out what's convenient for the two commissioners, 5 and we'll split that agenda? 6 MS. TREVINO: Yes, sir. 7 CHAIRMAN CLOWE: I'm flexible in any 8 way that Commissioner Cox wants to do it, first or 9 last. 10 Ms. Nettles, did you want to comment on 11 the matter covered under Item 12 on the agenda? 12 MS. NETTLES: Yes, sir. May I come 13 down? 14 CHAIRMAN CLOWE: Yes, you may. 15 MS. NETTLES: Good morning, 16 commissioners. I'm Dawn Nettles with the Lotto report 17 from Dallas. I do have comments to make with regard 18 to Item No. 12, the audit. 19 First of all, y'all are new and y'all 20 have not ever heard me spell out this situation to 21 you. Several things were said while ago that I want 22 to make sure is corrected. First of all, the 23 complaint was originated on September the 28th, 2001, 24 during a public comment hearing. That transcript was 25 not on the website. 0104 1 CHAIRMAN CLOWE: I'm going to ask you 2 to be more specific. Give us the complaint that 3 you're referring to, so we'll know exactly. 4 MS. NETTLES: Okay. On September the 5 28th, 2001, I came here to Austin, sat right here, and 6 discussed with Kim, or commented to Kim, that Lotto 7 winners had been shortchanged. 8 What's important for y'all to know on 9 that, that was on September 28, 2001. What I had 10 reviewed was -- I didn't give Kim any information on 11 that day. She did try to get me to turn it over to 12 her, but I didn't. I simply stated that Lotto winners 13 had not been paid all that was in the prize pool. At 14 that time I explained to her that Lotto winners on 15 September the 28th, 2001, had been paid in five 16 different manners between 1996 and 2001. 17 Since y'all are new and don't 18 necessarily understand this, I want to really make 19 sure that that's clear. 20 CHAIRMAN CLOWE: Ms. Nettles, I was 21 here. 22 MS. NETTLES: I know. 23 CHAIRMAN CLOWE: I am not new. I think 24 when you say "new," you're referring to Commissioner 25 Olvera and the beginning of his term and Commissioner 0105 1 Cox and the beginning of his. 2 MS. NETTLES: Yes, sir. Commissioner 3 Clowe, you know how many times between September of 4 2001 and September of 2002 I called you and asked you, 5 "Where's our auditor's report? When is this 6 investigation going to be completed?" 7 But anyway, let me back up a little 8 bit. Realizing that this was stated here at this 9 commission on the 28th of September of 2001, I didn't 10 have any information about winners forward. By the 11 time that I had come here and commented on this, on my 12 allegations that Lotto winners had been shortchanged, 13 no one else had been shortchanged since then. 14 I can honestly tell you that between 15 September of 1996 through February of 2001, actually 16 March 2001, no winner has ever received less than the 17 amount in the prize pool. I think I said that wrong. 18 Since March of 2001, there's not been a single 19 solitary Lotto winner that has not received an amount 20 in the prize pool. Between September 1996 and 21 September -- or March of 2001, 13 people -- 13 wins 22 did not receive the amount of the prize pool. 23 When the commission came out with their 24 audit report, their 2002 audit report, their audit 25 report covered the exact same time frame, except 0106 1 because it took them a year to do it, they went a year 2 forward in what they reported. 3 The audit report states that it's an 4 interpretation problem with the rule. And my very 5 specific complaint was that 13 people did not receive 6 the amount in the prize pool, or 13 wins. That was 7 the winners for February 26th of '97. Their win was 8 shortchanged by 727,000. The winners on April 5, '97, 9 they were shortchanged 120,000. 5-17-97, they were 10 shortchanged by 107,000. February 4, '98, they were 11 shortchanged by 798,000. February 28th, they were 12 shortchanged by 14,000. 13 COMMISSIONER OLVERA: 28th of what 14 year? 15 MS. NETTLES: I'm sorry. 28th of '98. 16 On June 30th of '98, those people were 17 shortchanged by 109,000. On July the 18th of '98, 18 they were shortchanged by 76,000. On August the 19th 19 of '98, those people were shortchanged by 225,000. 20 September the 5th of '98, they were shortchanged by 21 88,000. November the 7th of '98, they were 22 shortchanged by 354,000. November the 10th of '99, 23 they were shortchanged by 144,000. And the last 24 number shortchanged was on February the 9th of 2000, 25 and they was shortchanged by 74,000. 0107 1 At that very time frame for this 2 shortchange is when I started posting on my website 3 exactly how much money the winner was supposed to 4 collect. From that day, every winner has received the 5 exact amount in the prize pool. 6 The rule, at the time, did not say that 7 anybody would receive less than the amount in the 8 prize pool, yet the winners, in the time frame that I 9 investigated, some received what the commission was 10 doing was trying to pay the investment cost. 11 Ironically, sometimes they did; sometimes they 12 didn't. Sometimes they paid less than the investment 13 cost. Sometimes they paid more than the investment 14 cost. Sometimes they paid the exact amount of the 15 prize pool; sometimes they paid less than the amount 16 of the prize pool. 17 You have another winner, to give you an 18 example of this -- okay, you have a win on March 24th 19 of 1999. And this is a very good example. 20 Supposedly, according to the documents that the 21 commission has, the investment cost was $9.8 million. 22 Now I had documents that show the investment cost was 23 10 million one. The winner was paid the amount of the 24 prize pool, which was 9.9. This is unlike the other 25 wins. We have so many different ways that these 0108 1 winners were paid. 2 When I went on the 14th and when I gave 3 this spreadsheet to the legislators, which still -- 4 now I've added the home towns. All I did was just 5 include a spreadsheet that shows the interest rates, 6 because the interest rates was the factor. I'm not 7 complaining about anything except those people who did 8 not receive the amount in the prize pool. And that 9 was wrong. That's really wrong. 10 To go a year, whenever they took their 11 year to investigate my allegations, and to come up and 12 not to do -- to make it right, when the rule did not 13 state that you were going to pay the amount of the 14 investment cost, you did not state that you were going 15 to pay the amount you advertised. That rule stated it 16 was a pari-mutuel game and the executive director may 17 increase the amount to the winner. It never said you 18 could decrease the amount. 19 And I don't believe there was an 20 interpretation problem as this audit report says. The 21 reason is because beginning in February 1997, when 22 that new rule took effect, the letter to the 23 comptroller's office, the fax -- when there's a 24 winner, the commission faxes over a fax to the 25 comptroller's office asking them to invest X number of 0109 1 dollars or purchase securities for X number of dollars 2 and tell them how much it's going to be. Then the fax 3 changed to, "Tell us how much you need to get a return 4 of 7 million or 10 million or 20 million." 5 That was a very distinct change that 6 this commission made. And it shows very clearly that 7 they were intending to play the amount that they 8 advertised. 9 I do know that that discussion did take 10 place up here, but it was overruled to write it in the 11 rule, because they wanted the option to pay those 12 different ways. 13 I don't have a complaint about 14 everything else I've uncovered. And I've uncovered -- 15 you've given me all this time. And believe me, I've 16 uncovered a lot more. But my only concern is for the 17 13 people that did not receive the amount of the prize 18 pool, because it's wrong. All these others -- where I 19 just listed those, I did me a quickie spreadsheet that 20 shows the before and after. 21 When you have a winner who won on 22 February the 12th of '97 and he was overpaid by 23 215,000, but then on February 26th you shortchanged 24 the next one 727,000, then you have another winner on 25 3-1, just four days later, and he's overpaid by 0110 1 24,000, how do you justify this kind of thing for a 2 lottery? It's wrong. 3 I've been begging for three years for 4 you all to take care of these people, and all I've got 5 is nothing. To me there is no need for investigation 6 because my figures, even though I disagreed with one, 7 only one number out of the report that the lottery put 8 out versus what I had -- and I just said, "I'll go 9 with y'all," these numbers match to the penny what 10 that first audit report gave. And these people need 11 to be paid. It's wrong. And there is no 12 interpretation problem. 13 And there's really -- I'm sure legal 14 can probably -- as good as Kim is, I have no doubt 15 that she can come up with a good, legitimate reason to 16 not pay with this legal -- maybe it's a broad 17 definition or maybe it's a narrow interpretation of 18 the law. I'm sure something can be come up with. 19 But this is a moral issue and an 20 integrity issue. If all winners received at least the 21 amount of the prize pool, all of them should have 22 gotten it. These people didn't. 23 I ask you all to please stop your 24 investigations. Just make the decision on what you're 25 going to do so we can move forward. Because this 0111 1 issue is not going to drop. I can promise you it's 2 not going to drop until they're taken care of. 3 I have one other comment I wanted to 4 make. I'm finished on that one. I wanted to make one 5 more comment just because y'all discussed it earlier. 6 And that is that -- actually I received an e-mail 7 yesterday that got my attention, and I couldn't -- I 8 can't believe it's here on your agenda and y'all 9 discussed it this morning. The people of Texas will 10 not accept computerized drawings. I can tell you 11 right now it won't go. It may save y'all money, but 12 technology is so advanced -- and you already have a 13 problem here at the commission with people thinking 14 that you cheat on their drawings. I don't think you 15 cheat on their drawings. I don't think that. Never 16 have. 17 But with the computerized drawings, the 18 computer has the ability to go through and scan all 19 the combinations that are already bought and can come 20 up with the numbers, you know -- there's no such thing 21 as random. It's an algorithm that determines the 22 numbers that are drawn or how they're drawn. 23 I can tell you right now the people of 24 Texas do not want it. The other states that have 25 already started it -- I think there's only two. Isn't 0112 1 that right? I don't remember. But I have a ton of 2 stories and e-mails that's already been in the media 3 about how the people oppose that. It's just like 4 bingo. Give us drawings and give us balls. Don't do 5 computerized drawings. You have enough headaches as 6 it is without adding that one. I promise you it won't 7 go over. 8 I'm finished, Commissioner Clowe. 9 CHAIRMAN CLOWE: Thank you for your 10 comments, Ms. Nettles. Have you provided that 11 information that you referred to to Reagan and Kim? 12 MS. NETTLES: Which information? 13 CHAIRMAN CLOWE: These spreadsheets 14 that you just referred to. 15 MS. NETTLES: Yes. I didn't have 16 enough copies when I was here two weeks ago. I did 17 give Kim a copy of the spreadsheet. She already had 18 an auditor's report. She already had the one that 19 y'all did. 20 CHAIRMAN CLOWE: I'd like to make sure 21 that they have the latest information that you're 22 referring to today, because our recollection was that 23 you were commenting on overpayments in the 24 administrative committee hearing primarily, and I 25 didn't hear you comment very much about that today. 0113 1 This look includes all aspects of that. 2 MS. NETTLES: I'm awfully glad you said 3 that, Commissioner Clowe, because you're absolutely 4 right. I realized three weeks ago or so, as I was 5 reading about the CHIPS story, that I have perhaps 6 gone a long way on trying to get something done up 7 here about the cheated winners. I realized what I 8 probably need to be complaining about is the 100 9 million in overpayments rather than the 3 million in 10 underpayments. 11 CHAIRMAN CLOWE: That's certainly your 12 business. What I'm asking is a complete sharing of 13 information with the staff here so that, as they look 14 at this, they can have everything that you have 15 produced that you want to make a part of this. 16 MS. NETTLES: They have my 17 spreadsheet. Again, I'm not complaining about the 18 overpayments. However, from the state side, I think 19 you need to do a rule, like I said, two years ago that 20 this is strictly pari-mutuel. And in order to protect 21 the state -- because that 100 million would have gone 22 to the state. It should have gone to the players, but 23 it would have gone to the state, because they've 24 already transferred monies out of the reserve to the 25 General Revenue Fund and passed. This money was used 0114 1 to pay just a few choice winners. 2 CHAIRMAN CLOWE: I understand that. 3 Just so we have the latest information. Thank you 4 very much. 5 MS. NETTLES: Thank you for hearing me. 6 CHAIRMAN CLOWE: Next item, 13: 7 Consideration of and possible discussion and/or action 8 on the agency's business plan. Mr. Anger. 9 MR. ANGER: Good morning, Mr. Chairman 10 and commissioners. For the record, my name is Michael 11 Anger, and I'm the lottery operations director. I'm 12 here this morning to give you a brief update on the 13 status of the agency's business plan. 14 Commissioners, this morning I provided 15 each of you with a copy of the agency's draft 16 comprehensive business plan for your review. I had 17 hoped to provide this draft to you earlier in the 18 month. However, the staff have just recently 19 completed final review of that document, and I was 20 just able to bring that document to you today. There 21 are no external deadlines with regard to the agency's 22 business plan, and I wanted to make that available to 23 you to take a look at and review as you had indicated 24 that you wish. 25 With your approval, I would be glad to 0115 1 schedule Dr. Cadenhead and his team to come in next 2 month at the commission meeting and give an overview 3 of their work with the agency and their work with the 4 staff and the development of this plan. And at that 5 time -- if you would like to make comment on the plan 6 at that time or schedule any further discussions, we'd 7 be glad to make those arrangements as you choose. 8 COMMISSIONER COX: Mr. Chairman, I 9 don't think, unless we plan to have a very long and 10 very late meeting, that a regular meeting is going to 11 provide a proper forum for the detailed presentation 12 that I would like to have on this. 13 CHAIRMAN CLOWE: So you're suggesting 14 that we schedule an additional meeting with this being 15 the only thing on the agenda? 16 COMMISSIONER COX: I ask that you 17 consider that, yes, sir. 18 COMMISSIONER OLVERA: I have no 19 objection. 20 CHAIRMAN CLOWE: I am certainly in 21 agreement with that, so we'll ask you to move forward 22 on that basis, Michael. I've already stated what my 23 limitations are in the month of August. We have a 24 deadline on the LAR on the 27th, I think it was. And 25 it may be that we might need to set this meeting in 0116 1 September. But if you'll work that out with Reagan 2 and the commissioners, we'll move ahead on that basis. 3 MR. GREER: Mr. Chairman, just to 4 reinforce that that would work, because it's a 5 document that -- we're working internally. There are 6 no time lines that we have to meet. That might make 7 it easier and give more time for y'all to -- 8 CHAIRMAN CLOWE: That would not be an 9 emergency meeting of the commission. It can be a 10 regularly scheduled meeting. As long as we docket the 11 agenda 10 days before the meeting, we can meet as 12 often as we want to. I was thinking about meeting 13 every week. 14 MS. KIPLIN: Mr. Chairman, I think you 15 might have been joking, but it can carry over from day 16 to day as long as you're not adjourning. 17 CHAIRMAN CLOWE: I appreciate that 18 input, and that is correct. But I think it would be 19 good to docket this subject and have a separate 20 meeting and let the public come, if they're 21 interested, for this issue and let the commissioners 22 come for this issue. And, you know, we'd almost make 23 this a work issue. 24 MS. KIPLIN: I'm sorry. I wasn't 25 clear. I meant on a separate commission meeting if 0117 1 your work continued, you can carry that over till the 2 next meeting. 3 MR. ANGER: Commissioners, with your 4 permission, what I will do is coordinate a time that's 5 appropriate with your schedules and work with the 6 general counsel, and I will bring Dr. Cadenhead and 7 his team at the time of that individual meeting. 8 CHAIRMAN CLOWE: Commissioner Olvera, 9 with your approval, I'm going to move we go into 10 executive session now and come back to the public 11 agenda after your departure since there may be some 12 items that we need all three commissioners there. 13 At this time I move the Texas Lottery 14 Commission go into executive session to deliberate the 15 duties and evaluation of the executive director and/or 16 deputy executive director, internal audit director, 17 and the charitable bingo operations director pursuant 18 to Section 551.074 of the Texas Government Code; to 19 deliberate the duties of general counsel and security 20 director pursuant to Section 551.074 of the Texas 21 government code; to receive legal advice regarding 22 pending or contemplated litigation and/or to receive 23 legal advice pursuant to Section 551.071 (1)(A) or (B) 24 of the Texas Government Code and/or to receive legal 25 advice pursuant to Section 551.071 (2) of the Texas 0118 1 Government Code, including but not limited to: Patsy 2 Henry vs. Texas Lottery Commission, Sandy Surber, et 3 al. vs. GTECH Corporation, Yolanda Garza vs. SSP, et 4 al., Linda Cloud vs. Mike McKinney, et al., James T. 5 Joneblood vs. Texas Lottery Commission, Steven W. 6 Hieronymus, et al. vs. Texas Lottery Commission, and 7 Gametech International, Inc., Employment law, 8 personnel law, procurement and contract law, 9 evidentiary and procedural law, and general government 10 law. 11 Is there a second? 12 COMMISSIONER COX: Second. 13 COMMISSIONER OLVERA: Second. 14 CHAIRMAN CLOWE: All in favor, say 15 aye. The vote is three-zero in favor. 16 Texas Lottery Commission will go into 17 executive section. The time is 10:47 a.m. The date 18 is July 29, 2004. 19 (Recess.) 20 CHAIRMAN CROWE: The commission is out 21 of executive section. The time is 12:50 p.m. Today 22 is July 29, 2004. Is there any action to be taken as 23 a result of the executive session? I believe not. 24 Therefore, we'll go to Mr. Bennett. 25 Item 15, originally: Report, possible 0119 1 discussion and/or action on the agency's audit 2 services procurement. You don't want to talk about 3 14, do you? 4 MR. BENNETT: I'll be happy to take up 5 14. 6 CHAIRMAN CLOWE: Can you handle it? 7 MR. BENNETT: I can handle 14. 8 CHAIRMAN CLOWE: Let's go to it first, 9 then. 10 MR. BENNETT: Thank you. For the 11 record, my name is Ridgely Bennett. I'm the deputy 12 general counsel for Texas Lottery Commission. Item 14 13 is the instant tickets and services RFP. That RFP was 14 issued on July 6th. Proposals are due by August 6th, 15 and the announcement successor or opposer are 16 scheduled to occur on August 31, 2004. 17 CHAIRMAN CLOWE: Any questions? 18 MR. GREER: In reference to the prebid 19 conference, you might touch on that. I think all four 20 vendors were present. 21 MR. BENNETT: I wasn't present at the 22 prebid conference. Mr. Marker may be on his way down, 23 and he can address that, if you'd like him to. 24 MR. GREER: I just wanted y'all to be 25 aware that the prebid conference did take place. I 0120 1 believe all four major instant ticket vendors were 2 present at the conference, and I had an opportunity to 3 ask questions, and they did have an exchange. 4 CHAIRMAN CLOWE: Very well. Item 5 No. 15, Mr. Bennett. 6 MR. BENNETT: Item No. 15 concerns the 7 audit services procurement that the agency had issued, 8 and I have to report that the agency received zero 9 proposals and responses to the RFP. Staff is 10 currently evaluating its options to determine how best 11 to obtain the audit services that the agency requires. 12 CHAIRMAN CLOWE: Very good. 13 COMMISSIONER COX: Mr. Bennett? Zero? 14 MR. BENNETT: Zero. 15 COMMISSIONER COX: None whatever? 16 MR. BENNETT: None whatever. 17 COMMISSIONER COX: Isn't it nice to be 18 popular? 19 CHAIRMAN CLOWE: Mr. Bennett, I don't 20 believe we need to discuss Item 16. Is that correct? 21 MR. BENNETT: Staff requested that item 22 be passed. 23 CHAIRMAN CLOWE: If any items come up 24 regarding the issue of the operator's contract, you 25 would -- where you need commission input at any given 0121 1 period of time, you will give the commissioners ample 2 opportunity to study whatever issue you might be 3 bringing to the commission's attention. 4 MR. BENNETT: We most certainly will 5 attempt to do that in all circumstances. 6 CHAIRMAN CLOWE: Thank you. We're 7 ready to go to Item No. 19: Consideration of the 8 status and possible entry of orders represented 9 through A through F. 10 MS. KIPLIN: Commissioners, if I could 11 take A, B, and C. Those are contested cases all 12 relating to the lottery activities. In each one of 13 those cases the administrative law judge recommended 14 revocation of the licenses, the lottery licenses, 15 retailer licenses. 16 In Young Season and Star City it was 17 for insufficient funds at the time that the swept the 18 accounts, and for Katy Depot it was failure to keep 19 the lottery informed on material information in the 20 application, mainly that they had gone out of 21 business. 22 Staff does recommend that the 23 commission approve the entry of the orders revoking 24 each of those licenses. 25 CHAIRMAN CLOWE: Are there any 0122 1 questions? So moved. 2 COMMISSIONER COX: Second. 3 CHAIRMAN CLOWE: All in favor, please 4 say aye. Opposed, no. The vote is two-zero in 5 favor. 6 I would like the record to reflect that 7 Commissioner Olvera left the executive session during 8 that time and is not present since the commission has 9 reconvened in open conference. So he will be shown as 10 absent on these votes. 11 MS. KIPLIN: Commissioners, the 12 remaining items, D, E, and F, are proposed settlements 13 and agreed orders between the Bingo Division and the 14 respondent licensees. In American Legion Post 507 the 15 findings are a personal use of charitable funds in the 16 amount of $7600; failure to retain required records, 17 failure to deposit bingo funds; finally, failure to 18 keep accounts on all checks. 19 I think the Bingo Division wanted to 20 bring your attention in this particular matter, the 21 American Legion Post 507, on -- you'll have this in 22 your notebook -- findings 3 and 4 and the fact that 23 there was testimony by folks associated with American 24 Legion that -- I think this is the one where 25 Mr. Zuniga was in possession of bingo records and that 0123 1 the organization could not get those records and then 2 have those providers. 3 Mr. Sanderson, I know you'll probably 4 want to expand on this particular case. 5 MR. SANDERSON: Thank you, Kim, yes. 6 Commissioners, Chairman Clowe, findings 3 and 4 that 7 are on Page 2 off the agreed order, finding No. 3 8 dealt with the fact that there was a $7600 in 9 distributions reported on the organizations for the 10 report. When we did the audit, there were no records 11 presented on how that money was used. The checks were 12 written to the American Legion, but they were endorsed 13 by Melton Wilson and the -- Melvin Wilson would not 14 provide any documentation as to how that funds were 15 used. 16 The commander, at the time we had the 17 hearing, testified that she tried on numerous 18 occasions to get information from Mr. Wilson and also 19 the fact that during the time period that these checks 20 were written from the bingo account to the American 21 Legion post, she was the treasurer and she did not 22 receive those checks or recall receiving those checks 23 on behalf of the American Legion. 24 And in the Finding No. 4 the 25 organization was playing in a bingo hall where the 0124 1 individual that is the commercial lessor is Ramone 2 Zuniga, and they tried on numerous occasions to get 3 him to provide the records for the bingo activities, 4 and we tried to get those records also and have yet to 5 receive any records. 6 MS. KIPLIN: The parties have agreed, 7 and in particular American Legion post, to predeposit 8 into the bingo bank account the amount of $7600 and 9 also to provide procedures to the division to ensure 10 compliance with the Bingo Enabling Act. And the 11 predeposit will occur over a period of 12 months. 12 It's my understanding that the bingo division monitors 13 these settlement agreements to ensure that there's 14 compliance. They will also attend bingo training. 15 That's American Legion Post 507. 16 MR. SANDERSON: May I add one other 17 thing to that? They've already deposited $1600 of 18 that $7600. So they've already started making the 19 predeposits. 20 CHAIRMAN CLOWE: What's your assist, 21 Phil, of the staffing now and their ability to make 22 these agreements come true? 23 MR. SANDERSON: We have met with the -- 24 first off, Shirley Thompson that was the commander at 25 the time that the hearing was held and when the 0125 1 agreements were being discussed, had indicated that 2 the post itself had other numerous problems from this 3 Melvin Wilson outside of bingo and that they had 4 recovered from those as far as the building that they 5 were in. They lost it because of the contracts not 6 being met. And they've recovered in those areas. 7 And the new commander that has since 8 taken over, we've met with him and had discussions 9 with him, and of course the procedures that have been 10 put in place require that the two officers sign all 11 the checks and that they give a monthly report -- they 12 have a bingo subcommittee now that monitors the 13 games. 14 They have disassociated themselves with 15 these two individuals, Ramone Zuniga and Melvin 16 Wilson. From all indications and talking with the 17 coordinator in the Dallas office, they have turned 18 things around and are taking a more active role in 19 their bingo activities. 20 CHAIRMAN CLOWE: Any questions? 21 COMMISSIONER COX: No. 22 CHAIRMAN CLOWE: Any other comments on 23 the other two cases? 24 MS. KIPLIN: Yes. On the Royal Order 25 of Moose Lodge 1932, which is Item E, this is another 0126 1 memorandum agreement and consent order. The findings 2 begin on the first page, Item 2. They did not use net 3 proceeds from any game being exclusively for 4 charitable purposes specifically in the amount of 5 $34,460, failure to remit price fees in the amount of 6 a little over 11,000. You can see there are other 7 items that are here that are set out. 8 The Charitable Bingo Division does 9 believe that a sanction -- Phil, let me turn this over 10 to you. You're more familiar with this case in terms 11 of why you all are recommending to the commission not 12 to proceed to revoke license, but in the alternative, 13 enter into an agreement order. 14 MR. SANDERSON: This was an audit that 15 was performed on the organization where the 16 individuals that were involved -- I guess the primary 17 operator and the person that took the books -- or 18 maintained the books was an elderly individual. And 19 apparently he had Alzheimer's, and he just forgot that 20 he filed zero reports. The money was all accounted 21 for. The money was all -- there was no funds 22 missing. 23 The misuse of the proceeds -- the 24 disallowed use of proceeds for charitable purposes, at 25 that time they were primarily using the funds for the 0127 1 organization, their building and conventions, and at 2 that time were not authorized use of charitable 3 proceeds. That's where they were disallowed at. 4 We once again met with the new 5 president and officers. They've agreed to pay out the 6 price fees with the penalty and interest and to make 7 the predeposit. And I believe they've gone and are 8 acquiring a personal loan to pay back those funds into 9 the bingo account. 10 MS. KIPLIN: The other matter is in the 11 matter of Branch Volunteer Fire Department. And my 12 understanding is that this is also an agreement. And 13 the allegations are failure to include on application 14 the name of bingo workers and associated required 15 information related to the bingo workers. 16 Commissioners, the reason that I've 17 itemized these and gone through these for you today is 18 because, really, these are your statements of policy 19 when you entered into these agreed orders in terms of 20 precedence that you establish for future cases that 21 have same or similar allegations and whether, as a 22 matter of policy for the agency, these are appropriate 23 sanctions for the conduct. 24 I'll probably try to reinforce it, 25 maybe not every commission meeting, unless you want, 0128 1 but the fact that this really is a same type of 2 policy. This is what some people consider ad hoc 3 rule-making by entering into these cases, not only 4 these, but the contested case orders, you're actually 5 creating -- your statements of policy with regard to 6 disciplinary actions and enforcement proceedings, just 7 like you create policy rules. 8 Staff, at this point, I believe, 9 recommends signing these agreed orders. 10 CHAIRMAN CLOWE: I understand your 11 comment. I think an answer I would give you is it 12 creates policy insofar as the facts' expiration is 13 concerned. 14 MS. KIPLIN: That's right. And can be 15 used in cases to argue commission's policy in cases of 16 same or similar facts. I think, to the extent 17 possible, we try to emphasize those that are 18 mitigating factors and those that are aggravating 19 factors, and we'll continue to do that. 20 CHAIRMAN CLOWE: I think that's what 21 we're doing. The American Legion post is located in 22 Balch Springs? 23 MR. SANDERSON: Yes, sir. 24 CHAIRMAN CLOWE: Are they going to take 25 criminal action? 0129 1 MR. SANDERSON: We have asked the post 2 to pursue criminal action. I believe they've 3 contacted the county or district attorney up there in 4 the Dallas area, and they're trying to get subpoenas 5 to get the bank records from the individuals and see 6 if there's any proof of any activities. The hard part 7 in that area is that sometimes we have a difficult 8 time in the Dallas county attorney or the Dallas DA to 9 take any bingo cases. 10 CHAIRMAN CLOWE: Any questions? 11 COMMISSIONER COX: Phil, Kim, in this 12 Moose case we have -- the business manager of the 13 operation didn't do those things because he had 14 Alzheimer's. And I'm looking at this two different 15 ways. One, I understand that you never know until you 16 do an autopsy whether a guy has Alzheimer's or not. 17 MR. SANDERS: This is what the 18 individual with the organization claimed, that they 19 were trying to keep him active in the organization, 20 and they felt that running bingo and keeping track of 21 bingo would help keep him active within the 22 organization. 23 COMMISSIONER COX: Then the other side 24 of it is I would say that let's take that at face 25 value that he had Alzheimer's. Would there ever, 0130 1 then, be an instance in which we would enter into a 2 settlement where we would accept just the prize fees 3 that are due and not assess any penalties and interest 4 because, gosh, this was just a tragic situation? 5 MR. SANDERSON: Not that I'm aware of, 6 no, sir. 7 COMMISSIONER COX: Thank you. 8 CHAIRMAN CLOWE: Move in items letter 9 D, E, and F, we accept the staff recommendations. 10 COMMISSIONER COX: Second. 11 CHAIRMAN CLOWE: All in favor, please 12 say aye. Opposed, no. The vote is two-zero in 13 favor. 14 Reagan, if you'll give us just a minute 15 to sign these three orders, we'll be ready for your 16 report. All right. 17 MR. GREER: Thank you. There were a 18 number of issues I wanted to bring you up-to-date on. 19 Specifically we talked quite a bit today about Lotto 20 Texas and the effect that it's had on the agency most 21 recently, which has all been positive. The current 22 jackpot at 13 million is moving its way up again. 23 Last night, had a $10 million draw. We did have 24 47,835 winning tickets. 25 Our record, $145,000 million jackpot, 0131 1 was claimed on July 7, 2004. Wanted to make you aware 2 it was claimed by VOM Enterprises, Limited; IBO 3 Management Company, L.L.C., G.P.; Alfredo Ornalis 4 Bronigan, president, out of El Paso. They had good 5 legal representation. Long name. They came in, had 6 minimal publicity. They received a total of 7 $82,569,717, which was the cash value option on the 8 record $145,000 Lotto Texas jackpot drawing held on 9 June 19. After taxes it was 61,927,287.75. 10 CHAIRMAN CLOWE: Wow. 11 MR. GREER: Pretty incredible, wasn't 12 it? 13 During that process, we touched before, 14 but I wanted to bring up again, because I like to bask 15 in it, record jackpot also gave us a record sales 16 week, which was $122 million plus, one of the tickets 17 sold, leading up to that jackpot. The winning ticket 18 sold in El Paso at a downtown Chevron station at 715 19 North Stanton in El Paso. The retailer is eligible to 20 receive a bonus of one percent capped at $500,000. 21 We're really looking forward to that trip to present 22 that check on August 18 to that retailer in El Paso. 23 Nelda's coordinating with me and will 24 be inviting Senator Shapleigh and Representative 25 Pickett, both of whom have said for a long time, "When 0132 1 are we going to get a winner?" They're making up for 2 it with this one, obviously. 3 This was among the single state lottery 4 advertised jackpots, number two in the history of our 5 country in the lottery pool. That's also worth 6 noting. 7 We had another winner that came on July 8 7th on Lotto Texas. Actually, they won the prize on 9 July 7th, but they claimed the prize on July 22nd. We 10 had a press conference with him last week. His name 11 is McArthur Mack Petty out of Dallas. 12 What was interesting about that, and 13 I've mentioned it to the chairman, that is worth 14 mentioning again, he decided to take a new twist on it 15 and called his mother from the press conference in 16 Dallas to inform her that she had won this amount. 17 She didn't believe him. Called back, talked to me. 18 It was funny and interesting the way that shook out. 19 The advertised jackpot amount was 20 $9 million, and he had a cash option before taxes of 21 $5.780,028 million. He was thrilled. That retail 22 will also be received in a bonus of $90,000. I'll be 23 going Dallas soon to present that to Jack's Grocery 24 and enjoy doing that. 25 Mega Millions is currently at 0133 1 $10 million. We talked about the record jackpot 2 amount but did not mention the fact that it actually 3 ended up paying out on July 22nd, 2004, $294 million. 4 And it was won by Geraldine Williams of Lowell, 5 Massachusetts. Got a lot of press out of that, and 6 that's worth noting. 7 We continue to see some new records 8 here, June was no exception to that, with our highest 9 total sales of the month in our 12-year history in the 10 month of June, which included all the games for a 11 total of $391.6 million. 12 We talked extensively earlier -- I'm 13 not going to go into any more detail -- about the 14 Latin Lotto scam. Thank you for bringing that up, 15 because we are going to continue to be aggressive on 16 that. 17 Another note in the security realm is 18 in Waco in McLennan County, in fact, yesterday, a 19 grand jury indicted some retailers who were scratching 20 off via the PIN number on tickets and selling the 21 losing tickets and keeping the winning tickets. I 22 think that's worth noting, because our people were on 23 top of that issue, reported it to the DA in that 24 county. They followed through on it. The grand jury 25 has made an indictment, and the individuals involved 0134 1 in that can receive up to 20 years in prison on a 2 second-degree felony. We take the integrity of the 3 lottery seriously. 4 COMMISSIONER COX: Reagan, help me 5 understand how this works. There's a PIN on each 6 ticket? 7 MR. GREER: At the bottom. 8 COMMISSIONER COX: Scratch that off. 9 The machine will read it. They don't have to scratch 10 anything else off. 11 MR. GREER: Right. 12 COMMISSIONER COX: So then those people 13 who only scratch the PIN off, because they don't want 14 to get all that other stuff on their hands, they're 15 going to find this. But the average person, I guess, 16 likes scratching all that off, and they don't even 17 notice this. 18 MR. GREER: Right. So they sell them 19 the ticket. And then the retailer in this instance 20 would enter the numbers into the computer, check to 21 see if it was a winning ticket or not. If it was a 22 winning ticket, they would purchase it. If it wasn't 23 a winning ticket, they would sell it. 24 CHAIRMAN CLOWE: The average player 25 cannot just expose the PIN number and know if it's a 0135 1 winning ticket. 2 COMMISSIONER COX: Right. But if it 3 were exposed when they bought the ticket, they would 4 say, "Wait a minute." 5 CHAIRMAN CLOWE: It's an invalid 6 ticket. 7 MR. GREER: Which, in actuality, is 8 what happened in this case. It was a former Justice 9 Department employee who purchased a ticket and looked 10 at it and thought it was irregular-looking and brought 11 it to Mike's attention. And there you go. 12 COMMANDER PITCOCK: We call it bad 13 validation. Mike Pitcock, commander of Texas 14 Lottery. This is something we're looking very closely 15 at, bad validation, because it's a practice where 16 employees usually will identify -- they cash these all 17 day long, so they become very good and aware of where 18 the VIRN number, but you have to enter it into a 19 validated ticket. If you can expose parts of that and 20 they can magnify it, or however they do it, back in 21 the back room, they can find the winning ticket by 22 scanning the ticket, run the VIRN, you get the winning 23 ticket. And it's never scratched. 24 The ones that are nonwinning, which 25 we've watched through the system -- and we visit 0136 1 retailers when we see a repetitive amount of these 2 tickets run that are not winning, it tells us somebody 3 is messing with the ticket. We go to that quite 4 repeatedly. Case in Waco, sometimes they do it so 5 fast that you're doing a $25 ticket and you know where 6 the VIRN is and you're sitting there running, you can 7 rack up a lot of tickets and a lot of money real 8 fast. 9 So in conjunction with GTECH, we have 10 some alarms that tell us when a retailer is doing 11 that, so we send an investigator out to investigate. 12 MR. GREER: Thank you, Mike. 13 We've got some great new scratch-off 14 games. We continue to see a lot of positive activity 15 in that area, which we've seen in our charts this 16 morning. Just worth mentioning is Cash Connection. 17 300,000 Casino Thrills is coming out. It's one of the 18 things we talked, Commissioner Cox, in reference to 19 the tier levels. And the overall odds of winning on 20 this game are 1 in 2.35. We're going to watch closely 21 to see how that does in the $10 realm. 22 On July 20th I went to Dallas and took 23 place in the Corvette Cash Second Chance Drawing. 24 That was an eye-opener to me. Never had been to one 25 of those before. There were 90,000 entries on the 0137 1 second-chance drawing. And through MDI they had 2 volunteer fire department guy from Carrollton, which I 3 thought was neat, come over and pull out of each box 4 randomly, and then they received a prize packet of 5 Corvette memorabilia. So there were 600 happy people 6 that day out of the 90,000. 7 CHAIRMAN CLOWE: How many games do we 8 have on the street now, Reagan? 9 MR. GREER: Thirty-four is what I want 10 to say. I'll verify that and get back to you on 11 that. It stays in that general realm as far as active 12 games. There's some that aren't as active. I'll have 13 to get Steve to help me with the numbers on that. A 14 lot. I know that. At any given time -- 15 COMMISSIONER COX: Is it still in the 16 realm of 90 to 100? 17 MR. GREER: Total, right. But as far 18 as the games that are really performing and active, 19 it's about 34. It's more than 34, less than 100. 20 In Dallas I handed a retailer a check 21 for $120,000. It's a great story. It was a retailer 22 who was a Vietnamese immigrant who never dreamed he 23 would have the opportunity to give his children an 24 education. He's using the 120,000 to pay for his 25 daughter to go to medical school, which I thought was 0138 1 real cool. Nice guy. Across the street from the GM 2 plant. Had a lot of press. They focused on theme, 3 which was the money was going to a worthwhile cause. 4 The theme for the month in July has 5 been reaching new heights, which we're doing, based on 6 our June performance and continue to look forward to a 7 record year at the end of our fiscal year next month. 8 I wanted to also let you know that I 9 will be attending a NASPL conference. Of note is the 10 fact that a number of these topics we talked about 11 today, not the least of which was automatic drawings, 12 will be a part of the seminars that Steve Martin and I 13 will be going out there for August 10th through the 14 12th, a two-day conference in San Diego. 15 But the focus is industry updates and 16 trends. To be frank with you, I really want to 17 establish a stronger working relationship with the 18 state of California. I think there's a lot of 19 similarities between our two states. They are in a 20 transition mode right now. They don't have an 21 executive director currently, have an acting. The new 22 Governor Schwarzenegger has not appointed a new ED 23 yet. I want to establish some relationships out 24 there, so we're going out to this conference. We'll 25 bring you back a report in our next commission 0139 1 meeting. 2 CHAIRMAN CLOWE: Any questions? 3 COMMISSIONER COX: No. 4 CHAIRMAN CLOWE: Thank you, Reagan. 5 Phil. 6 MR. SANDERSON: Chairman Clowe and 7 Commissioner Cox, in your notebook today is the 8 monthly status report that's been provided by Billy 9 Atkins. And I'd like to make a note of a couple items 10 on there. The first is that we do have a vacant 11 auditor position in Dallas. We've posted for that. 12 The posting closes tomorrow at 5 p.m. And as of this 13 morning we've received 15 applications. 14 The BAC meeting is tentatively 15 scheduled for Wednesday, August 11th, at 10 a.m. I'd 16 also like to call your attention to the division 17 update that's included in your notebook that outlines 18 the six months of calendar year 2004. And in 19 comparing the same time period of 2003, the first six 20 months, as a result of a House Bill 2519, the number 21 of temporary applications, which increased from 6 to 22 12 that an organization could utilize, we have 23 received 110 percent more applications over the same 24 time period, and we've issued 95 percent more licenses 25 during the first six months. 0140 1 Overall our applications that we've 2 conceived have increased by 52 percent and our 3 licenses issued have increased by 42 percent. And at 4 the same time, the Registry of Worker, we've entered 5 in over 11,000 individuals into the Registry of 6 Worker. And this is through the end of June. 7 I'll be glad to answer any questions 8 you may have. 9 CHAIRMAN CLOWE: Thank you, Phil. 10 Is there anyone wishing to make comment 11 to the commission at this time? Thank you all very 12 much. We are adjourned. The time is 1:20 p.m. 13 14 15 16 17 18 19 20 21 22 23 24 25 0141 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 ) 5 COUNTY OF TRAVIS ) 6 7 I, KELLY E. FISHER, Certified Shorthand 8 Reporter for the state of Texas, do hereby certify 9 that the above-captioned matter came on for hearing 10 before the Texas Lottery Commission as hereinafter set 11 out, that I did, in shorthand, report said 12 proceedings, and that the above and foregoing 13 typewritten pages contain a full, true, and correct 14 computer-aided transcription of my shorthand notes 15 taken on said occasion. 16 Witness my hand on this the 9th day of 17 August 2004. 18 19 Kelly E. Fisher, Texas CSR No. 2834 20 Expiration Date: 12-31-05 WRIGHT WATSON STEN-TEL 21 Firm Registration No. 225 1801 N. Lamar, Mezzanine Level 22 Austin, Texas 78701 (512) 474-4363 23 JOB NO. 040729KEF 24 25