0001 1 2 3 4 5 6 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 7 TEXAS LOTTERY COMMISSION 8 MEETING 9 NOVEMBER 18, 2005 10 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 11 12 13 14 15 16 17 18 19 BE IT REMEMBERED that the TEXAS LOTTERY 20 COMMISSION held a meeting on the 18th day of November, 21 2005, at 8:30 a.m., before Steffanie L. Decker, CSR in and 22 for the State of Texas, reported by machine shorthand, at 23 the offices of the Texas Lottery Commission, 611 East 6th 24 Street, Auditorium, Austin, Texas, 78701, whereupon the 25 following proceedings were had: 0002 1 APPEARANCES 2 Chairman: 3 Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Mr. James Cox, Jr. 6 General Counsel: 7 Ms. Kimberly L. Kiplin 8 Acting Executive Director: 9 Mr. Gary Grief 10 Charitable Bingo Operations Director: 11 Mr. Billy Atkins 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX 2 I. The Texas Lottery Commission will call meeting to order................................ 6 3 II. Report by the Bingo Advisory Committee Chairman, possible discussion and/or action regarding the 4 Bingo Advisory Committee's activities, including the November 2, 2005, Committee meeting......... 6 5 III. Report, possible discussion and/or action on lottery sales and revenue, game performance, new 6 game opportunities, and trends.................. 13 IV. Report, possible discussion and/or action on the 7 agency's financial status....................... 49 V. Consideration of and possible discussion and/or 8 action on the agency's FY 2006 Itemized Operating Budget.......................................... 51 9 VI. Report, possible discussion and/or action on GTECH Corporation..................................... 65 10 VII. Consideration of an possible discussion and/or action, including proposal, on amendments to 11 16 TAC 401.305 or new rule 16 TAC 401.305 relating to Lotto Texas on-line game...................... 85 12 VIII.Report, possible discussion and/or action on the lottery terminal functionality, including the 13 quick pick feature for all games and/or impact to players..........................................112 14 IX. Report, possible discussion and/or action on the lottery advertising and promotions.............. 118 15 X. Report, possible discussion and/or action on HUB and/or minority business participation, including 16 the agency's mentor/protege program............. 119 XI. Report, possible discussion and/or action on the 17 agency's contracts.............................. 122 XII. Report, possible discussion and/or action on the 18 79th Legislature................................ 127 XIII.Consideration of and possible discussion and/or 19 action, including approval of the FY 2006 Internal Audit Activity Audit Plan, on external and internal 20 audits and/or reviews relating to the Texas Lottery Commission and/or on the Internal Audit Departments 21 activities...................................... 130 XIV. Consideration of and possible discussion and/or 22 action on the appointment and employment of an Executive Director.............................. 141 23 XV. Commission may meet in Executive Session:....... 139 A. To deliberate the appointment, employment, 24 and duties of the Executive Director, Acting Executive Director, and/or Deputy 25 Executive Director pursuant to Section 551.074 of the Texas Government Code. 0004 1 B. To deliberate the duties and evaluation of the Internal Audit Director pursuant to 2 Section 551.074 of the Texas Government Code. 3 C. To deliberate the duties and evaluation of the Charitable Bingo Operations Director 4 pursuant to Section 551.074 of the Texas Government Code. 5 D. To Deliberate the duties of the General Counsel pursuant to Section 551.074 of the 6 Texas Government Code. E. To receive legal advice regarding pending or 7 contemplated litigation and/or to receive legal advice pursuant to Section 551.071 8 (1)(A) or (B) of the Texas Government Code and/or to receive legal advice pursuant to 9 Section 551.071(2) of the Texas Government Code, including but not limited to: 10 Patsy Henry v. Texas Lottery Commission Linda Cloud v. Mike McKinney et al. 11 James T. Jongebloed v. Texas Lottery Commission 12 Russell Verney v. Carol Keeton Strayhorn, Greg Abbott, and Regan E. Greer, in their 13 individual and official capacities Gametech International Inc. v. Greg Abbott, 14 Attorney General of Texas et al. Michael McDaniel, Jeff Schuckers, and 15 William Wilson v. Northstar Bank of Texas et al. & Northstar Bank of Texas v. Elite 16 M & S, 5395 Partners Ltd, and Faye Lynn Wilson 17 In re Matter Involving the Assignment or Lottery Prize of Walter Gonzales 18 Michele Sanchez et al. v. Texas Lottery Commission et al 19 Charles Isbell v. Atkins et al. Texas Lottery Commission v. Joel Bowen and 20 Associates, Inc. d/b/a JB & Associates Employment law, personnel law, procurement 21 and contract law, evidentiary and procedural law, and general government law 22 Request for an Attorney General's opinion regarding game rules.................. 23 XVI. Return to open session for further deliberation and possible action on any matter discussed in 24 Executive Session.......................... 139 XVII. Consideration of the status and possible entry 25 of orders in: A. Docket No. 362-06-0179 - Stockman Travel 0005 1 Center................................... 142 B. Docket No. 362-06-0181 - Davis Food Mart. 142 2 C. Docket No. 362-06-0182 - Raceway Petroleum #864.................................... 142 3 D. Docket No. 362-06-0048 - Alpha Food Mart 142 E. Docket No. 362-06-0049 - Huntington Quik 4 Stop.................................... 142 F. Docket No. 362-05-8427.B - Huntsville 5 Elks Lodge Number 1981.................. 142 G. Docket No. 362-03-0248.B (Consolidated)-In 6 the Matter of the Denial by the Texas Lottery Commission of the Application for Bingo 7 License by Red Men Council 12 White Mountain. This docket is consolidated and relates to 8 the denial by the Texas Lottery Commission of the applications by Red Men Council 5 Ramona, 9 Red Men Council 12 White Mountain, Red Men Council 13 Nacoma, Red Men Council 14 10 Cheyenne, Red Men Tribe 13 Buffalo, Red Men Tribe 16 Black Crow, Red men Tribe 17 War 11 Eagle, and Red Men Tribe 25 Omaha....... 54 H. Docket No. 362-05-6464.B - Arthur D. 12 Rothenburg.............................. 142 I. Case No. 2005-576 - south Plains Volunteer 13 Services................................ 142 XVIII. Report by the Acting Executive Director and/or 14 possible discussion and/or action on the agency's operational status, and FTE status. 163 15 XIX. Report by the Charitable Bingo Operations Director and possible discussion and/or action 16 on the Charitable Bingo Operations Division's activities................................. 170 17 XX. Public comment............................. 174 XXI. Adjournment................................ 180 18 19 20 21 22 23 24 25 0006 1 MR. CLOWE: Good morning. It's 8:30 a.m. 2 Today is November the 18th, 2005. Commissioner Cox 3 is here. My name is Tom Clowe. We have a quorum of 4 the Commission, so I'll call this meeting of the 5 Texas Lottery Commission to order. 6 I will begin with Item Number 2 on the agenda, 7 report by the Bingo Advisory Committee Chairman, 8 possible discussion and/or action regarding Bingo 9 Advisory Committee's activities, including the 10 November 2nd, 2005, committee meeting. 11 Ms. Taylor, good morning. 12 MS. TAYLOR: Good morning. My name is 13 Suzanne Taylor. Good morning, Commissioners, glad to 14 be here. I'm going to go ahead and read you the same 15 thing that you have a copy of there. 16 Item Number 1, the Bingo Advisory Committee to 17 the Texas Lottery Commission met on November 2nd, 18 2005, in Austin at 10:00 o'clock a.m. All members 19 were in attendance. Commissioner Cox was also in 20 attendance. 21 Item 2, it was moved, seconded and passed to 22 approve the August 3rd, 2005, Bingo Advisory 23 Committee meeting minutes with no changes. 24 Item 3, Billy Atkins gave committee members a 25 brief summary of the background pertaining to the 0007 1 development of a rule relating to progressive bingo 2 games. Staff recommended working on a draft rule 3 pertaining to a progressive game that would comply 4 with existing prize limitations contained in the 5 Bingo Enabling Act. Public comment was received 6 stating this would be a good starting ground that 7 could help answer questions from legislators about 8 progressive bingo games. A workgroup was created 9 consisting of Rosie Lopez, Danny Moore, Mario Manio, 10 and Public Member Joe Garcia. Sandy Joseph will get 11 in touch with the work group members and arrange a 12 date for the initial meeting. 13 Item 4, BAC members were advised their previous 14 recommendation to Commissioners to fill the 15 commercial lessor position on the BAC was not 16 eligible. Mario's position on the committee still 17 needs to be filled. And as of February, 2006, 18 Suzanne and Danny's positions will need to be filled. 19 A new nomination committee was created consisting of 20 Tom, Kim and Larry. Committee members thanked 21 Worlanda Neal for putting tabs in the BAC meeting 22 book, which made finding material for the agenda 23 items much easier. 24 Five, Terry Shankle made a slide presentation to 25 the committee regarding the electronic filing of the 0008 1 quarterly reports for conductors, lessors, and units. 2 Lottery staff requested help from the committee on 3 the unit report. Suzanne, Kim, and Public Member 4 Steve Fenoglio volunteered for this work group that 5 will meet sometime during the next two week -- weeks 6 to complete work on the electronic reports. 7 Item 6, Bobby Heith reviewed samples of bingo 8 PACs -- PSAs with the committee and requested input 9 from the committee on changes and/or items that 10 should be included in the PSA. BAC members suggested 11 that saying how much could be won and showing someone 12 winning on the PSA would be helpful. 13 Item 7, BAC members were briefed on the bingo 14 caller of the year competition sponsored by the 15 National Bingo Game Association in the United 16 Kingdom. Members agreed that a contest of this sort 17 could help generate positive media attention for 18 bingo. A work group consisting of Rosie, Kim and 19 Mario was created. Danny will get in touch with the 20 Texas Charity Advocates to seek their help with this 21 project. 22 Item 8, Sandy Joseph reviewed data from the 23 implementation of the Enforcement Process Review with 24 BAC members. Thirty-one rules have been approved for 25 implementation, fourteen have been implemented, an 0009 1 additional six to nine will be implemented by year 2 end, and five are waiting for development. 3 Item 9, the draft BAC Annual Report was 4 discussed. There was discussion that net receipts 5 should be on the report. It was agreed that Suzanne 6 and Kim would work on this item and add it to the 7 report to be presented to the BAC members at the next 8 meeting. 9 Item 10, Phil Sanderson reviewed the latest 10 version of the Bingo Operations Manual with BAC 11 members. 12 Item 11, Billy Atkins reviewed the report on the 13 activities of the Charitable Bingo Operations 14 Division with the committee. It was noted the Bingo 15 Service Center has had 99 active external users. 16 Organizations being affected by Hurricane Rita were 17 informed they could request an extension on the 18 filing date. Nine organizations used the extension. 19 Item 12, Public Comment: Carol Lauder 20 congratulated the committee members for the good 21 discussion, staying on the agenda and congratulated 22 the bingo staff for their support. Commissioner Cox 23 thanked BAC members for their work. 24 Item 13, items for future BAC meetings were 25 discussed and the future meetings for 2006 were 0010 1 tentatively scheduled for February 15th, May 17th, 2 August 16th and November 15th. 3 And this should be Item Number 14, meeting was 4 adjourned at 12:07 p.m. 5 If you have any questions, I'd be glad to answer 6 them. 7 MR. CLOWE: Do you have anything to add? 8 MR. COX: No, sir. 9 MR. CLOWE: Billy, do you have anything to 10 add? 11 MR. ATKINS: Thank you, Mr. Chairman. Just 12 a couple of things I'd touch on. On the discussion 13 of the progressive bingo game, the way the staff 14 tried to lead the discussion out was along the lines 15 that as you'll recall several years ago when we 16 amended the Bingo Paper Rule, which is 402.301, there 17 was a section in there dealing with style of play 18 that talked about several different commonly 19 conducted bingo games. And so part of what the staff 20 was bringing forward with this proposal is that there 21 might be a greater benefit to licensees to have that 22 information in a stand-alone rule. That is, 23 different styles of bingo games that are within the 24 parameters of the existing Bingo Enabling Act so that 25 all organizations will be aware of those and be able 0011 1 to conduct those if they so choose. 2 On the item relating to the electronic filing 3 that Suzanne mentioned. I just did want to report 4 that that work group has met. They met this week. 5 And I believe that they got the issues that we were 6 seeking assistance on resolved, and we're planning to 7 go ahead and move forward and make that service 8 available to licensees beginning with the first 9 quarter of 2006. 10 And then just a quick clarification. When 11 Suzanne was talking about the implementation of the 12 Enforcement Process Review, it -- those were 13 recommendations that the staff had made. They 14 weren't rules, but they were recommendations to 15 internal processes. And I think Suzanne is correct, 16 approximately 31 of those have been implemented so 17 far. 18 They did -- the BAC did receive, I believe, good 19 comment, including from Commissioner Cox, on some 20 additional information for the Bingo Annual Report. 21 And I know that we'll be working with -- with Suzanne 22 and her committee on that. 23 And then finally, I just wanted to let you know 24 that the Bingo Operations Manual that we had took 25 back before the BAC has been posted on the web site, 0012 1 so that is now also available to our licensees. 2 MR. CLOWE: Very good. And Billy and 3 Suzanne, I'm interested, maybe not concerned but 4 interested, in filling the vacancies that -- the 5 vacancy that now exists and then those vacancies 6 which are coming up. And I see where you formed a 7 new nominating committee. What is your sense of how 8 that search is going to proceed? Do we have 9 candidates that want to serve and -- you know, that's 10 the life's blood of this committee. What's your 11 sense of where we are in that process? 12 MS. TAYLOR: I know the staff has worked 13 very diligently sending out notices to notify all the 14 members in the last quarterly reports. Everybody got 15 a slip of paper, all the commercial lessors, telling 16 them that the position was open and there was another 17 one coming open. There just hasn't been the interest 18 that there used to be. The last notebooks -- when I 19 first got on the BAC many years ago, the notebook was 20 huge with nominations and people interested in 21 serving on the committee. And I am not quite sure 22 why the interest has waned. I don't know if it's 23 because the committee members need to pay their own 24 way back and forth. I really don't know why the 25 interest is not there, but I know that the staff has 0013 1 really worked hard trying to alert everybody in the 2 bingo community to the openings. And I just don't 3 think that they've received a very good response. 4 MR. ATKINS: We -- we have been working 5 closely with Kimberly Rogers whose been heading this 6 up for the Bingo Advisory Committee. We have made 7 these vacancies -- we have posted them prominently on 8 the web site as Suzanne mentioned. We sent out a 9 notice to all licensees with the quarterly reports. 10 Subsequent to that we did a targeting mailer where we 11 sent nomination forms directly to all licensed 12 commercial lessors, manufacturers and distributors. 13 And I -- I believe right now we have approximately 14 three or four nominations that we have received. 15 MR. CLOWE: So you do have some nominations 16 that have come in? 17 MR. ATKINS: There are some, yes, sir. 18 MR. CLOWE: Okay. That's good. That's 19 fine. Well, I'm encouraged by that. Thank you for 20 your good work. 21 Thank you, Suzanne. 22 MS. TAYLOR: Thank you. 23 MR. CLOWE: Next, Item 3, report, possible 24 discussion and/or action on lottery sales and 25 revenue, game performance, new game opportunities, 0014 1 and trends. 2 Ms. Pyka, Mr. Tirloni. 3 MS. PYKA: Hello, Commissioners. For the 4 record, my name is Kathy Pyka -- I'm Kathy Pyka. I'm 5 the controller for the Texas Lottery Commission. 6 With me to my right is Robert Tirloni, Products 7 Manager. 8 Our first chart this morning reflects revenue 9 from sales and net revenue to the State for the 10 period ending November 12th, 2005. This report 11 reflects -- 12 MR. COX: Kathy, is your mic on? 13 MS. PYKA: Yes, it is. 14 MR. COX: Okay. 15 MR. CLOWE: You need to get a little closer 16 to it, please. 17 MS. PYKA: How is that, Commissioners? 18 MR. COX: Thank you. 19 MS. PYKA: Uh-huh. This report reflects 11 20 weeks of fiscal year 2006 activity. Total sales 21 through the 11-week time period amounted to 709.5 22 million, while estimated net revenue to the State for 23 this period was 180.4 million. Net revenue to the 24 State reflects a 1.8 percent increase in comparison 25 to 177.2 figure for the same period in fiscal year 0015 1 2005. Prize expenses of percentage of sales was 2 62.6 percent for the current time period as compared 3 to 62.3 percent one year ago. 4 The next slide that we were presenting this 5 morning presents a comparison of sales by game during 6 the two-week time period in which the Mega Millions 7 jackpot grew from 225 million to 315 million. You'll 8 notice on the left-hand side, total sales increased 9 3.7 million during this time period of that jackpot 10 growth, noting that the Mega Millions increase was 11 4.3 million. 12 Robert is going to discuss the 315 million Mega 13 Million jackpot a little bit further in our 14 presentation. 15 MR. COX: Kathy, could you go back to that? 16 MS. PYKA: Certainly. 17 MR. COX: I'm slow today, I guess. There's 18 just too much there for me to get that quickly. 19 MS. PYKA: So we had total sales for the 20 first week of the jackpot when it was at 225 million 21 at 42.3 million for that week, total sales for each 22 game. 23 MR. TIRLONI: Saturday through Tuesday. 24 MS. PYKA: Well, actually, I should say 25 Saturday through Tuesday, that's correct. Noting 0016 1 Mega Millions had sales of 5 million. 2 Then the following time period where we are 3 looking at the Saturday through the Tuesday time 4 frame when the Mega Million jackpot increased to 5 315 million, our sales growth went up to 45.9 million 6 with Mega Millions at 9.3 million, a growth of 4.3 7 for that game. We thought this was interesting 8 information to supply this morning. We have got a 9 $3.7 million growth. And of that, 4.3 million was 10 attributed to the Mega Million game. 11 MR. CLOWE: What's that tell you? What do 12 you draw from that? 13 MR. COX: Well, it doesn't tell me much, 14 because I don't have anything -- what I'm looking 15 for, I guess, is how does that compare to when Mega 16 Millions jackpot is 10 million, was where I thought 17 we were going with that. I do see that it seems to 18 be sucking off some small amounts from other games, 19 but when I see 42.3 then 45.9, I guess what I'd want 20 to know is what is it when the Mega Millions jackpot 21 is low? Is it 41? 35? 30? 22 MS. PYKA: We thought the information was 23 interesting because with the Mega Million growth, we 24 had hoped that we would see increase in sales in the 25 other games as individuals were going out to buy Mega 0017 1 Million tickets. 2 MR. GRIEF: Which is something we've seen 3 in the past, Commissioner. Other things were -- 4 while we didn't see much of a cannibalization effect 5 on other games, even as this jackpot grew to record 6 highs, although the Mega Millions sales increased, we 7 didn't see any jump in instant sales or on-line game 8 sales as a -- as a whole. 9 MR. COX: Okay. 10 MR. GRIEF: And in answer to your question 11 about Mega Millions sales at the low levels, Robert, 12 at the introductory Mega Millions levels, what's an 13 average week for Mega Millions? 14 MR. TIRLONI: Do you have that, Kathy? 15 MS. PYKA: I do not have that with me, 16 Gary. I'm sorry. 17 MR. GRIEF: I'm thinking it's around 18 between two to $3 million. 19 MR. TIRLONI: That sounds accurate. And 20 Commissioners, I have a slide later on in the 21 presentation that compares this roll cycle that was 22 just completed to some earlier Mega Millions roll 23 cycles that were up in the $200 million range for 24 comparison purposes for you. 25 MR. COX: Okay. Now, what are the drawing 0018 1 dates for Mega Millions? 2 MR. TIRLONI: Mega Millions is Tuesdays and 3 Fridays. 4 MR. COX: Tuesdays and Fridays. So you're 5 just showing the build-up to one of those drawings, 6 the Tuesday drawing? 7 MR. TIRLONI: Yes. I believe that's -- I 8 believe Kathy's staff built this slide in that manner 9 because the $315 million jackpot was hit on Tuesday, 10 November 15th. 11 MR. COX: Okay. 12 MR. TIRLONI: So they didn't want to do a 13 full-week to full-week comparison, first of all, this 14 week is not yet completed and the jackpot was hit on 15 this past Tuesday. 16 MR. COX: Right. Now, what are the drawing 17 dates for Powerball? 18 MR. TIRLONI: Powerball is Wednesdays and 19 Saturdays. 20 MR. COX: Same as Lotto Texas? 21 MR. TIRLONI: That's correct. 22 MR. COX: Okay. Thank you. 23 MR. CLOWE: My question exactly. 24 Thank you. 25 MS. PYKA: Our next slide includes fiscal 0019 1 year 2006 year-to-date sales by game. As noted on 2 the slide, 73.7 percent of sales or 522.6 million was 3 from instant tickets, with 7.8 percent of sales or 55 4 million from Pick Three, followed by 7 percent and 5 53.1 million from Mega Million, and 5.6 percent and 6 40 million for Lotto Texas. And the following slide 7 simply provides a graphical presentation of the 8 $709.5 million amount by game. 9 MR. TIRLONI: Commissioners, this is a 10 slide we have shown you monthly. This is our instant 11 ticket sales broken down by price point. And last 12 month I told you that for the first time the $5 price 13 point was making up a bigger piece of the pie. In 14 the past it had been the $2 price point and that -- 15 that trend continues. They are very close. The $5 16 is making up 24-and-a-half percent of the total and 17 the $2 price point is making up just under 18 22 percent. And as Kathy mentioned, our total 19 year-to-date instant sales are 522.6 million. 20 MR. COX: Robert -- 21 MR. TIRLONI: Yes, sir. 22 MR. COX: -- it looks like from that that 23 we are getting about 40 percent of our revenue from 24 the under-$5 tickets, and so that would say 25 60 percent, nearly 60 percent from the $5 and over. 0020 1 What do we know about how much on-line players play? 2 MR. TIRLONI: The crossover between on-line 3 and instant? 4 MR. COX: No. What I'm asking is -- what I 5 see there is -- I don't know anything about numbers 6 of players, but I do know that 60 percent of our 7 revenue is coming from people who bet $5 and more. 8 How much of our revenue in the on-line games comes 9 from people who bet $5 and more? And how many of 10 them buy one and two and three -- this -- maybe next 11 month you could show us this same kind of thing for 12 the on-line games, give us a feel for how many people 13 come up and buy five tries, how many buy ten, how 14 many buy one, et cetera. 15 MR. TIRLONI: We can break -- yeah, we 16 should be able to break that down for you by 17 transaction. 18 MR. COX: Okay. 19 MR. TIRLONI: The value of the 20 transactions. 21 MR. COX: Maybe a comparison here with how 22 many people -- I don't know where it goes, but I'd 23 like to see it. 24 MR. TIRLONI: Absolutely. 25 MR. CLOWE: I think that's a very 0021 1 interesting question. How are you going to gather 2 that? 3 MR. TIRLONI: We'll be able to gather that 4 through GTECH through their -- through their ProSys 5 system. They'll be able to track the transactions 6 and the value of the transactions, so we'll be able 7 to determine, let's say, for on a lotto -- on a 8 lotto -- on the lotto game, based on the number of 9 transactions for a drawing, how many of those are $3 10 and above, $5 and above. And we can break that down 11 by game. 12 MR. GRIEF: I have a feeling we are going 13 to need to qualify that, Commissioners. There's 14 going to be -- it's not going to be as crystal clear 15 as I think you'll like it to be. And, Robert, 16 correct me if I'm wrong, for example, I think if a 17 player comes up and wants $10 -- $10 worth of Lotto 18 Texas, they can do that all in one transaction and we 19 can capture that off the terminal. 20 MR. CLOWE: Okay. 21 MR. GRIEF: But if they ask them for $10 22 for Pick Three, I think that's a separate 23 transaction. We wouldn't necessarily be able to link 24 the two and say this particular player -- 25 MR. COX: That's fine. 0022 1 MR. GRIEF: Okay. I just want to make 2 sure -- 3 MR. CLOWE: It's within the confines of 4 each game that the transaction information is 5 captured? 6 MR. TIRLONI: Yes. I believe -- and I 7 would have to check with GTECH and check that that's 8 correct, but I believe that we'll be able to capture 9 that by game, within each individual game. 10 MR. CLOWE: So it's clear if in Gary's 11 example a player says, "I want ten tickets Lotto 12 Texas Quick Pick" -- 13 MR. TIRLONI: Uh-huh. 14 MR. CLOWE: -- that's a single transaction 15 and is recorded that way? 16 MR. TIRLONI: That's correct. 17 MR. GRIEF: I believe that's correct, 18 Mr. Chairman. 19 MR. CLOWE: That's what Commissioner Cox 20 wanted -- 21 MR. COX: Exactly. 22 MR. GRIEF: But we'll look into that and 23 make sure we have good information. 24 MR. COX: Great. 25 MR. TIRLONI: And we'll put something 0023 1 together. And then if you'd like to see further 2 detail, we would certainly get that for the meeting 3 after that, too. 4 Commissioners, these next few slides are 5 follow-up. Commissioner Cox you had a question last 6 month, and I've got that information for you. I 7 wanted to give a quick recap before I present that 8 new information. For the past few meetings we have 9 been looking at the comparison and how the Lotto 10 Texas jackpot has rolled. And I think we are all 11 familiar with the fact that Lotto always rolled in 12 minimum of $1 million increments. And then in June, 13 for the first time ever, we held the jackpot constant 14 at eight. And then since then our strategy at the 15 lower starting levels has been to hold at four until 16 we can -- could comfortably roll to the next whole 17 million-dollar increment. And I've shown you this 18 slide for the past few months. And last month we 19 looked at this slide. And if you remember, the 20 dotted line is the sales and the solid line is the 21 trend. And the point of showing you this slide last 22 month was to illustrate that when we were rolling in 23 whole million-dollar increments, that yielded our 24 best sales performance. And that's visible by the 25 solid green trend line. And when we have held for 0024 1 the first time at $4 million jackpot levels, that 2 obviously yielded less in sales. This is our current 3 Lotto Texas roll cycle. 4 And, Commissioner Cox, the question you had was 5 why did we stop at the sixth drawing, and you asked 6 us to carry this out forward. And so these two 7 slides were -- are recaps. And here -- here is the 8 information carried out. The blue line stops because 9 that was a jackpot hit at $6 million. And this blue 10 line stops because that was a hit at $4 million. 11 That was during Hurricane Rita, and I would make the 12 assumption that that's also the reason for that being 13 the lowest in terms of the roll cycles represented 14 here. But this is the current roll cycle and you can 15 see the trend line for that roll cycle. It almost 16 seems over time it will intersect with this previous 17 -- with this previous one. 18 MR. COX: What do we know when we know 19 that? 20 MR. TIRLONI: I think it shows that people 21 have become somewhat accustomed to the way the game 22 is rolling. And this current roll cycle is 23 performing better per se than -- than this previous 24 one. All of that being said, last month we talked 25 about a recommendation that Office of the Controller 0025 1 and Lottery Operations made to the acting executive 2 director, and that recommendation was to -- since the 3 Lotto Texas Rule was adopted by the Commission last 4 month, the recommendation was to, at the starting 5 levels, return to the strategy of rolling the jackpot 6 in minimum of $1 million increments. We are 7 providing this as information. We still stand behind 8 our recommendation to return to that strategy with 9 the hopes that at the lower levels we get somewhere 10 back up into -- into this range and we see more of a 11 roll cycle trend as we have experienced in the past. 12 MR. COX: Okay. What are the constraints 13 keeping you from going to that strategy? 14 MR. TIRLONI: There are no constraints at 15 this point in time. We have made the recommendation 16 to the acting executive director and we talked a 17 little bit about that last month. And he has a -- he 18 has approved our recommendation to do that. Now that 19 the Lotto Texas Rule was adopted by the Commission 20 last month, that guarantees all of the jackpots in 21 the roll cycle. 22 MR. GRIEF: Previously to that, 23 Commissioner, the constraint was after we got past 24 the fourth drawing in a roll cycle, then we could 25 only pay based on sales. 0026 1 MR. COX: I remember that, but we took that 2 one off last month, right? 3 MR. GRIEF: Uh-huh. 4 MR. COX: And we have not had a -- we have 5 not been hit since that; is that the case? 6 MR. GRIEF: That's correct. 7 MR. COX: So is it your plan, then, to go 8 four, five -- or to progress at such time as we 9 return to four? 10 MR. GRIEF: Yes. Start the jackpot at 11 4 million and progress in a minimum $1 million rolls. 12 MR. COX: Okay. Good. 13 MR. CLOWE: But then I think it should be 14 said that there is another constraint that is 15 financial. If the jackpot is hit at the lower levels 16 when it's being subsidized, if that's the right word, 17 by the reserve fund, then we would financially not 18 win. We'd lose. 19 MR. COX: Of course. 20 MR. CLOWE: So there is that issue that is 21 the downside of the rule we adopted. 22 MR. COX: Sure. 23 MR. CLOWE: Which I'd just like for 24 everybody to be aware of. 25 MR. GRIEF: Yes, sir. 0027 1 MR. CLOWE: Would Mega Millions chart be 2 similar to that, Robert, if you put it up? 3 MR. TIRLONI: The trend of the roll cycle? 4 Yes, definitely. Yeah, and probably more -- and I do 5 have a slide -- two slides from now I have three 6 different roll cycles for us to look at. 7 MR. CLOWE: Okay. 8 MR. TIRLONI: But, yes, absolutely. Kathy 9 alluded to the $315 million jackpot on Mega Millions 10 that we had this past Tuesday, just a couple of days 11 ago, and I wanted to give you some information on 12 that. The jackpot ticket was sold in Anaheim, 13 California, as I said, for the $315 million jackpot 14 on Tuesday. 15 California allows the winner the opportunity to 16 choose the cash value within 60 days of the claim 17 date. So we don't know yet if this is going to be an 18 annuity payment prize or a cash value prize. Our 19 financial or Office of Controller staff have 20 approximated the cash value at about $187.5 million. 21 Just for your information, the Associated Press is 22 reporting that that winning ticket is held by a group 23 of seven employees at a medical center in the Anaheim 24 area. 25 The roll cycle for this $315 million jackpot 0028 1 began in September, on a Tuesday on September 20th. 2 There were 17 drawings that took us all the way up to 3 the $315 million jackpot. Last Friday we were at an 4 advertised $262 million jackpot, and there was no 5 winner obviously and the game rolled to 310. And 6 that was what we started with was 310. Tuesday 7 morning during the jackpot estimation call, the sales 8 supported a higher jackpot, and therefore, it was 9 increased to $315 million on Tuesday morning for 10 Tuesday night's drawing. This is the largest 11 advertised jackpot that we have ever had in Texas 12 Lottery history. If there had been no jackpot ticket 13 sold on Tuesday, tonight's drawing would have been 14 advertised at $380 million. And if that had 15 occurred, that would be a record in the lottery 16 industry in the United States. Previous record was 17 363, and that was held -- that record is held by the 18 Big Game, which if you recall is the game -- it's 19 basically the Mega Millions game before it became 20 Mega Millions. 21 MR. COX: Does Mega Millions pay advertised 22 or actual? 23 MR. TIRLONI: They pay -- they guarantee 24 the advertised jackpot. And if they can pay up to 25 the next whole million dollars, they do. So if they 0029 1 -- if they're advertising 310 and sales come in at 2 311 and a half, they would pay 311. 3 MR. COX: Okay. So what are they going to 4 pay here? 5 MR. TIRLONI: My understanding, and Kathy 6 can correct me if I'm wrong, is because -- because 7 they're not sure if it's a cash value or an annuity 8 prize yet, all of those financial details are not 9 completely settled yet. If it's an annuity, I'm 10 being told that it's going to be paid at 315. 11 MR. COX: So they haven't told -- Mega 12 Millions hasn't told the State of Texas what the 13 winner gets? 14 MR. GRIEF: No. I think that's a correct 15 statement, because the winner hasn't yet chosen the 16 annuity or the cash value. 17 MR. COX: But shouldn't we know what sales 18 supported as a cash payout? 19 MS. PYKA: Commissioner, the settlement did 20 occur yesterday at 315 million. 21 MR. COX: 315. So they were advertising 22 more than sales supported. That's the point I'm 23 trying to get to. 24 MS. PYKA: Actually -- 25 MR. COX: Or somewhere up to -- somewhere 0030 1 between -- somewhere under 316? 2 MS. PYKA: Correct. 3 MR. COX: It may have supported 4 315-something. 5 MS. PYKA: Correct. 6 MR. COX: But didn't support a million 7 more? 8 MS. PYKA: Right. 9 MR. COX: Could we just find out just for 10 grins whether it supported 315 or not? 11 MS. PYKA: (Nods head.) 12 MR. TIRLONI: It's going to. 13 This is the roll cycle comparison that I was 14 referring to earlier, and I'll -- I'll walk you 15 through these. There's three different roll cycles 16 represented here. And these -- these represent Texas 17 sales only, not the group sales. The first green 18 line is a jackpot roll cycle that took place last 19 summer in '04, and it climbed all the way up to a 20 $290 million jackpot after 16 drawings. If you 21 recall, this jackpot roll cycle was taking place 22 simultaneously with the Lotto Texas jackpot roll 23 cycle that took us up to a record $145 million. 24 Those were pretty much running -- running together at 25 the same time. California was not in the game during 0031 1 this roll cycle. 2 The next roll cycle is the red line. That roll 3 cycle started just this past summer in July. It 4 ended in September, again 16 draws and we had a $250 5 million advertised jackpot. 6 And then the blue line is the current roll cycle 7 that we've just been discussing, a total of 17 draws 8 that took us up to the advertised 315. Some 9 interesting things here. You see at the 16, the 16 10 draw mark is the apples-to-apples comparison, so to 11 speak. And you see at that 16th draw, a little bit 12 over a year ago we were at -- we had a $290 million 13 jackpot and you can see the sales. And a year or so 14 later, at the 16th draw we have a jackpot of about 15 $40 million less. And, again, these are just Texas 16 sales, but you can see the -- the decrease in sales 17 and the lower jackpot amounts. This is an issue we 18 have talked about. There's obviously jackpot fatigue 19 taking place here. It's taking place amongst many of 20 the Mega Millions states, which I would say is the 21 reason for the lower jackpot amount. These two roll 22 cycles, the blue and the red, do include California. 23 So if California were not a part of the game, you 24 know, we could assume that these jackpot amounts 25 would be even less than -- than what they were. One 0032 1 thing to note that's interesting in this current roll 2 cycle on the blue line, you see right over here there 3 is a bit of a spike. We looked at that with Kathy's 4 staff, and there's two things going on that we could 5 attribute to that spike. During this time period the 6 Powerball jackpot was increasing to $340 million, and 7 there was a great deal of national media attention 8 surrounding that jackpot. And at the same time we 9 also had a Mega Millions advertising campaign taking 10 place. So there were two things happening 11 simultaneously here that we could assume contributed 12 to that -- to that spike there. 13 MR. COX: Is there any way we can isolate 14 the effect of the advertising by looking at 15 comparable jackpots and see if there's another 16 similar situation with Powerball? Sure would like to 17 know whether that advertising worked or not. 18 MS. PYKA: Commissioner, we can have staff 19 look at that and report back to you. 20 MR. TIRLONI: In conclusion, I have one 21 other update, Commissioners. Commissioner Cox, last 22 month when we talked a great deal about rules and 23 game rules and game procedures, you asked if it would 24 be possible for us to put the game procedures for our 25 instant games on the web site so they were more 0033 1 accessible to the public. Dale Bauersock (phonetic), 2 our instant product coordinator, worked closely with 3 our IR, Information Resources Division. And I'm 4 happy to say we have implemented that for the 5 majority of our games that are currently on sale and 6 active right now and we are continuing to fine tune 7 that process, and that will be on a go-forward basis. 8 Game procedures will be on our web site for all of 9 our instant games. 10 MR. COX: Excellent. 11 MR. TIRLONI: And that concludes our report 12 for this morning. 13 MR. GRIEF: And I have one further item to 14 add under this agenda item, Commissioners. I'm 15 continuing to research the possibility of the Texas 16 Lottery joining the Powerball game in addition to our 17 Mega Millions game. I have sent a letter to Margaret 18 DeFrancisco, who is the CEO and president of the 19 Georgia Lottery and also the lead director of the 20 Mega Millions group in this regard. I sent that 21 letter on November 16th, and I asked for a response, 22 a written response to that concept of Texas being a 23 member of both games. I also had a telephone 24 conversation yesterday with Chuck Strutt, who is the 25 head of the MUSL organization which heads up 0034 1 Powerball, and I informed him of the discussions that 2 have been taking place here in Texas regarding this 3 matter. I hope to receive a response back from the 4 Mega Millions group in the near future. And I will 5 be attending a Mega Millions directors' meeting in 6 New York on December 6th at which I'm sure that that 7 will be a topic of discussion, and I'll keep you 8 informed. 9 MR. COX: Okay. Gary, are you going to 10 talk at all about the other items on the agenda at 11 that Mega Millions meeting in New York? 12 MR. GRIEF: Regarding rules, for example? 13 MR. COX: Yes. 14 MR. GRIEF: If you're referring, 15 Commissioner, to the unanimous consent of all 16 directors versus a majority vote, I certainly will be 17 prepared to talk to that. 18 MR. COX: Okay. You're going to talk about 19 that today? 20 MR. GRIEF: No, sir, not today. I wasn't 21 planning on it. 22 MR. COX: Okay. I'd like to -- at some 23 point I'd like to hear a little bit about that issue. 24 I've heard some -- some about it, but what I 25 understand is that Mega Millions requires -- for 0035 1 important decisions requires unanimous approval of 2 all the participating states. And they're trying to 3 change that to a majority, and they're going to try 4 to make the change on a majority vote, not a 5 unanimous vote. Is that -- 6 MR. GRIEF: That's my understanding. 7 MS. KIPLIN: And I'm thinking this isn't 8 properly noticed to go into the Mega Millions 9 contract for today. And I'll be glad, if you'd like, 10 to post it for the next Commission meeting. 11 MR. COX: Okay. So you said that you've 12 written a letter to the -- to the head of the Georgia 13 Lottery. Now, what is her role in Mega Millions? 14 MR. GRIEF: She is the lead director, the 15 unofficial presiding person at meetings, for example, 16 the lead -- the lead person. 17 MR. COX: And have you had any discussions 18 with her about this? 19 MR. GRIEF: Yes, I have. Not about the 20 majority -- 21 MR. COX: Uh-huh. 22 MR. GRIEF: Well, I take that back. Yes, I 23 have had some preliminary discussions about the 24 majority vote versus the unanimous vote, and I 25 have -- if counsel doesn't stop me -- 0036 1 MS. KIPLIN: I think it's better to go 2 ahead and have it noticed for a future Commission 3 meeting. 4 MR. COX: Okay. Good. 5 MR. CLOWE: Okay. But we can talk about 6 new game opportunities -- 7 MS. KIPLIN: That's right. 8 MR. CLOWE: That's properly noticed back to 9 Powerball and -- 10 MR. COX: And that was really what I was 11 asking. 12 MR. CLOWE: I thought he was talking about 13 the Powerball. 14 MR. COX: Have you talked to her about the 15 fact that we may be considering -- that we want to 16 consider whether we should be in both games or not? 17 MR. GRIEF: Yes, I have. 18 MR. COX: And did she -- is there anything 19 to report there or did you just tell her? 20 MR. GRIEF: I told her, and what we agreed 21 to was that I would put this letter to the group. 22 And she agreed to provide a written response from the 23 group. 24 MR. COX: Okay. But it's -- it's your 25 understanding that there is nothing in the Mega 0037 1 Millions agreement that would prohibit our doing 2 both? 3 MR. GRIEF: That's my understanding, and I 4 placed that understanding in the letter that I sent 5 to her and asked them to look into that and see if 6 they concur with that understanding. 7 MR. COX: Okay. Thank you. 8 MR. CLOWE: Let's just talk about that a 9 little bit since you're going to a meeting on 10 December 6th. I doubt that we'll have another 11 meeting between now and then. And I'd like to cover 12 some ground that might help you in that discussion. 13 First of all, Counselor, it's within the statute for 14 us to consider our entry into Powerball, is it not? 15 MS. KIPLIN: Yes. There's nothing in the 16 statute that would prevent you from entering into 17 that new game. 18 MR. CLOWE: Okay. So that's a hurdle that 19 we have got to get over and make certain that we are 20 on firm ground with. Gary, this subject has come up 21 from the very beginning in our entry into Mega 22 Millions. And there was a negative reaction to it 23 from the then leadership of Mega Millions, and they 24 just summarily, I think, dismissed it. And if I 25 remember correctly, you and I -- at that time I can't 0038 1 remember if Commissioner Cox was on the board or if 2 he had a position. 3 MR. COX: I believe I was. 4 MR. CLOWE: Do you -- what was your 5 position? 6 MR. COX: I don't remember. 7 MR. CLOWE: So, you know, from the very 8 beginning we know at least that we have expressed 9 that interest and we have wanted that as a 10 consideration. My sense is the -- and Ms. -- is it 11 DeFrancisco? 12 MR. GRIEF: Ms. DeFrancisco from Georgia. 13 MR. CLOWE: She came from New York, didn't 14 she? 15 MR. GRIEF: She did. 16 MR. CLOWE: And now she's heading up the 17 Georgia Lottery. I think, if I understand it 18 correctly, we are talking about a business decision 19 on their part. I don't think there's anything that 20 precludes it in their rules, is there? 21 MR. GRIEF: Not that I'm aware of. 22 MR. CLOWE: So it's really, then, a 23 business decision. And Robert made the remark that 24 all of the states in Mega Millions are suffering some 25 jackpot fatigue. And I think we saw that on the 0039 1 slide that he showed us. And we are in competition 2 with Powerball. And if it's the job of this agency 3 within the statute to generate dollars for the State, 4 this is a valid consideration. And I'd like for you 5 to drill down and get an answer for us if there's a 6 negative reaction, what is the negative reaction 7 based on. Why? My sense is that Mega Millions 8 doesn't want to compete with Powerball. My sense is 9 Powerball is open to having states in both games. 10 To me, the State of Texas, which is the state 11 that I'm interested in, would benefit by having entry 12 into both of those games as these jackpots work back 13 and forth. There's a valid business motivation on 14 behalf of myself and, I assume, Commissioner Cox to 15 bring dollars in for people who want to participate 16 in Powerball. So I don't think it's silly or a 17 non-business request for us to approach the Mega 18 Millions leadership. And to me, in the long run, 19 they need to look at where their organization is 20 going and where Powerball is going and make a good 21 business decision rather than saying no, no, no, no, 22 and then maybe finally yes and not dealing with what 23 appears to be a reasonable request on behalf of this 24 State. I think you need to focus their attention on 25 that. And all the states are experiencing the same 0040 1 kind of jackpot fatigue. I mean, we are all dealing 2 with it. Let's get them thinking about being 3 proactive instead of reactive. 4 MR. GRIEF: Will do. 5 MR. CLOWE: And the message I'm trying to 6 give you, if Commissioner Cox is in agreement, is we 7 are serious about this and we want to know why it 8 can't be done for the players of the State of Texas. 9 And if other Mega Millions states want to do the 10 same, better look at it. 11 MR. COX: And I would add to that that the 12 answer is not Texas doesn't understand the lottery 13 business. There has to be some business reason that 14 they can articulate to us as to why this doesn't make 15 sense. 16 MR. GRIEF: Very good. 17 MR. CLOWE: That's a good point. And I 18 know that you're going to hear back, "Well, you 19 should be focused on your per capita sales and get 20 your per capita sales up." And given that New York 21 and Massachusetts have higher per capita sales, but 22 in Texas it's different. And we are not going to 23 push per capita sales as hard as apparently they do 24 in Massachusetts and New York. Our culture with what 25 we have in our State, in my mind, where there's some 0041 1 opposition to legalized gaming doesn't allow us to 2 push it like they probably do in New York and 3 Massachusetts. So the -- an answer of just work on 4 your per capita sales will not be satisfactory to us. 5 Am I okay on that? 6 MR. COX: Yes, sir. 7 MR. CLOWE: We want to do the same thing 8 with these on-line games that we are doing with the 9 instant tickets. You're making that point over and 10 over again in the work that you're doing, we are 11 creative, we are innovative. The on-line games are 12 not as attractive to the casual player as the instant 13 tickets are, and we just want to bring those up to a 14 level where there are similar choices, in my mind. 15 MR. GRIEF: That's very helpful. Thank 16 you, Mr. Chairman. 17 MR. CLOWE: Okay. Good luck on that. 18 Report back to us in our December meeting, if you 19 will. 20 MR. GRIEF: Yes, sir. 21 MR. COX: Anything further, Robert, Kathy? 22 MS. PYKA: May I follow up on that 23 settlement amount for you? 24 MR. COX: Yes. 25 MS. PYKA: It's 315,054,699. 0042 1 MR. COX: Right on the money. 2 MS. PYKA: Right on the money. 3 MR. COX: Good. 4 MS. PYKA: A little interest factor change. 5 MR. COX: Thank you. 6 MR. CLOWE: Why does California give them 7 60 days to make that decision? I think that's 8 interesting. Are they the only state that does that? 9 MR. TIRLONI: Each individual state has 10 different rules about payment selection. In Texas we 11 require the payment selection at time of purchase. 12 MR. CLOWE: Yeah. 13 MR. TIRLONI: Other states -- other states 14 do not. They let the winner choose the option after 15 they claim or as they're claiming the prize. 16 MS. KIPLIN: Mr. Chairman, would you like a 17 little more information on that issue, because it's 18 been -- it's been an issue for a period of time, and 19 it really goes back to an IRS doctrine called the 20 Constructive Receipt Rule, Constructive Receipt 21 Doctrine. And some time ago the IRS' position in 22 terms of lottery prize payments was that if, for 23 example, you, Mr. Chairman, you picked a cash value 24 beforehand and, Commissioner Cox, you picked an 25 annuity payment, if it was so easy for Commissioner 0043 1 Cox to then select a cash value and he was going to 2 be taxed on his whole amount as cash value, then they 3 would apply what would be called a Constructive 4 Receipt Doctrine to all jackpot winners and then 5 everybody would be -- have to pay tax as if they had 6 constructively received the entire amount regardless 7 of whether it was an annuity payment. 8 MR. CLOWE: Really? 9 MS. KIPLIN: And then sometime 10 thereafter -- and I can't remember the dates and I'll 11 get more information for you, but sometime thereafter 12 the -- there was a tax bill that was passed by 13 Congress that I believe attempted to address this 14 issue and in -- in allowing a prize winner to 15 exercise that option after the date of claim. The 16 issue at the time for the lottery states was what did 17 those words mean? What was date of claim? And I 18 think there was another -- another operative word 19 that escapes me right now in terms of the timing on 20 that. The lottery states tried to get an IRS ruling 21 to -- to further clarify what the use of those 22 particular words were and when the clock began. 23 Because when the clock began would -- would be very 24 important and when the clock ended for that period of 25 time with -- within which you could -- you could 0044 1 change your selection. That ruling never was issued 2 by the IRS. There were states that made a decision 3 that they were going to go ahead and take advantage, 4 if you will, of the change in the -- in the tax law. 5 And in Texas at that time as a matter of policy chose 6 not to. And the issue for that was because of the 7 risk that if the interpretation -- finally if it were 8 ever determined by a court or by an IRS ruling to be 9 inconsistent, then you would be back to having 10 that -- the problem with the Constructive Receipt 11 Rule. But it is a policy decision for -- for each 12 lottery as to whether they want to allow this option 13 and I -- I can tell you that I -- in the comments 14 that we have received on the rulemakings that we have 15 had in the past on the Lotto Texas, there has been 16 comment from Commenter that they would like to have 17 that option. But the Commission in the past in my 18 view, in my sense has been risk averse and not 19 wanting to open up that risk. But California, as 20 best I can tell from what Mr. Tirloni just said, does 21 allow that, and there are other lotteries that do as 22 well. 23 MR. CLOWE: Do you happen to know how many? 24 MS. KIPLIN: No, sir, I don't. 25 MR. CLOWE: Would you get that 0045 1 information -- 2 MS. KIPLIN: Sure. 3 MR. CLOWE: -- and give it to us in our 4 next meeting? 5 MS. KIPLIN: Certainly. 6 MR. CLOWE: Robert, in your opinion, does 7 that rule incent the player in some way? 8 MR. TIRLONI: The ability to choose 9 afterwards? 10 MR. CLOWE: (Nods head.) 11 MR. TIRLONI: I think there are some 12 players that -- that would find that appealing. I 13 will tell you that the majority of -- of players and 14 the majority of winners we are seeing are -- are cash 15 value. 16 MR. CLOWE: That's running 60 or 65 17 percent, isn't it? 18 MR. TIRLONI: Typically that's what it's 19 run in the past. 20 MR. COX: It seems that right now a person 21 is making a decision without any real need to 22 consider it carefully. And that the time that they 23 would really want to make that decision is with 24 professional advice after they win. And if we could 25 give them that opportunity, it seems like we'd be 0046 1 doing something good for the players. 2 MR. CLOWE: And it falls within 180-day 3 claim period so there's no cash risk involved in that 4 issue as long as it -- those funds are frozen either 5 way for 180 days, aren't they? 6 MS. PYKA: Correct. 7 MR. GRIEF: I want to comment on that, if I 8 could, Mr. Chairman. 9 MR. CLOWE: Sure. 10 MR. GRIEF: I think that's one of the 11 probably several pesky little items we'd have to 12 think about. Currently when we sell a winning 13 ticket, and based on what we see in the system, it 14 shows that they wanted a payout over time. We go out 15 and purchase through the Texas Treasury the day 16 following the drawing. We go ahead and purchase 17 those payments. 18 MR. CLOWE: Well, you take immediate action 19 on it the way our rule is written? 20 MR. GRIEF: Yes, we do. And our estimates, 21 our jackpot estimates that we do, which are based on 22 the 25-year payouts, are based on the interest rates 23 at or very near the time of the drawing. So if we 24 allow a player, for example, to wait 60 days, 90 25 days, some number of days, and they come back in and 0047 1 choose the 25-year payout, interest factors may have 2 changed, could be dramatically. And what we end up 3 paying over a 25-year period could be substantially 4 different than what we advertised for that jackpot. 5 That's just one of the things we'd want to think 6 about. 7 MR. CLOWE: That could be a significant 8 factor. The way interest rates are changing, if you 9 were out 60 days and then bought your annuity, it 10 could make a substantial difference. 11 MR. GRIEF: Especially with that much money 12 involved and the 25-year time frame -- 13 MR. CLOWE: Yeah. 14 MR. GRIEF: -- it could make a significant 15 difference. 16 MR. COX: And yet, it could go either way 17 and the player would have the option to come in and 18 stop that clock running as soon as the player made a 19 choice. And you make a good point. I still think 20 there are pluses and minuses that we ought to look at 21 an analysis of. 22 MR. GRIEF: Would you like us to prepare 23 that type of analysis? 24 MR. COX: I would. 25 MR. GRIEF: I'll be glad to do that. 0048 1 MR. CLOWE: How -- yeah, sure. How does 2 California handle that? 3 MR. GRIEF: I'm not familiar, Mr. Chairman, 4 with how they handle it. We can find out. 5 MR. CLOWE: Do you know, Counselor? 6 MS. KIPLIN: No, sir, I do not. 7 MR. CLOWE: We ought to find out, because 8 the point is well made, it can go either way and 9 they've got to have some protection on that aspect of 10 it if they're giving 60 days to make that decision. 11 MR. COX: Like we buy it the day -- the 12 business day following your making the decision would 13 be the way -- probably the best way to handle it. 14 MR. CLOWE: Well, I think this is a good 15 discussion. I think it's opened up a whole new 16 subject that we haven't looked at in the past. And I 17 think we ought to delve into it and see what the 18 benefits are to the players and to the State and look 19 at it in depth and make a decision, and see if we are 20 where we want to be or we might want to consider some 21 change. 22 MR. TIRLONI: And Kathy and I were just 23 talking, we are on a jackpot estimation call with the 24 Mega Million states twice a week. California is part 25 of that call. So it would be very easy for us to 0049 1 establish a contact at California to get information 2 about that for you all for the next meeting. 3 MR. COX: Okay. 4 MR. CLOWE: Okay. Tell them those Texans 5 are at it again. 6 MR. TIRLONI: Yes, sir. 7 MR. CLOWE: Anything further on this 8 subject? 9 MS. PYKA: No, sir. 10 MR. TIRLONI: No, sir. 11 MR. CLOWE: Then we'll move to Item Number 12 4, report, possible discussion and/or action on the 13 Agency's financial status. 14 Ms. Pyka. 15 MS. PYKA: Yes. Good morning again, 16 Commissioners. For the record, my name is Kathy 17 Pyka. I'm the controller for the Lottery Commission. 18 Tab 4 includes information on the Agency's financial 19 status. The first report under Tab 4 reflects 20 transfers and allocations to the Foundation School 21 Fund and allocation of unclaimed prizes as of 22 November, 2005. Total transfers to the State, as 23 noted at the bottom of the report, were 154.1 million 24 through the month of November. This represents a 25 5.1 percent decrease from the same time frame 0050 1 transferred in November, 2004. 2 The second page of your notebook reflects the 3 detailed information for the monthly transfers. Of 4 the 154.1 million transferred amount to the State, 5 153.1 million was transferred to the Foundation 6 School Fund, and 933,000 was transferred from 7 unclaimed lottery prizes. 8 The following document is a simple calculation 9 of how we arrived at the transfer amount for the 10 month. And then the following document -- or the 11 next document includes a report of lottery 12 expenditures and transfers from fiscal year 1992 to 13 date. Total cash-based transfers to the Foundation 14 School Fund through November of this year totalled 15 154.1 million with a cumulative transfer to the 16 Foundation School Fund noted on the last page of 17 7.8 million. And then moving to -- 18 MR. COX: 7.8 what? 19 MS. PYKA: 7.8 million. 7 million -- 20 7.8 billion. 21 MR. COX: Thank you. 22 MS. PYKA: I'm so sorry. Moving to the 23 report behind the pink tab of your notebook, we'll 24 begin looking at the fiscal year 2006 method of 25 financing summary for the period ending October 31st, 0051 1 2005. The Commission's fiscal year 2006 lottery 2 account budget for '06 is 182.3 million. Of this 3 amount, 10.7 percent has been expended through the 4 first two months. And then looking at the Bingo 5 operation's budget funded out of general revenue 6 funds, excluding the prize allocation, about 7 15 percent of the budget has been expended through 8 the first two months and each of these expenditure 9 categories does track in accordance with the 10 two-month expenditure pattern. 11 Commissioners, may I answer any questions about 12 the financial data? 13 MR. CLOWE: Do you have any questions, 14 Commissioner Cox? 15 MR. COX: No, sir. 16 MR. CLOWE: Thank you, Kathy. 17 MS. PYKA: You're welcome. 18 MR. CLOWE: The next subject is yours as 19 well, Number 5, consideration of and possible 20 discussion and/or action on the Agency's fiscal year 21 2006 itemized operating budget. 22 MS. PYKA: Thank you, Commissioner. Again, 23 my name is Kathy Pyka. I'm the controller for the 24 Texas Lottery Commission. And this morning I wanted 25 to provide you an update on the itemized operating 0052 1 budget for fiscal year 2006. The fiscal year 2 2006-2007 appropriations bill does require that 3 itemized operating budgets be filed with the 4 Governor's Office of Budget Planning and Policy as 5 well as the Legislative Budget Board each fiscal 6 year. This itemized budget document includes the 7 previously adopted fiscal year 2006 operating budget 8 information as well as actual expended amounts for 9 fiscal years '04 and fiscal years 2005. The document 10 is due to those parties on December 1 of 2005, and we 11 are certainly on track to complete this within the 12 next couple of days. Prior to submission of the 13 document, we'd certainly be happy to meet with you 14 individually to discuss the document and provide you 15 a review of it. And I wanted to note that in 16 addition to filing a hard copy of the document, we 17 have to submit it electronically through the 18 Automated Budget System to the Legislative Budget 19 Board. So once we complete that, which again is due 20 by December 1st, we have to provide a certification 21 that each of those documents, the electronic document 22 and the hard document, are one in the same and 23 certify that they are one in the same, supply that to 24 those offices, that they'll be in the Governor's 25 Office within the seven days of filing the electronic 0053 1 document. 2 May I answer any questions? 3 MR. COX: Do I recall correctly, Counselor, 4 that we had difficulty with that certification last 5 year? 6 MS. KIPLIN: Yes, sir, your -- your 7 recollection is correct. And we did modify the 8 certification, and I've visited with Ms. Pyka 9 regarding that. And our recommendation is that we 10 use the same certification that we modified and -- 11 because we think it makes sense. 12 MR. COX: If I recall, Chairman Clowe is 13 required to sign that? 14 MS. KIPLIN: Yes. It's the chairman, the 15 executive director and the chief financial officer. 16 MS. PYKA: That is correct. 17 MR. COX: Thank you. 18 Thank you, Mr. Chairman. 19 MR. CLOWE: Kathy, are you feeling 20 comfortable with your new responsibilities and the 21 areas that you're reporting to us on? 22 MS. PYKA: I certainly have a learning 23 curve, there's no doubt, but I do feel comfortable on 24 it. There's some areas of the Commission that's just 25 very natural to me because I've done it many other 0054 1 places many times, but certainly the aspects of the 2 Lottery Commission business I am certainly going 3 through a learning curve and working hard at 4 understanding it better every day. 5 MR. CLOWE: Good. 6 MS. PYKA: Thank you. 7 MR. CLOWE: Thank you very much. 8 MS. PYKA: Uh-huh. 9 MR. CLOWE: Commissioner Cox, there has 10 been a request from an outside party regarding an 11 item in our agenda that it be brought up earlier than 12 its schedule, and that is under Item Number 17 13 represented by the Letter G, Docket Number 14 362-03-0248.B. Would it be your pleasure to take 15 this up at this time or do you have a thought on 16 that? 17 MR. COX: If we could have a short break 18 before we do so. 19 MR. CLOWE: Certainly. We'll take a short 20 break, ten minutes or so, and then we'll come back 21 and if Mr. White and Mr. Bledsoe (phonetic) will be 22 ready, we'll go forward. 23 (Short recess.) 24 MR. CLOWE: Come back to order now, please. 25 We'll now move to Item Number 17, Letter G, Docket 0055 1 Number 362-03-0248.B. 2 Mr. White, will you give us a short refreshment 3 of the case and your recommendation and then, Mr. 4 Bledsoe, we'll call on you for a short statement, as 5 well. 6 MR. WHITE: Yes, sir. For the record, my 7 name is Steven White. I'm chief of enforcement. 8 This may be redundant to what I said last time, and I 9 apologize, but for a refresher, this case arises out 10 of the audits of eight conductor organizations 11 performed in 2001. The cases were filed at the State 12 Office of Administrative Hearing in 2002 after the 13 organizations refused to produce requested documents 14 and reimburse the bingo Counselor disallowed 15 disbursements. Discovery, mediation continued until 16 these cases were tried in December of 2004. In fact, 17 since such time we had another mediation which 18 failed. The findings of the administrative law judge 19 were that these organizations failed to produce 20 records necessary for the Commission's auditors to 21 complete the audits and wrongfully disbursed over 22 $60,000 in charitable Bingo funds for noncharitable 23 purposes. 24 The staff recommends that the Commission adopt 25 all of the administrative law judge's findings of 0056 1 fact and conclusions of law with the exception of 2 Conclusion of Laws Numbers 10 and 11. Conclusion -- 3 proposed Conclusion of Law Number 10 by the 4 administrative law judge states, "Based on the 5 foregoing, the Commission should renew the 6 applicant's Bingo operator's license." 7 Conclusion of Law Number 11 states, "The 8 Commission should monitor the Red Men organizations 9 involved in this case to ensure compliance with the 10 Commission's rules and statutory provisions in the 11 bingo Enabling Act." 12 These two conclusions are not conclusions of law 13 at all, but rather recommendations for appropriate 14 licensing action mischaracterized as conclusions of 15 law. It is the sole responsibility of the Commission 16 to decide what is an appropriate licensing action, 17 not the administrative law judge's. The 18 administrative law judge made findings that the 19 applicants committed numerous violations of the Bingo 20 Act, including the wrongful disbursement of 21 approximately $60,000 in charitable Bingo money to 22 their own use and failed to produce records and 23 documents necessary for the Commission to carry out 24 its mission of regulating the charitable bingo 25 industry. The ALJ's recommended licensing action is 0057 1 inconsistent with the Bingo Act and long-standing 2 agency policy. 3 Conclusion of Law Number 11 is irreconcilably 4 inconsistent with the administrative law judge's 5 findings that the appellants failed to properly 6 disburse charitable proceeds. Section 2001.105(A)(3) 7 of the Bingo Enabling Act states that "The Commission 8 shall renew a license to conduct bingo only if it 9 determines that the applicant's bingo proceeds are 10 being disposed with in accordance with the Act." 11 In Conclusion of Law Number 7, the 12 administrative law judge found that the applicants 13 had not disposed of bingo funds in accordance with 14 the Act. The ALJ cites to no authority or no law 15 that would allow the Commission to ignore Section 16 2001.105(A)(3) and to renew the applicant's license. 17 The Commission auditors, Randall Hare, Thomas Leak 18 and the Deputy Director of Bingo Operations Phil 19 Sanderson all testified to the best of their 20 knowledge the Commission has never allowed a licensee 21 to continue to conduct charitable bingo when they 22 refuse to or are financially unable to reimburse 23 their bingo funds for the disallowed charitable 24 disbursements. 25 Conclusion of Law Number 11 is irreconcilably 0058 1 inconsistent with the ALJ's findings that the 2 applicants violated Bingo Enabling Act Sections 3 2001.302, 505(B) and Bingo Rule 402.590(D) by failing 4 to produce general accounts records requested by the 5 Commission. 6 The AL -- administrative law judge found that 7 the applicants deposited $45,000 in charitable 8 proceeds into Charles Isbell's Dos Rios bank account 9 in order to build a private retreat on Mr. Isbell's 10 island. Charles Isbell is the owner and president of 11 the commercial bingo halls where the applicants 12 conduct bingo, as well as a Red Men member. This 13 $45,000 in wrongfully disbursed disbursements were 14 made in direct violation of 2001.002-19(A) of the 15 Bingo Act, which states that a nonprofit organization 16 may not distribute any of their income to its 17 members, officers or governing body other than 18 reasonable compensation for services. A denial of 19 the applicant's license is for such deliberate and 20 ongoing violations of the Bingo Enabling Act is the 21 only remedy consistent with the Commission policy. 22 It is the responsibility of the Commission to 23 determine the licensing action to be taken, not the 24 administrative law judge's. 25 The Bingo Enabling Act mandates that the 0059 1 Commission exercise strict control and close 2 supervision over the bingo conducted in this State. 3 The wrongful disbursements of charitable bingo money, 4 particularly the $45,000 for the building of a 5 private retreat on Mr. Isbell's private island, is 6 more than simply a dispute over what constitutes 7 charitable purpose. These organizations were paying 8 Mr. Isbell rent to use his bingo halls. Many, if not 9 most of the members of these organizations employed 10 in Charles Isbell -- were employed in Charles 11 Isbell's bingo halls. The same organizations then 12 voted to give Mr. Isbell additional money and call it 13 a charitable disbursement. 14 When our auditors went to audit these Red Men 15 and asked for the necessary records and documents in 16 an attempt to do their job, they were told, "We are 17 not going to give you those records. We are not 18 going to give you -- we are never going to give you 19 those records." Those are the quotes -- the words of 20 Kevin Isbell, son of Charles Isbell. In other words, 21 they told our auditors, "We are not going to comply 22 with the law. We are never going to comply with the 23 law." To that extent they have kept their word. As 24 to today, our auditors still have not been able to 25 complete their audits because of these organizations' 0060 1 refusal to provide the necessary documents despite 2 numerous written demands that they do so. 3 The violations of this case are deliberate, 4 intentional and ongoing. They have not yet paid back 5 the wrongfully disbursed proceeds. They have not yet 6 produced the documents repeatedly ordered by the 7 Commission. Nonrenewal of the applicant's license is 8 the only action consistent with the Bingo Enabling 9 Act and long-standing Agency policy. It's the only 10 action consistent with the Agency's duty to regulate 11 the bingo industry. There is no reason to deviate 12 from the law and long-standing agency policy in this 13 case. And the staff urges that you once again adopt 14 the ALJ's findings of fact and conclusions of laws 15 with the exceptions of Numbers 10 and 11 and deny the 16 applicants their licenses. 17 MR. CLOWE: Thank you, Mr. White. 18 We'd like to hear from you now, Mr. Bledsoe. 19 MR. BLEDSOE: Thank you very much, 20 Mr. Chairman. I appreciate you all for taking us out 21 of time. I'm -- we are glad that you all are able to 22 accommodate us. To begin with, I want to raise an 23 issue and I -- and it's with regrets that I raise the 24 issue, because I know that I personally like 25 Commissioner Cox and have known him for a while, but 0061 1 based on the ex parte communication that he received 2 in the case, when I went back and I reviewed the 3 transcript in the case, it became apparent to me that 4 Mr. Atkins had provided him with information that was 5 incorrect and outside the record and that apparently 6 he reached a judgment based on a quote that 7 Mr. Atkins attributed to him in regards to his 8 questioning of the administrative law judge's 9 decision. And we reviewed different presentations 10 that have been made to this body about the issue of 11 ex parte communications. 12 Ms. Kiplin had advised -- I've got some specific 13 quotes in there from her about things that she has 14 said that seem to completely encompass this factual 15 situation. And then I think you had Mr. Borkin 16 (phonetic) and Mr. Helmcamp (phonetic) who used to 17 head up the Administrative Law Division of the 18 Attorney General's Office to actually come before you 19 and to address this body about a number of issues, 20 including the issue of ex parte communications. And 21 I have specific quotes in the submission that I 22 provided to you on this. I've got specific quotes 23 from Ms. Kiplin, from Mr. Helmcamp and from Mr. 24 Borkin, and all those situations seem to indicate 25 that in a situation like this, a Commissioner should 0062 1 recuse themselves from considering the matter because 2 indeed there has been an ex parte communication. 3 There -- we were not noticed about the 4 communication. We had no way of being there in the 5 communication. It's not part of the official 6 proceeding. There's no transcription of the official 7 communication. But the only summation of it that we 8 have indicates that damage or harm was done to our 9 client that we can't undo in this context. So with 10 respect to Commissioner Cox, we would ask that 11 Commissioner Cox would recuse himself from 12 considering this matter. 13 MR. CLOWE: Counselor, I think at this 14 point in time, to the extent that you can in the 15 public meeting, we need legal direction. 16 MS. KIPLIN: Sure. 17 MR. CLOWE: If you don't feel comfortable, 18 we can go into executive session to receive legal 19 advice. 20 MS. KIPLIN: Sure. Mr. Bledsoe brought the 21 documents with him, I guess, today. And those would 22 have been provided to you. I do not have a copy. I 23 will say in the -- the September 28th meeting, we did 24 ask Mr. Bledsoe to provide his position on this 25 matter. And in particular we asked him to do that so 0063 1 it wouldn't be at the 11th hour, so Mr. White in 2 particular would have an opportunity to respond and I 3 could review those documents and be able to provide 4 you legal advice. 5 Mr. Bledsoe, I know that you received a letter 6 from me, I think it was--I've got a copy of 7 it--October 6, and this is the first communication 8 you and I have had on that. So I think what -- what 9 I'd like to do, if the Commission would allow that, 10 is to give us an opportunity to review the 11 information that Mr. Bledsoe has provided at this 12 11th hour so we have an opportunity to analyze it and 13 I can give you meaningful legal advice. 14 MR. CLOWE: All right. 15 MS. KIPLIN: I have not seen the 16 documents -- 17 MR. CLOWE: I understand. 18 MS. KIPLIN: I briefly took a look at 19 them -- 20 MR. CLOWE: I understand. 21 MS. KIPLIN: -- and I don't have them in 22 front of me. 23 MR. CLOWE: Just as a matter of general 24 information, is it a Commissioner's personal decision 25 when an issue of this type arises as to whether or 0064 1 not to recuse themself? I know that in the past I 2 have recused myself on an issue -- 3 MS. KIPLIN: (Nods head.) 4 MR. CLOWE: -- and that was my personal 5 decision. And I didn't ask for legal advice at that 6 time, but just as a general information, that's the 7 case? 8 MS. KIPLIN: Sure. And, you know, I'll go 9 back to the prohibition on ex parte communication. 10 And the purpose of it is to obviously afford parties 11 due process and to give them an opportunity to 12 participate. On ex parte communications that are of 13 the type that are prohibited and, of course, that 14 remains to be seen on -- Mr. Bledsoe would argue that 15 -- I'm thinking Mr. Bledsoe would argue this is one 16 of the types that would be prohibited. You'll have 17 an argument that maybe it's not from Mr. White. So 18 the first threshold is, is it or is it not fall 19 within the scope of a prohibited ex parte 20 communication. But the -- but the ultimate situation 21 is whether the person who's been involved in that 22 communication can in fact continue and not be biased 23 or predisposed to an outcome based on that 24 communication. The other aspect is to give the 25 parties an opportunity to know of that communication 0065 1 and give them an opportunity to respond and -- and 2 participate. And as you know, Mr. Atkins did 3 disclose the communication, and that was back in -- 4 well, whatever date I mentioned, and time's gone by. 5 But I think it does go to whether the individual who 6 has engaged in that communication can -- can in fact 7 remain unbiased and -- and proceed. 8 MR. CLOWE: Thank you very much. We'll 9 pass this item until our December meeting. 10 Thank you, Mr. White. 11 Thank you, Mr. Bledsoe. 12 MR. BLEDSOE: Thank you, Mr. Chairman. 13 MR. CLOWE: Give you -- give you time? 14 MR. COX: Have to study it one more time. 15 MR. CLOWE: Yeah. If that's all right with 16 you? 17 MS. KIPLIN: And if I could, I'd like to 18 have a copy of what's been provided. 19 Thank you. 20 MR. CLOWE: Next is Item Number 6, report, 21 possible discussion and/or action on GTECH 22 Corporation. 23 Mr. Grief. 24 MR. GRIEF: Commissioners, a couple of 25 items to report to you regarding the potential 0066 1 ownership change of GTECH Corporation that's 2 previously been mentioned. I have no new 3 developments to report to you regarding that item. 4 However, the Agency has issued a request for proposal 5 for outside legal counsel and services related to 6 that potential transaction that I would ask the 7 general counsel to brief you on. 8 MS. KIPLIN: Commissioners, the Commission 9 has -- the Agency has issued a request for proposals 10 for outside counsel. I believe it was issued 11 November 8th. And proposals, I believe, are due 12 November 22nd, and then we'll evaluate those. The 13 ability to issue the RFP, if you will, for outside 14 counsel has been approved through the Office of the 15 Attorney General. They're -- they're the entity that 16 has to approve an Agency entering into an outside 17 counsel contract. And, of course, those are -- those 18 are three-party contracts, the Attorney General's 19 Office, the firm, and then the Agency. 20 The scope of services -- hang on. Pardon me. I 21 wanted to get this in front of me. The scope of 22 services in the -- in this RFP is to be able to 23 provide general legal advice, assistance and counsel, 24 including corporate law in mergers and acquisitions 25 needed to assist the Lottery in evaluating the 0067 1 proposed change in the ownership. And there was an 2 issue that came up earlier in the week on -- also 3 including possible litigation and legal services 4 involving these matters. And the idea is that if, in 5 fact, we do proceed and there is an issue and 6 litigation would ensue, that you'd already have a 7 firm that was familiar with those issues and then you 8 wouldn't be having to get people up to speed on a 9 learning curve. We really don't know at this time 10 what will occur in terms of the -- the proposal that 11 GTECH has. And we can always cancel this RFP if we 12 need to. It's not to exceed a cap of $300,000. And 13 it would be -- we would be the ones that would be 14 monitoring the services that are being provided in 15 terms of billable hours. 16 MR. COX: Okay. Let's -- let's start at 17 the beginning. What are these services for 18 specifically? 19 MS. KIPLIN: Well, it's to help the Lottery 20 evaluating the proposed change of ownership with the 21 Agency's -- 22 MR. COX: Okay. So let's -- did we get 23 some request from anybody that asked us to take some 24 kind of action? 25 MS. KIPLIN: In terms of issuing the RFP 0068 1 or? 2 MR. COX: What caused us to want to -- 3 MS. KIPLIN: Oh. 4 MR. COX: -- submit this -- or put this RFP 5 out on the street? 6 MS. KIPLIN: We had received information 7 from GTECH regarding a potential purchase and 8 change -- ultimately change of their ownership, a 9 proposed change of ownership is the way that I would 10 characterize it. 11 MR. COX: Okay. So far I haven't seen any 12 reason to hire lawyers. 13 MS. KIPLIN: Well, I think the issue has to 14 do with trying to get -- and we did look to the AG 15 and sought their advice on what kind of level and 16 scope of legal services we would need. 17 MR. COX: Let me go back. You said you got 18 a letter from GTECH telling you that they were 19 contemplating a transfer of interest. Did they ask 20 us to do anything? 21 MS. KIPLIN: No. I don't recall. I don't 22 have that letter in front of me. But there is the 23 issue in terms of ensuring that the vendor would 24 still be eligible to be the Lottery operator and that 25 goes into background investigations of people who are 0069 1 enumerated within the contract. It also goes back to 2 the contract -- the contract terms itself in terms of 3 suitability of persons who are involved with the 4 lottery operator -- 5 MR. COX: So GTECH writes a letter and they 6 said here's a stack this high of information on the 7 new potential owners, investigate them. Is that what 8 they asked? 9 MS. KIPLIN: They have not asked anything 10 at this point. What we've -- what we have heard is 11 that there would -- that if this -- this change were 12 to occur, it would -- it could be complete -- the 13 first thing we heard is in January of 2006, and I 14 think now there's been a bit of a shift on that. I 15 will say that the Texas Lottery, at least--I will 16 speak for myself, and Mr. Grief, you can speak for 17 yourself--but wanted to make sure that we were doing 18 what we needed to do to conduct what due diligence we 19 needed to to protect the interest of the Lottery and 20 of the State as it relates to the Lottery. 21 MR. COX: I guess I'm confused as to -- 22 GTECH writes a letter and says, we are going to have 23 some new stockholders, maybe. Now, how does that -- 24 the fact that they tell us that trigger any action on 25 our part? Is there some consent required? Are they 0070 1 asking for some consent? What's -- what -- 2 MS. KIPLIN: Well, there has -- there has 3 been a draft consent letter that's been circulated to 4 lotteries, not just the Texas Lottery. 5 MR. COX: Okay. So they're asking our 6 consent for this? Did they send along a check for 7 $300,000? 8 MS. KIPLIN: No, there is not. In the -- 9 in the contract, the lottery operator contract, there 10 is a provision that does allow us to require them to 11 pay the costs of the background investigation. I 12 will say, and I don't -- I want to be careful about 13 my -- my -- my -- the information I convey in a 14 public meeting, because I know that there's been a 15 position taken that the information is proprietary, 16 and so I don't want to trip into that. But in 17 looking at what has been proposed in terms of the 18 documents, it is a complex ownership structure, and 19 some of the potential shareholders or owners are 20 international. And so that also presents an issue in 21 terms of conducting the necessary background 22 investigations on folks that are international. 23 MR. COX: Okay. Well, I guess I'm still 24 not clear on what we are doing here. GTECH sends us 25 a letter and says that we may have some new 0071 1 stockholders. And did they say we want the State of 2 Texas to consent to this transaction? 3 MS. KIPLIN: The first one -- the first one 4 was informational. And the second one was a letter 5 that had been -- it was a draft consent letter that 6 had been provided not just to the Texas Lottery but 7 other lotteries. And the intent was--speaking for 8 them--for the lotteries to review it. They weren't 9 at that point looking for consent. 10 MR. COX: Okay. So they weren't or were? 11 MS. KIPLIN: No, not at that -- not at this 12 time. The worry or the concern that we have is that 13 if the -- if the process moves, it will move pretty 14 quickly. And we wanted to make sure we were not in a 15 position of having caused any kind of undue delay in 16 terms of our review. 17 MR. COX: Well, they haven't even asked for 18 anything yet, so how could we have caused a delay? 19 MS. KIPLIN: Well, I think they're moving 20 forward in terms of -- of -- of looking at this 21 proposed ownership change. I can't speak for GTECH. 22 Mr. Rivera is in the audience, not to identify him, 23 but in terms of what they're doing. What we are 24 trying to do is make sure that we are positioned 25 should the matter become more and more coming closer 0072 1 to fruition. 2 MR. COX: Okay. So we are guessing that at 3 some point they're going to ask for our consent? 4 MS. KIPLIN: Yes. 5 MR. COX: Okay. Do they -- is there a 6 contractual requirement that they obtain our consent? 7 MS. KIPLIN: I think it depends on the way 8 in which the ownership change is ultimately 9 structured. 10 MR. COX: Okay. 11 MS. KIPLIN: And that is -- remains to be 12 seen. That remain -- that -- just don't know that. 13 Now, with regard to the -- 14 MR. COX: So -- let me -- let me follow 15 that. Are you saying it is possible that GTECH could 16 have a whole new set of stockholders and we might not 17 have any opportunity to determine whether those 18 stockholders are satisfactory to us or not? 19 MS. KIPLIN: It is possible that they could 20 have a whole new set of owners. With regard to 21 whether we would have the opportunity to determine 22 whether they were -- they were eligible, we -- we 23 will have to have that opportunity because it is 24 required by our statutes. 25 MR. COX: Okay. So our statute requires 0073 1 that the lottery operator have what? Help me with 2 the words. 3 MS. KIPLIN: Our statute requires that the 4 lottery operator be eligible for a sales agent 5 license, which then necessarily gets into conducting 6 background investigations for, in particular, 7 criminal histories on enumerated people that are 8 within that particular section. 9 MR. COX: Okay. Now -- 10 MS. KIPLIN: But the contract gives -- and 11 Mr. Marker, our head contract lawyer, is not here 12 today, but the contract gives the Lottery broader 13 oversight, if you will -- 14 MR. COX: Okay. 15 MS. KIPLIN: -- than the statute. 16 MR. COX: Okay. So what does -- what does 17 the contract say or do we need Mr. Marker before we 18 can answer that? 19 MS. KIPLIN: I would -- I would want 20 Mr. Marker here before we can answer that. 21 MR. COX: Okay. 22 MS. KIPLIN: And I'm sorry that he's 23 unavailable. 24 MR. COX: Because where I'm trying to get 25 with this is I believe that the -- every vendor 0074 1 associated with the Lottery should have officers, 2 directors, key employees, and stockholders who have a 3 character and a reputation consistent with the goals 4 of the Texas Lottery. Now, are we in a position to 5 have that or can I only wish for that? 6 MS. KIPLIN: No. I believe the contract 7 gives that -- that level of authority, but in terms 8 of the specific provisions, I would want to defer to 9 a contract attorney who has reviewed that -- 10 MR. COX: Okay. 11 MS. KIPLIN: -- contract in specific detail 12 and not me. But I would say with the request for 13 proposals, we -- what we are trying to do is to 14 anticipate where we need to be and -- so that we can 15 be there at the time that we need to be there and not 16 have a delay through a procurement process. I would 17 also say that if we don't need the services, then we 18 don't need the services. 19 MR. COX: And I'm not concerned at all 20 about the RFP. Where -- I'm just trying to 21 understand the whole picture. And I hope that GTECH 22 understands that this probably isn't going to be a 23 rapid process. 24 MS. KIPLIN: Yes, sir. The other thing 25 that I would like to make -- make you all aware is 0075 1 that there have been a number of conference calls 2 among the states that have GTECH as their vendor. 3 And that is another avenue, another approach in terms 4 of having the states, if you will, pool resources and 5 be able to share information. I -- I don't know 6 whether that will come to -- come to fruition because 7 of the -- obviously when you have that many people 8 that are involved, it tends to make it more difficult 9 to move forward, but I do know that that is another 10 avenue. So we actually have two avenues that are 11 available to the Texas Lottery. 12 MR. COX: We haven't had a great deal of 13 success finding other states having standards similar 14 to ours on other matters, but maybe this would be 15 different. 16 MS. KIPLIN: Well, that makes -- that's 17 part of what makes it difficult because even in those 18 conference calls states have different thresholds and 19 may have different operative contract language. But 20 the states that are trying to participate in that to 21 see if we can't pool resources, it makes sense to do 22 that to the extent we can. We have sent a letter to 23 GTECH to let them -- to let GTECH know about the 24 effort and to try to obtain GTECH's consent in terms 25 of sharing certain information that may otherwise be 0076 1 considered to be confidential. For example, criminal 2 history information and the like. I just don't know 3 at this time, one, if the proposed ownership change 4 will occur, and, two, if it does become likely, you 5 know, very likely that it's occurring which avenue 6 will serve the Texas Lottery best. 7 MR. COX: What we are trying to balance 8 here it sounds like is manage the risk that we could 9 end up with a lottery operator that has new ownership 10 that we are not satisfied with and who's going to run 11 the lottery. And obviously, we don't want that to 12 happen. 13 Thank you, Mr. Chairman. 14 MR. CLOWE: Appreciate that discussion. My 15 understanding is that what we are talking about here 16 is a proposed change of management, and the control 17 of the lottery vendor corporation would change. 18 That's a significant event in any company's business 19 life. My understanding further is that there was a 20 judgment that the expertise regarding corporate law 21 of this type and kind did not reside within the legal 22 staff of the Lottery Commission, nor in fact did it 23 lie within the Attorney General's Office. And so 24 that was the reason for reaching out to outside 25 counsel. Now to give this a full airing, it's my 0077 1 recollection there was some questions from the 2 licensing committee regarding this issue in our 3 appearance there Monday of this week. 4 And, Gary, would you characterize those 5 questions so that we'll have a full understanding. 6 Commissioner Cox was not there because he could not 7 be there. And I don't know whether anybody has made 8 him aware of those questions. Would you take that 9 task? 10 MR. GRIEF: I'll do my best. I may ask the 11 general counsel for some help along those lines. My 12 recollection in the hearing was the questions raised 13 by the committee were similar to some that you have 14 raised today, Commissioner Cox. Why are we doing 15 this? What do we need these services for? Did you 16 go through the Attorney General's Office? What 17 authority do you have to spend this type of money, et 18 cetera. Ms. Kiplin did a good job of explaining some 19 similar things that she's said to you today, how we 20 did consider the situation, reach out to the AG's 21 Office, find that like us they didn't have the 22 expertise to address this type of situation, and 23 hence the need for the outside counsel contract. 24 Kim, can you supplement that any? 25 MS. KIPLIN: No. I think that's a very 0078 1 fair summary, a very comprehensive summary. The 2 ultimate bottom line issue, at least for me as the 3 general counsel, is to make sure that the Commission 4 is positioned to be able to ascertain whether the new 5 owners -- owners and the -- and the ownership change 6 in the structure within GTECH conforms to our 7 contract, conforms to our statutes and whoever these 8 owners are, are suitable within the parameters of the 9 contract and the parameters of the statute. Not just 10 from a character and fitness, if you will, background 11 investigation, but also I guess a financial 12 suitability. And that's where we are ultimately 13 hoping to be should we need to be there. 14 MR. COX: Okay. Does the contract that -- 15 by statute, I think you said that there -- would have 16 to meet the requirements of a lottery retailer? 17 MS. KIPLIN: Correct. 18 MR. COX: But by the contract there is a 19 broader standard, I think I heard you say. 20 MS. KIPLIN: Yes. 21 MR. COX: Okay. And would you provide me 22 with that language as to what the standard is 23 according to the contract? 24 MS. KIPLIN: Yes. 25 MR. COX: Thank you. 0079 1 MR. CLOWE: I think this is a -- I think 2 this is a significant event in that I have been told 3 that we have been advised that this negotiation 4 involves a change of ownership and control. It 5 involves investors referred to by the general counsel 6 as international. That would be foreign ownership. 7 We are entitled by our statute to examine this and 8 make certain that it is in compliance with our 9 contract. Now, the issue is in my mind what is our 10 due diligence required? If we sit back and don't do 11 anything and it turns out that this deal goes through 12 and there's new ownership that is not acceptable to 13 this Commission, vis-a-vis the statute, then we have 14 not performed due diligence. 15 MR. COX: Exactly. 16 MR. CLOWE: If, in fact, we go out with 17 this RFP and we engage a law firm and we spend money 18 and the deal falls through, that is a waste of money, 19 although you said that GTECH funds that. 20 MS. KIPLIN: The contract does allow the 21 Lottery to require that the company, GTECH, to pay 22 for the cost of background investigations. 23 MR. CLOWE: Well, that's a yes. 24 MS. KIPLIN: I think our position would be 25 that that would be a yes, but I -- well, I'll just 0080 1 leave it at that. 2 MR. CLOWE: So I think the reason that this 3 issue is on our agenda today, this morning is for the 4 staff to tell us what they're doing and to get a 5 sense of comfort about what they're doing. And I 6 think this has been an excellent discussion going to 7 that end. I don't want to -- and I appreciate you 8 getting into the detail that you have. I don't want 9 to engage a law firm outside, spend money and be 10 wasteful on the one hand. On the other, if this deal 11 goes through -- and in my business experience these 12 deals are never done until they're done. There are a 13 lot of things that can happen in a deal of this 14 size -- 15 MR. COX: Yes, sir. 16 MR. CLOWE: -- that can kill it. But if it 17 goes through and the controlling ownership of the 18 lottery vendor goes outside of the United States to 19 an entity that we find is something less than 20 acceptable to us, then I think this Commission would 21 be held responsible, the Commissioners, because 22 that's our policy and oversight role. That's the way 23 I see it. 24 How do you feel about it? 25 MR. COX: I don't think there's any doubt 0081 1 that this is an important transaction. The -- the 2 ownership of lottery vendors just like these people 3 and us, their integrity has to be beyond question. 4 It has to be the reality of integrity and the 5 perception of integrity. And I don't think that 6 getting a head start on this is wrong at all. I 7 think we have got to be prepared to do this thing. 8 We have got to be working at an appropriate speed. 9 We have got to be spending GTECH's money, not ours, 10 however, because we are responding to something that 11 they're asking us to do. It seems to me without 12 regard to the contract, it's just fair that if 13 they're asking us to do this, they should pay what it 14 costs us to do it. 15 MR. CLOWE: And you're confident of that 16 yes answer? You seemed to hesitate for a moment. I 17 want to -- I want to get a positive, firm response 18 from you on that issue. 19 MS. KIPLIN: Well, I -- you're not -- I 20 don't think I can give you a positive, firm response, 21 because I think it comes down to a contract 22 provision, and I think people will argue about what 23 that contract provision means. 24 MR. CLOWE: I sense -- 25 MS. KIPLIN: I think our position is that 0082 1 it's -- we have the authority to request that they 2 pay for the background investigation. They may want 3 to quibble about what the scope of that means. I 4 think that we would take a broad scope of that. 5 MR. CLOWE: And I take it you haven't had 6 detailed discussions with them to this point? 7 MS. KIPLIN: No, we have not. 8 MR. CLOWE: Well, I think it would be 9 appropriate if you want to move ahead to do that. 10 MS. KIPLIN: Okay. 11 MR. CLOWE: And, you know, it seems like to 12 me the one thing we have is withholding approval at 13 this point. That's what brings them to the table to 14 discuss this matter with us -- 15 MS. KIPLIN: Sure. 16 MR. CLOWE: -- and give us their answer. 17 And I don't care what the other states are doing, 18 frankly. I appreciate that there are other states 19 that have interest, but my interest is protecting 20 this state. 21 Anything further? Are you looking for any 22 direction this morning? 23 MR. GRIEF: No, sir, just providing you 24 with information. 25 MR. CLOWE: Mr. Rivera, are you in the 0083 1 audience? Do you have any comment on this subject? 2 I understand, I think, what your position is and -- 3 and you may be limited in what you can say. Has this 4 proposed acquisition been announced to the market? 5 MR. RIVERA: For the record, Mr. Chairman, 6 I am Ramon Rivera, the account and general manager 7 for GTECH in Texas. And I'll have to apologize to 8 the Commission that I don't have any more to add than 9 what has been discussed this morning. And, in fact, 10 I believe the Lottery staff has more information 11 than -- than I do, and for understandable reasons, 12 Mr. Chair. There's -- there are some SEC concerns 13 with respect to insider trading and so forth that the 14 company is very mindful and dutiful, and therefore, 15 to my understanding, the proposed change in ownership 16 is still being examined, nothing has been announced 17 to Wall Street, and the deal has not been consummated 18 to my knowledge. 19 MR. CLOWE: And nothing that you've heard 20 here in this discussion this morning is such that you 21 want to correct it or take issue with it; is that 22 correct? 23 MR. RIVERA: That's correct, Mr. Chair. I 24 think that it was very wise to -- to ask general 25 counsel to discuss with us the potential of -- of the 0084 1 costs. I think that that's a discussion that needs 2 to take place, and I appreciate you doing that, sir. 3 MR. CLOWE: Thank you, sir. 4 Okay. We'll leave it at that. 5 MR. GRIEF: One other item, Mr. Chairman, 6 under this agenda item, if I may -- if I might? 7 MR. CLOWE: Yes. 8 MR. GRIEF: Regarding the ongoing 9 discussions that have been taking place with GTECH 10 Corporation about the manner in which GTECH is 11 compensated as the lottery operator for the Texas 12 Lottery. There was a meeting held last week here in 13 Agency headquarters between senior corporate staff at 14 GTECH and senior staff here at the Agency, along with 15 Commissioner Cox who also participated. The focus of 16 those discussions continues to be the net versus 17 gross issue which we have talked about in prior 18 Commission meetings. The meeting was helpful, in my 19 opinion, and we look forward to continuing those 20 discussions with GTECH in the very near future. 21 MR. CLOWE: Very good. 22 Do you have anything to add, Commissioner? 23 MR. COX: No, sir. 24 MR. CLOWE: Thank you for participating in 25 that. 0085 1 Thank you, Gary. 2 MR. GRIEF: Yes, sir. 3 MR. CLOWE: Next we'll move to Item 7, 4 consideration of and possible discussion and/or 5 action, including proposal on amendments to 16 TAC 6 401.305 or new Rule 16 TAC 401.305 relating to Lotto 7 Texas on-line gaming. 8 Ms. Woelk, good morning. 9 MS. WOELK: Thank you, Commission. For the 10 record, my name is Sarah Woelk. I'm an assistant 11 general counsel. The presentation we are about to 12 make is a fairly simple presentation, but it's a 13 little confusing because we have got several 14 different balls in the air or we will with this. 15 As background, at the last meeting you voted to 16 publish a general on-line game rule which would 17 change the way we approach on-line games, and they 18 would be operated under game procedures instead of 19 individual game rules. Later in the same meeting 20 Robert laid out his ideas for some changes to Lotto 21 Texas, most specifically a change to a six of 54 22 matrix. Then Commissioner Clowe said, "Since we 23 don't know if or when the general rule regarding 24 games might take effect, I would like to move forward 25 on a separate but parallel track with just a Lotto 0086 1 Texas Rule." 2 So what we have today for you is a rule that 3 would be a specific Lotto Texas rule that would adopt 4 the six of 54 matrix. It would also eliminate 5 contributions to the Lotto Texas prize reserve fund. 6 If you voted to publish this rule, then you would 7 have two different directions that you could go and 8 give you the flexibility of following this path, 9 adopting this rule, ultimately, in operating Lotto 10 Texas under this rule. If you decided you wanted to 11 adopt the rules you proposed at the last meeting, you 12 could move along that path. You could also adopt one 13 and then ultimately the other, so the benefit of 14 proposing and publishing this is it maximizes your 15 flexibility and cuts down any time delay we might 16 have for letting one process run and then decide we 17 wanted to go a different direction. So the -- the 18 changes Robert discussed in detail at the last 19 meeting, I think he's available to discuss them in 20 detail again or can just do a very brief overview 21 of -- this -- this rule looks very different because 22 it's formatted differently, but it is in substance 23 essentially the same rule we have now with -- with 24 those two major changes, matrix and prize reserve 25 fund. 0087 1 MR. TIRLONI: Commissioners, for the 2 record, again, my name is Robert Tirloni. I'm the 3 products manager. I have two brief slides, and they 4 are pretty much repeats from the last meeting. This 5 is the six of 54 matrix that I discussed with you 6 last month. I do want to point out that last month I 7 did have one typo. And when I was talking about this 8 matrix I showed this as a $5 guaranteed prize last 9 month and that was incorrect. I apologize. It is a 10 $3 guaranteed prize, and that is reflected in the 11 rule, the proposed rule before you today. 12 The six of 54 matrix, as you know, was a 13 previous lotto game matrix here in Texas. And we 14 discussed in great detail why staff recommends taking 15 a step back to that matrix. I do have the full 16 presentation from last month available if you have 17 any questions or if you'd like to revisit any of 18 those issues at that -- at this time. 19 MR. CLOWE: Okay. I want to make sure that 20 I'm on the right track here. The rule the Commission 21 adopted in our last meeting in October was basically 22 to change the determination of the on-line games when 23 changes were necessary and other related matters from 24 a rule specific to what was termed procedures. And 25 that general rule established those procedures 0088 1 similar to that which we employ with the instant 2 tickets. 3 MS. WOELK: Yes. There's a slight 4 misstatement there. You did not adopt that rule. 5 You proposed for publication. You -- 6 MR. CLOWE: And I meant to say proposed it 7 for publication. I misspoke. I beg your pardon. 8 Thank you for that correction. But we published for 9 public comment and consideration that rule. And that 10 is a -- that's a sweeping change. That's a big 11 change in my mind. It allows the executive director 12 with those eight specific issues that require 13 Commission oversight and approval latitude that 14 doesn't exist now -- 15 MR. TIRLONI: That's right. 16 MR. CLOWE: -- on the on-line games. My 17 comment and the way I felt at the time was that's a 18 big deal. That's substantial and it may take some 19 time. Based on what Robert was recommending, I 20 thought let's have a rule and go forward on a 21 specific change on Lotto Texas, which is what you 22 represent up there on the screen, Robert, and is what 23 you're asking us to publish for comment at this time. 24 MR. TIRLONI: That's correct. 25 MS. WOELK: That's right. 0089 1 MR. CLOWE: So we are running down two 2 tracks at the same time. 3 MR. TIRLONI: (Nods head.) 4 MR. CLOWE: Okay. Now I have a couple of 5 questions. Are you sure this is what you want to 6 recommend this time? 7 MR. TIRLONI: Yes, sir. Staff is positive 8 this is our recommendation for the Commission. 9 MR. CLOWE: And this is going to be the one 10 you want now and it's going to be successful and -- 11 make your warranties and representations. 12 MR. COX: You might want to define success 13 for him, Robert. 14 MR. TIRLONI: Let me -- let me do that. 15 Part of the discussion we had last month showed the 16 drastic reduction in sales after we went from the six 17 of 54 to the bonus ball matrix. 18 MR. CLOWE: Thirty percent, I think. 19 MR. TIRLONI: In that roll cycle that we 20 showed you, yes, a lot of the loss at the lower 21 starting level jackpots. And we feel that that 22 change that we made to the bonus ball drove off, so 23 to speak, a lot of the base core players that -- that 24 played at those starting jackpot levels. We feel 25 that taking a -- and I also talked about a lot of 0090 1 different research that we did. And pretty much 2 where we ended up at was knowing that we lost a great 3 deal of sales and no matter how many different angles 4 we studied or other jurisdiction or game features, we 5 basically come back to the same point that when we 6 made the change we lost a lot of sales on lotto. And 7 so taking the step back to the six of 54, we hope to 8 be able to stop the sales decline on the current 9 game, hopefully stabilize the game. And because of 10 the change back to a straight one digit -- I'm sorry, 11 six digit, one field game, give the players back the 12 play style that they were accustomed to for many 13 years in Texas and get rid of the bonus ball as part 14 of this recommendation, which seems to be the 15 underlying message that we have heard since we made 16 the change to the bonus ball matrix. 17 MR. CLOWE: And you have focused on the 18 fact that you think the players don't like the bonus 19 ball? 20 MR. TIRLONI: Absolutely. They absolutely 21 do not. 22 MR. CLOWE: Our original matrix was six in 23 50, wasn't it? 24 MR. TIRLONI: Six in 50, yes, when the 25 lotto first started. 0091 1 MR. CLOWE: And what I heard when we went 2 to six in 54 from a lot of players, well, you've 3 messed up my numbers and, you know, and I had my 4 favorite numbers in the 50. How do you address that 5 issue? 6 MR. TIRLONI: I think that was a concern at 7 the time. I think now the concern is more of, "I 8 don't like the two fields. I don't like choosing 9 from two different fields. I don't like two 10 different sets of numbers." The lottery already has 11 two other games that are that play style, Texas Two 12 Step and Mega Millions. I think the overriding issue 13 is getting back to a straight six-digit game for the 14 players. 15 MR. CLOWE: Okay. I'm concerned about that 16 point. I'm not sure it's six in 54 or six in 50, and 17 I just wonder if we shouldn't hear from the public on 18 that. 19 MR. COX: Well, I -- what we are doing here 20 is voting to expose this for public comment. 21 MR. CLOWE: So do we have the latitude if 22 the public comment says six in 50 to go to six in 50? 23 MS. WOELK: Well, the legal standard is if 24 it's a material change you have to republish, and you 25 have more experience in matrix, whether that's a 0092 1 material change. 2 MS. KIPLIN: Well, it's not just whether 3 it's a material change. It's whether -- whether it's 4 a change that those that would not have had notice of 5 the rulemaking would be disadvantaged. And since 6 this is part of that, and I'm thinking you're going 7 to have comment on it, based on comment in any 8 rulemaking, there are material changes that are made. 9 It's not -- it's actually not -- the word isn't 10 material, substantial. Substantial. And so I think 11 if you receive comment during the comment period 12 where folks wanted to go to six of 50 and you amended 13 your -- at the time you voted to adopt with that 14 amendment, I think that that would not be a problem 15 and require you to republish. 16 MR. CLOWE: Okay. 17 MS. KIPLIN: I'll just -- I'll say that. I 18 think if you just decided that you wanted to do it on 19 your own and you never got any comment on it, that 20 might be -- that might create a different problem for 21 you. There's one case that's pretty much the key 22 case on that, on the issue of when do you need to 23 republish. 24 MR. GRIEF: Mr. Chairman? 25 MR. CLOWE: Just a minute. 0093 1 MR. COX: One thing that I've heard 2 somewhere, maybe Robert or Gary can help me remember 3 where I heard this, was that six of 54 today is 4 pretty much six of 50 back then adjusted for 5 population changes. 6 MR. TIRLONI: And, Chairman, I hear what 7 you're saying about the six of 50, and we'll 8 certainly work with legal and review all of the 9 comment that comes in on this proposed rule. One 10 thing that I would want to do, we have had the 11 statistician run roll analysis on -- on this matrix 12 based on current sales levels that we are 13 experiencing on lotto. If there was overwhelming 14 public response for six of 50, we'd certainly want to 15 run roll analysis for that to see what kind of 16 jackpot levels we think we would achieve and what the 17 payout on the game would then be. Last month I 18 talked a little bit about the fact that this game -- 19 and Sarah mentioned that this game does not have a 20 prize reserve fund. It is designed as a 50-percent 21 payout game. Based on the fact that this rule will 22 also guarantee the player the -- the greater of the 23 advertised jackpot or the jackpot based on sales, the 24 statistician's roll analysis reveals that this game 25 will probably average at about a 53 percent payout 0094 1 game and we would have to look at all of that for a 2 six of 50, as well. 3 MR. CLOWE: Well, I'm hearing from the 4 general counsel that we can do that under this rule. 5 And, Robert, I want to -- want you to understand, I 6 appreciate the work that you're doing and others are 7 doing, and I'm appreciative of it, but if I had known 8 we were going to lose 30 percent of our player base 9 when I voted for the change that was recommended, I 10 wouldn't have voted for it. 11 MR. TIRLONI: I understand. 12 MR. CLOWE: And, you know, to just give 13 away 30 percent of that market was a mistake. And 14 I'm a little bit more cautious now than I was before 15 in relying on this kind of thing. I want to hear 16 from the public and I want these analyses run so that 17 if we change this game again, we change it right this 18 time, back to where the majority of players in Texas 19 want it to be. 20 MR. TIRLONI: I agree. 21 MR. CLOWE: You okay with that? 22 MR. COX: Sure. 23 MR. CLOWE: And you're saying that we have 24 that latitude within the rule? 25 MS. KIPLIN: I believe you do. I think the 0095 1 point and the purpose of proposing amendments or a 2 new rule for public comment is to receive public 3 comment. And it does not -- the rulemaking process 4 does not envision that a -- an agency would not be 5 able to amend the rule in response to the comment 6 received during that rulemaking. You know, it's 7 always a question of fact about what -- how far is 8 too far before you've made some kind of 9 substantial -- 10 MR. CLOWE: Yeah, yeah. 11 MS. KIPLIN: -- change to where you ought 12 to republish it. But I think you're on very firm 13 ground if you're -- if you're changing it and it's in 14 response to comment. And the other -- the other 15 aspect of it is it's not going to otherwise affect 16 people who would not have otherwise received notice 17 of this rulemaking. 18 MR. CLOWE: Okay. And in regard to that 19 notice, how are you going to publish it so people 20 understand we are open to their comment relative to 21 six and 54, six and 50, six and six, or, you know, 22 whatever? 23 MS. KIPLIN: This -- these are the -- the 24 legal requirement obviously is to publish in the 25 Texas Register. Now, the criticism, you know, has 0096 1 always been, well, you know, who reads the Register? 2 We put it on our web site. I think in the past there 3 have been occasions where we have actually issued 4 media advisors. I can even think of in the past 5 where the Commission has had hearings in other -- in 6 other towns, for example, Dallas and Houston, on a 7 particular -- I believe it was a particular Lotto 8 Texas rulemaking. 9 I think in this situation -- 10 MR. CLOWE: Yeah. Yeah, we had those. I 11 was on the Board at that time and it was -- the first 12 time we considered changing it. I -- I don't think 13 we need to go to that at this time, but I would like 14 to have a broad publishing of this rule for 15 consideration certainly on the web site. I think we 16 ought to issue a press release that this is being 17 considered and get the public to comment on it in the 18 broadest sense. We need to get back and pick up that 19 30 percent that we lost. Those people are either not 20 playing or they're going to something else and we 21 need to pick those people back up. 22 MS. KIPLIN: And, Mr. Chairman, I also 23 would say have a public hearing. Now, I will tell 24 you that they're -- they're not attended, the public 25 hearings so. 0097 1 MR. CLOWE: Yeah. I agree with the public 2 hearing, but not the kind of town hall meetings that 3 we tried to have -- 4 MS. KIPLIN: I understand. 5 MR. CLOWE: Okay. 6 MS. KIPLIN: And we do have a new -- a new 7 vehicle by which people can provide comment. And I'm 8 hopeful that people will take advantage of it, and 9 it's putting it up on our web site. And there is an 10 opportunity to provide now on-line comment, thanks to 11 our Information Resources Department. So I'm hopeful 12 that people will provide comment through that means. 13 I know that there's been criticism on the -- you 14 know, kind of the bricks and mortar approach on 15 providing comments, so we've tried to address that. 16 MR. GRIEF: Mr. Chairman? 17 MR. CLOWE: Just a minute, Gary. 18 MR. COX: Mr. Chairman, as to getting that 19 30 percent back, I think that we need to get the 20 staff to address that for us. I think that I've 21 heard them say that 30 percent isn't coming back. 22 What we are looking to do is try to prevent further 23 decline from where we are now. But I don't want to 24 say that, Gary, and be putting words in your mouth. 25 So why don't you describe for us your expectations of 0098 1 what this matrix change is going to do. 2 MR. GRIEF: I'll be happy to. And I'd like 3 to supplement some things that Robert said earlier. 4 When staff came up with this recommendation, one of 5 the many things that we were very mindful of is the 6 Commission's concern about instant tickets and the 7 fact that our sales are migrating more to the instant 8 ticket product and there's a higher payout percentage 9 for those tickets. So while we may be churning more 10 money through the system, we are returning less at 11 the bottom line. And, Mr. Chairman, we carefully 12 looked at six of 50 and six of 52. And if we want to 13 continue to provide, for example, $4 million starting 14 jackpot levels with rolls of increments of at least a 15 million dollars, our payout percentage under -- 16 certainly under a six of 52 and even more so under 17 six of 50, I believe is going to have to rise to 18 levels that might be unacceptable to the Commission. 19 So I just wanted to make you aware that we did 20 investigate those very thoroughly and -- and staff 21 would not support a six of 50 or a six of 52 given 22 those constraints. 23 MR. COX: And let me -- let me see if I 24 recall this correctly. I'm thinking that what the 25 analysis that Dr. Eubank did said was that at six of 0099 1 50 we would be paying out 67 percent. 2 MR. TIRLONI: It was upwards of 60 percent, 3 that's correct. And it's currently at 52. So you'd 4 see at least an 8 percent increase in the payout on 5 that game. 6 MR. GRIEF: We would be very concerned 7 in -- in that regard. 8 Going back to your question, Commissioner, about 9 the 30 percent. I do believe that getting back those 10 30 percent with a traditional lotto game, no matter 11 what the matrix is, would be very difficult. If we 12 went to a six of 40, I don't know that we would ever 13 entice those 30 percent of the players who quit 14 playing just because they don't like the game to come 15 back. But I believe it will make it, under this 16 matrix, more attractive just for those players who 17 when we did lose the 30 percent had the reason that 18 they gave to us was "I can't play my six numbers 19 anymore; You messed up my system," I think for those 20 players, if we can effectively get the word out 21 through advertisement, through press releases, et 22 cetera, that we can get some percentage of those 23 players back. But this matrix is really not to try 24 to recapture that 30 percent so much as it is to try 25 to go back to where we were and be able to do things 0100 1 similar to what we do on the instant ticket side if 2 we can get that global rule change done where we can 3 gather data, make changes, test different play 4 styles, add on features, et cetera, add new rolls, 5 whatever our marketing folks can come up with as far 6 as trying to push the edge of the envelope and bring 7 in greater revenue. That's what we are trying to do 8 is get back to a baseline and establish that baseline 9 level and then move forward on those other ideas. Is 10 that what you wanted? 11 MR. CLOWE: Thank you, Commissioner Cox, 12 for putting that in focus for me. I think you hit 13 the nail right on the head. 14 And, thank you, Gary, for telling us you looked 15 at these other choices. That's good information to 16 have. 17 MR. TIRLONI: Mr. Chairman, can I add one 18 thing to that? 19 MR. CLOWE: Certainly. 20 MR. TIRLONI: I attended the focus groups 21 that I talked about last month and I talked about a 22 moment ago. In regards to the -- it was very 23 interesting. In regards to the six of 54, when the 24 moderator asked the players about a six-digit game 25 and going back to a six-digit game, I would have 0101 1 expected the players to zone in on or focus on the 2 six of 50. What was interesting to me was there 3 wasn't a very good recollection of what the matrices 4 were. There wasn't a recollection that it started at 5 six of 50 and it changed to six of 54 and then it 6 changed to the bonus ball. And that was the point I 7 wanted to follow up on when I said the overriding 8 message was the six digit. They couldn't distinguish 9 between was it 50, was it 52, was it 54. They kept 10 focusing on what Mr. Grief said a moment ago, it was 11 six. It was a straight six numbers. It was 12 somewhere in -- the field was made up of 50 some-odd 13 numbers and it was the low end of 50, but if put to 14 task and asked what was the matrix, there was -- 15 there were very few people that could actually come 16 out and say it was six of 50, it changed to six of 17 54. And I just wanted to add that based on the 18 comment I made about the overriding focus on the six 19 digits. 20 MR. CLOWE: Very good. 21 Anything further? 22 MR. COX: No, sir. 23 MR. CLOWE: I think we'll hear from 24 Ms. Nettles now. She wishes to address this issue. 25 MS. NETTLES: Good morning, Commissioners. 0102 1 My name is Dawn Nettles, and I'm with the Lotto 2 Report out of Dallas. And I would like to make a few 3 comments on what you all have been discussing, but I 4 got to start first with what you all discussed first 5 about the confusion about the rule that you proposed 6 -- or, yeah, whatever you call it, that you proposed 7 last month to switch over to procedures, rather than 8 rules. I'm -- I'm really confused, because I haven't 9 seen that and I've been watching for the proposed 10 deal to come up on the TLC web site and it hasn't 11 ever shown up there. 12 In fact, just last night again -- when you go to 13 the legal page on the web site, when you click on 14 legal and you go down to proposed rules and you click 15 on proposed rules, right now you're getting that 16 there are no proposed rules. Okay? That's what it 17 says on there, "No proposed rules". So you go back 18 to the legal page and you look at comment hearings, 19 and there's a comment hearing posted for 20 November 30th, but there's no proposed rules. And it 21 -- the notice on it is for 402.706 and 402.707. So I 22 was really confused based on the fact that it says 23 there's no proposed rules. Is what you all did last 24 month a proposed rule? Is it a proposed -- is it 25 being proposed? Is it going to appear in the -- 0103 1 MR. CLOWE: That's a good question. Can 2 you answer that, Counselor? 3 MS. KIPLIN: Yes, I can, and I'll ask 4 Ms. Woelk if she wants to chime in. But what -- what 5 has occurred and I'm thinking that that was 6 information that Ms. Woelk provided, but the rule -- 7 if you recall, you adopted amendments to Lotto Texas, 8 along with the other actions that you took at the 9 last Commission meeting. You can't have two subject 10 matters -- can -- you cannot have two rulemakings on 11 the same subject matter. So the rule that is 12 adopted, it takes 20 days for it to be effective 13 before the other rule can be filed with the Register, 14 the other rulemaking can be filed. The rule that you 15 adopted will be effective November 20th, so the other 16 rulemaking will be filed with the Register 17 November 21st for publication in the -- in the Texas 18 Register. And until that rule is accepted with the 19 Register for its publication, there is nothing to 20 link to. And we have learned that in putting it up 21 every once in a while you've got grammatical errors 22 and things so that it's not identical, so what we 23 have done is not post until we know it's been 24 accepted by the Texas Register for publication. 25 MR. CLOWE: So the answer to Ms. Nettles' 0104 1 question is that the rule that the Commission voted 2 on to publish for comment will be posted on the 21st 3 of November? 4 MS. KIPLIN: It will be filed with the 5 Register on -- on the 21st. I see Ms. Woelk nodding 6 her head in agreement. And then it will go in 7 whatever the next publication for that -- for the 8 Register is. 9 MR. CLOWE: Okay. 10 MS. KIPLIN: And I will say there's 11 generally anywhere from a ten-day to two-week delay 12 on when it's filed and when it's published in the 13 Register. They're only published now on Fridays. 14 MR. COX: Okay. Now, I -- maybe this is 15 not the right time, but I have the further question 16 of how publishing that rule and taking comment on it 17 interplays with the request for an opinion from the 18 Attorney General? 19 MR. CLOWE: That's a good question. 20 MS. KIPLIN: The request for the Attorney 21 General opinion has been submitted to the Attorney 22 General's Office. We are hopeful that we can get an 23 opinion in a short time period, but they do have -- I 24 believe it's 180 days in which to issue an opinion. 25 A rulemaking, once filed with the Register, there 0105 1 must be some action on that rulemaking within six 2 months or it is withdrawn. It is automatically 3 withdrawn. So there are two trains that are running, 4 and we are hopeful that we can get the opinion back 5 before we hit the six-month clock on the rulemaking. 6 If not, then we'll need to address that. 7 MR. COX: Well, are we going to go ahead 8 and get public comment on a rule that we may have to 9 pull back because the AG says you can't do that? 10 MS. KIPLIN: I think that's the staff's 11 plan. But we'll certainly take direction. 12 MR. COX: Well, I certainly like the idea 13 of moving the rule as rapidly as we can and I guess 14 that's consistent with that idea. 15 MS. KIPLIN: Yes, it is. It's consistent 16 with the overarching direction I think we have 17 received from the Commission, which is to move 18 forward expeditiously. 19 MR. COX: Thank you. 20 MR. CLOWE: Ms. Nettles, does that answer 21 your question? 22 MS. NETTLES: Sort of. Okay. I understand 23 what you're saying, I guess, because I really asked 24 what 402.706 and 402.707 is. If you're having a 25 comment hearing on November 30th and it's not a 0106 1 proposed rule, what is it? I mean, what is that? I 2 mean, you're having a comment hearing on the 30th of 3 November. I'm trying to figure out what it's about. 4 MR. CLOWE: You can answer that question 5 for her, can't you? 6 MS. KIPLIN: Those are bingo proposed new 7 rules on admin penalty guidelines. And Ms. Joseph is 8 the attorney who came over to visit with the Bingo 9 Director about that, and I think that's another one 10 where we are waiting for them to be published in the 11 Register. And I'm hopeful -- hopeful it would be in 12 today's publication, but I do not know. 13 MS. NETTLES: Well, the notice for it is in 14 the Texas Register because I printed out that page. 15 MR. CLOWE: But, Ms. Nettles, I'm asking 16 for your comment on this subject. 17 MS. NETTLES: I hear you. And I was trying 18 to get there, but I needed to find out if -- if the 19 proposed rule for last month, if it's a rule, and if 20 it's Lotto Texas, how you can have two at the same 21 time. But that's okay, I understand what she is 22 saying on that. 23 What I wanted to comment on with what you all 24 were just saying is for beginners your rule is 25 certainly much better than what you have right now. 0107 1 I do want to say that your discussions about six 2 and 50 and six and 54, I am greatly appreciative that 3 you all are open to that. I do not believe that if 4 you switch to six and 54, I do not believe that 5 you're going to see the increase in -- the maximum 6 potential of increase that this Lottery can bring in 7 on the six and 54. And I'm just putting this on the 8 record so that you know. I don't believe that you 9 will see the sales increase that you could get if you 10 did a little bit better than that. As far as the six 11 and 50, I understand that players -- savvy players 12 that know and have kept up with the games, they do 13 know it was six and 50. Your focus group studies may 14 not because they're not necessarily always based on 15 players because that's the law for getting these 16 focus group studies. But your serious players, the 17 ones that you want to get back -- which incidentally 18 I believe is more than 30 percent. I believe you've 19 lost far more than 30 percent. You will get some 20 players back going to six and 54, but you've still 21 got all those people that you lost when you switched 22 from six and 50 to six and 54. Since I understand 23 that you're trying to get some rolls so that you can 24 get your jackpot to build, I honestly believe that 25 with the population increase, I believe it really is 0108 1 -- would justify six and 52 without anybody -- any 2 player getting angry with you. And I think the 3 people would think that you all have hung the moon 4 and they will come back to you. I do realize that 5 other states have never seen this, ever. When other 6 states have switched back and gone back to their old 7 matrix, they did not see the increase, but they 8 didn't have me in it. And other states are not 9 Texas. And I know what these people want because I 10 work with them every day, the players. And I really 11 believe I am voicing an honest, sincere opinion for a 12 six and 52 game that gives you a little bit greater 13 odds than the six and 50, but it's not back to the 14 six and 54 that the people of Texas objected to in 15 the first place. So I would really like to see you 16 all do that. But you go with six and 54, you're 17 better. I just don't think the State's going to 18 bring in as much money. 19 Kim, I believe that -- I have not read this rule 20 completely, but I think that you ought to know that 21 on the next to last page under Paragraph C, you have 22 a typo. And you have the word "then" on that first 23 sentence, says "less then" and it should be "than." 24 And that's a typo that you can correct, if you care 25 to. 0109 1 MS. KIPLIN: Thank you. Is that the rule 2 that was put out on the -- I mean on the table 3 outside? 4 MS. NETTLES: On the table out there. The 5 next to last page it says, "To the extent that the 6 total amount of fourth prizes for a drawing is less 7 then," and I believe it needs to be "than." 8 MS. KIPLIN: Thank you for pointing that 9 out. 10 MR. CLOWE: Thank you, Ms. Nettles. 11 Is that a correction that you want to make? 12 MS. NETTLES: It's a -- 13 MS. KIPLIN: We'll -- we'll make it. There 14 hasn't been a motion on that yet. 15 MR. CLOWE: I'm asking you, is that a valid 16 correction in the rule that you want to make, the 17 typo that Ms. Nettles pointed out? 18 MS. KIPLIN: Yes. Yes. 19 MR. CLOWE: With that correction, then, I 20 move that the Commission adopt the staff 21 recommendation to publish for public comment. 22 MR. COX: Second. 23 MR. CLOWE: All in favor, please say "aye." 24 Aye. 25 MR. COX: Aye. 0110 1 MR. CLOWE: Opposed, no? The vote is 2-0 2 in favor. 3 MS. NETTLES: Commissioner Clowe, 4 Commissioner Cox had asked me to make a comment that 5 I told him about earlier with relation to Item 6 Number 3 on the agenda, I believe. It's a very short 7 comment if you'd like to hear it now. 8 MR. COX: I did ask her at some point. If 9 this is -- if this is an okay time? 10 MS. NETTLES: I mean, I don't know, I may 11 not be here if you wait until after the entire 12 meeting -- 13 MR. COX: It relates to an earlier agenda 14 item. 15 MR. CLOWE: Yeah, if that's your plan. 16 MR. COX: Thank you. 17 MS. NETTLES: Okay. You all were talking 18 earlier about the 315,000 -- I mean, $315 million 19 Mega Millions jackpot, and you were talking about the 20 -- how much was it going to be a return of and what 21 did California do and blah, blah, blah. And I wanted 22 to point out that the -- there was 187 million 23 something in the prize pool at the end of that draw 24 that the investment cost was 184 million, to give a 25 return of 315 million. So there is something like 0111 1 $3 million in excess funds that, as per the Mega 2 Millions rule, except for the increase by a million 3 dollars, where the people do not get that. And that 4 is an issue that I had tried to cover with Texas a 5 long time ago about going with parimutuel payouts, 6 how it's safer. Of course, you all end up -- the 7 states end up with a little extra. But in addition 8 to that, you all were talking about the -- giving the 9 people a choice between annual pay and cash value 10 option, and that's something I've been pushing for 11 for a long time, but you all were discussing how you 12 handled that. And I don't know about California, but 13 I do know how Ohio handles it, if -- and they give 14 the people a choice, cash value option versus annual 15 pay. What Ohio does is the player does not have to 16 mark their play slip with what they want. They have 17 a choice. The day after a win, since they don't 18 know, they automatically buy the annuities. And then 19 when the player comes forth and he's going to take 20 the cash value option, then they end up selling it 21 and charging the player. Now, I've never been able 22 to determine if the cost that the player has been 23 penalized for doing that was justified or not, 24 because I've seen it range from 500,000 to 25 $2 million. And the experts have told me that 0112 1 2 million is a way too high figure to penalize a 2 winner, you know, for cashing in early. But that is 3 how Ohio does it. And, of course, this is the first 4 time for California, so I don't know either. I was 5 just waiting to see on that one, but I wanted to 6 voice that for you all. 7 MR. CLOWE: Thank you. 8 MR. COX: Thank you, Ms. Nettles. 9 MR. CLOWE: Next will be Item Number 8, 10 report and possible discussion and/or action on the 11 lottery terminal functionality, including Quick Pick 12 feature for all games and/or impact players after -- 13 did you want to take a break? 14 MS. KIPLIN: No, Mr. Chairman. I had 15 another matter that I wanted to bring up on the Lotto 16 Texas Rule. 17 MR. CLOWE: All right. Sorry about that. 18 I wasn't aware of that. We'll go back to Item Number 19 7 then. 20 MS. KIPLIN: I wanted to bring your 21 attention to a correction of an error that we filed 22 with the Register, and it had to do with the rule 23 that you adopted at the last Commission meeting. We 24 submitted a proposed amendment to that rule for 25 publication in the September 2nd, 2005, issue of the 0113 1 Texas Register. 2 MR. CLOWE: And you want to read that in 3 the record? 4 MS. KIPLIN: The graphic that was submitted 5 to the Register as published on Page 5415 of that 6 publication was incorrect. The Commission had not 7 voted to propose to change the graphic, and the staff 8 submitted the wrong graphic to the Register. The 9 graphic under the rule remains unchanged. And at the 10 October 31st, 2005, Commission meeting, the 11 Commission did vote to adopt the amendments as 12 proposed without changes from the proposed text as 13 published in the September 2nd issue of the Register. 14 But in doing so the Commission understood that what 15 was published in the Texas Register was identical to 16 what the Commission proposed at its August 15th, 17 2005, meeting. And so, therefore, the Commission did 18 not vote to amend the graphic notwithstanding the 19 staff error, and it was a staff error, of submitting 20 the incorrect graphic in connection with the 21 submission of the proposed text. The correct graphic 22 has been submitted to the Register with the filing of 23 the adoption of the amendments to the rule. And I 24 just wanted to make sure you all were aware of it. 25 And, frankly, the graphic on its face was absolutely 0114 1 inconsistent with the text of the rule. 2 MR. CLOWE: Very good. No action is 3 required? 4 MS. KIPLIN: No action is required. I 5 wanted to make sure you all were aware of it and 6 apologize for the staff error. 7 MR. COX: Now how about that break? 8 MR. CLOWE: Yes, sir. 9 Mr. Anger, we'll come back to you. 10 (Short recess.) 11 MR. CLOWE: Can we come back to order, 12 please? 13 Mr. Anger, we are now to your item, please. 14 MR. ANGER: Good morning, Mr. Chairman, 15 Commissioner Cox. For the record, my name is Michael 16 Anger, and I'm the lottery operations director. 17 Commissioners, I'd like to provide you with an update 18 on the status of the Agency's review of GTECH 19 terminal functionality related to the Quick Pick 20 feature. 21 Commissioners, Dr. Eubank has completed his 22 analysis of all of the data sets that were extracted 23 from GTECH's system under the supervision of Deloitte 24 and Touche for the Lottery's on-line games. As I 25 reported at last month's meeting, Dr. Eubank 0115 1 identified some concerns during his testing related 2 to some of the data sets. This information has been 3 communicated to GTECH Corporation and GTECH has 4 agreed to provide Dr. Eubank with additional data and 5 information regarding system operation and their 6 methodological procedures for Dr. Eubank to conduct a 7 more thorough analysis of this matter and -- that 8 will allow him to draw final conclusions. 9 The parties are in contact and are currently 10 working through finalizing the agreements requested 11 by GTECH to protect information that GTECH has 12 determined and identified as being proprietary or 13 confidential in nature. Upon execution of those 14 agreements, the parties will be able to conduct a 15 full sharing of information for Dr. Eubank's review. 16 And Dr. Eubank has been asked to attend a Commission 17 meeting to present his findings upon the completion 18 of this analysis. 19 That concludes my report this morning. I'd be 20 happy to answer any questions that you have. 21 MR. COX: What's the hold up? 22 MR. ANGER: At this time, Commissioner, the 23 hold up has to do with information that GTECH has 24 identified that they might share with Dr. Eubank that 25 they've deemed to be proprietary, potentially source 0116 1 code related to their testing suite that they use for 2 statistical tests and other source code data that 3 they may provide to Dr. Eubank. So they have 4 indicated a concern about ensuring that the 5 confidentiality and protection of that information is 6 proprietary. 7 MR. COX: You said that. 8 MR. ANGER: Yes, sir. 9 MR. COX: What's the hold up? That's -- it 10 don't take that long. 11 MR. GRIEF: Commissioner, if I could, I'll 12 try to help Mr. Anger out. I think -- I think if it 13 were up to Mr. Anger and I, we would have had that 14 done many weeks ago. You're talking about attorneys 15 that are having to get together and agree on language 16 and confidentiality documentation. And I understand 17 it's taking that long because they haven't been able 18 to agree on a concept up until -- I believe, just 19 within the last day or two there's been a 20 breakthrough in those discussions. 21 MR. COX: So is -- are we paying counsel to 22 negotiate this with GTECH or who's paying 23 Dr. Eubank's lawyers? 24 MR. GRIEF: It's actually our lawyer. 25 MR. COX: Is it you, Ms. Kiplin? 0117 1 MS. KIPLIN: It's not me, but it's 2 Mr. Marker, and I support what -- where Mr. Marker is 3 coming from. And we are not advising Mr. Eubank. 4 Mr. Eubank is free to go retain his own counsel. Our 5 interest is to make sure that Mr. Eubank -- pardon 6 me, Dr. Eubank, whatever nondisclosure agreement 7 Dr. Eubank signs does not limit his ability because 8 somebody would then claim he breached that 9 nondisclosure agreement to provide information to the 10 Commission, whether it be in a public or -- meeting 11 where it -- where the two Commissioners can ask him 12 questions and he be able to disclose the information 13 that he believes he needs to in response to those 14 questions. And Mr. Marker believes that the 15 nondisclosure agreement that has been provided by 16 GTECH is overly broad and makes no sense. And he has 17 been working with their attorneys to understand that 18 our interests are at stake here and that we intend to 19 protect our interests to make sure that we are able 20 to get the information that we need from Dr. Eubank 21 to be able to make informed decisions regarding this 22 issue. 23 MR. COX: Are GTECH's lawyers slow-playing 24 us? 25 MS. KIPLIN: I don't know that I could 0118 1 characterize it that way. I think Mr. Marker's 2 concern is that their lawyer may not necessarily be 3 in close contact with the folks within GTECH to 4 understand the issues at hand. 5 MR. COX: Sometimes business people have to 6 get into these things and move them along. 7 MS. KIPLIN: Yes. 8 MR. GRIEF: And, Commissioner, that's 9 exactly what's happened in the last two days. 10 MR. COX: Thank you, Gary. 11 MR. CLOWE: Thank you, Michael. 12 MS. KIPLIN: Thank you. 13 MR. COX: Thank you, Michael. 14 MR. CLOWE: Next, Item Number 9, report, 15 possible discussion and/or action on the Lottery 16 advertising and promotions. 17 Ms. McCullough. 18 MS. MCCULLOUGH: Good morning, 19 Commissioners. For the record, my name is Chelsea 20 McCullough. I'm the creative coordinator for the 21 Texas Lottery Commission. A holiday instant ticket 22 campaign will run in the general and minority 23 markets. Television flight will -- will air 24 December 5th through December 24th and will be 25 supported by radio, outdoor and point-of-sale 0119 1 material. Live reads will run 100 percent holiday 2 unless the Mega Millions jackpot is more than 3 100 million, at which time they will switch to Mega 4 Millions. We will feature one promotion in November, 5 which is the Amarillo Showcase Championship Rodeo. 6 That will be on November 19th. 7 And that concludes my presentation. If you have 8 any questions, I'd be happy to answer them. 9 MR. CLOWE: Thank you. 10 MS. MCCULLOUGH: Thank you. 11 MR. CLOWE: Next, Item 10, report, possible 12 discussion and/or action on HUB and/or minority 13 business participation including the Agency's 14 mentor/protege program. 15 Ms. Bertolacini. 16 MR. JACKSON: Good morning, Commissioners. 17 For the record, I'm not Joyce Bertolacini. 18 MR. CLOWE: Sorry about that. 19 MR. JACKSON: My name is Tom Jackson. I am 20 contracts and purchasing manager for the Agency. 21 MR. CLOWE: What did you do with her? 22 MR. JACKSON: She is off today. 23 MR. CLOWE: Oh, okay. You'll do. 24 MR. JACKSON: Okay. The TLC subcontracting 25 report submission deadline did not allow time to 0120 1 complete the October monthly HUB minority contracting 2 activity report for this meeting. Included in your 3 notebooks today is the September monthly HUB minority 4 contracting activity report. The report includes all 5 fiscal year 2006 expenditures paid from 6 September 1st, 2005, through September 30, 2005. Our 7 total qualifying expenditures as of September 30 were 8 approximately 7.4 million, and our estimated HUB 9 minority utilization was 5 million, which equates to 10 69.16 percent. Please note that our overall HUB 11 percentage is currently escalated due to 12 subcontracting payments made by several of our large 13 contractors during the month of September. This 14 figure should begin to level out within the next 15 several months. 16 Also included in your notebooks is a series of 17 summary reports which analyze the Commission's HUB 18 performance for fiscal year 2005 based on the Texas 19 Building and Procurement Commission's annual 20 statewide HUB report. I'd like to highlight some of 21 the key points of these reports. 22 The Commission's overall HUB utilization 23 decreased from 27 percent in fiscal year 2004 to 24 24 percent in fiscal year 2005. During fiscal year 25 2005, the Commission continued to exceed the goal for 0121 1 professional services. During this report period, 2 direct spending with HUB certified minority and 3 women-owned business companies declined. However, 4 subcontracting payments to HUB certified minority 5 vendors increased by nearly $4.5 million. The TLC 6 ranked Number 11 in total expenditures captured by 7 the TBPC HUB report. Therefore, due to lower overall 8 spending in fiscal year 2005, the TLC was not one of 9 the top ten largest spending agencies. However, if 10 included in the ten largest spending agencies, the 11 TLC continued to rank Number 1 by overall HUB 12 percentage. 13 I also wanted to mention the -- that work is 14 progressing on the Agency's fiscal year 2005 minority 15 business participation report, and I hope to be able 16 to present the report for your overall approval at 17 the January Commission meeting. 18 Regarding the Commissioner's mentor/protege 19 program, a meeting with our local team, Davila, 20 Buschhorn and Associates, P.C. and Don Robinett, CPA 21 was held on October 6th. And DDB Dallas recently met 22 with their protege, Louis Printing in Dallas. Both 23 teams have established goals and time lines for 24 progress. And that concludes the report. 25 MR. COX: Good report. 0122 1 MR. CLOWE: Tom -- yes, it is a good 2 report. And, you know, we don't spend a lot of time 3 in the public meeting discussing this subject, but we 4 are very appreciative of the efforts on your part and 5 Joyce and others, and we want to keep this Agency 6 with the ranking it has. So our thanks to everybody 7 who's involved in this, and let's keep these good 8 efforts and results up. 9 MR. JACKSON: Yes, sir. 10 MR. CLOWE: Thank you. Next, Item 11, 11 report, possible discussion and/or action on the 12 Agency's contracts. 13 MS. ZGABAY-ZGARBA: Good morning, 14 Commissioners. For the record, my name is Angela 15 Zgabay-Zgarba, contract and procurement specialist. 16 In your notebook under Agenda Item Number 11 is a 17 report that's been updated through November 10th. 18 And if you have any questions, I'd be happy to answer 19 them. 20 MR. COX: What is the status of our 21 advertising contracts? 22 MS. ZGABAY-ZGARBA: The contracts 23 themselves or the RFP? 24 MR. COX: Well, the contracts. Remember, 25 we asked for a six-month extension? 0123 1 MS. ZGABAY-ZGARBA: Yes. 2 MR. COX: What happened on all of that? 3 MS. ZGABAY-ZGARBA: Okay. The DDB contract 4 was extended through April 30th as indicated in the 5 report. We extended the same opportunity to the King 6 Group for a six-month extension, and they declined. 7 MR. COX: Okay. So now who's doing that 8 work now? 9 MR. GRIEF: I'd like to ask Mr. Anger to 10 come forward -- 11 MS. ZGABAY-ZGARBA: Yeah, I think Mr. 12 Anger -- 13 MR. GRIEF: -- if I could, Commissioner. 14 MR. COX: Sure. 15 MR. GRIEF: He can give you a quick 16 overview of that. 17 MR. ANGER: Commissioner, in response to 18 your question, after the King Group determined not to 19 enter into the extension that was offered to them, 20 their contract expired on October 23rd. So in 21 essence, the minority market advertising services 22 contract for the Agency ceased to exist. We 23 evaluated, in coordination with legal counsel here at 24 the Agency, the current contract with DDB Dallas, the 25 general market advertising services vendor. And that 0124 1 contract was broad enough in nature that it would 2 allow us to ask them to take on those 3 responsibilities in addition to the general market 4 advertising responsibilities. We sought out DDB. 5 They expressed an interest that they would be willing 6 to do that, and they proceeded down the path of going 7 through a good faith effort with regard to 8 historically underutilized business subcontracting 9 opportunities. They ultimately through that process 10 identified a firm called Cultura (phonetic) out of 11 the Dallas area that is a minority-owned business 12 that has taken on underneath their authority, DDB 13 Dallas' authority, under the general market contract, 14 the responsibility of continuing the Agency's 15 minority market services advertising through the -- 16 the contract term April 30th of next year. 17 MR. COX: So we are currently operating in 18 a way that is consistent with what UT recommended we 19 consider for the future, which was a single prime 20 contractor and then letting that prime contractor 21 subcontract to the extent they needed. Is that 22 correct? 23 MR. ANGER: That is correct. 24 MR. COX: Okay. Now, help me remember why 25 it was that we had a separate agency in the first 0125 1 place. Is there some kind of statutory requirement 2 that we have different kinds of advertising or was 3 that a business decision back down the road somewhere 4 or how did we get there? 5 MR. GRIEF: I'll take that one, Mike. That 6 was a business decision, Commissioner. And it was 7 based on the circumstances at the time. There was 8 significant interest in those contracts by the 9 Legislature and others. And the management of the 10 Agency at the time took that all into consideration 11 and made a conscious business decision to split those 12 contracts out. 13 MR. COX: Thank you. 14 MR. CLOWE: And I might add, I think I was 15 on this Board at that time, that it was successful 16 and it really did create some excellent results. And 17 the King Group did a good job for us, and it was 18 their decision not to renew and I'm happy that we are 19 in this present format. 20 And I assume, Mr. Jackson, the minority work 21 that's being given to that firm based on the DDB's 22 contracting is counted and will be counted in our 23 figures. Is that correct? 24 MR. JACKSON: (Nods head.) 25 MR. CLOWE: You're nodding your head yes, 0126 1 so, you know, it's in line with the study as you 2 point out, Commissioner, and it's just a change based 3 on a business recommendation that should continue to 4 produce good results. 5 MR. ANGER: Yes, sir. 6 MR. COX: So we have six more months or 7 through April 23rd, I guess you said, with DDB. And 8 so we are at this time, I guess, getting an RFP ready 9 for the following advertising services contract? 10 MR. ANGER: That's absolutely correct. We 11 are working diligently on that now and expect to be 12 going forward with that very soon. 13 MR. COX: So does that say, then, that the 14 six-month extension we got with DDB is the last one 15 that we have under our contract? 16 MR. ANGER: It's the last one that we have 17 under the contract, yes. There -- the contract -- 18 MR. COX: So we have to go out for bids 19 this time? 20 MR. ANGER: The contract that we had with 21 them actually allowed for a one-year renewal option. 22 We negotiated a six-month in place of that, so it 23 replaced the one-year renewal option that existed, so 24 there are no renewals left on the existing contract. 25 MR. COX: Present -- this is the -- we are 0127 1 on the last one? 2 MR. ANGER: Yes, sir. 3 MR. COX: Okay. Thank you. 4 MR. CLOWE: Very good. Thank you, Michael. 5 Anything else, Angela? 6 MS. ZGABAY-ZGARBA: No. Unless you have 7 any other questions? 8 Thank you. 9 MR. CLOWE: Next, Item Number 12, report, 10 possible discussion and/or action on the 79th 11 Legislature. 12 Ms. Trevino. 13 MS. TREVINO: Good morning, Commissioners. 14 For the record, I'm Nelda Trevino, the Director of 15 Governmental Affairs. As you know, the House 16 Licensing and Administrative Procedures Committee 17 chaired by Representative Keno Flores held a hearing 18 on Monday, November the 14th. The Agency was asked 19 to appear before the committee to respond to 20 questions on various matters including the Agency's 21 disaster recovery site. Committee members were 22 invited to tour the disaster recovery site and on 23 Tuesday, November the 15th, Agency staff provided a 24 tour of the site to staff of Chairman Flores' office 25 and Representative Mark Homer's office. 0128 1 Representatives from the Department of Information 2 Resources and the State Auditor's Office also 3 participated in that tour. 4 Additionally, we have been in communication with 5 the other committee members' offices asking if they 6 are interested in also touring the disaster recovery 7 site. And as of this date, there has not been any 8 interest that has been expressed. 9 In preparation for the hearing, we did respond 10 to numerous requests for information from Chairman 11 Flores' office and continue to respond to their 12 inquiries. We will keep you informed on developments 13 related to this matter. 14 And that concludes my report and I'll be happy 15 to answer any questions. 16 MR. COX: Mr. Chairman, I don't know 17 whether this is the appropriate point to ask this 18 question, but let me lay it out there and you tell 19 me. What are the requirements that we are to meet 20 with respect to this parallel system in a bunker, if 21 you will, and where are we with respect to those? 22 MR. GRIEF: Ms. Trevino is looking at me, 23 so I think I'll try to take a crack at that. 24 Commissioner, I don't think those requirements 25 are as clear as you might want them to be. I think 0129 1 the terms that have been used by various people are: 2 "Is it operational? Is it up and running?" I have 3 not seen any type of checklist or defined down to 4 some level of detail explanation of that. I will 5 tell you that I believe the site is operational and 6 it is meeting the needs of the Agency. I testified 7 to that under oath at the hearing recently. And we 8 are still in communication with the office of the 9 chairman of that committee and trying to be 10 responsive to the questions that are being -- being 11 asked of us regarding that site. 12 MR. COX: Now, if this were an auditing 13 matter, the ultimate authority would be the State 14 Auditor. And it isn't an auditing matter. It's an 15 IR -- IT matter. 16 MR. GRIEF: It actually -- 17 MR. COX: Is there an agency that's 18 ultimately responsible for this and we might say, 19 "Would you come look at this and tell us whether we 20 are where we should be or not?" 21 MR. GRIEF: Fortunately, it is an auditing 22 matter. And we have asked that the State Auditor's 23 Office include a review of our disaster recovery site 24 in the security audit, which we have just had our -- 25 you were a part of the entrance conf -- 0130 1 MR. COX: Yes. 2 MR. GRIEF: They have indicated they will 3 include that as a part of their audit. And I know 4 that Chairman Flores has asked the Department of 5 Information Resources to also weigh in on that 6 matter. 7 MR. COX: Okay. Great. 8 MR. GRIEF: So there will be at least two 9 sources, outside third-party sources, that will 10 evaluate that site and issue some type of 11 determination. 12 MR. COX: Okay. So where you are right now 13 is that you have asked for an objective evaluation of 14 this by the State Auditor and Chairman Flores has 15 asked for the same thing from DIR. So we are doing 16 the best we can and the answer will be we either are 17 or we aren't where we should be and then we'll get 18 where we should be if we are not? 19 MR. GRIEF: Yes, sir. 20 MR. COX: Thank you, Mr. Chairman. 21 MR. CLOWE: Thank you. 22 Thank you, Nelda. 23 Next, Item 13, consideration of, possible 24 discussion and/or action, including approval of 25 fiscal year 2006 internal audit activity audit plan 0131 1 on external and internal audits and/or reviews 2 relating to the Texas Lottery Commission and/or on 3 the Internal Audit Department's activities. 4 Ms. Melvin. 5 MS. MELVIN: Good morning, Commissioners. 6 For the record, I am Katherine Melvin, internal -- or 7 excuse me, director of the Internal Audit Division. 8 I have several items for you this morning. The first 9 of which I will be requesting your approval of the 10 internal audit plan. I will also provide a brief 11 update on external audits. And finally, I will 12 provide an update of internal audits, including a 13 scheduled quality assurance review of the internal 14 audit function. 15 So let's start with the audit plan. Before you 16 in your notebooks is the proposed fiscal year 2006 17 internal audit activity plan of which I'm requesting 18 your approval. The Internal Audit Division 19 appreciates the opportunity to provide our vision for 20 internal audit efforts at the Texas Lottery 21 Commission during the 2006 fiscal year. This 22 document provides our audit plan as required by 23 professional auditing standards and the Texas 24 Internal Auditing Act. The division is committed to 25 being a valuable resource and improving the Agency's 0132 1 operations and is proposing a plan that targets key 2 areas, yet builds in flexibility to allow for the 3 Commissioners and management special requests. This 4 flexibility is important as we have seen as needs may 5 arise unexpectedly throughout the fiscal year. 6 While the list of proposed projects results from 7 our consideration of a wide ranging scope of 8 projects, it is important to understand that it does 9 not nor does it intend to address or provide coverage 10 for all TLC components and systems. Our goal is to 11 optimize our resources to provide reasonable coverage 12 in areas we believe require the most attention. The 13 -- however, because we cannot address every risk 14 area, it is important for the Commission and 15 management to understand the limitations of the audit 16 coverage and the risk that they assume in areas not 17 audited. We believe, however, that this plan 18 allocates resources of our division to the most 19 important priorities and risks of the Agency at this 20 time. 21 Commissioner Cox, at the September Commission 22 meeting you asked that I come forward with a plan to 23 address a recommendation relating to auditing our 24 contracts with advertising vendors. That 25 recommendation stemmed from a study that was also 0133 1 laid out at that meeting. This audit plan proposes 2 just that. We have allocated hours to specifically 3 address contract compliance and that would include 4 advertising vendors, too. 5 Finally, I'd like to thank management's 6 assistance and time in providing both input and 7 information that led to the development of this plan. 8 And that concludes my presentation of the plan. 9 I'm happy to answer any questions. 10 MR. CLOWE: Do you have any questions? 11 MR. COX: Is this something that we 12 approve, Mr. Chairman? 13 MR. CLOWE: No. I think -- my recollection 14 is we don't approve the audit plan, we'll just 15 register any concerns or objections, if we have them, 16 or am I incorrect on that? 17 MS. MELVIN: You may be thinking of the 18 individual audit reports. The audit reports I sign 19 and issue. The audit plan -- 20 MR. CLOWE: That's it. That's it. 21 MS. MELVIN: Yes. 22 MR. CLOWE: That's it. We do approve it. 23 I'm sorry, Commissioner. 24 MR. COX: Mr. Chairman, I've reviewed this 25 in detail with Ms. Melvin, and I'm prepared to move 0134 1 that we approve it as such time as you want that 2 motion. 3 MR. CLOWE: I think now is appropriate, and 4 I'd second that motion. All in favor please say 5 "aye." 6 MR. COX: Aye. 7 MR. CLOWE: Aye. The vote is 2-0. 8 MS. MELVIN: Thank you, Commissioners. 9 Let me move on to the next topic I have for you, 10 and that's external reviews of the Agency. Two 11 audits currently ongoing, one is the annual financial 12 audit, I've reported in previous Commission meetings, 13 the State Auditor's Office is managing. This project 14 utilizing the independent accounting firm Maxwell, 15 Lock and Ritter. We anticipate that should wrap up 16 here in December. 17 Also reported in previous Commission meetings, 18 we continue to await final results from the 19 Controller's post-payment audit of which I'm working 20 with Ms. Pyka to hopefully bring that review to a 21 close. 22 Mr. Grief mentioned the security review. I 23 would like to also discuss two audits in progress 24 being conducted by the State Auditor's Office. We 25 attended an entrance conference for both of these 0135 1 audits on Wednesday. Commissioner Cox, yourself and 2 the State Auditor Mr. Keel were in attendance. And 3 if it pleases the Commissioners, I'd like to read the 4 stated objectives for both of those audits. 5 The first is an audit of human resource 6 management at the Texas Lottery Commission. The 7 three stated objectives are, first, to determine 8 whether the Commission's human resources policies and 9 practices protect the Agency from business and 10 financial risk. The second is to determine the 11 status of prior audit findings related to human 12 resource management reported in an audit report on 13 management controls at the Lottery Commission, 14 August, 1997. And then third, to determine if the 15 Lottery Commission is properly classifying employees 16 in the classification plan. That audit is scheduled 17 to run through February, 2006. 18 The second piece, as Mr. Grief mentioned, was 19 the security audit. This is a statutory requirement 20 that we have every two years, a comprehensive 21 security review. The State auditors will be 22 performing this review. And their stated objectives 23 are, first, to perform a comprehensive audit of all 24 aspects of Lottery security in accordance with the 25 State Lottery Act. 0136 1 And the second is to address recommendations for 2 a post-implementation audit in the 2004 biannual 3 security review to determine whether the 4 reorganization effective November, 2004, impacted 5 security functions. While this wasn't stated on the 6 actual agenda for the meeting, the auditors did 7 discuss possible follow-up on a previous audit, the 8 instant ticket controls audit. 9 Any questions about the State Auditor's Office 10 or their activities? 11 Okay. Lastly, just a brief update on internal 12 audits. Internal audit completed its review of the 13 Agency's prepayments for promotional items. That 14 report was released on October 31st. I believe a 15 copy of that report is also in your notebook. I'll 16 leave it to the Commissioners' discretion if you'd 17 like me to lay out my conclusions or overall 18 recommendations from that report. 19 MR. COX: I'm familiar with the report. 20 MR. CLOWE: I am too. We are satisfied. 21 Thank you. 22 MS. MELVIN: Okay. Thank you. 23 I mentioned a peer review or a quality assurance 24 review of the internal audit function. This is just 25 my very last item to update you on. As required by 0137 1 the Texas Internal Auditing Act and the standards to 2 which we adhere, the internal audit function will be 3 undergoing a scheduled quality assurance review at 4 the end of this month. We have engaged the services 5 of Mr. Richard Tar to conduct the review. He is a 6 certified internal auditor and a certified 7 information systems auditor. He has extensive 8 background in performing peer reviews of internal 9 audit functions for other agencies here in Texas but 10 also private industry too. 11 That concludes my presentation. I'm happy to 12 answer any questions. 13 MR. COX: Thank you. 14 MR. CLOWE: Thank you very much. 15 MS. MELVIN: Thank you. 16 MR. CLOWE: Next, Item 14 we'll pass at 17 this time and come back to later. 18 Commissioner Cox, do you want to handle these 19 orders under Item 17 before we go into executive 20 session or -- 21 MR. COX: What's your pleasure, 22 Mr. Chairman? 23 MR. CLOWE: Counselor, is there any press 24 on any of these? 25 MS. KIPLIN: No, there really aren't. 0138 1 There is one that is a -- staff takes a different 2 view from that which was recommended, I think, by the 3 ALJ. 4 MR. CLOWE: But there's no press? 5 MS. KIPLIN: But there's no press and they 6 can -- 7 MR. CLOWE: All right. If you are ready, 8 we'll go into executive session. 9 MR. COX: Okay. 10 MR. CLOWE: At this time, I move the Texas 11 Lottery Commission go into executive session, A, to 12 deliberate the appointment, employment, and duties of 13 the executive director, acting executive director 14 and/or deputy executive director, to deliberate the 15 duties and evaluation of the internal audit director 16 and charitable bingo operations director, and to 17 deliberate the duties of the general counsel, 18 pursuant to Section 551.074 of the Texas Government 19 Code; B, to receive legal advice regarding pending or 20 contemplated litigation and/or to receive legal 21 advice pursuant to Section 551.071(1)(A) or (B) of 22 the Texas Government Code and/or to receive legal 23 advice to section -- pursuant to Section 551.071(2) 24 of the Texas Government Code, including but not 25 limited to Patsy Henry versus Texas Lottery 0139 1 Commission, Linda Cloud versus Mike McKinney, et al, 2 James T. Jongebloed versus Texas Lottery Commission, 3 Russell Verney versus Carol Keeton Strayhorn, et al, 4 Gametech International versus Greg Abbott, et al, 5 Michael McDaniel, et al versus Northstar Bank of 6 Texas, et al, and Northstar Bank of Texas versus 7 Elite M&S, 5395 Partners Limited, et al, in the 8 matter involving the assignment of lottery prize of 9 Walter Gonzales, Michael Sanchez, et al versus Texas 10 Lottery Commission et al, Charles Isbell versus 11 Atkins, et al, Texas Lottery Commission versus Joe 12 Bowen and Associates, Inc. d/b/a JB & Associates, 13 employment law, personnel law, procurement and 14 contract law, evidentiary and procedural law, and 15 general government law. Is there a second? 16 MR. COX: Second. 17 MR. CLOWE: All in favor please say "aye." 18 MR. COX: Aye. 19 MR. CLOWE: Aye. The vote is 2-0. The 20 Texas Lottery Commission will go into executive 21 session. The time is 11:30 a.m. Today is 22 November the 18th, 2005. 23 (Executive session.) 24 MR. CLOWE: We'll come back to order. The 25 time is 1:16 p.m. The Texas Lottery Commission is 0140 1 out of executive session. Is there any action to be 2 taken as a result of executive session? 3 I make the motion that the evaluation of the 4 internal audit director be approved. Is there is a 5 second? 6 MR. COX: Second. 7 MR. CLOWE: Is their anyone abstaining? 8 All in favor, please say aye. 9 MR. COX: Aye. 10 MR. CLOWE: Aye. The vote is 2-0 in favor. 11 The evaluation is approved. 12 Next I make a motion to approve the salary 13 increase for the internal audit director. I make a 14 motion that the annual salary be set at $105,000 and 15 such action to be effective November the 1st, 2005. 16 Is there a second? 17 MR. COX: Second. 18 MR. CLOWE: Is there anyone abstaining? 19 All in favor, please say "aye". 20 MR. COX: Aye. 21 MR. CLOWE: Aye. The vote is 2-0 in favor. 22 The salary increase is approved. 23 Commissioner, if you'll sign this with me. 24 Next we'll move on to the item we passed earlier 25 in the agenda, Number 14, consideration of and 0141 1 possible discussion and/or action on the appointment 2 and employment of an executive director. 3 Ms. Morris, will you bring us up to date on 4 that, please? 5 MS. MORRIS: Good afternoon. Diane Morris. 6 As the commissioners know, the executive search 7 committee interviewed eight applicants for the 8 position of executive director. Four applications 9 were recommended to be interviewed by the 10 commissioners. Early, I'm thinking, last week those 11 events occurred. And at this point we have 141 12 applications for the position. 13 MR. CLOWE: Anything further? 14 MS. MORRIS: No, sir. We continue to 15 receive applications, and I will continue to send 16 those to the executive director search. 17 MR. CLOWE: The commissioners last week 18 interviewed the four candidates that were recommended 19 for interview by the search committee. And the 20 commissioners have deliberated those interviews in 21 executive session today. Additionally, this week the 22 Commission received two promising applications, 23 although one of them was withdrawn this morning. At 24 this time the Commission is sending the other 25 promising application on to the search committee with 0142 1 the question if they would like to interview the 2 candidate and that process goes on. 3 Anything further, Commissioner? 4 MR. COX: No, sir. 5 MR. CLOWE: Then we'll go on to the next 6 item on the agenda, which is consideration and status 7 and possible entry of orders and dockets represented 8 by the letters A through F, this is under Item 17, 9 and G through -- I'm sorry, H through I excluding G. 10 Mr. White. 11 MR. WHITE: Yes, sir. For the record, my 12 name is Steven White. I'm Chief of Enforcement. 13 Lost my notes. Commissioners, you have before you 14 today, I believe--well, I'll have to count them, I 15 lost my notes--1, 2, 3, 4, 5 PFDs, lottery PFDs 16 involving licensed retailers. These Proposal For 17 Decisions involve these cases, these retailers had 18 insufficient funds in their accounts to pay for 19 tickets sold. They either -- three times in -- 20 within a year or they have never made good on the 21 deficient accounts. Each of the cases, the 22 administrative law judges have recommended revocation 23 of their licenses, and the staff concurs that their 24 licenses should be revoked and recommends that you do 25 so. 0143 1 MR. CLOWE: Identify those by the letter, 2 please, Mr. White. 3 MR. WHITE: Yes, sir. Those are Tabs A 4 through E, I believe. 5 MR. CLOWE: All right. 6 MR. WHITE: Exhibit behind Tab F is a 7 proposal for decision involving a bingo case. That 8 is a case involving an organization that had failed 9 to timely pay its prize fees three times within one 10 year. And again, the administrative law judge 11 recommended that the license be revoked, and the 12 staff concurs that the license should be revoked. 13 MR. CLOWE: All right. 14 MR. WHITE: Behind Tab H is the case of 15 Arthur Rothenburg who was on the worker registry. 16 And that case involved Mr. Rothenburg was a -- an 17 operator. He was -- let me find my notes on that. 18 Conducting -- he conducted a bingo occasion past the 19 licensed time by 15 minutes. That is a violation of 20 the act. In fact, it's a violation of a criminal 21 statute, which the judge found to have occurred by a 22 preponderance of the evidence. The staff's position 23 is that is an act that constitutes contrary to the 24 integrity of a bingo occasion. The ALJ found that to 25 be a violation and recommended a thousand dollar fine 0144 1 but found that it was not an action contrary to the 2 integrity of a bingo -- the staff disagrees with that 3 fairly strongly. The ALJ first made a finding that 4 he committed this violation, and he cited to a 5 criminal statute, saying he violated this criminal 6 statute. Of course, this is an administrative 7 hearing and it was by a preponderance of the evidence 8 beyond a reasonable doubt, but that is a most serious 9 violation. And if it -- I think it's very important 10 that this Agency takes the position that such conduct 11 is an action contrary to the integrity of bingo. If 12 we go along with the ALJ's ruling of law policy, 13 which I don't believe is his venue, where does it 14 stop? In this case it was only 15 minutes past the 15 licensed time. It could be -- it could have been an 16 hour or more. It could have been the next day. If 17 such acts conducting bingo in the name of a licensed 18 organization in a licensed bingo hall, you know, 19 conducting bingo, illegal bingo under those 20 circumstances is not an action contrary to the 21 integrity of bingo, we have a big problem if we 22 cannot take action against individuals who conduct 23 such illegal bingo occasions by removing them from 24 the registry of workers. So the staff's position is 25 that you adopt all of the ALJ's findings of fact and 0145 1 conclusions of law with the exception of one finding 2 of fact and one conclusion of law, that is finding of 3 fact Number 8 and conclusion of law Number 6, which 4 finding of fact Number 8 states, "The respondent's 5 actions of running 15 minutes later than the 6 allocated time of the sessions in question should not 7 impact the integrity of a bingo game." And the 8 proposed conclusion of law states, "Based on a 9 finding of fact Number 8, the respondent has not 10 violated 2001.313(E)(4) of the act. That is the 11 provision that says an action contrary to the 12 integrity of bingo warrants removal from the worker's 13 registry. 14 So the bottom line is we would ask the 15 commissioners to adopt all the findings of fact, 16 conclusions of laws of the administrative law judge 17 with the exception of those two and remove Mr. 18 Rothenburg from the worker registry, as well as 19 impose a thousand dollar administrative penalty as 20 recommended by the ALJ. 21 MR. CLOWE: Did you cover I? 22 MR. WHITE: This is a proposed settlement 23 agreement involving a conductor organization for 24 violations of the acts. The recommended -- the 25 organization has agreed to take corrective action by 0146 1 sending members to bingo training and make sure the 2 actions do not occur again. And we recommend that 3 you adopt that PFD. 4 MR. CLOWE: Is the order you're 5 recommending under letter H reflective of the changes 6 or the omissions that you've recommended to us? 7 MR. WHITE: Let me double-check. 8 Yes, sir, it is. 9 MR. CLOWE: Move the adoption of the staff 10 recommendation on orders as reflected by the letter A 11 through F and H and I. 12 MR. COX: Mr. Chairman, I'd like to have a 13 little further discussion on H. 14 MR. CLOWE: Certainly. I'll withdraw that 15 motion then until we have had that discussion. Go 16 right ahead, please, sir. 17 MR. COX: Okay. 18 Steve, you're going to have to help me with H. 19 MR. WHITE: Yes, sir. 20 MR. COX: Here's what I think is going on 21 here. Mr. Rothenburg's a volunteer? 22 MR. WHITE: I am not sure of that. I 23 believe he was -- I can say this is probably not in 24 the record, but I believe he was being compensated. 25 MR. COX: Okay. So he's a compensated 0147 1 employee? 2 MR. WHITE: Yes, sir. 3 MR. COX: You're fining him a thousand 4 dollars? 5 MR. WHITE: Yes, sir. 6 MR. COX: He's been fined a thousand 7 dollars? 8 MR. WHITE: Well, that's the proposal of 9 the administrative law judge. 10 MR. COX: Now, help me understand what 11 hours of -- hours of play mean. Is this -- are they 12 given a six-hour window to conduct ten minutes worth 13 of business, and therefore, they can kind of do it 14 whenever they want to? Are they given a two-hour 15 window to conduct two hours of business or, you know, 16 how tight is all this operation? 17 MR. WHITE: It is pretty tight. There are 18 -- there are -- the license authorizes the 19 organization to conduct bingo at a specific day of 20 the week and time period. It leaves a two-hour 21 period, if I'm not mistaken. And Mr. Atkins -- 22 MR. ATKINS: Organizations can conduct 23 bingo for up to four hours in an occasion. 24 MR. COX: Up to four hours. How long does 25 it typically take them to run a session off? 0148 1 MR. WHITE: Again, probably Mr. Atkins is 2 better prepared to answer that. 3 MR. ATKINS: You know, Commissioner Cox, 4 that's going to depend to a big degree on the hall 5 itself and the type of games. What Mr. White was 6 referring to is it is not uncommon for the bingo 7 games to be conducted within a two-hour period. 8 There will usually be one organization that conducts 9 bingo for one hour, followed by another organization 10 that conducts bingo for an hour. 11 MR. COX: Okay. Now, in this particular 12 case, tell me what happened. 13 MR. WHITE: I mean, the auditor went 14 on-site to -- as part of an inspection, asked who was 15 in charge. Mr. Rothenburg then advised himself as 16 being in charge. If I recall, there were -- there 17 was no operator listed on the sign as required by the 18 rule, statute, but Mr. Rothenburg said, "Yeah, I'm in 19 charge." Asked, you know, what organization is this 20 bingo being conducted for? He said, the seniors -- 21 Freeing the Senior Citizens Association, I believe is 22 the title. 23 MR. ATKINS: No, I believe it was B'nai 24 B'rith. 25 MR. WHITE: Yes, sir. Thank you. And she 0149 1 informed Mr. Rothenburg that the time period for that 2 organization ended, and again, I don't recall the 3 hour, but, you know, it had already expired. It was 4 past. And I don't want to -- there was some dispute 5 over the exact words that were spoken, but, you know, 6 basically informing him, either directly or 7 indirectly, that you -- this is improper, this is -- 8 you're past the time to conduct bingo, and he just 9 sort of shrugged his shoulders and continued with the 10 bingo occasion. 11 MR. COX: Do we know anything about whether 12 he got started late, maybe because another 13 organization had exceeded their time? 14 MR. WHITE: You know, I -- I don't recall 15 that -- he testified at the hearing, and I hate to be 16 -- I don't recall that being, you know, his defense 17 or saying that along those lines. May have been -- 18 MS. KIPLIN: On Page 2 on the PFD, it says, 19 "According to Hal, respondent explained the session 20 had gotten started late because people were coming in 21 slowly." 22 MR. COX: Okay. The people are coming in 23 slowly. He's got a commitment, I assume, to conduct 24 X number of games. I don't think I've ever played 25 bingo in a Texas hall, but I played bingo years and 0150 1 years ago. And all the games were a nickel--this 2 tells you how long ago it was--until you got to the 3 last game, and it was a quarter. So the big deal was 4 the last game. And if somebody had cut that off 5 before the last game, I think I would have felt, man, 6 I came here for that quarter game and you didn't -- 7 you ran over and didn't give it to me. You know, I'd 8 feel pretty hurt about that. So -- but you would 9 have him -- if people are dribbling in a little late 10 and they're having a hard time getting seated and 11 maybe the lights go out or something like that, you'd 12 have him just stop right at the end and not conduct 13 the activities that he's promised his customers just 14 because there's this time limit? 15 MR. WHITE: That's his licensed time 16 period. And, yes, I think he's required to comply 17 with those -- with his license. 18 MR. COX: Why? 19 MR. WHITE: Well, otherwise, I mean, where 20 do you draw the line? 21 MR. COX: I know -- I know that, but I want 22 to know why at all. 23 MR. WHITE: Why -- I'm sorry? 24 MR. COX: Why do you have a rule that is so 25 tight that you're taking -- 0151 1 MS. KIPLIN: It's a statute. 2 MR. COX: Or a statute, why is there a 3 statute that is so tight that this man doesn't have 4 enough time to conduct the games that he's promised 5 his patrons he's going to conduct? 6 MR. WHITE: Well, I think he does have the 7 time. He just -- it's based upon the fact that he 8 started late, that was his decision. I mean, I -- 9 MR. COX: I'm just having a hard time 10 seeing this as a big a problem as you seem to think 11 it is. 12 MR. WHITE: Well, you know, I -- I guess 13 let me put it this way. I don't -- am not going to 14 disagree with you or try to argue how big of a 15 problem it is. You know, maybe you can say this is a 16 rather -- it's not as serious, perhaps it doesn't 17 warrant removal from the registry, going 15 minutes 18 late or past his licensed time, but I think it is an 19 important legal issue to say that it is a failure to 20 comply with your license and conducting bingo outside 21 the licensed time is a violation of the act and it is 22 an action contrary to the integrity of bingo. 23 MR. COX: No. Wait. You're saying two 24 things. One, I recognize that you're telling me it's 25 a violation of some statute. Now, has he been 0152 1 prosecuted for that? 2 MR. WHITE: No, he has not. 3 MR. COX: So that's right now an 4 allegation, isn't it? 5 MR. WHITE: What is an allegation? 6 MR. COX: He hasn't been convicted of any 7 crime? 8 MR. WHITE: He's not been convicted of a 9 crime. An administrative law judge has found that he 10 has violated that statute. 11 MR. COX: Okay. Is -- would this be the 12 kind of crime that one would be convicted of? Has 13 anybody ever been prosecuted for running 15 minutes 14 late on a bingo session? 15 MR. WHITE: I don't know about running late 16 on a bingo session. People have been prosecuted for 17 conducting bingo after a license has expired. 18 MR. COX: That's different clearly. 19 MR. WHITE: That's different, but it's just 20 it's different in degree only. And I'm not 21 necessarily suggesting that Mr. Rothenburg should be 22 criminally prosecuted, but I am suggesting this is an 23 important legal issue. If you decide that running 15 24 minutes later past your licensed time is not an 25 action contrary to the integrity of bingo, what about 0153 1 running two hours past the time? 2 MR. COX: Wait, wait, wait. Wait just a 3 minute. 4 MR. WHITE: Yes, sir. 5 MR. COX: Let me go at the speed I can go 6 here. You have assumed that because he violated this 7 law, is it? 8 MS. KIPLIN: Well, there -- yes, there is a 9 statute. 10 MR. COX: There's a law that says you've 11 got to conduct bingo just within the hours that are 12 posted? Do you apply for this? Do you get it 13 granted? Do we assign it? 14 MR. ATKINS: You apply for specific hours 15 and they are printed on the license that is issued to 16 you. 17 MR. COX: Okay. Okay. Now, help me get 18 where you are on two things. One, do you consider 19 every case in which someone runs one minute 20 past--let's start with one minute, we'll go two hours 21 later if you want to--to be a violation of that 22 statute? 23 MR. WHITE: Yes. 24 MR. COX: Do you consider that to reflect 25 on the integrity of the game? 0154 1 MR. WHITE: Yes. 2 MR. COX: Okay. Now, I ran -- I'm going to 3 confess here. I ran 15 minutes late on a parking 4 meter last month and I had to pay $15, but I don't 5 think that reflects on my integrity at all. 6 MR. WHITE: Well, that -- that may be true. 7 We are talking -- that's running 15 minutes late on a 8 parking ticket and we are talking 15 minutes late 9 past a licensed time, and they are different still 10 and -- 11 MR. COX: Help me get to where you are 12 that -- on two questions, one, that in general it 13 reflects on the integrity of the game that they run 14 one minute late, and then that in this case because 15 they ran 15 minutes late, it reflects on the 16 integrity of the game. Let me ask you another one 17 before I ask you that one. What would you think if 18 instead of -- Gary, what time do we have the Lotto 19 Texas drawing? 20 MR. GRIEF: 9:50 -- 21 MR. ANGER: The drawing is 10:12. 22 MR. GRIEF: 10:12. 23 MR. COX: What if we had it at 10:13, would 24 that reflect on the integrity of the game? What if 25 we had it at 10:28? 0155 1 MR. WHITE: If there's a statute that says 2 it's supposed to be at 10:12 and you did it at 10:13, 3 I would say it affects the integrity of the game. 4 MR. COX: Just because it violated the 5 statutes? 6 MR. WHITE: Yes, sir. And that -- 7 MR. COX: Because it seems to me to be form 8 rather than substance that we are talking about here. 9 I can't see any indication that the integrity of the 10 bingo drawing and the awarding of the prize, which is 11 the game, was affected here. These people violated 12 an administrative requirement, but I don't think it 13 had anything to do with the integrity of the game. 14 MR. WHITE: Well, I -- you know, I guess 15 all I can say is I think the staff would say that it 16 does. 17 MR. COX: But they've got to tell me -- the 18 staff's got to convince me why. 19 MR. WHITE: And I think it's -- again, if 20 you don't set a black letter law saying that you must 21 comply with the license that you were issued, then, 22 you know, is there any -- any restriction? Can they 23 play bingo 24 hours a day? Would that ever affect 24 the -- would that affect the integrity of the game? 25 MR. COX: We are not talking about 24 hours 0156 1 a day. We are talking about 15 minutes. 2 MR. WHITE: Yes, sir. And that goes to 3 degree. And that's what I'm saying, I believe that 4 would go to the issue, what is an appropriate 5 sanction? If you do not want to remove Mr. 6 Rothenburg from the worker registry because you don't 7 feel that such warrants removal, that's one thing, 8 but it's another thing to say that it's not a 9 violation of -- of the Act. 10 MR. COX: No, no. I'm not -- I don't know 11 Mr. Rothenburg, and this isn't about Mr. Rothenburg. 12 What this is about is what is the definition of 13 integrity of the game. 14 MR. WHITE: Right. And I would -- 15 MR. COX: I want to know what, in 16 substance, does that term mean to staff? Does that 17 mean that if somebody smokes a cigarette -- if a 18 caller smokes a cigarette in a bingo hall that has a 19 no-smoking prohibition that that would affect the 20 integrity of the game? 21 MR. WHITE: I would say -- 22 MR. COX: What if -- what if he's running 23 eight liners, that would affect the integrity of the 24 game? 25 MR. WHITE: In my opinion, I would say yes. 0157 1 MR. COX: Would you say that there's a 2 difference in degree between running 15 minutes late 3 and running eight liners? 4 MR. WHITE: Well, it's substantive 5 difference, but in both cases, an argument could be 6 made that affects the integrity of the game. And 7 again, I'd like to emphasize, I think you know 8 complying with the license is the most basic and 9 fundamental regulatory action we have. If it's 10 decided that you don't need to comply with your 11 license, you can conduct bingo anytime, anyplace 12 anywhere. I mean at that point, the rest of the 13 regulatory scheme -- we might as well forget about 14 it. This is one of the most fundamental requirements 15 of the bingo licenses, that you comply with your 16 license. 17 MR. COX: Well, I would certainly agree 18 with you that we shouldn't have bingo conducted 19 anytime, anyplace, anywhere, but I think that's a lot 20 different than 15 minutes. 21 MR. WHITE: I agree with you it's a lot 22 different, but the principle of law, I would suggest, 23 is the same. If you don't have a black letter law 24 that says you must comply with your license, and if 25 you don't, it affects the integrity of the game. 0158 1 Then in a case, if it was going -- you had a 2 conductor conducting bingo 24 hours a day, I don't 3 think we could say, in your case it does affect the 4 integrity of the bingo game. I think you're either 5 required to comply -- if you don't comply with the 6 terms of your license, it either affects the 7 integrity of the bingo game or it doesn't. 8 Now, the next issue is what is an appropriate 9 sanction? Maybe the case of 24 hours a day, perhaps 10 we'd all agree that revocation is appropriate. 11 Fifteen minutes, it's open to dispute, but I would 12 like to think the issue of law as to whether or not 13 it affects the integrity of a bingo game is not 14 open -- is not disputed. 15 MR. COX: Okay. Mr. White, is it the 16 inviolable policy of the Bingo Division to revoke the 17 license of every person who violates any rule, any 18 law? 19 MR. WHITE: No, sir. 20 MR. COX: Why is this man being singled 21 out? 22 MR. WHITE: Well, I'll read you a letter 23 received from B'nai B'rith headquarters. This -- 24 this was introduced at the hearing. I'll read one 25 paragraph, it says "B'nai B'rith does not oppose the 0159 1 decision of the Commission to deny renewal of the 2 bingo license applied for by Arthur Rothenburg. 3 B'nai B'rith expects individuals who operate bingo on 4 behalf of B'nai B'rith to conduct such operations in 5 strict compliance with all applicable laws, rules, 6 and to do so with the intent and effect of 7 benefitting the charitable purposes of B'nai B'rith." 8 He is the chief financial officer of B'nai B'rith 9 International so, you know, he -- they take -- the 10 organization itself takes this violation very 11 serious. 12 MR. COX: That's great. Good for them, but 13 that's irrelevant to this decision. 14 MR. WHITE: Okay. And your question is why 15 are we recommending revocation? 16 MR. COX: Yes. 17 MR. WHITE: And we feel that the -- in -- 18 MR. COX: Fifteen minutes -- 19 MR. WHITE: Fifteen minutes after being 20 told by an auditor, "You've run past your licensed 21 time, you're violating the Acts." You know, and I 22 don't want to say exactly -- maybe I'm -- I don't 23 want to quote the auditor, but basically told him, 24 you need to stop, and he just shrugged his shoulders 25 and continued with the game. And I think it shows a 0160 1 disregard for the rules, the authority of the 2 Commission. 3 MR. COX: You know, this thing has got a 4 lot of arms and legs. Are bingo auditors officers of 5 the law? 6 MR. WHITE: No, sir. I'm not sure what 7 that term means but -- 8 MR. COX: Well, I think that if somebody 9 comes to me and says you've got to quit doing that, 10 I'm going to say, what's your authority for telling 11 me I've got to quit doing it. Are these people -- is 12 part of their charter to go tell people to stop doing 13 that and start doing this, or is there authority to 14 write it up and bring it back to Austin and then it's 15 decided what's going to be done? 16 MR. WHITE: I would think both. I would 17 think if an auditor -- 18 MR. COX: I don't want to think. I want to 19 know. Does the auditor have the right to step into 20 the middle of a bingo game and say, quit doing it 21 this way and start doing it that way? 22 MR. WHITE: I think -- again, you don't 23 want to think, you want to know. 24 MR. COX: Right. 25 MR. WHITE: I can't -- off the top of my 0161 1 head, I can't quote you to a statute or rule, but I 2 would say if an auditor sees an ongoing violation, 3 which is clear and blatant, that auditor has more 4 than -- can -- I think has a duty -- 5 MR. COX: I know what your opinion is, but 6 what I want to know is what's the law. Now, how many 7 people have bingo auditors caught running late? And 8 how many -- out of that number, how many of them have 9 had their ticket pulled? 10 MR. WHITE: I do not know the answer to 11 that. 12 MR. COX: Okay. Well, I -- Mr. Chairman, I 13 think I've got three questions here. One, what is a 14 definition of the integrity of the game? Secondly, 15 what is the authority of a bingo auditor? And 16 thirdly, what kind of record do we have for applying 17 this approach to things on a consistent basis? 18 MR. CLOWE: And would you like to pass this 19 item until next month and ask Mr. White to come back 20 with those answers? 21 MR. COX: Yes, sir, I would. 22 MR. CLOWE: Very well. Do you have any 23 comments or questions on these other orders? 24 MR. COX: I do not. 25 MR. CLOWE: Then I move that the Commission 0162 1 adopt the recommendation on orders represented by the 2 letters A through F and I. 3 MR. COX: Second. 4 MR. CLOWE: All in favor, please say "aye". 5 MR. COX: Aye. 6 MR. CLOWE: Aye. The vote is 2-0 in favor. 7 And, Mr. White, we will ask you to bring those 8 answers back that Commissioner Cox asked relative to 9 Docket Number 362-05-6464.B. 10 MR. WHITE: Yes, sir. Can you repeat those 11 questions one more time? 12 MR. COX: You bet, Steve. The first one 13 was brief integrity of the game for me. I want to 14 know what that is and what it isn't. And I'd like to 15 know some things not only that you consider to be 16 affect on the integrity of the game, but some things 17 that you would say don't have an affect on the 18 integrity of the game, even if it's what color tie 19 they have on. Second one is what is the authority of 20 a bingo auditor to require a change in the conduct of 21 an ongoing bingo occasion. Can he just step in and 22 say, you know, you're over, you're talking too loud, 23 you're -- shouldn't be sitting there, you didn't post 24 your name out there. You alluded to the fact the 25 name wasn't posted. Could he have stopped it for 0163 1 that? Why didn't he? And then the last one was how 2 many times have we found organizations running over 3 and how many -- out of that, how many times have we 4 pulled someone's ticket for doing it? 5 MR. WHITE: Yes, sir. 6 MR. COX: Great. Thank you. 7 MR. CLOWE: And we'll sign these orders, 8 and then, Gary, I'll call on you for your report. 9 All right. Item Number 18, report of the acting 10 executive director. 11 Mr. Grief. 12 MR. GRIEF: Commissioners, first, I'd like 13 to call upon Diane Morris to give you an overview of 14 a project relating to our personnel policy manual. 15 MS. MORRIS: Good afternoon. During this 16 fall of this year, human resources has started the 17 project of the human resources effort to, from the 18 employee level up, revise the personnel policy manual 19 for this agency. In early September copies of other 20 agency personnel policy manuals were placed on our 21 intranet. E-mails had been sent to employees asking 22 them for input. Obviously, the effort that at least 23 human resources and myself were taking very 24 seriously, seeking employee input into how can we 25 improve our personnel manual, how can we improve our 0164 1 personnel policies and procedures. I have visited 2 with Gary Grief and have received his approval to 3 again build it from the bottom up in the sense of 4 I -- I don't have the directors or the supervisors 5 assisting me with this project, except I have a 6 couple on some work groups that I'll talk about, but 7 it has been a voluntary effort from employees that 8 have stepped forward and have agreed to help with 9 editing particular chapters. I have chapters in 10 various forms of draft stages. I'm sending the 11 chapters back and forth between the employee work 12 group. It is my goal that the chapters in their 13 ultimate draft stage will mostly be completed before 14 the winter break, and I say December 15th in -- when 15 I define that. Some of the divisions, such as the 16 payroll, or the compensation and benefits, and those 17 kind of subjects, travel, we have floated drafts of 18 those chapters past the individuals in the Office of 19 the Controller to help review, to add comment, to 20 update. We are looking at the ERS web site and 21 bringing a lot of the benefits, explanations more up 22 to date. I'm very excited about the project. It is 23 something that is heartening to see the employees 24 working together. 25 In particular, we have a work group of employees 0165 1 that are drafting a grievance policy. I will say 2 right now the terms of that policy is in flux in that 3 I think it has some paragraphs and others, and I 4 don't know that they're even done yet, but they are 5 meeting without me. They are meeting with John Shaw, 6 another member, the EEO specialist in human 7 resources, to help draft that particular policy. 8 In addition to that, we have another committee 9 that is working on, again, the employee performance 10 evaluation. And there has been a lot of work gone 11 onto that. And I am hopeful that that project will 12 also be done by the beginning of December. 13 Ultimately, we are also -- and I have an 14 employee that has offered to help who is a manager to 15 lead a work group on the counseling and discipline 16 chapter, looking towards the forms of discipline, the 17 forms of counseling, and even prior to that coaching 18 and mentoring by our agency staff. And particularly, 19 the actions of the managers and the supervisors to 20 coach their staff. 21 So the other thing, and I hadn't had a chance to 22 remark about it, is we had open sessions, invited all 23 employees of the Agency to come to this room. Two 24 meetings were held in October and one was held in 25 November. I didn't have as good of a turnout as I 0166 1 hoped, quite frankly. I think it's something that 2 the employees that have volunteered on the work 3 group, when they receive my E-mails of the draft of 4 the chapters, they're sending them back to me and I'm 5 incorporating the changes. The drafts are out on a 6 common drive where employees can see the changes and 7 see how they're occurring. Ultimately, on our 8 Internet page, the draft of the chapters as they're 9 developed will be available for all employees to 10 comment. 11 Additionally, I've said to the employees, if you 12 don't want to talk to me, particularly, or -- or 13 face-to-face, send me an E-mail, send me a piece of 14 paper, slip it under my door. I will take 15 suggestions and comments to the personnel policy 16 manual any way I can get them. 17 MR. GRIEF: Thank you, Diane. 18 Any questions, Commissioners? 19 MR. CLOWE: Thank you, Diane. Sounds very, 20 very good. 21 MR. GRIEF: Next item I'd like to cover 22 commissioners, at the last commission meeting we ran 23 short of time and there was a request from the 24 Commission to put up on the screen two charts from 25 the Ipsos Reid monthly tracking study that is 0167 1 performed for us. 2 The first chart that you see up on the board is 3 responses from a random telephone sample of 4 approximately 400 public contacts that this Ipsos 5 Reid makes contact with. And the question that's 6 asked is how would you describe your overall opinion 7 of the Texas Lottery on a scale of one to seven, 8 where one means your opinion is very negative and 9 seven means your opinion is very positive. And on 10 this chart you see the positive responses represented 11 by the blue bars at the bottom, negative represented 12 by the tan, and neutral represented by the gray in 13 the middle. And I think it's a pretty clear story to 14 see that when we had the problem that arose back in 15 June with the Lotto Texas jackpot estimation, the 16 positive responses dipped from 47 to 39 percent, but 17 we feel that we have worked hard to correct that 18 particular problem, as well as worked towards other 19 aspects of Agency performance, and you can see a 20 subsequent rise in the level of positive performance 21 or positive responses rather. Any questions on that 22 slide? 23 MR. COX: Gary, what's the best we have 24 ever gotten as long as -- how far back does this 25 thing go? 0168 1 MR. GRIEF: I'm not sure, Commissioner. 2 I'd be happy to find that out, though, and bring that 3 back to you. 4 And then the other slide that's of interest, 5 it's a similar -- similar type question. In this 6 question, the public is asked how much do you agree 7 or disagree with the following statements that could 8 be made about lotteries and gaming in Texas. And the 9 statement that this slide is -- is particular to is 10 the Texas Lottery is operated fairly and honestly. 11 Again, those who agree are in the blue bar at the 12 bottom, disagree in the tan at the top. And you can 13 see almost a identical drop in the month of June 14 followed by slow but steady increases in the positive 15 responses. I'm not sure when we'll be getting -- 16 this is through September. 17 Robert, do you know when we should be receiving 18 the October study? 19 MR. TIRLONI: I believe the research group 20 already has October so we may be able to have it next 21 month. 22 MR. GRIEF: Very good. Would the 23 Commission be interested in seeing the results next 24 month as well? 25 MR. CLOWE: Sure. 0169 1 MR. GRIEF: Any questions about that 2 information? 3 MR. CLOWE: No. I don't think so. 4 MR. GRIEF: Just a couple of more items 5 under my report. I am scheduling time with the 6 division directors in early December to once again 7 revisit our business plan, and in particular, the 8 various action plans that are laid out in the 9 business plan. I'm doing these -- this formal 10 revisiting of that document approximately once every 11 six months, and it keeps our focus on the plan and 12 insures that we are moving forward with the various 13 initiatives that we outlined in that plan. And I'll 14 be forwarding the commissioners a written update on 15 our progress in that meeting in late December. 16 Our E-strategy initiative also continues. I 17 believe both commissioners have participated in 18 interviews with our E-strategy group. That includes 19 the greater use of our agency web site, as well as 20 the use of technology in general. In that follow-up 21 process we are also reviewing some of the 22 opportunities that were identified the first time we 23 conducted those interviews back in 2003, and look and 24 see if that opportunity has already been realized, or 25 what the status of that work is, or even if that 0170 1 opportunity is still a relevant goal for the agency. 2 We'll continue to keep you informed as we move 3 through that process as well. 4 And finally, I'll touch on our progress that's 5 been made on the results of the survey of 6 organizational excellence. If you recall, I 7 previously reported to you that I provided feedback 8 to our SOE employee work group on the first three 9 items that they had submitted to management. And 10 they had submitted a top ten. And for items four 11 through ten, Diane Morris and I met with the 12 committee and we were able to answer and address some 13 of the issues that were raised. We made significant 14 progress, but we do need further meetings on those 15 items. We'll continue to have those and keep you 16 advised of that. And that concludes my report. 17 MR. CLOWE: Any questions? 18 MR. COX: No, sir. 19 MR. CLOWE: Thank you, Gary. 20 Next, we'll take Item Number 19, report by the 21 Charitable Bingo Operations Director. 22 MR. ATKINS: Thank you, Commissioners. In 23 addition to the report that you have in your 24 notebook, I just would like to draw your attention to 25 a few items. I did mention earlier under the 0171 1 discussion of the Bingo Advisory Committee Chair's 2 presentation, we have posted to the Internet a copy 3 of the bingo operations manual that's available to 4 our licensees in a PDF format. Also, our media 5 relations staff continues to work on the public 6 service announcements that were presented to the BAC 7 at their last meeting. Several of the committee 8 members have supplied some additional tape to media 9 relations for them to review and possibly include. 10 Also, I understand that media relations has included 11 a voice-over on the initial draft that they have 12 done. I've not had the opportunity to see that, 13 though. 14 We also mentioned earlier that there is a public 15 hearing scheduled for November 30th on the proposed 16 administrative rules that will occur in this room at 17 11:00 a.m. 18 Very quickly, as it relates to the web site, we 19 had, as of this morning, 109 external users 20 registered with the Bingo Services Center. That 21 number continues to grow. 22 We have also updated the graph on the web site 23 that is charting Bingo's progress towards $1 billion 24 in charitable distributions. For the third quarter 25 that amount is up to $796 million. I'm sure that 0172 1 we'll pass $800 million this year. 2 Also, I just wanted to let you know we were 3 scheduled to make allocations on November 30th. I 4 have been advised we are currently planning on 5 mailing out those allocations on Monday, 6 November 21st. 7 And then just very briefly I wanted to update 8 you on the recent NAGRA board meeting I attended. 9 The meeting dealt primarily with scheduling the 2006 10 conference that will be held in June. Some of the 11 keynote speakers that are currently being planned for 12 are I. Nelson Rose who's a gaming attorney and 13 author. And also, they have invited Senator John 14 McCain from Arizona to speak to the group. 15 MR. COX: Where is this going to be, Billy? 16 MR. ATKINS: It's scheduled for Scottsdale. 17 And the Arizona and Gaming Commission is the host 18 jurisdiction, and so they have been working with 19 Senator McCain's office to see if he would be 20 available. 21 I was assigned to work on some projects for the 22 upcoming conference, and that includes a redesign of 23 the conference notebook that's provided to members, 24 as well as working with several other board members 25 on potential changes to the bylaws that could help 0173 1 increase membership in the organization. We 2 discussed the various break-out sessions that are 3 being worked on by the committee chairs. As you'll 4 recall, Phil Sanderson is co-chair of the charitable 5 gaming with Salome Serum (Phonetic) from Manitoba. 6 Other break-out sessions include sessions relating to 7 Indian gaming, Internet gaming. There's an 8 investigator session, as well as sessions on casinos. 9 And then also, I'm finally happy to report that 10 a former Texas Lottery Commission employee has become 11 active in NAGRA, Ridgley Bennett, former Deputy 12 General Counsel, who is now with the DC Lottery has 13 agreed to chair the NAGRA's policy committee, so we 14 are glad to have him involved. 15 MR. COX: Is he the general counsel of DC 16 Lottery? 17 MR. ATKINS: I believe it's the equivalent 18 of being the general counsel. I would defer to our 19 general counsel for his exact title. 20 MS. KIPLIN: Washington, DC has a very 21 interesting structure in terms of its governance. I 22 believe there is a general counsel -- 23 MR. CLOWE: That's an understatement. 24 MS. KIPLIN: I think there is a general 25 counsel for all of DC's governance. He is the 0174 1 counsel for the DC Lottery, and he is located there, 2 although he reports to counsel, the general counsel 3 for all of DC governance. 4 MR. ATKINS: That concludes my report. 5 MR. CLOWE: Any questions? 6 MR. COX: No, sir. 7 MR. CLOWE: Thank you, Billy. 8 Item Number 20, public comment, Mr. Bresnen. 9 MR. BRESNEN: Thank you, Mr. Chairman. My 10 name is Steve Bresnen. I'm here on behalf of the 11 Bingo Interest Group today. I know you've had a long 12 meeting, a lot of -- full agenda, so I won't take too 13 long, but I did want to call your attention to 14 something that's going on. Y'all -- y'all may be 15 aware of it. I don't know if you're aware of the IRS 16 audits of charities that are involved in bingo that 17 are occurring right now in the Dallas/Ft. Worth area. 18 Billy, are you aware of those? 19 MR. ATKINS: (Nods head.) 20 MR. BRESNEN: To my knowledge, there have 21 been about 40 charities that have been under audit by 22 the IRS starting back in early part of the year. 23 They are -- I'm proud to report at this point in time 24 that about -- I think about 15 of those have received 25 final letters from the IRS. Each and every one of 0175 1 those concluded that they continue to deserve their 2 tax exempt status. There's not a single one of them 3 that is referenced anything in their bingo operations 4 that would disqualify them from being licensed by the 5 Commission or to continue those operations. I would 6 -- I have copies of the letters. I don't know if Mr. 7 Atkins gets those or not. 8 MR. ATKINS: (Shakes head.) 9 MR. BRESNEN: But I think the tone and the 10 helpful quality of the letters shows a process that 11 the Commission might want to think about adopting or 12 inculcating in the culture, because to me, even 13 though some problems are found, it's a very 14 problem-solving oriented thing rather than a long 15 administrative process or penalty-oriented sort of -- 16 sort of thing. And I've got copies of the letters. 17 I'll make copies and get them to the staff. 18 Interestingly, all of these particular 19 organizations that I'm aware of, Sharon Ives 20 (phonetic), who's appeared before you many times, 21 does the bookkeeping. I think it's a reflection of 22 the fantastic work that Sharon does. And talk about 23 integrity, she has got it. And working with those 24 charities, I think she has done a fantastic job, so I 25 want to -- I want to offer the -- what appears to be 0176 1 the IRS model coming through from these letters as 2 one that you might work to include in the culture at 3 the Commission. 4 I will say there are a few things that they've 5 recommended some improvements on. And I'd just like 6 to give you a flavor of what they are. There's a few 7 places where people have put -- they filed a Form 990 8 as their main tax return. Some of the people have 9 been putting the wrong numbers in the wrong blocks. 10 In a few occasions, the IRS has redone the form for 11 them and submitted it back to them for their 12 signature to show them, this is the way you should do 13 this. There was a couple of occasions where some 14 compensation that was paid wasn't reported on W-2s, 15 so they found they owed some employment tax. I think 16 that was -- the one I saw was $7800 worth of 17 compensation. I think that might have spanned a 18 couple of years, so they had to -- they got dinged a 19 little bit for not including that in their employment 20 tax. There's two or three of them that are 501C-3s 21 and also have foundation status. And the IRS has 22 determined they probably don't deserve the foundation 23 status too. As near as I can tell, that has -- 24 certainly has no bearing on their ability to operate 25 bingo or that they're conducting their business in 0177 1 any way that's not consistent with their tax exempt 2 status. There's something peculiar about being 3 designated as a foundation which I'm not familiar 4 with. 5 There were two -- there were a couple of them 6 that owed some unrelated business tax that's -- this 7 is the pull tab, income from pull tabs. And a -- I 8 don't know if it's at every level -- at all levels, 9 has to be taxed. There's a few of them that didn't 10 fully report all their -- all their pull tabs for 11 that. So they've -- it appears from the letters that 12 they've made good on those. And there's a couple of 13 times where some related organizations apparently 14 filed on the same Form 990 instead of filing separate 15 Form 990s. 16 I'm, frankly, underwhelmed by the response that 17 you see in here. It makes me feel very good that 18 these organizations have been complying with the law 19 and have been under, by Sharon's description, pretty 20 rigorous scrutiny. They've gone top to bottom 21 through their financials, and they seem to be coming 22 out very well. I know of some audits that have been 23 performed as far up as in northeast Texas, up in 24 Texarkana, and then I think Fort Worth is probably 25 the farthest west that I'm aware of. And I -- I 0178 1 think from what I've heard -- I've got documentation 2 of the cases that I'm talking about, and I'm thinking 3 this is sort of a preliminary report, when the rest 4 of them are done, then I'll come back and give you 5 the rest of them, at least the ones I have knowledge 6 of, so you'll know how that's turning out. But as I 7 said, there are 35 audits now that I'm aware of here. 8 And Sharon, through her usual style, has a nice 9 little spreadsheet on all of them. 10 Anyway, I just wanted to make you all aware of 11 that and let you know about it, the status of it. 12 Made me feel pretty good that overall people are 13 trustworthy, they're trying to comply with the law, 14 they're living within their tax exempt status. And I 15 thought I'd make you aware of it since these are 16 folks you regulate. 17 MR. COX: I have a question. 18 MR. CLOWE: Sure. 19 MR. COX: Steve, can you -- do you know any 20 more about this pull tabs being unrelated business 21 income? 22 MR. BRESNEN: It's a quirk in the Federal 23 Tax Law. There was an effort by a bunch of charities 24 in Texas, and I think nationwide, to try to do 25 something about it, but it treats regular bingo as a 0179 1 fundraising activity, in essence, and it treats the 2 pull tabs as unrelated to the -- it doesn't treat it 3 as bingo for federal tax purposes. So apparently it 4 treats it as unrelated to the business of bingo, 5 which is -- is a activity that can be carried on on 6 tax exempt basis. 7 MS. KIPLIN: Commissioners, if I -- I'm 8 sorry. I hate to be the gatekeeper, but we are under 9 the agenda item public comment that gives people an 10 opportunity to come forward and provide public 11 comment, but if it's not specifically noticed on the 12 agenda, then really, you all, under this item, are 13 limited to being able to respond to an inquiry on 14 policy and being able to deliberate about whether you 15 want to post an item for future commission meetings. 16 I hate to stop the dialogue that was -- 17 MR. COX: You're doing your job. 18 MR. CLOWE: But you can have that 19 conversation off the record after we adjourn. 20 MR. BRESNEN: Yes, sir. I'll be happy to 21 provide you some more information about that so 22 everybody's on the same page about it. It's a 23 long-standing problem. And, you know, under Texas 24 law it's bingo, under the federal law apparently -- 25 the tax law, it gets different treatment. I hope 0180 1 I -- I think I'm stating that properly. 2 MR. CLOWE: Thank you, Steve. Appreciate 3 it. 4 MR. BRESNEN: Thank you. 5 MR. ATKINS: Commissioner Cox, would you 6 like that on a future agenda? 7 MR. COX: Or somebody just tell me. 8 MR. BRESNEN: Thank y'all. 9 MR. CLOWE: Thank you, Steve. 10 Any other person wishing to make comment to the 11 Commission? Is there any further business for this 12 Commission? 13 Anything further, Commissioner? 14 MR. COX: No, sir. 15 MR. CLOWE: Then we will be adjourned. The 16 time is 2:10. Thank you all very much. 17 (Meeting adjourned.) 18 19 20 21 22 23 24 25 0181 1 REPORTER'S CERTIFICATION 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 5 I, STEFFANIE L. DECKER, Certified Shorthand 6 Reporter for the State of Texas, do hereby certify that 7 the above-captioned matter came on for hearing before the 8 TEXAS LOTTERY COMMISSION as hereinafter set out, that I 9 did, in shorthand, report said proceedings, and that the 10 above and foregoing typewritten pages contain a full, 11 true, and correct computer-aided transcription of my 12 shorthand notes taken on said occasion. 13 14 Witness my hand on this the _______ day of 15 November, 2005. 16 17 _________________________________ 18 STEFFANIE L. DECKER Texas CSR No. 3926 19 Expiration Date: 12/31/06 Firm Registration No. 225 20 1801 North Lamar Mezzanine Level 21 Austin, Texas 78701 (512) 474-4363 22 23 JOB NO. 051118SLD 24 25