1 1 2 3 4 5 6 ****************************************************** 7 8 TEXAS LOTTERY COMMISSION 9 MEETING 10 11 12 December 18, 2000 13 14 ****************************************************** 15 16 17 18 BE IT REMEMBERED that the TEXAS LOTTERY 19 COMMISSION meeting was held on the 18th of December, 20 2000, from 8:46 a.m. to 2:25 p.m., before Leigh Anne 21 Williams, CSR in and for the State of Texas, reported 22 by machine shorthand, at the Offices of the Texas 23 Lottery Commission, 611 East 6th Street, Austin, 24 Texas, whereupon the following proceedings were had: 25 2 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Ms. Elizabeth D. Whitaker Mr. Anthony J. Sadberry 6 General Counsel: 7 Ms. Kimberly L. Kiplin 8 Executive Director: Ms. Linda Cloud 9 Charitable Bingo Operations Director: 10 Mr. Billy Atkins 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 INDEX 2 Appearances.................................... 2 3 AGENDA ITEMS 4 Item Number 2.................................. 4 Item Number 3.................................. 5 5 Item Number 4.................................. 10 Item Number 5.................................. 21 6 Item Number 6.................................. 23 Item Number 12................................. 38 7 Item Number 10................................. 45 Item Number 7.................................. 50 8 Item Number 8.................................. 63 Item Number 9.................................. 63 9 Item Number 11................................. 66 Item Number 13................................. 69 10 Item Number 14................................. 69 Item Number 15................................. 75 11 Item Number 16................................. 93 Item Number 19................................. 140 12 Item Number 20................................. 145 Item Number 22................................. 152 13 Reporter's Certificate......................... 154 14 15 16 17 18 19 20 21 22 23 24 25 4 1 CHAIRMAN CLOWE: It is 8:30 a.m., and 2 I'd like to call to order the December 18th, 2000, 3 meeting of the Texas Lottery Commission. 4 Commissioners Whitaker and Sadberry are here. My name 5 is Tom Clowe, and we are ready to go forward with the 6 published agenda. 7 First item is report, possible 8 discussion and/or action on Lottery sales and trends. 9 Will this be Toni and Linda? 10 MS. CLOUD: Yes. 11 CHAIRMAN CLOWE: Very good. 12 MS. SMITH: Good morning, 13 Commissioners. For the record, my name is Toni Smith, 14 marketing director of the Texas Lottery Commission. 15 Total fiscal year 2001 sales to date 16 are 853,350,482. This is up 12.5 percent from fiscal 17 year 2000 total sales to date of 758,558,263. 18 Our current weekly sales average is 19 53,334,405, which again reflects the 12.5 percent from 20 last year's weekly average of 47,409,891. 21 To just briefly look at a comparison by 22 product, from -- comparing this year to last year, the 23 Instant product is up 15 percent from 514,712,188 24 compared to FY 2000 of 446,415,961. Lotto Texas is 25 also up 16.4 percent. Currently, we're at 221,431,234 5 1 compared to 190,238,268 of last year's sales. 2 And just to take a very quick look at 3 this past week, overall sales were down 14 percent 4 from -- We were at 53,061,546 compared to the previous 5 week at 62,012,720.50, and the primary factor for this 6 decrease was the Lotto Texas jackpots. We got hit on 7 the jackpots. So, that's where we are in sales. 8 CHAIRMAN CLOWE: Very good. Any 9 comments, Linda? 10 MS. CLOUD: No, sir. 11 CHAIRMAN CLOWE: Very good. Thank you, 12 Toni. 13 I believe the next item on the agenda 14 will be yours, report, possible discussion and/or 15 action on Lottery advertising and promotions including 16 print media criteria. 17 MS. SMITH: I have no new report on the 18 actual advertising and promotions, but I think Linda 19 has a comment on print criteria. 20 MS. CLOUD: Commissioners, on Monday, 21 December the 11th, we sent out a letter to the 22 publishers notifying them that the Lottery will no 23 longer accept USPS audits. These audits are postal 24 audits, and they do not provide the information that 25 the Lottery needs to confirm that circulation and -- 6 1 ads are being placed and circulated. 2 There's 119 newspapers, and they're 3 small rural newspapers that are affected by this. All 4 the rest of the newspapers are doing outside 5 independent audits. The decision was made after we 6 had independent consultant assessment done on all the 7 audits, all the audit firms that have to do with print 8 media, and they highly recommended that this is not a 9 true audit and this should not continue. 10 We also have sent out a letter to our 11 legislators to make them aware of where we are with 12 this project at this time, and we have already started 13 to receive -- or some of the legislators have already 14 started to receive complaints from some of the smaller 15 newspapers about us having made this decision not to 16 accept the USPS audits. We plan to have a meeting on 17 January the 9th with all the print media advertisers, 18 all the subcontractors, along with our advertising 19 vendors, and at that time, we're open for discussion 20 on what these small papers can provide us in lieu of 21 the USPS audit so that we can have a good feeling 22 about the circulation and their placement of our ads. 23 So -- but this is the only assurance 24 that we have, that it is an audit and an independent 25 audit, and the USPS audits do not give us that, the 7 1 verification. Just wanted to make you aware. 2 This is not intended to be a problem 3 for our newspapers. We hope that they can give us a 4 way to feel comfortable with some type of audit that 5 they can provide us other than what they're doing. 6 COMMISSIONER SADBERRY: You say there 7 have been comments or contacts made with the 8 legislature, at least with some members. Do you 9 anticipate any type of group inquiries like we've seen 10 in the past? Do you think what you've done will 11 address their concerns? 12 MS. CLOUD: We're hoping that, because 13 we're trying to make them aware at the same time that 14 we have notified the newspapers, that they'll 15 understand our situation and understand that that's 16 why we got in the situation we did before was not 17 having legitimate audits on these newspapers. 18 COMMISSIONER SADBERRY: And I take it, 19 then, the coordination with the state auditor's office 20 was taken into account in whatever your decision was 21 in this regard? 22 MS. CLOUD: We did not -- We have not 23 talked to them recently. They know that we have been 24 working -- This is part of our response to their 25 comments, and they know that we've been working on 8 1 doing all this. 2 COMMISSIONER SADBERRY: And whatever 3 informal understanding, or even formal, for that 4 matter, that may have been stemming back to the 5 previous executive directors concerning the audit has 6 been cleared up, I take it? 7 MS. CLOUD: Yes, with the state 8 auditors, yes. They know that the -- They know 9 exactly what we've done since their audit review, and 10 they have been kept aware that Debra's been reporting 11 back on this issue. 12 CHAIRMAN CLOWE: So, simply stated, it 13 is a requirement that the Commission must fulfill to 14 verify that we are receiving advertising for the 15 moneys that are being expended, on the one hand, and 16 on the other, the dilemma that the smaller rural 17 newspapers and publications are dealing with insofar 18 as the cost of an audit, and now the nonacceptance of 19 this past practice has brought this problem to the 20 surface, and you're having a meeting in January to 21 encourage comment and feedback, which, I think, 22 hopefully will be more focused on solutions than on 23 the problem that we can't afford an outside audit 24 firm, and maybe we can jointly come to a conclusion 25 that will satisfy all parts of this issue. 9 1 MS. CLOUD: Exactly. 2 CHAIRMAN CLOWE: Very good. 3 MS. CLOUD: The print media 4 subcontractors in the last meeting we had with them 5 made a comment that they would like to see more of 6 these kind of meetings during the year so that they 7 have an opportunity to speak, and we certainly want to 8 provide them with that avenue, and especially in this 9 case where we've got 118 of our print media that 10 doesn't have the proper audit that we need to provide 11 the advertising for them. 12 CHAIRMAN CLOWE: I'm sure you're going 13 to do everything you can to encourage a good turn-out 14 for that meeting, and you'll have your print media 15 consultants there? 16 MS. CLOUD: That is the day of the 17 legislate -- the day the legislative staff starts the 18 new session, and we -- a lot of these subcontractors 19 do come to Austin when there's a political affair, 20 and, so, many of them will be here. We tried to make 21 it convenient for them so that if they were in Austin, 22 then we could have this meeting and they could be 23 here. 24 CHAIRMAN CLOWE: Good. And we'll hear 25 back from them on this? 10 1 MS. CLOUD: Yes. 2 CHAIRMAN CLOWE: Very good. All right. 3 Thank you, Linda. 4 Moving on to item number four, 5 consideration of and possible discussion and/or 6 action, including proposal, on a new Lottery rule 7 regarding a new on-line game. Linda, is this your 8 topic? 9 MS. CLOUD: This is Robert Teloney's, 10 and we're going to make a presentation to the 11 Commission this morning. We have GTech 12 representatives in the room, as well as our staff. 13 So, it will be a brief presentation. We're not going 14 to take a lot of time with this, but we do want to 15 show you the proposed matrix for the new game, and the 16 rule will be also submitted at the same time. 17 CHAIRMAN CLOWE: Very good. 18 MR. TELONEY: Good morning, 19 Commissioners. For the record, my name is Robert 20 Teloney. I'm the on-line product manager in the 21 Lottery's marketing division. Commissioners, I have 22 been working with GTech, more specifically GameScape, 23 for the past few months on developing a new on-line 24 game matrix that would successfully replace Texas 25 Million and, at the same time, enhance and complement 11 1 the remaining on-line product mix, which, of course, 2 is Lotto Texas, Cash 5 and Pick 3. We began this 3 process back in the summer in late July when we 4 conducted focus group research with our retailers in 5 the cities of Houston and Dallas. We basically asked 6 our retailers for input and for their opinions on what 7 features an on-line game needs to have in order for it 8 to be successful. After coming back from that 9 research, we -- I, once again, began working with 10 GameScape on coming up with new on-line game concepts, 11 and that work continued until last month when we took 12 three new on-line game concepts out to our players in 13 the cities of Houston and San Antonio, and we did the 14 focus group research and mini-lab research, and we're 15 here today to present to you the on-line game concept 16 that emerged as the favorite. It is a bonus ball 17 style game, and we're calling it Texas Two-Step, and 18 right now, I'm going to ask Larry King from GTech to 19 walk us all through a presentation about this 20 replacement game. 21 CHAIRMAN CLOWE: Good morning, 22 Mr. King. 23 MR. KING: Good morning, Commissioners. 24 For the record, my name is Larry King. I'm the 25 account general manager for GTech Texas. With me 12 1 today is John Cadigan who is our vice president of 2 GameScape. On the slide projector over there is Amir 3 Sadri who is also one of our directors and a premier 4 game designer. I would -- As we've said, this is a 5 very quick presentation, but we would like to show you 6 an overview, and if you have any questions, feel free 7 to stop us during the presentation, and we'll have 8 time at the conclusion, also. 9 So, Amir, if you'd like to turn the 10 first slide. 11 Robert mentioned the games that we took 12 out to the players and tested. The first matrix was a 13 6 of 40, and what we mean is 6 balls out of 40 balls 14 with the overall odds of winning the jackpot at 1 in 15 3.8 million. That 1 in 3.8 million is very similar to 16 what Texas Million -- the top odds of Texas Million 17 are of winning the jackpot, and we had a starting 18 jackpot on that game of about $250,000. 19 The second game is very similar, 6 of 20 35, with the overall odds of winning the jackpot at 1 21 in 1.6 million and a starting jackpot of 200,000. The 22 third game, we'll call that a bonus ball style matrix, 23 and simply put, what that means is there are two 24 hoppers or two sets of numbers that you're drawing 25 from. I think, for instance, we drew, in this case, 4 13 1 of 40 numbers and 1 of 40 out of two separate drums. 2 The overall odds of the jackpot -- and I keep saying 3 overall, but the odds of winning the jackpot were 1 in 4 3.6 million, and we had a starting jackpot of 250,000. 5 What came out of the research and what 6 we found that the players overwhelmingly liked was 7 they liked the style of the game. They liked that it 8 was a new and exciting format that they were choosing 9 out of two different sets of numbers. I think the 10 Lottery conducted a contest, and overwhelmingly the 11 successful name was Texas Two-Step. I'm sure there 12 are a lot of marketing tie-ins that will go nicely 13 with that name, but the matrix that we are 14 recommending is a 4 of 35, 1 of 35 bonus ball style 15 game. 16 And, again, I'm not sure what drawing 17 mechanism we'll use, but if you can imagine the Lotto 18 hopper over there, there will be two of those or 19 similar sets of drawing apparatus with 35 balls in 20 each one. The player will select four numbers out of 21 one hopper and one number out of the second one. It's 22 a 50 percent pay-out which is in line with all of your 23 on-line games. 24 We're proposing two draws per week. 25 Currently, Texas Million is played on Friday nights 14 1 only. We're proposing Tuesday and Friday. I think 2 that retailers will like that additional day because 3 it will bring more traffic in their stores. We're 4 proposing a rolling jackpot starting at 200,000, and 5 we say a rolling jackpot. On Tuesday, for instance, 6 the jackpot may be 200,000. If there is no jackpot 7 winner on Tuesday, that jackpot could potentially roll 8 to 400,000 or somewhere in that neighborhood. 9 And we're proposing one dollar per 10 play. Currently, Texas Million is two dollars per 11 play. This would be one dollar. If you look at the 12 matrix in a little bit more detail, the odds of 13 winning the jackpot are 1 in 1.8 million. That is 14 less than half of what the odds of winning the jackpot 15 in Texas Million are. We found that players did like 16 these lower odds. The overall odds of winning a prize 17 are 1 in 32. 18 And going back to our last meeting, we 19 can say the overall odds of winning a prize because 20 it's not a break-even prize. The minimum level here 21 is five dollars, and players did like that. 22 Without going into a lot more detail, 23 the expected prize -- and this is an average prize -- 24 of the jackpot winner would be about $417,000. Now, 25 that could range from anywhere from 200,000 to 15 1 potentially over a million dollars, depending on how 2 it rolls. 3 I do want to point out the bottom two 4 prizes, the five-dollar prize and the seven-dollar 5 prize, those are guaranteed prizes. So, regardless of 6 how many winners there are at that level, those prizes 7 are paid at that amount, seven and five dollars. 8 The other prizes from the twenty-dollar 9 up to the jackpot winner are pari-mutuel. So, it will 10 depend on the amount of winners. If there are two 11 winners on a Tuesday night at the jackpot level and, 12 for instance, in the pool, there's 417,000, they would 13 split that. So, they'd each win a little bit more 14 than 200,000, and this is a cash prize. So, there's 15 no annuity involved. 16 If you notice, at the bottom, we did 17 factor in a 2 percent reserve fund, and that is simply 18 to cover the guaranteed prizes of seven and five in 19 the event that there are a lot of winners, that we may 20 need to tap into a reserve fund. 21 If you look at the projected draw 22 pattern, this chart here simply states that on an 23 average -- and when you see 104 draws, that's simply 24 one year. It's 52 weeks, two draws per week. We are 25 projecting that we will get hit 29 times in the two to 16 1 four hundred and fifty thousand dollar range, ten 2 times in the seven to nine hundred thousand, four 3 times in the 1.1 to 1.6, and there is a circumstance 4 that will more than likely happen that one series will 5 roll to get almost to $2 million. That should happen 6 one time in the year. 7 We're also projecting that sales for 8 the game should be about 104 million. That is about a 9 dime per cap for the State of Texas with 20 million 10 population, and that would be about twice what Texas 11 Million is currently doing. 12 I'd be happy to answer any questions, 13 as well as John and -- 14 CHAIRMAN CLOWE: Any questions? 15 COMMISSIONER WHITAKER: Yes. Can you 16 give me a little history as to why you thought the 17 Texas Million did not do well -- or relatively well 18 such that you're recommending replacement? 19 MR. KING: We do have a -- Amir, if you 20 can fast forward to -- We've got a Texas Million -- 21 Back one. 22 MR. CADIGAN: Good morning. Again, for 23 the record, my name is John Cadigan, vice president of 24 GameScape. Good morning, Commissioners. 25 This game, when it came out of the box, 17 1 as you can see, did fairly well with a pretty high 2 weekly sales and tapered down. The game is still a 3 pretty good game at a million dollars a week. We 4 would have liked to see it a little bit higher, but 5 basically it has run its course. I believe the 6 two-dollar prize point may have had something to do 7 with players being turned off by it and at once a 8 week -- being offered at once a week. 9 So, it's not unusual for a Lottery 10 today in the United States to, with it's third and 11 fourth and even fifth product offering, to rotate 12 these out every 18 months or so. 13 I don't know if I specifically 14 addressed the question, Commissioner, but -- 15 COMMISSIONER WHITAKER: So, you just 16 feel, in the normal course of events, this would be a 17 normal time to change that? 18 MR. CADIGAN: Yes. 19 COMMISSIONER WHITAKER: Given the fact 20 that the anticipated higher prizes are a million -- or 21 2 million, given the perception of people that 22 4 million for the Lotto is a low entry point, how are 23 we going to make this stick out in the minds of buyers 24 out there? 25 MR. CADIGAN: In terms of the top 18 1 prize? 2 COMMISSIONER WHITAKER: Yes. 3 MR. CADIGAN: Well, can we get that 4 slide? 5 MR. KING: We anticipated a few 6 questions here. 7 MR. CADIGAN: One of the -- That slide 8 right there, Amir. Thank you. 9 When we looked at similar states 10 demographically that Texas, if I may, clusters with or 11 are similar to in terms of population demographics, 12 which, as you can see, are Florida, New York and 13 California, we looked at their product mix and the 14 products they were offering. 15 Now, if -- It's kind of half on the 16 screen there. Texas with the Texas Million right 17 there, if we go to the next slide -- By the way, these 18 are the top prize offerings on the left-hand side. 19 California's got a million plus. They've got a 20 million-dollar game, a 250,000-dollar game. That's 21 what the X's indicate. The top prizes by game and the 22 games are indicated in the appropriate boxes. 23 Amir, can you just go to the next one? 24 When we -- Nope. Go back. 25 When we withdraw Texas Million from the 19 1 product offering, you can see here that Texas will 2 have a very identifiable hole in its top prize 3 offering. You have the Pick 3 game which offers, 4 obviously, a 500-dollar prize, a very solid Cash 5 5 game, Texas Cash 5, and then all the way up to Lotto 6 Texas. 7 Initially, when we sat down with the 8 Lottery back in July, this was of particular interest 9 here was finding something in here which could itself, 10 just by the prize level itself, differentiate from the 11 other offerings, and this, we believe, it will do. 12 You'll have a million-dollar top prize with your Lotto 13 game, a 200,000-dollar prize with Texas Two-Step, and 14 the average 50,000-dollar prize for Cash 5, and, 15 again, the 500 for the Pick 3. So, we feel that it 16 will differentiate just by the fact that the top prize 17 is what it's set at. 18 COMMISSIONER WHITAKER: What other 19 typical questions should I be asking? 20 MR. KING: We could go through the rest 21 of the slides. 22 MR. CLOWE: Good job. Any other 23 questions? 24 Do you want any action on behalf of the 25 Commission at this time? 20 1 MS. KIPLIN: Yes. Staff recommends 2 that you propose new section 16 TAC 4.01 -- pardon me, 3 401.312 relating to the new on-line game Texas 4 Two-Step for public comment for a minimum 30-day 5 period and published in the Texas Register. 6 CHAIRMAN CLOWE: And this is item five 7 on our agenda? 8 MS. KIPLIN: No. Item four on your 9 agenda. 10 CHAIRMAN CLOWE: Oh, you're not to item 11 five? 12 MS. KIPLIN: Huh-uh. I'm going to do 13 that next. 14 CHAIRMAN CLOWE: Okay. You want a 15 motion on this? 16 MS. KIPLIN: Yes, I need a -- It is an 17 action item. 18 CHAIRMAN CLOWE: So moved and cited. 19 All in favor say aye. 20 MS. WHITAKER: Aye. 21 CHAIRMAN CLOWE: Aye. 22 MR. SADBERRY: Aye. 23 CHAIRMAN CLOWE: Opposed, no. 24 The vote is three zero in favor. 25 We're now ready to go to item five. 21 1 MS. KIPLIN: The staff recommends to 2 propose the repeal of 16 TAC 401.311 concerning Texas 3 Million on-line game. The proposal will be published 4 in the Texas Register for a minimum of 30-day public 5 comment. 6 COMMISSIONER WHITAKER: May I ask a 7 question? 8 CHAIRMAN CLOWE: Sure. 9 COMMISSIONER WHITAKER: How is this -- 10 How do we tie this in to item four? In other words, 11 don't they kind of go together? 12 Will one -- For example, will Texas 13 Million be repealed even if the Two-Step were not 14 approved or are they contingent on each other? 15 MS. CLOUD: No. We -- Well, we're 16 holding the Texas Million game on the street until 17 we're ready to replace it with another game so that we 18 don't interrupt the revenue stream. What we want to 19 do -- What we will do, just like with Lotto Texas, we 20 do have to go through this repeal for Texas Million, 21 but at the time that we're ready to switch over the 22 games, we'll do the same thing we did with Lotto Texas 23 with the countdown on the multi-draw feature. So, 24 Texas Million will end on Saturday night, and Lotto -- 25 and the new game will start -- Texas Two-Step will 22 1 start on Sunday. 2 COMMISSIONER WHITAKER: So, Kim, your 3 motion takes into account -- this contingency into 4 account? 5 MS. KIPLIN: Well, the motion today 6 does not take it into account because what we're doing 7 is just proposing for public comment. At the time 8 that it's before you for consideration for adoption, 9 you have an opportunity to set an effective date for 10 both of these rules, the effective date for the 11 repeal, the effective date for the adoption of the new 12 rule, and that's when you can coincide the two. 13 COMMISSIONER WHITAKER: So moved. 14 COMMISSIONER SADBERRY: Seconded. 15 CHAIRMAN CLOWE: Moved and seconded. 16 All in favor, say aye. 17 MS. WHITAKER: Aye. 18 CHAIRMAN CLOWE: Aye. 19 MR. SADBERRY: Aye. 20 CHAIRMAN CLOWE: Opposed, no. 21 The vote is three zero in favor. 22 And, Linda, I think you anticipate this 23 change, assuming that everything goes forward 24 positively, to occur in the spring. Is that correct? 25 MS. CLOUD: Yes, sir. 23 1 CHAIRMAN CLOWE: Very good. Moving on 2 to item six, report, possible discussion and/or action 3 on the Communication Department's practices relating 4 to access to information. Keith Elkins. 5 MS. CLOUD: Commissioners, it's fine if 6 Keith wants to make this report. This is based on 7 Ms. Nettles' complaint, and I'm not sure she's in the 8 room. 9 CHAIRMAN CLOWE: Is Ms. Nettles here 10 this morning? 11 MS. CLOUD: And I didn't know if you 12 wanted to take this up if she wasn't here. Mr. Elkins 13 wasn't here last time. 14 CHAIRMAN CLOWE: I know he wasn't, and 15 I know he's made a special effort to be here this 16 morning. I think it would be appropriate for Keith to 17 make a statement, if he's ready, concerning this, and 18 this item can be taken up again at a later time, but I 19 think since Keith is here, we'd like to hear from him. 20 MS. CLOUD: Okay. 21 CHAIRMAN CLOWE: Keith, before you 22 begin your statement, on behalf of the Commission, I 23 would like to recognize at this time the passing of 24 Mrs. Gail Phillips who is a colleague -- was a 25 colleague of yours, a valuable employee of this 24 1 Commission and a wonderful person. We all are sorry 2 at her loss. I know that she was a good, close 3 personal friend and colleague of yours, and this has 4 been a stressful time for her family and others who 5 are her dear friends. It is noted in the Austin 6 American paper this morning, and I understand it was 7 on television as well, and this Commission would like, 8 as I say, to express its regret at the loss of 9 Ms. Phillips. 10 MR. ELKINS: Thank you very much, 11 Mr. Chairman. I'm sure she would appreciate that as 12 well. She was a ray of sunshine here. She'll be 13 missed. 14 CHAIRMAN CLOWE: Very good. 15 MR. ELKINS: For the record, my name is 16 Keith Elkins. I'm communications director for the 17 Texas Lottery Commission, and Commissioner Clowe, 18 Commissioner Sadberry and Whitaker, I appreciate the 19 pleasure to be here. 20 This issue, as you know, was -- has 21 been ongoing. It's been developing. I'll give you a 22 little bit of background. I have been with the agency 23 two tours of duty. I was here in '93 to '96 as media 24 relations manager, the same position that Ms. Phillips 25 had, and recently came back July of 1999 as 25 1 communications director. I'm quite familiar with 2 Ms. Nettles and the Lotto report, having been here 3 during both of those tours of duty, and she is 4 probably unaware I have actually been fighting battles 5 on her behalf during both of those times, fighting for 6 her right to get information for the -- from this 7 agency, fighting for her right to do with that 8 information whatever she chooses to do, up until 9 recently, and that was this past year, and that was 10 when Ms. Nettles, I think, took on a different role 11 than the role that she had claimed as a journalist and 12 became more of an activist, more of a public relations 13 practitioner, pushing one particular side or the 14 other, and it started when she launched a boycott of 15 Texas Lottery retailers against the agency that she 16 spearheaded, named herself as the spokesperson for the 17 retailers without ever contacting the Texas Lottery 18 Retailer Association. 19 She has also led protest against the 20 Lottery at both NASPL 2000 and against some of the 21 issues before us. I want the record to reflect that 22 she has every right to do that as an individual, and I 23 support her right to do that. 24 I've been a journalist myself for 25 longer than I care to admit, but I have fought for 26 1 everyone's right to do that, but journalists don't 2 write press releases as a general rule. Journalists 3 don't advocate a position one way or the other without 4 identifying that either as a label of a columnist or 5 as an editorial. Ms. Nettles hasn't done that. 6 When this started happening and then we 7 started getting into a situation where she would 8 request information from my division, we would get 9 that information, we would try to answer her 10 questions, then she would try to contact another 11 division to ask them the same questions to get into a 12 situation where she could play one against the other, 13 we realized that we had a problem, that -- of 14 information dissemination. 15 We have three different divisions here 16 at the agency that are responsible for providing 17 information to the public and to the news media. My 18 division, the communications division, is just one of 19 those. We work specifically with non-paid media, 20 DALLAS MORNING NEWS, WFAA TV, for example, and we have 21 a very small staff. There is also the open records 22 division that provides information according to Texas 23 open records laws specifically upon request located in 24 the legal section, and we have the customer service 25 division and marketing that does the lion's share of 27 1 providing information to the public. 2 When we realized that we had a 3 situation last year, then we -- I looked at this 4 situation and asked myself, are we providing the 5 information from this division to someone that is not 6 a working member of the news media, and are there 7 others. Maybe Ms. Nettles is not the only one. We 8 did a review of the situation. We found that there 9 were three entities, hers being one, another being in 10 Florida, and the third one I'm not sure that we ever 11 identified who it was that we were sending information 12 to. We set up a policy. We discussed that with 13 Ms. Kiplin, whether or not it would be fair and legal 14 and nondiscriminatory, was assured that it was. We 15 talked with Ms. Cloud about it. 16 Our intent was not to prevent 17 Ms. Nettles from getting information in any way. It 18 was not to slow down her access to that information in 19 any way, and it was not to try to influence what she 20 would do with that information pro or negative to the 21 agency. It was simply trying to find a way to make 22 this the most efficient use of our resources to make 23 sure that people in my division were working with the 24 public that they had been charged to work with, that 25 other divisions were working with their particular 28 1 constituencies, and that's why we went forth with the 2 position. 3 There was a three-part test, one being 4 a member of the Texas Media Directory or being a 5 recognized member, I believe, of either the broadcast 6 or print associations in Texas and subscribing to a 7 code of ethics for the Society of Professional 8 Journalists, which basically says that you have no 9 agenda, that you strive for accuracy, you try to 10 remain unbiased, and you try and present the facts to 11 your audiences, whatever they might be, so that they 12 might make up their minds, and that you have no 13 agenda, you have no financial interest, you have no 14 reason to advocate a particular position one way or 15 the other. 16 It is my opinion that Ms. Nettles does 17 not meet that test. I've discussed this with 18 Ms. Cloud and Mrs. Kiplin. The easiest thing for me 19 to do is simply to add her back to our fax list. I 20 could do that in about 30 seconds, and this issue 21 could be over as far as it involves her. The real 22 problem that I see coming down the line, however, is 23 that -- what do we do the next time if we have a 24 financial company or somebody else who says, well, 25 look, add me to your list as well. At what point do 29 1 you draw the line there? And it's not so much just 2 adding the name or a number to a fax list. 3 In the case of Ms. Nettles and the 4 Lotto report, once you send out information, there was 5 quite a bit of staff time that was involved, either 6 myself or a member of my staff, answering the 7 questions or debating the merits of whatever it was 8 the agency was trying to do. We simply didn't -- I 9 didn't feel that we had the manpower, without 10 increasing our budget and our staff, to do that, and I 11 felt that open records or the customer service 12 division could better serve her particular needs. 13 I will also note that since the policy 14 was put into place, I have not noticed any decline in 15 her Web site or in her publication as far as the 16 information that she normally provided before. She is 17 still obtaining the information, as best I can tell. 18 She is still disseminating that to her readers, and 19 that's fine. We have no -- I have no reason to want 20 to stop that in any way. I was just looking for a 21 matter of efficiency. Of course, I work for this 22 agency on an at-will basis. I would certainly do 23 whatever is the will of this agency, but just for the 24 record, the policy was implemented in hopes that we 25 would have maximum efficiencies as far as a revenue 30 1 standpoint and that we were also maximizing staff time 2 efficiently in providing public information to 3 everyone. 4 COMMISSIONER WHITAKER: Mr. Elkins, I 5 take it that part of the basis of your policy or a key 6 part of it was the desire to provide public 7 information in an even-handed way. Is that correct? 8 MR. ELKINS: Yes, ma'am. 9 COMMISSIONER WHITAKER: Do you know why 10 Ms. Nettles is not here today? Did she receive notice 11 of the meeting? 12 MS. CLOUD: Yes. She has it posted on 13 her Web site. 14 COMMISSIONER WHITAKER: But no one 15 knows why she's not here today? 16 MS. CLOUD: No. 17 MS. WHITAKER: Nor do we know whether 18 she would desire to comment on this? 19 MS. CLOUD: No, Commissioners, we 20 don't -- we have not had a conversation with her. 21 COMMISSIONER WHITAKER: And I take it, 22 Mr. Elkins, that the open records act is still being 23 completely complied with and she has complete access 24 to that? 25 MR. ELKINS: Yes, ma'am, as far as I'm 31 1 aware. 2 MS. WHITAKER: And is there any 3 particular information that you know she was seeking 4 that is involved at this point? 5 MR. ELKINS: No, ma'am, I don't know of 6 any specific information. I will say that some of the 7 information that she's had issues with in the past is 8 not information that we routinely provide from the 9 communications division. It is more specifically 10 involving pretest drawing results and that sort of 11 thing that we normally don't provide, except upon 12 request. 13 MS. WHITAKER: So, there's no current 14 issue? 15 MR. ELKINS: Not that I'm aware of. 16 MS. WHITAKER: Thank you. 17 MR. ELKINS: Yes, ma'am. 18 MS. CLOUD: Commissioners, we also have 19 made every attempt to update our Web site with the 20 information Ms. Nettles is asking for so that all she 21 has to do is go to the Web site to get the 22 information. As far as the security checklist and 23 pre-draw reports, we're -- in another 30 days, we're 24 going to be automating that process, and it will be 25 computerized. It will not be a manual process as we 32 1 know it today. So, this, too -- She can still get the 2 reports, but it will be computerized reports. 3 MS. KIPLIN: Commissioners, just from 4 my end, Mr. Elkins mentioned that the open records 5 section is housed in the legal department, and just to 6 kind of give you an idea of -- It's handled by one 7 individual, and, of course, there is support staff, 8 and we do have an attorney assigned to consult with. 9 For fiscal year 2000, we had 855 requests that came in 10 for one person to handle, and for fiscal year 1999, it 11 was 806. This year alone, the first quarter is 213. 12 If you carry it out, it's 852, and I'm looking, in 13 particular, to this particular individual's request to 14 see how we're handling them because I think one of the 15 concerns was that she wasn't receiving information 16 timely. 17 Under the open records act, of course, 18 the agency has ten business days within which to 19 respond, and in just taking a pretty quick look -- For 20 example, I'm looking at the month of October. We had 21 72 open records requests for that month. 51 of those 22 were Lottery, and of those 51, Ms. Nettles had 22, and 23 when I look at those on breakdown, I can tell you 24 exactly the kind of information that she was 25 requesting. So, I can answer that question, if you'd 33 1 like, more specifically, but it looks as though we're 2 coming in pretty much about half of the time that it 3 would actually take to respond. So, we're doing our 4 dead level best to be as responsive to not only 5 Ms. Nettles, but every other requestor. 6 Now, I will tell you that to be able to 7 manage these number of requests, we do take them in 8 the order in which we receive them, not to say that we 9 only work on one to the exclusion of others that are 10 pending, but because we send them out for, obviously, 11 responses throughout the agency where it's 12 appropriate, but we do take them in the order we 13 receive them. We think it's the only fair way to 14 approach it. 15 I've had people say, well, why can't 16 you just handle the ones that are simple first, and 17 that's in the eyes of the beholder, what's simple and 18 what's not simple, and, so, somebody who -- If we were 19 to judge one as not being simple, I can just about 20 assure that they would disagree and would want that 21 bumped to the front of the line. So, I do support the 22 way in which we are responding to those open records 23 requests, and I think we do a pretty good job 24 considering that we've got one person that's handling 25 this, along with the records management, and the 34 1 number of requests that we have coming in, and it 2 looks to me like we're going to be setting about the 3 same kind of trend, over 800, if the first quarter is 4 an indication of what the three remaining quarters 5 will be. 6 COMMISSIONER SADBERRY: I had a 7 question, either one of you. Probably you, Kim. 8 Keith mentioned some interaction with legal and having 9 received some feedback or confirmation of the 10 propriety, if you will, in the way that his department 11 is handling this. Is that -- Was that just general 12 advice? Was it set in any form of formal advice or 13 documentary advice? 14 MS. KIPLIN: No. It was oral advice, 15 oral consult, and the -- My position is very clear. 16 As long as we're treating people that are similarly 17 situated the same, then I think that we are falling 18 well within the law, and I know Mr. Elkins referred to 19 it as a policy, and it may be an internal policy, but, 20 frankly, the policy of this agency is embodied in the 21 open records rule that's been promulgated and is part 22 of our administrative code chapters, and that is the 23 formal policy of the agency, and that is that 24 requestors make written requests to the agency via the 25 open records coordinator and that we respond as we 35 1 need to by law. I think what he's talking about is an 2 internal procedure about how best to handle the 3 information dissemination within the agency. 4 COMMISSIONER SADBERRY: And you do, as 5 general counsel of this agency, stand behind his 6 articulation of the practice, if you will, that he's 7 carrying out concerning this information? 8 MS. KIPLIN: Sure. I think he is -- 9 His decision is well reasoned. He's related it back 10 to what he considers to be the code of ethics that's 11 maintained by professional journalists. 12 I will tell you that Ms. Nettles was 13 not the only person affected by the decision 14 internally how to handle information being 15 disseminated from the communications division. There 16 were, I think, a couple others that also fell within 17 this particular focus, and once again, information, as 18 required by law, is distributed -- you know, what's 19 publicly available, obviously. You know, we try to do 20 the best we can to get it up on the Web site, and it's 21 available just as quick as we can, but information 22 that's provided by a governmental body is provided 23 pursuant to the open records act. 24 COMMISSIONER SADBERRY: Just for this 25 record, does anybody happen to have access to the date 36 1 of the meeting that Ms. Nettles did appear and I 2 understand she did address some comments? I believe 3 that Mr. Elkins is essentially responding to those 4 now. I mean, it's okay. I just want -- I guess it's 5 more important. 6 MS. KIPLIN: I believe it was the 7 October 11th, 2000 Commission meeting. 8 COMMISSIONER SADBERRY: So, she has had 9 a chance to speak. Her comments are a matter of the 10 record, as are now Mr. Elkins'. 11 And by the way, I appreciate the Chair 12 having called on Mr. Elkins to make these comments 13 even in her absence because I think, in my own 14 perspective, now we have a complete record on this. 15 CHAIRMAN CLOWE: Thank you, sir. 16 MR. ELKINS: Commissioner Sadberry, 17 Mr. Chairman, if I might just add, I also went one 18 step further after I had implemented it in as 19 procedure, not a policy, to make sure that I was not 20 looking at this with jaded glasses or anything like 21 that, and I proposed this hypothetical situation to an 22 Internet group made up of professional journalists 23 asking them if, under this circumstance, someone did 24 this, so on and so forth, should they be considered a 25 journalist. 37 1 I didn't identify Ms. Nettles. I did 2 not identify the agency, but it was a hypothetical 3 situation, and all of the responses that I received 4 were pretty much along this line: In the example you 5 cite, a person who engages in protest and boycott 6 activity is not a journalist, but instead is an 7 activist. 8 And then it goes on, and I can provide 9 that to the record if you will like. 10 CHAIRMAN CLOWE: Thank you, Keith, for 11 your response, and, Kim, for your following comments. 12 I appreciate the point Commissioner Sadberry made, in 13 that, my recollection was that Ms. Nettles was here 14 with us on October the 11th, and then this subject was 15 passed in our November meeting, and, Keith, we did 16 want your comments on the record and here today. 17 MR. ELKINS: My pleasure. 18 CHAIRMAN CLOWE: We'd invite you to see 19 that Ms. Nettles knows that you made commentary to 20 this Commission and point the transcript out to her so 21 that she may be aware of what you've said. This 22 Commission is interested in openness and fairness of 23 all communication of all items, and although you have 24 laid out a very convincing position on your part, my 25 doubt is that Ms. Nettles is satisfied, and having 38 1 said that, I want her to know by way of this 2 transcript that this issue, although we've covered it 3 today, can be revisited at some point in time in the 4 future if she desires to come before the Commission 5 and make a comment, but we have now come to a point 6 where you responded, as was promised. So, we're going 7 one step at a time. 8 MR. ELKINS: Thank you, Mr. Chairman. 9 And for the record, I do believe that Ms. Nettles also 10 posts the transcript of these meetings on her Web site 11 as well. 12 CHAIRMAN CLOWE: Very good. Thank you, 13 Keith. 14 We have some individuals who are here 15 with us this morning relative to some items that are 16 on our agenda. So, in respect to those folks, we're 17 going to step out of the agenda order. And where is 18 the -- Is it item 12, Linda? 19 MS. CLOUD: Yes, sir. 20 CHAIRMAN CLOWE: Let's move, then, to 21 item 12, the report, possible discussion and/or action 22 on the agency's security audit. Linda, will you take 23 us into this item? 24 MS. CLOUD: Yes, sir. We have 25 PricewaterhouseCoopers auditors here, and they -- 39 1 Mr. Pitcock will sit at the table with them, and 2 they'll make an overview of the audit for you, and if 3 you have any questions, they'll be glad to answer 4 them. 5 You have a copy of the security audit 6 passed out to you earlier, sent to you, the public 7 document sent to you -- We try to send it to you -- 8 sorry, Betsy, you didn't get yours -- ahead of time so 9 you would have had a chance to read it, but go ahead. 10 MR. SLOCUMB: Thank you, Linda and 11 Commissioners. I appreciate the opportunity to be 12 here today. My name is Ray Slocumb, and I am a 13 partner with PricewaterhouseCoopers. 14 I've asked George Galindo, who is the 15 manager also on this particular security audit 16 project, to join me should we get some particular 17 questions. I'll just give a brief summary, brief 18 overview of the process we went through and talk 19 briefly about the report and then be happy, as I said, 20 to answer any questions. 21 As you know, over the past couple of 22 months, PricewaterhouseCoopers has performed a 23 security audit of the Texas Lottery. The scope that 24 we used in performing our work was limited to 25 Section 5 of the RFP that was sent out to us. We 40 1 followed that to a "T," and the scope included, as far 2 as the areas, the Texas Lottery Commission, the 3 lottery operator, which is GTech, security audit of 4 the Lottery vendors, which included Scientific Games 5 and Pollard Bank Note, as well as review of the 6 security of the claim centers, and as Linda mentioned 7 we have completed the audit, and we have our report 8 available to give to you today. We have delivered it 9 to Linda and to Mike to distribute appropriately. 10 If you look at the report, the way 11 we've broken it out is we tried to make it very easy 12 to read and to understand. We've identified the 13 control issue that we were auditing against, any 14 security weaknesses we found, the risks that we 15 believe were there and our recommendations for 16 addressing those control issues. And then one of the 17 things we've been doing in the past few weeks is 18 working very closely with the Lottery to make sure we 19 get their responses in the report, working with Linda 20 and the various directors over the areas, as well as 21 GTech and the various vendors, and those responses are 22 included in the report. 23 In summary, while we have found 24 opportunities at the Lottery, its operator and its 25 vendors for control and security to be improved, we 41 1 did not witness or discover any procedure or action 2 that would materially impact the fairness or integrity 3 of the Lottery games. 4 I want to personally thank Linda Cloud 5 and her management team, as well as Debra McLeod, 6 internal audit, for helping us coordinate a lot of the 7 meetings, in getting access to everything we needed. 8 Nothing was kept from us. Everything we asked to see 9 was given to us. We were able to get in here and get 10 the work done very efficiently with no delays. Also, 11 I might just want to mention, as we found minor 12 issues, Linda and her directors were very, very 13 diligent in addressing those things immediately that 14 they could deal with, and as I said earlier, we 15 delivered other reports today. 16 Lastly, I just want to say again thank 17 you for the opportunity to work with the Texas 18 Lottery. We really appreciate it. 19 COMMISSIONER SADBERRY: Form question: 20 How frequently is this report generated? 21 MS. CLOUD: It's every two years, and 22 we have to present it to the legislature before the 23 session starts. 24 COMMISSIONER SADBERRY: And is it an 25 executive director of the agency, if you will, report? 42 1 MS. KIPLIN: It's not an action item. 2 The executive director provides the complete report of 3 the security study to the Commission. The Commission, 4 in turn, provides it to the governor and the 5 legislature before the meeting of each regular 6 legislative session with the summary of the security 7 study that shows the overall evaluation of the Lottery 8 security, and that's provided by Texas Government Code 9 Section 466.020. Not an action item. 10 COMMISSIONER SADBERRY: And I note the 11 RFP by which this report is generated is June of 2000. 12 What's the term of the current contract on this? 13 MS. McLEOD: Through May. 14 MR. BENNETT: I believe it's through 15 May, according to Debra McLeod. 16 For the record, my name is Ridgely 17 Bennett. I'm the deputy general counsel. I hate to 18 answer those questions off the top of my head. So, I 19 will check on that question and get you a proper 20 answer. 21 COMMISSIONER WHITAKER: Who did the 22 audit report two years ago? 23 MS. CLOUD: Pricewaterhouse. 24 COMMISSIONER WHITAKER: And did you 25 have a chance to compare those findings with these, 43 1 and is there anything of note in comparing the two as 2 far as progress? 3 MR. BENNETT: No, I don't believe 4 there's anything of note. Obviously, there's been a 5 lot of change over the last two years, but I would say 6 that there's really not -- I would say there's 7 probably not really anything major to note. 8 COMMISSIONER WHITAKER: So, you're 9 satisfied with the progress of change, in response? 10 MR. BENNETT: Yes, I am. 11 MS. CLOUD: One thing I'd like to point 12 out in this report, Commissioners -- and you'll see it 13 in GTech's response, as well as the Lottery response. 14 Both sides of the house, GTech and the Lottery 15 Commission, have changed out major components of their 16 computer systems. So, this audit came at an excellent 17 time in order to give us an opportunity to see where 18 we might not have tied all of our security down as 19 much as we wanted to, and it pointed out areas where 20 our computer people could go back and do that, as well 21 as GTech staff, but GTech has changed out one of the 22 biggest systems they've ever changed out with the 23 process change-over, and the Lottery system on this 24 side of the house has done the same. 25 CHAIRMAN CLOWE: Do you have any 44 1 comments? 2 MR. PITCOCK: I was here, you know, two 3 years ago -- 4 MS. KIPLIN: Well, could you identify 5 yourself? 6 MR. PITCOCK: I'm sorry. Mike Pitcock, 7 director of security, Texas Lottery Commission. I was 8 here two years ago when we did the audit and this 9 audit, and I will tell you that the staff that 10 Pricewaterhouse sent over this time, you know, went to 11 great lengths to uncover anything they could find that 12 would be, in their eyes, a weakness that we had, and I 13 compliment them for that. Their professionalism was 14 good. They interacted with my staff, I think with the 15 computer people, GTech, and I never heard a complaint 16 one about the interactions, and I think that that 17 deserves a compliment because when you have this 18 intense of a project and it's not going to make 19 everybody happy, to say the least -- but they 20 interacted well, and I think they did an excellent 21 job. 22 CHAIRMAN CLOWE: Very good. Nothing 23 further. 24 Thank you, gentlemen, very much. 25 We'll now go back to the agenda, and I 45 1 believe item number seven is next, status report, 2 possible discussion and/or action on the Lottery 3 operator audit procurement. 4 MS. CLOUD: Commissioners, can I 5 interrupt just a moment? We also have our financial 6 auditors in the room whenever you can get to them as 7 well. That report has to be presented to the 8 legislature as well. 9 CHAIRMAN CLOWE: And what item does 10 that relate to, Linda? Point that out to me, please. 11 Number ten? 12 MS. CLOUD: Ten. 13 CHAIRMAN CLOWE: All right. Then, 14 we'll go to number ten if they're here and ready to 15 appear before the Commission. 16 Mr. Sanchez, good morning. 17 MR. SANCHEZ: Good morning, 18 Chairman Clowe. Good morning, Commissioners. My name 19 is Bart Sanchez. I'm the financial administration 20 director. With me is the representatives from the 21 audit firm McConnell & Jones. I'll let them introduce 22 themselves. 23 MR. McCONNELL: My name is Wayne 24 McConnell, and I'm a managing partner and partner in 25 charge of our assurance practice. 46 1 MR. EATON: Hello, Commissioners. My 2 name is Eric Eaton. I'm the director of assurance 3 services for McConnell Jones. 4 MS. KIPLIN: Commissioners, while 5 they're distributing, let me just do a little 6 housekeeping. This is also not an action item for you 7 all. We are required under Section 466.017 of the 8 Texas Government Code to have an annual financial 9 report. It's the executive director that obtains the 10 certified public accountant to conduct that 11 independent audit for each fiscal year and then from 12 there, the certified public audit -- pardon me, 13 accountant shall present an audit report to the 14 executive director, commissioner, governor, 15 comptroller and the legislature not later than the 16 thirtieth day after the Commission date for the annual 17 financial report, and I think Mr. Sanchez has that 18 date. 19 MR. SANCHEZ: Yes. On the last 20 Commission meeting, I presented the annual financial 21 report which is the unaudited version of the financial 22 statements that is presented to the comptroller on 23 November 20th. Before us, we have the audited 24 financial statements that were audited by McConnell & 25 Jones, and if you want for them to present it they can 47 1 do a general overview and respond to any questions 2 that you may have. 3 MR. EATON: Commissioners, we'd like to 4 express our appreciation for being given the 5 opportunity to work with the Texas Lottery and also 6 thank management, Linda, Bart, Debra, Patsy, for their 7 cooperation during our engagement. 8 A brief overview. On Page 1, we have 9 the independent auditors report which is -- expresses 10 an unqualified opinion and general purpose financial 11 statements for the fiscal year ending 8-31-2000. 12 Basically, it's a clean opinion, and it's showing the 13 reportable conditions related to the financial 14 reporting. I guess some general observations would be 15 that, you know, you had total operating revenue of 16 2.6 billion, operating expenses of 1.8 billion, with 17 the transfers to the multicategorical school, 18 hospitals and higher education about 830 something -- 19 $862 million. 20 One change that's not in this year's 21 report that was in last year's was the Y2K and the 22 effects of Y2K issues. Those are no longer 23 applicable. So, you will not see those when comparing 24 to last year's report. 25 You have your notes of the financial 48 1 statements, and I know that you're just getting this. 2 So, you know, if you want to skim through it and have 3 any questions, that would be fine. But also on 4 Page 36 is our report on compliance on internal 5 controls over financial reporting in accordance with 6 governmental auditing standards. We noted no 7 instances of noncompliance that are required to be 8 reported, and we noted no reportable conditions that 9 are considered to be material witnesses. We are 10 not -- No matters came to our attention during the 11 course of our audit. 12 We did have nonmaterial weaknesses 13 which are reported starting on Page 38 which is on our 14 report on -- to management on the internal controls in 15 accordance with government statutes, recommendations 16 to increase the effectiveness of efficiencies on the 17 Commission. We can go over those if you'd like or if 18 you want to scan over those and have any questions. 19 CHAIRMAN CLOWE: Questions? 20 COMMISSIONER SADBERRY: Same set of 21 questions. You've already told me before I asked you 22 it's a known item matter. Again, the frequency two 23 years, again? 24 MS. KIPLIN: It's annual. 25 COMMISSIONER SADBERRY: Okay. And the 49 1 RFP, the contract? 2 MS. KIPLIN: I should have anticipated 3 that. 4 Mr. Bennett, hopefully you'll come up 5 here. While he's answering that question, the 6 security audit contract, Commissioner, that does 7 expire May 31, 2001, and there are no options to 8 renew. We'll get you an answer on the one that's 9 before you right now. 10 CHAIRMAN CLOWE: Any other questions? 11 Bart, do you have any following 12 comments? 13 MR. SANCHEZ: I think one of the areas 14 in their management letters to improve was an area 15 that we had discussed at prior Commission meetings was 16 the staffing of my division. As is last year, I 17 experienced a lot of turnover. It was very 18 challenging again to complete the audit, but I'm glad 19 to say that we were able to do it. I want to 20 appreciate -- acknowledge Billy Atkins lending me Tom 21 Leak, one of his audit managers from San Antonio. He 22 helped tremendously in trying to get the audit 23 completed. 24 CHAIRMAN CLOWE: Very good. I think, 25 on behalf of the Commission, we want to express our 50 1 appreciation, Bart, for the job that you and your 2 staff are doing. Everyone loves clean audits, and 3 both you and Mike have produced clean audits. In its 4 wisdom, the Commission probably will take a little 5 time to digest this material, and we don't have 6 questions beyond what we've asked this morning, but as 7 we get to spend a little time on this, we may come 8 back and we'll direct questions to you, Bart, that you 9 can help us with, if there are any. 10 MR. SANCHEZ: That's fine. 11 CHAIRMAN CLOWE: Thank you, gentlemen. 12 And now I believe that we are ready to 13 go to item seven, status report, possible discussion 14 and/or action on the Lottery operator audit 15 procurement. 16 MS. KIPLIN: Commissioners, just to 17 make a note, Mr. Bennett is also scheduled to be 18 here -- Well, I'll just retract what I was just about 19 to say. Mr. Bennett has just entered the room. 20 CHAIRMAN CLOWE: Ridgely, we're to item 21 number seven which, I believe, is yours. 22 MR. BENNETT: Once again, my name is 23 Ridgely Bennett. I'm the deputy general counsel. 24 Item number seven is the status report 25 and possible discussion and/or action on the Lottery 51 1 operator audit procurement, and I believe the 2 executive director has something she'd like to say 3 about that issue. 4 MS. CLOUD: Commissioners, we've been 5 trying to get this audit out for some time, as you 6 well know. We've put it out a couple of times in the 7 last few years and not had responses to it. We're so 8 late in the process at this particular time, it's my 9 recommendation that we do not go forward with doing 10 this audit at this time. We're in the process of the 11 RFP. I don't think it's the -- The timing is just not 12 good, and I would like to say that we drop this item 13 until after the RFP process and then we put -- Whoever 14 might be the successful proposer would put it in the 15 contract so that we do it more frequently than what 16 we've been able to do with this particular situation. 17 COMMISSIONER SADBERRY: Linda -- and 18 I'm not -- Well, you can call whomever -- 19 MS. CLOUD: Well, Debra might want to 20 come up. 21 COMMISSIONER SADBERRY: We did do 22 something -- and I don't want to use the terminology 23 that -- I'm sure Debra will straighten me out on, but 24 something like an agreed-upon approach or asking of 25 that nature. Did we do anything of a similar nature 52 1 in the life of this contract that would be considered 2 an audit of any nature? 3 MS. McLEOD: To answer your question, 4 it's called agreed-upon procedures, and it was from 5 the year of '92 to '97. What they did was go in and 6 look at the cost information that the Lottery operator 7 had provided us with purely to verify that those 8 numbers did tie back to their audited financials. 9 And with regard to your second 10 question, every year, GTech does a SAS-70 audit for 11 us. Ernst & Young comes in and looks at the controls 12 over the computer environment and prepares a report 13 for us. 14 MS. CLOUD: We also get a copy of their 15 annual financial statements, audited statements. 16 COMMISSIONER SADBERRY: Debra, do I 17 recall that on one or more occasions, you actually 18 traveled to the GTech headquarters in connection with 19 the procedure? 20 MS. McLEOD: No, sir, I did not. In 21 fact, at the time, Deloitte & Touche that did the 22 audit was required to prepare a sworn statement of 23 secrecy. Therefore, any information that may have 24 come to their attention was held by Deloitte & Touche. 25 All we had asked for purely on this audit was did the 53 1 numbers they provide us tie back to their audited 2 financials. 3 COMMISSIONER SADBERRY: That was going 4 to be my next question, is where is the data if 5 someone wanted to see it or inquire about it, and 6 what's the condition or circumstance of the 7 custodialship of that data? 8 MS. McLEOD: Custodialship, to my 9 knowledge, rests with me under my privilege of 10 internal audit work papers. There has been no formal 11 report prepared on this, except that the information 12 we have been provided by GTech does comply with the 13 information under the contract they were required to 14 give us. 15 COMMISSIONER SADBERRY: Would it be 16 fair of me to ask you whether or not you concur in the 17 executive director's position regarding, if you will, 18 dropping this item through the remainder of this 19 contract? 20 MS. McLEOD: Yes, sir. I think, at 21 this time, it would be more beneficial to drop this 22 item for two reasons. We've tried very hard for the 23 last 18 months, that I know of, to get a firm in here 24 to perform this audit. We've had no takers. I think, 25 at this point in time, it would be beneficial to the 54 1 agency just to drop it. 2 COMMISSIONER SADBERRY: Final question. 3 Is there any actual real or perceived detriment to the 4 agency in not pursuing this item under its rights to 5 do so under the contract that you could identify or 6 not? 7 MS. CLOUD: I don't perceive there to 8 be anything detrimental to the agency at this time. I 9 think we have been provided -- GTech has been 10 providing the internal audit with quarterly statements 11 on their GTech Texas expenses, and, so, they have been 12 doing what we've requested them to do, and that was 13 not done prior to the present administration in GTech. 14 We had not been getting these reports that often. 15 The contract actually says once a year. 16 So, they are providing information that we've 17 requested, and I don't see where we're in any kind of 18 detriment by not going forward with this audit at this 19 time. 20 MS. McLEOD: And I would echo the 21 executive director's comment on that, partly because 22 they have been giving us the information and even more 23 responsive than prior management had, and, 24 furthermore, the information that they have been 25 giving us has been in full disclosure under the terms 55 1 of the contract and then some. So, I think they've 2 been more than cooperative in giving us the 3 information. 4 What they have given us has been in 5 line with what has been previously reviewed by 6 Deloitte & Touche. So, everything is in compliance 7 with what we had seen before under the audit or under 8 the agreed-upon procedures reviewed by Deloitte & 9 Touche and is currently being given to me. 10 COMMISSIONER WHITAKER: No questions. 11 CHAIRMAN CLOWE: Debra, in your 12 position as internal auditor, what would be your 13 opinion on why we have been unable, as you pointed 14 out, over the last 18 months to achieve the audit 15 goal? 16 THE WITNESS: My understanding, under 17 the prior commissioners' decision, was they wanted an 18 audit done, and the purpose of the audit was to give 19 some sort of comparison of these numbers. 20 To give you a brief history, many years 21 ago we were asked -- the staff was asked how much is 22 the real cost, what if the legislature had come in and 23 said if we did it internally versus having an external 24 firm. They went through great exercise to come up 25 with numbers independent of the Lottery operator, and 56 1 that was presented before the commissioners. At that 2 time, the commissioners wanted to look further at what 3 were the numbers that GTech had who was the only 4 source we had that was providing information. 5 Point of this audit would be to compare 6 it against something that, quite honestly, we don't 7 have anywhere in the nation. There's no other Lottery 8 that's providing all the services that GTech is doing. 9 The efficiencies with that type of operation will 10 change from state to state given the size of the 11 operation, the network service that we have to go 12 through -- that's satellite, lease land, telephone. 13 It's a phenomenal system that they've put together, 14 17,000 retailers. This is not like any other state 15 that you can do a comparison to. 16 I think, from an audit profession, it's 17 very difficult without a benchmark or without another 18 firm having been here to do that type of comparison. 19 The best they can do is look at, did the numbers 20 actually tie back to their audited financials, and 21 that's the reason for why we scoped it down to an 22 agreed-upon procedure at that point. Asking for an 23 audit opinion -- I believe the industry will not give 24 you one because there is no benchmark to say -- 25 Whereas with audited financial statements you can say 57 1 everything that they reported or they paid is fairly 2 presented in your financial statements, and we're 3 asking them to go beyond that, more of an economist's 4 view, and that's not what auditors do. 5 COMMISSIONER SADBERRY: Basically, no 6 takers is what you're saying? 7 MS. McLEOD: No takers. 8 COMMISSIONER SADBERRY: This is the 9 process in which the issue of indemnity and all those 10 issues came up? 11 MS. McLEOD: No. That's related to the 12 contract. Some of that was indemnity issues with 13 potential issues after the Deloitte contract. 14 CHAIRMAN CLOWE: Well, I'm looking to 15 the future, and I think you're correct, both of you, 16 on -- the timing now is inappropriate, but if we want 17 the information which you have described which would 18 be the result of an audit and it's not a proper audit 19 subject or approach, I think we need to reevaluate 20 what our goal or our desires are in this regard and 21 either change our approach, because we are not getting 22 any takers under this approach, or we need to 23 determine a different way to achieve the results that 24 we're looking for. 25 It raises a question when you ask for 58 1 an audit and you can't get it, and I think we need to 2 be proactive in attacking that subject and, when this 3 comes up in the future, have a proper path to go down. 4 I don't want this subject as it is on the table and 5 let it be three years and nobody wants to do the 6 audit. You know, let's see what it is we're after and 7 determine if we can get it and how we can get it, as 8 we perhaps agree to drop it at this time. 9 MS. CLOUD: One of the things, 10 Commissioners, just let me point out, the two audits 11 that you received today have opinions. The problem 12 we've got in the audit we're requesting for the 13 Lottery operators is we want an opinion. We want an 14 opinion of the financial information or the -- 15 whatever we've laid out in the RFP, and these audit 16 firms don't want to give an opinion. So, that -- If 17 we do another agreed-upon procedure, we could get a 18 whole bunch of them to do it, but that's not giving us 19 what we want. 20 CHAIRMAN CLOWE: Well -- and, you know, 21 if we can't get the opinion, it's not an audit, and I 22 think Debra enlightened the commissioners, in that, we 23 were looking for information relative to the subject 24 of what's being done by way of an array of services 25 and evaluating them, and I agree with her comment that 59 1 that may be a judgment call and not the proper subject 2 of an audit. So, I'm suggesting that we step back 3 from this and see what it is we really want and how we 4 should go at it. You know, maybe we ought to re-cast 5 this activity and not have it an audit, but have it 6 something else. 7 MS. McLEOD: And that's very possible, 8 Commissioner. There's several firms out there that 9 are very well knowledgeable with the industry or the 10 variety of vendors that are out there, and I think 11 that kind of information has been coming to the 12 executive director in the help of rewriting the RFP in 13 a go-forward basis. When you try to design a document 14 that will handle the next, possibly, five to ten 15 years, you have to look forward as to what is going on 16 in the industry and how do we make changes in our 17 services here. So, I think she's tried, in her role, 18 to do that on a prospective basis. Whereas, I think 19 the audit is going back and looking at a historical -- 20 how is the money spent and did we get the best -- or 21 did GTech spend their money most judiciously. 22 One thing I would say -- and, of 23 course, Mr. King, I believe, is here, but they account 24 for the Texas operation as a cost center, and as such, 25 they are very accountable to their headquarters as to 60 1 how money is spent through their operation, and, thus, 2 you would assume -- or make the logical assumption 3 that since they're only being paid on a percentage of 4 sales, that they're going to try to make the most use 5 of their dollars when they spend it. It's not like a 6 regular contract here where if we have a direct 7 payment of services, we can audit how much it would 8 cost to deliver the tickets for those sales. 9 So, we're going through this in a 10 different mode of looking at the cost. We have to 11 take -- how did they expend the money and try to keep 12 it a profitable venture for themselves. 13 CHAIRMAN CLOWE: That's helpful. 14 Mr. King, this is one of those times 15 when you should have left the courthouse after you 16 gave your testimony. I have a question for you. To 17 the best of your knowledge, are there other states 18 that have a relationship with your firm that conduct 19 this type of audit? 20 MR. KING: To the best of my knowledge, 21 I know of none. I know that all of our sites across 22 the U.S. do a SAS-70 audit on a yearly basis, and we 23 provide that to our customers. I know this dates back 24 a few years. So, I'm not exactly sure why it 25 resurrected or -- but I know it's been on the agenda 61 1 for at least my tenure the last two years, but I would 2 sort of argue that we -- our company is audited on a 3 daily basis. You know, our contract compliance -- if 4 there is something that we didn't do one week or did 5 something a little more, we hear about it the next 6 date. Now, I'm not sure how that relates to this 7 particular audit, but I know, financially, we provide 8 all of our cost, and it used to be a yearly basis, and 9 Linda and Debra request it on a quarterly basis, and 10 we have no problem doing that. 11 CHAIRMAN CLOWE: I don't think the 12 subject that we're after here has so much to do with 13 that as it does the way Debra explained it, and I 14 thought it was an excellent explanation of an 15 evaluation of the cost incurred for the different 16 functions that GTech is providing under its contract 17 to the Lottery Commission, and I see that -- Now that 18 we're into this discussion, I agree with Debra. It's 19 not so much an audit function. We're getting that 20 accomplished. It's a judgmental determination of 21 whether or not this Commission is properly engaged in 22 its contract with the operator for the various 23 activities which you're providing at a cost to the 24 State. 25 So, I think this discussion has been 62 1 beneficial for me, at least, if no one else, on where 2 it is we're headed on this and being able to make 3 these judgment calls based on some fact which we're 4 not going to get from an auditor, looks like to me, 5 and we're not going to get an opinion letter. I 6 understand that more clearly now than I have in the 7 past. Thank you, sir. 8 MR. KING: Are you saying I should 9 leave the courthouse? 10 CHAIRMAN CLOWE: I've been called 11 back -- is it voir dire -- by the attorneys as an 12 unfriendly witness. So -- 13 MR. KING: Thank you, Commissioner. 14 CHAIRMAN CLOWE: You're welcome to 15 stay. 16 Any other questions, Commissioners? 17 COMMISSIONER WHITAKER: Kim, I take it 18 you concur with his judgment of -- 19 MS. KIPLIN: Well, I think it's the 20 executive director's decision based on her experience. 21 The only thing I can say from a legal perspective is 22 that we have the statutory right to audit the Lottery 23 operator, and we also have the contractual right, and 24 I think you've heard what the executive director's 25 position is. 63 1 CHAIRMAN CLOWE: Does this call for a 2 motion? 3 MS. KIPLIN: No. It's not an action 4 item. It's been in direction for some time from the 5 Commission, but it's not an action item. 6 Mr. Bennett, were you able to find out 7 the expiration date for the financial audit. 8 MR. BENNETT: Yes. Commissioners, on 9 item number 10, the contract -- the primary term of 10 the contract with McConnell & Jones ends August 31st, 11 2001. The Texas Lottery Commission does retain, at 12 its sole discretion, the option to renew the contract 13 for two additional one-year periods. 14 CHAIRMAN CLOWE: Very good. Thank you, 15 Debra, for your comments. 16 And, Ridgely, I believe the next item, 17 number eight, is yours as well, status report, 18 possible discussion and/or action on the Lottery 19 operator procurement and/or Lottery operator 20 consultant. 21 MR. BENNETT: Thank you, Commissioners. 22 As you are aware, as part of our research in 23 preparation for drafting the Lottery operations and 24 services RFP, the Texas Lottery Commission issued a 25 request for information in order to obtain information 64 1 about technology and business practices and things of 2 that nature of the current Lottery vendors. The 3 responses to the request for information have been 4 submitted to us, and they're currently being reviewed 5 by the drafting committee. 6 CHAIRMAN CLOWE: I believe there are no 7 questions. Thank you, Ridgely. 8 MR. BENNETT: Thank you. 9 CHAIRMAN CLOWE: Next item, number 10 nine, consideration of and possible discussion and/or 11 action on state audit reports relating to the Texas 12 Lottery Commission. Debra McLeod. 13 MS. McLEOD: Commissioners, several 14 months ago, the state auditors office put out a 15 management letter addressing some issues on a 16 performance review that they had performed. They've 17 since come out with a finalized document. I believe 18 they analyzed several state agencies and included 19 their comments at that time. Management's response to 20 those findings that they had here at this agency was 21 that actions would be corrected. I've had no 22 opportunity to verify that. So, I will turn that over 23 to Linda Cloud for response. 24 MS. CLOUD: Patsy might want to come up 25 on that one. She's a little more familiar with the 65 1 responses back to the state auditors, but we did send 2 a letter spelling out everything we were going to do. 3 You want to -- 4 MS. HENRY: We did have management 5 responses that were included in the report posted to 6 the state auditors Web site responding to their 7 findings. All of the circumstances that they had 8 concerns with were corrected before they left these 9 offices and wrapped up their audit. We have some 10 staff working now to compile the next edition of our 11 performance audits that will go to the legislature on 12 the 1st of January, and as part of that process, we 13 will be providing some additional documentation to our 14 internal auditors to satisfy their concerns as a 15 follow-up. 16 But as far as the state auditors office 17 is concerned, they acknowledged the correction of all 18 of their concerns in the document in their writing. 19 So, we're pleased about that, and then we acknowledged 20 our work effort along with that, and they published 21 that as well. 22 CHAIRMAN CLOWE: No questions, I 23 believe. Thank you both. 24 Anything further, Debra? 25 MS. McLEOD: The only thing that I 66 1 wanted to say is the audit that Patsy mentioned by the 2 management advisory services is, to my knowledge, the 3 only one that the state auditors has scheduled and is 4 currently performing. I'm not aware of any other 5 audit that they're scheduled to do. Unless you would 6 like to keep this open as an agenda item for the next 7 meeting, there's no other further reports or findings 8 that I would have to report henceforth. I just want 9 to let you know. 10 CHAIRMAN CLOWE: I think we're 11 satisfied. 12 MS. McLEOD: First time in probably a 13 number of years, but -- 14 CHAIRMAN CLOWE: Very good. Thank you, 15 Debra. 16 I believe our next item now is number 17 11, report, possible discussion and/or action on the 18 agency's minority participation report. Robert Hall. 19 MS. KIPLIN: Commissioners, this is an 20 action item for you, and it's under Section 466.107 of 21 the Texas Government Code. You are to annually report 22 to the legislature and the governor on the level of 23 minority business participation as it pertains to both 24 the Commission's contracts and the licensing of sales 25 agents. The report is to include recommendations for 67 1 the improvement of minority business opportunities in 2 Lottery related business, and that phrase minority 3 business is as it's defined in that Section 466.107 4 and does exclude women-owned business. 5 COMMISSIONER WHITAKER: It excludes 6 what? 7 MS. KIPLIN: Women-owned business. 8 CHAIRMAN CLOWE: Did you say it 9 excludes or includes? 10 MS. KIPLIN: It excludes. 11 MS. WHITAKER: And how does that relate 12 to HUB? 13 MS. KIPLIN: HUB excludes women-owned 14 businesses. 15 COMMISSIONER SADBERRY: Is that 16 peculiar to our statute? Is that what I recall, 17 something like that? 18 MS. KIPLIN: Yes. 19 COMMISSIONER WHITAKER: Ours being the 20 Lottery? 21 MS. KIPLIN: Yes, the State Lottery 22 Act. 23 CHAIRMAN CLOWE: Good morning, Robert. 24 MR. HALL: Good morning, Commissioners. 25 For the record, my name is Robert Hall. 68 1 Commissioners, I know you've had an opportunity to 2 review the report, and we are generally trying to, 3 with your approval and action today, release the 4 report on January the 8th. I'll be happy to answer 5 any questions that you may have regarding the report. 6 CHAIRMAN CLOWE: Robert, I've studied 7 your report at length and discussed it with you, I 8 think, at least a couple times, and I think it's an 9 excellent job, and I'm very eager to see the 10 Commission expand its activities and your leadership 11 in this area, and I think since you've been here, we 12 have really moved ahead, and I'm pleased with this 13 report. That would be my comment. 14 MR. HALL: Thank you, sir. 15 COMMISSIONER WHITAKER: I am, too. It 16 looks very thorough and detailed. Glad you're on 17 board. 18 COMMISSIONER SADBERRY: Same here. 19 CHAIRMAN CLOWE: And I do believe we 20 require a motion. 21 MS. KIPLIN: This is an action item. 22 You would be making a motion to approve the 23 Commission's minority participation report so that you 24 can report it to the legislature and the governor. 25 COMMISSIONER WHITAKER: So moved. 69 1 COMMISSIONER SADBERRY: Seconded. 2 CHAIRMAN CLOWE: All in favor say aye. 3 COMMISSIONER WHITAKER: Aye. 4 CHAIRMAN CLOWE: Aye. 5 COMMISSIONER SADBERRY: Aye. 6 CHAIRMAN CLOWE: Three zero in favor. 7 Thank you, Robert. 8 MR. HALL: Thank you. 9 CHAIRMAN CLOWE: Our next item is 10 number 13, report, possible discussion and/or action 11 on the agency's demographic study of the Lottery. 12 MS. CLOUD: Commissioners, the 13 demographic study is not prepared for today's meeting. 14 This is an item that we also have to provide to the 15 legislature before the session starts. It is not an 16 action item for the commissioners. It is for myself, 17 and it will be ready by the 31st of December, but it's 18 not ready today. 19 CHAIRMAN CLOWE: Very good. The next 20 item is number 14. Get ready, Billy. Report, 21 possible discussion and/or action on the 777th 22 legislature, including the agency's legislative 23 proposals. Nelda Trevino. Good morning, Nelda. 24 MS. TREVINO: Good morning, 25 Commissioners. For the record, I'm Nelda Trevino, the 70 1 governmental affairs director. 2 Commissioners, we've provided for you 3 in your notebooks and updated your tracking reports 4 this morning on the bills that the agency is currently 5 tracking, and just as a matter of reference, there 6 have been 580 bills and resolutions filed so far. Of 7 those, 545 are actual bills, and what we've got on our 8 tracking report so far is 19 bills. One in particular 9 that I'd like to highlight this morning is on Page 3 10 of the tracking report. It is the last bill noted on 11 there. It's Senate Bill 107 by Senator Wentworth, and 12 it's related to the application of the open meetings 13 law to attendance at a legislative committee meeting 14 by a quorum of another governmental body. 15 As you recall, there was a recent AG 16 opinion that stipulated anytime there was a quorum of 17 a governing body at a legislative committee, the 18 agency would have to post an open meetings notice. 19 This bill would address that. It exempts, basically, 20 that requirement. So, we wanted to highlight that for 21 you because, obviously, that's going to be an issue 22 for us this coming legislative session. If this bill 23 takes effect, it won't take effect until after this 24 session. So, I know that we've got that issue to deal 25 with with the commissioners appearing before any sort 71 1 of legislative committee. 2 MS. KIPLIN: Just to follow up, it 3 specifically is identifying legislative committees 4 that are meeting. Okay? So, not just members of 5 legislature, and it's public communication by the 6 governmental body at those legislative committee 7 meetings or hearings, and if there is a two-third 8 vote, the bill would go into effect immediately. If 9 not, it's scheduled to go into effect September 1, 10 2001. 11 CHAIRMAN CLOWE: And, so, for the 12 clarification in everyone's minds, where we are now, 13 based on the Attorney General's opinion, is that if a 14 quorum of this Commission appears before a committee, 15 then we must, in fact, post and call to order a 16 meeting of the Commission and maintain a transcript of 17 that meeting? 18 MS. KIPLIN: We either have to keep a 19 tape-recording or minutes. Our minutes, of course, 20 have been the transcripts reported by a court 21 reporter, but you're absolutely correct. We'll have 22 to post within the time prescribed by law. Regular 23 course is seven days. That's not the case for the 24 legislature. If a quorum is summoned by legislative 25 committee to hearing, then the opinion does indicate 72 1 that it would be possible to post under emergency 2 notice, but if the quorum voluntarily appeared, then 3 it would be the regular. 4 CHAIRMAN CLOWE: And, Nelda, in 5 conversations that you and I have had, you're going to 6 be talking to staff about this situation, and I think 7 the dilemma is that the commissioners wish to appear 8 as much as possible before the committees with staff 9 to demonstrate our support and our involvement. So, 10 the choice of one commissioner going to escape this 11 requirement is not attractive to the commissioners, 12 and, so, we want to ask everyone to apply their 13 attention to this problem to allow, where possible, 14 all three commissioners to attend these meetings and 15 certainly two, which will be probably more likely to 16 occur. 17 MS. TREVINO: Absolutely. And as you 18 mentioned, Chairman Clowe, we will be visiting with 19 committee staff in order to see what procedure the 20 committees might be putting in place because this is 21 not a situation unique to this agency, but it will be 22 affecting other governmental bodies. So, we're hoping 23 that this committee, again, will be putting some 24 procedures in place that will help us logistically get 25 through this AG's opinion. 73 1 CHAIRMAN CLOWE: It's probably more 2 impacting on commissions that have three or five 3 members -- 4 MS. TREVINO: That's correct. 5 CHAIRMAN CLOWE: -- than larger 6 commissions, number of commissioners. 7 MS. TREVINO: Right. 8 CHAIRMAN CLOWE: Very good. Any other 9 comments? 10 COMMISSIONER WHITAKER: What is the 11 nature of the McClendon bill relating to meeting of a 12 government body held by video conference call? It's 13 on the first page. 14 MS. TREVINO: Commissioner Whitaker, if 15 my recollection serves me correctly, as an example, if 16 this Commission decided to hold an open meeting and, 17 for example, you would like to remain in Dallas and we 18 would do the video conferencing, we would have to have 19 it set up where there were cameras in place at the 20 location that you were at and also make that location 21 open to the public. 22 COMMISSIONER WHITAKER: But it's to 23 enable the use of video conferencing for meetings? 24 MS. TREVINO: And to make that location 25 open to the public. 74 1 MS. KIPLIN: This is an amendment to a 2 pending -- a bill that was passed -- I think it was 3 either last session or session before, that allowed 4 for video conferencing in this regard and -- but the 5 problem was that bill mentioned -- or stated that 6 there had to be a quorum present in one place. This 7 bill says you don't have to have a quorum present in 8 one place, as I read it, but the agency's still 9 required to make each place where there is a member 10 present and participating by video conference 11 accessible to the public. 12 COMMISSIONER WHITAKER: Any more news 13 on our legislative package? 14 MS. TREVINO: We're continuing to 15 finalize drafting of proposals that the Commission has 16 approved. Colin and I will be visiting with various 17 members of the legislature to see their interest in 18 filing these legislative proposals. 19 CHAIRMAN CLOWE: Very good, Nelda. 20 Thank you very much. 21 MS. TREVINO: Thank you. 22 CHAIRMAN CLOWE: I believe we'll take a 23 five-minute break at this time, and then, Billy, if 24 you'll be set up, we'll be ready to begin your items. 25 (Recess.) 75 1 CHAIRMAN CLOWE: We are now back in 2 session, and we are to the long awaited and much 3 looked forward to item number 15. We put this off 4 twice. We're brimming with anticipation. I'm 5 serious. The report, possible discussion and/or 6 action on the agency's bingo operator training 7 program. This emanates from a meeting sometime ago 8 where there were some comments made. I believe the 9 Commission asked for this report, and you have 10 prepared it, and we've deferred, I know, at least 11 twice, and we are looking forward to it and glad that 12 you're here to give it to us. 13 MR. ATKINS: Commissioners, we'd like 14 to pass. We need some more time. 15 COMMISSIONER SADBERRY: I so move. 16 CHAIRMAN CLOWE: Well, you've almost 17 cleared the room. I think you better play to the 18 audience you've got. 19 MR. ATKINS: Commissioners, for the 20 record, my name is Billy Atkins. I'm the director of 21 the charitable bingo division. With me today is Roy 22 Gabrillo, G-a-b-r-i-l-l-o. 23 As you mentioned, Mr. Chairman, at the 24 September 11th, 2000 meeting of the Texas Lottery 25 Commission, you requested staff to prepare comments in 76 1 response to certain criticisms that were made 2 regarding the perceived lack of training offered by 3 the division. Specifically, we were told at that 4 meeting that our training efforts consisted of, quote, 5 read the book, come back and talk to us after your 6 first month, end quote. And we appreciate the 7 opportunity, the long-anticipated opportunity, as you 8 mentioned, to afford it to us to provide you with 9 information that will show that statement to be 10 factually inaccurate. 11 Additionally, the Commission wondered 12 if there was anything else we could do to, quote, be 13 more helpful and efficient in having bingo charitable 14 operations schooled in the matter of procedurally 15 being correct, and if, after this presentation, 16 there's anything that you believe we can include, we'd 17 be happy to receive those suggestions. 18 This presentation will cover the 19 following: Our pre-licensing interviews which occur 20 between the division and any organization before the 21 license is even issued, our books and record 22 inspection which is a follow-up meeting we have with 23 the organizations after they begin their bingo 24 operations, and our operator training program which, 25 as you know, is our ongoing educational efforts with 77 1 our licensees. 2 At the end, I'll also discuss 3 supplemental instruction efforts, the training 4 program's impact on the division, as well as the 5 licensees' response to the program. So, at this time, 6 I'd like to turn it over to Roy who is the senior 7 audit manager for the charitable bingo division, and 8 I've asked Roy to give this part of the presentation 9 since it's his section that's primarily responsible 10 for these activities. 11 MR. GABRILLO: Thank you, Billy. Thank 12 you, Commissioners for giving us this opportunity. 13 For the record, my name is Roy Gabrillo. I'm the 14 senior audit manager for charitable operations 15 division. 16 As Billy just mentioned, before any 17 license is issued, before any bingo game is conducted, 18 before the first bingo ball is drawn, we meet with the 19 applicant face to face to discuss in detail the 20 licensing and record keeping requirements. Contact is 21 made by an auditor to arrange a date and time to 22 conduct a pre-licensing interview. 23 At that interview, copies of the Bingo 24 Enabling Act and the Charitable Administrative Rules, 25 the audit forms manual and the licensing forms manual 78 1 are provided. Also, the auditor provides the 2 applicant with a business card if any questions arise 3 after the interview. The licensing requirements are 4 then explained to the applicant, which include 5 displaying of the license, amending a license, 6 changing playing days and/or times, increased license 7 fee or bonds, adding/deleting of officers, directors, 8 workers and operators, renewal of the license, the 9 operator's responsibilities, authorized 10 representatives, changes in the lease agreements. A 11 license distributors list is also provided, temporary 12 suspension or administrative hold on the license, 13 surrender of the license and temporary licenses. 14 There are 12 different elements 15 relating to the licensing procedures. These items are 16 documented on the form that is signed by the 17 individual that is representing the organization 18 acknowledging that all of the items have been 19 discussed and that the representative understands 20 these items. All are discussed in detail, and any 21 questions the applicant may have are answered or a 22 note is made if a question can't be answered at that 23 time. The auditor will either find the answer him or 24 herself and get back to the applicant or refer the 25 applicant to the proper person for an answer. And, 79 1 again, this is done before any license is issued. 2 It's a face-to-face meeting with the applicant at that 3 time. 4 CHAIRMAN CLOWE: And how many auditors 5 do you have spread throughout the state? 6 MR. GABRILLO: When we're fully 7 staffed, 120 auditors. Right now, we have 18. 8 CHAIRMAN CLOWE: These meetings take 9 place in our regional offices? 10 MR. GABRILLO: Yes. 11 MR. ATKINS: If it's more convenient, 12 Mr. Chairman, the auditors can also make arrangements 13 to go out to the applicant's location. 14 MR. GABRILLO: After discussing the 15 licensing requirements in detail, the pre-licensing 16 interview then covers the record keeping requirements. 17 The record keeping requirements include bingo fund 18 information, which is a discussion of the checking and 19 bingo savings account, prior approval of loans to the 20 bingo accounts, and prize fees withheld. Bookkeeping 21 requirements covers an explanation of the forms 22 recommended for an accurate accounting log of bingo 23 activity. Those forms -- or records are the daily 24 cash report, disposable car sale summary, daily 25 schedule of prizes, daily floor sales by usher, cash 80 1 register tapes, sales journal and cash disbursements 2 journal, instant bingo purchase log, lessor receipts 3 journal. Also, maintaining a complete invoice file 4 and retaining records related to bingo for a period of 5 four years is also discussed. 6 Other information and requirements 7 covers the 35 percent distribution requirement, bingo 8 operator and lessor quarterly reports which are the 9 due dates, prize fees and rental receipts, taxes, 10 advertising restrictions, prize limits on bingo games, 11 prohibition of games of chance, electronic card 12 marking devices, pull tab bingo dispensers, books and 13 records inspections, audits and general restrictions 14 of bingo games. 15 There are 26 different elements of the 16 Bingo Enabling Act and Charitable Bingo Administrative 17 Rules that are covered in detail relating to the 18 record keeping requirements. These items are also 19 documented on the form that is signed by the 20 individual representing the organization acknowledging 21 that all items have been discussed and that the 22 representative understands. Again, all of this takes 23 place prior to the license being issued and before the 24 first bingo ball is drawn. 25 After an organization gets their 81 1 license and begins conducting games, we follow up with 2 them shortly thereafter to see how they're doing, and 3 this is done through the books and records inspection. 4 The BRI is conducted within 90 to 180 days from the 5 issue of the license. During that period, the 6 licensee can contact a regional office at any time 7 with a question or if a problem arises. A 8 notification letter is sent to the primary operator, 9 and seven to ten days after the letter is mailed, the 10 auditor will contact -- make contact with the primary 11 operator and arrange a date and time to conduct the 12 inspection. Also, at that time, the auditor will 13 inform the primary operator as to what records are 14 needed and what time period is covered. 15 We emphasize that we meet with the 16 person most knowledgeable about the records. If that 17 person is not the primary operator or alternate 18 operator, then arrangements are made to have the 19 bookkeeper or accountant present, also. 20 The auditor reviews the books and 21 records and discusses any discrepancies that are noted 22 in the inspection. The auditor makes recommendations 23 to correct those discrepancies. If the discrepancies 24 are numerous or of a serious nature, the auditor can 25 recommend that a follow-up inspection be conducted 82 1 within 90 days, one calendar quarter, to give the 2 licensee enough time to take corrective measures. 3 Again, the auditor leaves a business card with the 4 licensee if any questions arise in the future. 5 There are 15 different elements 6 relating to a books and records inspection that are 7 covered about the licensee. These items are also 8 documented on the form that is signed by the 9 individual representing the organization acknowledging 10 that all items have been discussed and that the 11 representative understands. Any violations are 12 discussed in detail with the licensee and bookkeeper 13 or accountant, if applicable. 14 To summarize, training is available and 15 is provided to every licensee from the very beginning. 16 First, it's a pre-licensing interview which covers 17 licensing and record-keeping procedures. Then it is 18 followed by a books and records inspection which is a 19 review to verify compliance of the Bingo Enabling Act 20 and Charitable Bingo Administrative Rules, and this 21 takes us to the operator training program. 22 The operator training program is 23 intended to be ongoing in nature. The first class was 24 held here in Austin on March 1st, 2000. 25 classes 25 were held in 19 cities throughout the state from 83 1 March 1st of 2000 to August 26th of 2000. 20 classes 2 have been held in 14 cities throughout the state from 3 October 5th to December 2nd. The classes were held in 4 the Odessa, Dallas, Houston, San Antonio and Austin 5 regions, and pursuant to the charitable bingo 6 administrative rule 402.550, the program consists of 7 eight hours of training. Three hours consists of a 8 self-study portion where the student reads in its 9 entirety the Bingo Enabling Act and the Rules, and the 10 remaining five hours consists of classroom-style 11 instruction. 12 The consents of the operator training 13 program instruction and general information covers a 14 brief history of bingo in Texas, an overview of the 15 charitable bingo operations division, the scope of 16 bingo in Texas and information available from the 17 charitable bingo operations division. 18 Conducting a bingo game covers who, 19 when and where bingo can be conducted, the bingo bank 20 account, bingo personnel, operator responsibilities, 21 frequency and times of games, and restrictions on 22 conducting bingo games. Record keeping requirement 23 covers the preparation of all recommended forms with 24 the accounting of all funds from the conduct of bingo 25 and preparation of the quarterly reports. 84 1 Administration and operation of a bingo 2 game covers rent and rent relationships, affiliated 3 organizations, common mistakes on license 4 applications, charitable distribution requirements, 5 and how to maximize charitable distributions, 6 inventory controls, bingo expenses, and records 7 retention. Promoting a bingo game covers ideas for 8 increasing attendance and attracting new players, 9 which includes ideas on where and how to advertise 10 bingo games, door prizes, Hall themes and marketing 11 their Hall. The bingo advisory committee is also 12 included in this section. 13 The program concludes with a question 14 and answer session, and, also, anytime during -- 15 throughout the presentation, if someone has a 16 question, you know, that they're free to ask that 17 question rather than waiting till the end of the 18 session. 19 MR. ATKINS: Commissioners, we -- there 20 are a number of actions that we take in order to 21 notify our licensees of upcoming training programs. 22 The first is publication in our bingo bulletin. We 23 also, as training is scheduled in a particular region, 24 mail out notification to all licensees in that region 25 of the upcoming training programs. Training programs, 85 1 as they're scheduled, are posted on our Web site, and 2 we also did a mass mailing to all licensees back on 3 September 21st after Rule 550 was adopted, 4 distributing a copy of that rule to all licensees, as 5 well as the latest updated training schedule. 6 In addition to the formal scheduled 7 training that Roy laid out just now, there are also a 8 variety of helpful tools that are available to 9 licensees throughout the year. That includes, again, 10 our bingo bulletin. This is our regular publication 11 that contains useful information relating to licensing 12 audit and accounting services issues. We conduct 13 throughout the year seminars and presentations to any 14 organization requesting one regardless of their size 15 or location. We routinely place new, useful 16 information on our Web site. We conduct assessment 17 and assistance inspections, what we call A&A's, and 18 this is where one of our auditors visits every 19 location at least once a year. They are actually 20 physically in the Hall available to answer any 21 questions that the organizations may have. 22 We are -- Everyone in the division is 23 literally no more than a phone call away. We've had a 24 toll-free number here in Austin since bingo 25 transferred over. We heard from licensees that 86 1 sometimes they needed to contact our regional offices. 2 So, we've installed toll-free numbers there, also. 3 Finally, we issue what we call 4 compliance notifications. Those consist of renewal 5 notices when an application or a license is about to 6 expire. We distribute 35 percent distribution notices 7 and quarterly report forms. 8 To give you an idea of the impact that 9 the training program -- and this is just the operator 10 training program that Roy discussed -- has had on the 11 division, the costs incurred by the division from 12 March to September of this year were over $32,000. 13 Those included expended man-hours of over 1,300. The 14 total cost for phase two, which is what we're now in 15 from October to December, are just over $19,000, with 16 man-hours expended of over 800 man-hours, and of 17 course, as you know, the agency received no 18 appropriation, nor any additional AFTE's to conduct 19 this program. 20 Now, one of the things I want to let 21 you know is we now have this program in place, but 22 we're not stopping with that. We're looking for ways 23 that we can improve or expand on it. One of the 24 things that we're looking at is conducting joint 25 training programs, and what that is is -- We're often 87 1 asked by our larger statewide organizations to attend 2 their annual conferences and give short presentations 3 on bingo. What we've done is send letters to each of 4 those organizations offering to have the operator 5 training program presented in conjunction with their 6 conference. We think it would be a way to reach a lot 7 of organizations, as well as give their members the 8 opportunity to attend the program since they've 9 already spent the time and effort to attend their 10 training program. 11 As of -- We're currently tentatively 12 scheduled on January 19th of 2001 to conduct a joint 13 training program at the VFW mid-winter conference here 14 in Austin, and we think it's a good opportunity for 15 those members to attend our training program while 16 they're also at the VFW's annual conference. So, 17 we'll see how that goes and how that's received. 18 We're also looking at creating practice 19 exams for licensees to take in conjunction with the 20 training program. We're looking at the creation of 21 what we call specialized training courses where, 22 instead of offering a broad course on everything, we 23 will specialize on certain areas -- it could be 24 bookkeeping requirements -- and have condensed, 25 intense programs for maybe a shorter period of time 88 1 that licensees can attend. And finally, we are 2 exploring the possibility of conducting training 3 through teleconferencing or possibly through the 4 Internet. 5 I mentioned we serve a -- all of our 6 licensees after each training program. 98 percent of 7 the licensees surveyed state that the information is 8 presented in a manner that's easy to understand. 9 83 percent of those responding stated that they 10 learned something new from the program. We find that 11 very beneficial considering we have some licensees 12 that have been licensed since the early 1980s. And, 13 finally, 98 percent of those who responded thought 14 that they thought the training program was worthwhile. 15 So, in conclusion, Commissioners, I 16 hope that this presentation has demonstrated how hard 17 the staff has worked to make services available to our 18 licensees and to offer them every assistance possible 19 in order to conduct exciting successful games. So, 20 having given that presentation, we'd be happy to 21 respond to any questions or receive any comments. 22 COMMISSIONER SADBERRY: If I may, my 23 perception, my comments and observations would be that 24 we have come a long way, and I want to compliment you 25 and your staff, Billy, on this. I was trying to 89 1 recall the comment. I know we've had this discussion. 2 I don't recall who made the comment, but I take it 3 that whoever would be interested in knowing or having 4 access to your presentation today was made aware or 5 could have been made aware of that opportunity to do 6 so. And, so, with that, I'll just say that's 7 significant progress from the time this agency took 8 over bingo, and that I compliment you on that. 9 COMMISSIONER WHITAKER: I'm impressed 10 with the number of hours devoted to fanning all over 11 the state to do this and also the type of feedback 12 you're getting. 13 A couple of questions. What percentage 14 of the operators go to this training? It is 15 voluntary, correct, at this point? 16 MR. ATKINS: No, ma'am. It's 17 mandatory. 18 COMMISSIONER WHITAKER: It is 19 mandatory. Okay. Then, what percentage? 20 MR. ATKINS: As of December 2nd, 7 -- 21 almost, almost 77.9 percent, something, of our 22 licensees have attended the training. 23 COMMISSIONER WHITAKER: How often do 24 you want them to go through it again? 25 MR. ATKINS: Every two years. 90 1 COMMISSIONER WHITAKER: Every two 2 years? How do you deal with -- Now, this is -- What 3 kind of training do you do for the charities 4 themselves? 5 MR. ATKINS: All of this is directed 6 toward the charities. 7 COMMISSIONER WHITAKER: And how do you 8 deal with the situation, for example, where you'll 9 have a change of leadership, say, you know, turnover 10 fairly easily -- or often within the ranks of a 11 charity to make sure that the new people coming in are 12 aware of this and comply? 13 MR. ATKINS: Well, what we've done, 14 Commissioner Whitaker, is we have tried to impress on 15 the organizations that that's one of their 16 responsibilities, to have at least one trained person 17 on their record. That's why we strongly recommend 18 that they don't send just one person. They send at 19 least two to the training. It's not required in the 20 rule, but we strongly recommend it, and that's another 21 reason that we put the two-year requirement in there, 22 is in the event, you know, there was any training -- 23 First of all, we anticipated any changes that would 24 occur through a legislative session, those being 25 included in the training, as well as giving people who 91 1 have had the training before a chance to update that 2 or new people to attend. 3 COMMISSIONER WHITAKER: How well do you 4 think we're doing as far as keeping one trained person 5 around per operator? 6 MR. ATKINS: My impression is it's 7 probably still a little too early to tell. We -- You 8 know, we haven't even gone through a full calendar 9 year yet. I don't know if you want to -- 10 MR. GABRILLO: Most of the 11 organizations that have been attending have been 12 sending more than one operator. In fact, some of them 13 even sent their people who are just officers and not 14 designated as operators. When they call there to 15 register for the class, they want to register several 16 of their operators. I give them the same 17 recommendation that Billy just mentioned, that, you 18 know, it's not intended to send everybody at the same 19 time, you know, because we don't want the same person 20 attending every other year because then I don't think 21 the organization will benefit, the other operators 22 would benefit if only one person attends. So -- but 23 for the most part, most of the organizations have been 24 sending at least two operators to the training, that I 25 know of. 92 1 COMMISSIONER WHITAKER: Do you have a 2 permanent book, like a seminar book, that they can 3 take with them and have available that other folks in 4 the organization can, say, pull down that book at any 5 time and get up to speed on what was covered in the 6 training? 7 MR. ATKINS: The short answer is yes. 8 We call it the Act and the Rules. As far as any type 9 of workbook, no, ma'am, we don't yet. 10 COMMISSIONER WHITAKER: Is there a plan 11 to do that? 12 MR. ATKINS: Yes, ma'am. 13 COMMISSIONER WHITAKER: That would 14 probably be a good idea. 15 No more questions. 16 CHAIRMAN CLOWE: Billy, thank you and 17 Roy. This presentation, I think, lays to rest the 18 comments that you are relating to and sensitive about, 19 and we congratulate both of you on this program. 20 I think Commissioner Whitaker touched 21 on a point that bears another comment, and that is the 22 recurring theme in the cases that are brought before 23 this Commission that occur as a result of an 24 individual becoming ill or passing out of the office 25 and a lack of communications within a licensee's 93 1 organization relating to correspondence coming from 2 this Commission and the timeliness of the reaction to 3 that. I mention it only to applaud her focus on that, 4 in that, there's not a fast, quick, final answer, I 5 understand, to that problem, but for my short tenure 6 on this Commission, that seems to be the thing that 7 comes up more and more than anything else. So, as 8 part of your activities, I urge you to keep that in 9 mind and concentrate on that as much as possible to 10 maintain continuity within a licensee's organization 11 and help them by explaining to them how easy that 12 seems to happen. 13 Thank you all very much. 14 The next item is also yours, Billy, 15 number 16, report, possible discussion and/or action 16 on the charitable bingo operating division's 17 enforcement practices. 18 MR. ATKINS: Thank you, Commissioners. 19 At the October 11th, 2000 meeting of the Texas Lottery 20 Commission, you asked for a presentation on the 21 enforcement practices of the charitable bingo 22 division, and I guess the executive summary would be 23 that licensees who violate the Bingo Enabling Act or 24 Charitable Bingo Administrative Rules are subject to 25 administrative action. This division takes all 94 1 violations of the Act and the Rules seriously, and 2 each case is reviewed individually on the merits 3 specific to that case in determining the appropriate 4 administrative action to apply. 5 And I'd like to start off, 6 Mr. Chairman, if I could, with the very brief review 7 of the agency's enforcement history. I think that 8 that will be especially beneficial to you and 9 Commissioner Whitaker, Commissioner Sadberry having 10 lived through the entire thing. 11 When bingo transferred over to the 12 Texas Lottery Commission in 1994, there were a number 13 of licensees with a variety of outstanding 14 delinquencies, and the Lottery Commission took action 15 to enforce the Act and the Rules and require all 16 licensees to become current on all liabilities. And 17 as Commissioner Sadberry will recall, those licensees 18 cried foul, claiming that we should allow the 19 violations to continue since the agency previously 20 responsible for the regulation of bingo had allowed 21 them, but the Commission had one very simple goal, and 22 that was 100 percent voluntary compliance from our 23 licensees. 24 So, in conjunction with contested case 25 proceedings and orders signed by the Commission, the 95 1 Commission did not take disciplinary action against 2 licensees who paid liabilities prior to the agency 3 announcing ready at a hearing, but did proceed with 4 actions against those licensees who still owed 5 liabilities at the time of the hearing, and this 6 enforcement action by the Commission, I think, went a 7 long way towards achieving our goal of 100 percent 8 voluntary compliance. 9 However, the staff began to notice that 10 a different type of violator had appeared as a 11 by-product of these actions. Specifically, in 12 October of 1997, I assumed the responsibility for 13 signing show compliance letters. By the first part of 14 1999, I had about four full quarters of show 15 compliance letters behind me. These show compliance 16 letters were being sent to licensees -- to some 17 licensees who, quarter after quarter, failed to file 18 their return or pay their liabilities. They waited 19 quarter after quarter until staff had gone through the 20 time and expense of preparing for a hearing, and 21 despite the staff's numerous attempts to resolve these 22 matters, these licensees refused to comply with 23 staff's instructions or state law and would continue 24 to untimely file their returns or not pay their 25 liabilities until just prior to the hearing. 96 1 In fact, a number of attorneys for the 2 agency were often at the State Office of 3 Administrative Hearing on the phone desperately trying 4 to determine if any last-minute payment had been 5 walked into the agency prior to going into their 6 hearing. It's at this time, again around the first 7 part of 1999, that Terry Shankle, the accounting 8 services manager, and I were reviewing show compliance 9 letters, and we began to discuss this issue. 10 Ms. Shankle reported to me that there were a number of 11 licensees who, despite, again, the efforts of the 12 staff -- these organizations refused to comply with 13 the law and timely file their quarterly reports. 14 Ms. Shankle and I discussed some of the ways the staff 15 attempted to address this situation. 16 We also discussed -- and I want to 17 emphasize this word, conceptually, the concept of the 18 Lottery's three strikes rule. About the same time, 19 and my discussion with this is not an attempt to 20 waive -- or is not my intent to waive any type of 21 attorney-client privilege, but by way of explanation, 22 I sought legal advice and also discussed the issue 23 with the agency's general counsel. 24 Ms. Kiplin and I discussed the staff's 25 efforts to bring about compliance with these 97 1 licensees, and we also discussed, again only 2 conceptually, the Lottery's three strikes rule. Based 3 on legal advice from the general counsel, I understood 4 that the charitable bingo division had no specific 5 three strikes rule. I further understood, based on 6 legal advice from the general counsel, that the 7 charitable bingo division had the authority to take 8 administrative action for just one violation and that 9 charitable bingo could exercise its broad 10 prosecutorial discretion using a framework that is 11 provided for in the Bingo Enabling Act that includes, 12 among other things, an organization's history of 13 previous violations. 14 If you'll look at the notice in the -- 15 I believe it was the March/April 1999 issue of the 16 bingo bulletin, you'll see no reference to the number 17 three. In fact, I find it very compelling that the 18 hearing which first raised the issue in which the ALJ 19 recommended denial of the organization's license, we 20 didn't cite the organization for failing to file three 21 times or failing to file four times or five times or 22 six times or seven times, but for failing to timely 23 file eight times. We even introduced at the hearing a 24 subsequent ninth time. It's these same violators that 25 I first reported to you at the Commission meeting on 98 1 September 28th, 1999. At that meeting, I described 2 the situation we were now facing and our intent to 3 take action against these violators. 4 Again, I think the staff agrees with 5 the Commission's goal of 100 percent voluntary 6 compliance, but we've discovered that certain 7 organizations are just not going to respect the law or 8 this agency's authority, and these organizations are 9 the exception. I think our efforts at 100 percent 10 compliance are having a great deal of effect. We've 11 seen a decrease in the number of show compliance 12 letters that we have to mail out. We've seen a 13 decrease in the number of hearings that are both 14 scheduled and held. 15 At the same time that the Commission 16 asked that we give this presentation, you also asked 17 that it go before the bingo advisory committee, and I 18 did, on November 1st of this year, make essentially 19 the same presentation that I'm making to you now, and 20 I want to note that no one from the public or the 21 bingo advisory committee had any comments on our 22 practices. 23 Commissioner Clowe, you stated that the 24 Commission was seeking equal enforcement, and I think 25 the staff agrees, but the problem is some people in 99 1 the bingo industry seem to think that equal 2 enforcement is an all or nothing issue. For example, 3 if you're driving 72 miles an hour down the highway, 4 you may or may not get a ticket. Some people think 5 that if you're stopped for going 72 miles an hour, 6 they shouldn't get a ticket if someone else hasn't 7 gotten a ticket, even though the first person, in 8 addition to going 72 miles an hour, also didn't have a 9 license, they didn't have insurance, they don't have a 10 current inspection sticker. Those are, we think, 11 additional circumstances. 12 Again, we pursue our cases on an 13 individual basis on the facts unique to that case. In 14 fact, it's often the cases that get to you because the 15 organization just hasn't responded to the staff's 16 attempts to bring them into compliance, and oftentimes 17 when the cases get to you, staff has access to 18 information that we're just not at liberty to 19 disclose, but it's that information that makes us move 20 forward in our enforcement actions. I also think, 21 Commissioner Sadberry, that your comment was very 22 accurate, in that, it's been staff's desire to 23 cooperate and help the licensees come into compliance 24 and not striking at the first violation that's coming 25 back to bite us. As you've just seen, the staff 100 1 spends a tremendous amount of time in training and 2 assisting our organization and helping them stay in 3 compliance. 4 To conclude, as you know, the staff is 5 currently reviewing all of its rules, and those are 6 being revised, and those will all be made -- go 7 through the public comment process. We hope to 8 receive a lot of input from our licensees. We'll then 9 incorporate all of that into our training program. 10 So, we'll, you know, distribute as much information as 11 we can as efficiently as we can. 12 So, having said that, I'd be happy to 13 answer any questions you may have. 14 COMMISSIONER SADBERRY: Billy, you 15 stated that in some instances, cases come before us, 16 and you and staff have made a decision on pursuing 17 those cases, and there are reasons that you did so 18 that you cannot tell us. Those are my words, but I'm 19 not sure I understand what you mean by that. 20 MR. ATKINS: Well, we're not allowed to 21 go outside the record that you currently have before 22 you. 23 MS. KIPLIN: For example -- Let me just 24 jump in. Let's just take, for example, a revocation 25 matter. Under the Administrative Procedure Act, the 101 1 first document that goes out to initiate the 2 proceeding would be what's called an opportunity for 3 the organization to show compliance, you know, the why 4 we're wrong, why we're wrong on the facts and why 5 we're wrong on the application of the law. 6 After that, there is a notice of 7 hearing that goes out if the staff still believes that 8 there has been a violation of the law, a notice of 9 hearing setting it up, setting up the hearing, and 10 then, of course, there is an opportunity for a due 11 process hearing. The issues that are before the 12 administrative law judge are those issues that are 13 embodied in the show compliance letter and notice of 14 hearing letter. 15 Now, while that matter is pending, 16 there may be, from staff's position, other violations 17 occurring that are not part of that record, that's not 18 part of the administrative record before you, and as 19 you know, I'm getting pretty strict on what can be 20 before you for consideration for purposes of judicial 21 review, and that is the record that was created in an 22 evidentiary proceeding where witnesses were sworn to 23 testify and there was an opportunity for 24 cross-examination and where the administrative law 25 judge can judge the demeanor and credibility of the 102 1 witnesses. 2 So -- and I don't have any problem 3 saying it. As a general counsel, I want to try to 4 impress upon the bingo division and any other division 5 that has a contested case proceeding before you that 6 they need to stay within the record. 7 COMMISSIONER SADBERRY: I understand, 8 and I guess my question is -- I'm just trying to see 9 if I understand you, Billy -- Go ahead. 10 MR. ATKINS: Could I offer a couple of 11 more examples? One could be a situation where we 12 have, prior to taking administrative action such as a 13 revocation or denial, attempted to resolve the matter 14 through an agreed order, and the organization has been 15 unwilling, or it could even be a situation where we've 16 moved forward -- again, using Kim's examples, and I'm 17 speaking hypothetically -- on a revocation based on 18 certain violations. While that's going on, based on 19 other violations, we'll also be pursuing denial. 20 So -- but before you is only the 21 revocation. So, I can't speak outside the revocation. 22 COMMISSIONER SADBERRY: I understand 23 that. I guess that first example you gave when you 24 made your initial comments is what I'm listening to. 25 What you're saying is you have knowledge -- I'm seeing 103 1 if I understand correctly -- of certain contact which, 2 in your mind, justifies your staff taking a certain 3 position before us that might not be apparent, and you 4 are not at liberty to go into why you're doing that 5 because it didn't come up in the record of the 6 hearing, but it helps shape your attitude of 7 enforcement toward that individual entity. Am I 8 understanding that's what you're saying? 9 MR. ATKINS: That's correct. 10 MS. KIPLIN: I think that another way 11 I'd take a look at it is that the bingo division makes 12 a decision about what they think is the appropriate 13 administrative action at the time that the notice of 14 hearing is issued for -- and puts the licensee on 15 notice of revocation, and at that point, the bingo 16 director is taking into consideration the seriousness 17 of the violations, to the extent that there is a 18 history of previous violations. 19 And I think you've seen some of these 20 come before you, and you want to know, you know, why 21 are you going back in time. The purpose is to show 22 aggravating factors for a more serious or harsh 23 penalty because of recurring similar violations. 24 That's what is part of the record. 25 Now, what may be happening at the same 104 1 time that that case is pending is that there are 2 subsequent violations from when the notice of hearing 3 has been issued and the hearing, in fact, has been 4 held. So, that's the part that is outside the record, 5 and, yeah, I don't think it's correct, if there's been 6 some sort of settlement going on, to bring that to a 7 decision-maker. 8 COMMISSIONER SADBERRY: I understand 9 that. I'm getting at -- What I think I'm hearing, 10 Billy, is some form of administrative discretion, is 11 what you're saying. You can take into account factors 12 that we don't know about and can't hear about, but you 13 feel you have a reason why, in one instance, you might 14 be taking a hard line stand on facts that don't show 15 it in the record, but you know why you're doing it, 16 and we can't be held to, but you have a reason for it 17 in your administrative capacity? 18 I'm just trying to see if I understand 19 what you -- and you're saying that should be, 20 appropriately, the function of your office to do that? 21 MR. ATKINS: Yes, sir. 22 MS. KIPLIN: The only point I would 23 make there -- or, I guess, maybe a clarification, is 24 that at the time that the bingo director makes a 25 decision on how best to proceed, those factors have 105 1 been taken into consideration at that time, and that 2 record has been made. What occurs subsequent to that 3 may enforce his desire to bring it to the Commission 4 in the form that's coming out from the ALJ or to, for 5 example, disagree with the administrative law judge, 6 but that -- the decision that he has made about how 7 best to approach a contested case proceeding is made 8 on the facts that are part of the record. 9 COMMISSIONER SADBERRY: I understand. 10 But as an example, if it appears that the 11 commissioners may have a concern why this can't be 12 settled or why are you taking such a -- why are you 13 wanting to maintain a certain position, at that point, 14 if you maintain a hard line position in the face of 15 such questioning, you're saying there are things you 16 know that you can't tell us, but you know why you feel 17 it necessary on these facts that, yes, I think I 18 should take a run at settling -- trying to work out 19 some agreed order. I'm just trying to understand what 20 you're saying and make sure I'm clear on it. I'm not 21 taking a position on it or evaluating it. 22 I did want to go back to your earlier 23 beginning comments about when bingo came to this 24 agency. First of all, tell me if I'm at all on point, 25 accurate about my recollection about the agreements 106 1 that had been worked out with TABC. Did that have 2 anything to do with your starting point for purposes 3 of this presentation? Is that altogether a different 4 issue? 5 MR. ATKINS: It relates, 6 Commissioner Sadberry, to the extent that, again, as 7 you will recall, there were several, a number of 8 agreements that had been -- they were called PPAs, 9 partial payment agreements, that had been entered into 10 between the previous regulatory agency and certain 11 licensees. The problem was that the previous 12 regulatory agency had not held the licensees 13 accountable to the terms of the PPAs. One of the 14 common stipulations in the PPA is that the licensee 15 would remain current with all liabilities while paying 16 off previous liabilities. However, when it came over 17 here, we found organizations that were still not 18 paying. 19 COMMISSIONER SADBERRY: And what did we 20 do? I'm seriously trying to recall. 21 MR. ATKINS: We noticed them up for 22 hearing, and some bit the bullet and paid off, and 23 others we went to hearing on, and we took their 24 license. 25 COMMISSIONER SADBERRY: And it seems 107 1 like somewhere in that process is where the origin of 2 the payment by time of announcement of ready somehow 3 evolved into recognition, even as far as -- I believe 4 Diane Morris would call it an informal or -- 5 MS. KIPLIN: That would be ad hoc rule 6 making through entry of contested case -- 7 COMMISSIONER SADBERRY: Now, this case 8 that had the eight alleged actions which made a 9 reference to this three strikes you're out rule, how 10 did that come up in the hearing? 11 You said you didn't -- you cited them 12 for eight violations, but was there some testimony 13 about the three strikes rule? 14 MS. KIPLIN: Let me just make sure 15 that -- As I understand it, that contested case 16 proceeding is over, and there's nothing before the 17 Commission on that matter. Correct? 18 MR. ATKINS: That's what I understand. 19 COMMISSIONER SADBERRY: That was my 20 understanding. Okay. 21 MR. ATKINS: It was -- I believe, in 22 reviewing the transcript, Commissioner Sadberry, it 23 was initially, again, referred to by the agency's 24 attorney in her opening remarks in a manner of 25 something like or -- you know, as a type of example. 108 1 COMMISSIONER SADBERRY: And the ALJ, 2 more or less, it seems to me if I recall that case, 3 accepted that that was, in fact, something that was a 4 rule or policy or something like that and didn't agree 5 with it and thought that we should take a look at it, 6 and that seems to be at least some of the driving 7 force that leads you to where you are today on really 8 explaining what you do. 9 MR. ATKINS: That's correct. 10 COMMISSIONER SADBERRY: Now, what do 11 you do? Are you saying that in certain instances 12 where someone -- you are at the hearing ready to go, 13 someone picks up the phone and says, well, they're 14 over here paying now, and you would say, no, because 15 of their history, X, Y, Z factors, we will go forward, 16 and insist on administrative action? 17 MR. ATKINS: Actually, Commissioners, I 18 believe it's pursuant to my earlier presentation to 19 the Commission back in September of last year. Those 20 cases that we're going to move forward on, we've now 21 changed the language in our notice letters, and the 22 language in the notice letter says we're going to 23 hearing. 24 COMMISSIONER SADBERRY: Even if you 25 pay? 109 1 MR. ATKINS: Even if you pay, we're 2 going to hearing. 3 COMMISSIONER SADBERRY: So, you're 4 point now is that you've given notice to them, as you 5 see it, that the voluntary pay allowance will not 6 apply in your case; so, don't walk in with a check -- 7 or walk in with a check certainly, but don't expect us 8 to back off the hearing? 9 MR. ATKINS: That's right. 10 MS. KIPLIN: But certainly, you know, 11 it comes to you in the form of a contested case order, 12 and, ultimately, you the Commission is a 13 decision-maker about the pendency of that contested 14 case, and that's how you have developed this ad hoc 15 rule making through the entry of these contested case 16 orders where you've had evidence that came before you, 17 I think, that -- where people didn't want to pay 18 before the announcement of ready. 19 COMMISSIONER SADBERRY: And I guess the 20 question in that instance will be, just how much will 21 the record contain, if the record is what we're bound 22 to. If Billy had a reason for going forward and we 23 can't hear that because it's outside the record, then 24 it's very difficult to have equal application 25 considerations. It would seem to me that's what the 110 1 ALJ may be saying, or we might be interested in 2 considering. 3 Having had this history, I will say, 4 "A," it does seem like it worked, although you do get 5 bit, it seems, from time to time. You have, I have 6 perceived, wanted to move it to a point of -- I think 7 your words were putting teeth into it where you want 8 your -- your tolerance won't be used in these various 9 instances for the appearance of potential abuse. Am I 10 basically on point with you? 11 MR. ATKINS: Yes, sir. 12 COMMISSIONER SADBERRY: And you don't 13 have a three strikes you're out rule that you are 14 strictly adhering to. It may have been described in 15 that particular case as an illustration, an example to 16 the Court, to try to get into the record the reason 17 why you were going forward, as opposed to articulating 18 a rule, is what I think I'm hearing. Is that right? 19 MR. ATKINS: That's correct. There is 20 no three strikes you're out. There is a literal 21 interpretation and application of the language in the 22 Act and the Rules. 23 COMMISSIONER SADBERRY: Well, I'll let 24 other questions and comments go because, now that I 25 understand, I'm trying to understand how I feel about 111 1 it. 2 COMMISSIONER WHITAKER: Well, I'm not 3 comfortable with everything I'm hearing here because 4 we want to -- we will rule within the record in front 5 of us, but to the extent that there are mitigating 6 factors that are legally relevant, they need to be on 7 the record so that we can take them into account, and 8 it strikes me that the reasoning and the facts based 9 on which your decision decides to go forward, if 10 there's any way to get those into the record, 11 including the response -- For example, it's one thing 12 if you have somebody who has known that they're 13 supposed to pay, has gotten notice that they're 14 supposed to pay and then just don't bother to pay and 15 they have no excuse on the record. That's one 16 situation which would prompt one response from us. 17 Another situation that would give us a 18 very different response is if they didn't know -- or 19 if they did know, they didn't get notice -- you know, 20 it slipped. It was left on somebody's desk, and they 21 were sick and gone or whatever. The other people that 22 were responsible wanted to pay, and as soon as they 23 got notice, they rushed forward to pay. Now, that 24 would have -- provoke a very different impression in 25 my mind, as I assume it would in yours. Is there any 112 1 way we can get that type of development of the record? 2 MS. KIPLIN: Yes, I think so, and let 3 me tell you why. In an administrative proceeding -- 4 contested case proceeding -- and I'll use, just by way 5 of example, a revocation. First there's an 6 opportunity to show compliance that is issued to the 7 organization. There are other folks that are now on 8 that letter that get notice. 9 Mr. Atkins, can you say who they are by 10 title? 11 MR. ATKINS: The letter is addressed to 12 the organization's primary operator. That's the 13 person that the individual has represented to us is 14 going to actively be managing and responsible for all 15 aspects of their bingo game. It is sent to the 16 address of record they've given us. That's the 17 address the organization states, this is where we're 18 going to get our mail. 19 In addition to that, we copy another 20 officer of the organization at a separate address. 21 It's usually their home address. So, we send out two 22 notifications, both by certified and regular mail. 23 MS. KIPLIN: Okay. So, that's the show 24 compliance letter. Then there's a notice of hearing 25 letter. Then there's the hearing where -- I agree 113 1 with you, Commissioner Whitaker, this is the evidence 2 that should be developed, the entire matter regarding 3 the licensee, and then after that, the administrative 4 law judge is required to issue the proposal for 5 decision, and that is sent to the parties, and they 6 have an opportunity to file exceptions and replies. 7 If they want to try to file some request to reopen the 8 record, they can reopen the record if the ALJ believes 9 that there is good cause to do that. 10 Then this Commission, while it's not 11 required to by the Open Meetings Act, has established 12 a pattern or practice where it will notice up for open 13 meeting these matters and will give -- before the 14 Commission makes its decision, will give the parties 15 an opportunity to come before you. Now, I want 16 whatever is said when these parties come before you, 17 not just the bingo staff, but also the respondent, to 18 be within the record and after -- if they get an order 19 that is adverse to them, they have an opportunity to 20 file a motion for a hearing. 21 COMMISSIONER WHITAKER: Okay. So, 22 there would be that development on the record. 23 The other area that seems to have come 24 up several times has been your efforts, your 25 division's efforts to settle or work with those 114 1 people, and to some extent, that is not on the record, 2 and that's within the category of the information you 3 say we might not have. Correct? 4 MR. ATKINS: It -- I think it just 5 depends on the specific hearing. In the hearing that 6 we're referencing today, I think it was on the record. 7 Now, in some instances, you know, staff 8 went out to this individual's house, you know, even on 9 their own time, to get the payment. 10 COMMISSIONER WHITAKER: In other words, 11 to the extent that that could be part of the record, I 12 think if it can be, then that would be helpful. 13 MS. KIPLIN: And I understand what 14 you're saying, and I believe that, you know, if 15 there's not going to be any objection to it, then 16 putting into the record the settlement efforts would 17 be okay. 18 COMMISSIONER WHITAKER: In other words, 19 you're saying you're not required to negotiate a 20 compromise because you're saying that there is the 21 need to comply, and that's it. Correct? 22 MR. ATKINS: Correct. 23 COMMISSIONER WHITAKER: But to the 24 extent you make those efforts and there's a response 25 to those, to the extent that could be on the record, I 115 1 think that would be helpful. 2 The last thing, too, that I've noticed 3 is that, at the time of the hearing in front of us, 4 suggestions will be made, perhaps by the party coming, 5 you know, the licensee or their representative, that 6 apparently haven't been digested by staff or by your 7 division, and some of our time has been spent on 8 sorting those things through, and to the extent that 9 that, too, could be hashed out before it gets to us, 10 that would be helpful as well so that what we're 11 dealing with is not new information. Those would be 12 my comments. 13 CHAIRMAN CLOWE: Very good. Do you 14 want to respond, Billy? 15 MR. ATKINS: Yes. One of the examples, 16 Commissioner Whitaker -- and I think it's very 17 appropriate that you raise it -- is the repeated 18 reference that this Commission hears that they didn't 19 receive notice, that so-and-so was sick, that they 20 left it in their briefcase, that they went on 21 vacation, that -- I can literally go through a litany 22 of everything we've heard, and I guess that's a 23 frustration on the staff's part because we don't know 24 what else to do. We send it to them at their address 25 of record. We -- You know, what we started to do is 116 1 to copy someone else on the organization on the record 2 so, you know, it's going to someone other than the 3 primary operator. It's going to an officer. 4 MS. KIPLIN: But I'll predict that the 5 next comment that will be heard is, well, you sent it 6 to the wrong person, you know, the courtesy copy. 7 COMMISSIONER WHITAKER: Well, I assume, 8 though, that by the time of the hearing in front of 9 the administrative judge, any excuse by the 10 organization or any response to that -- In other 11 words, they would, at that time, be saying we didn't 12 give notice. Is that not correct? 13 MS. KIPLIN: These are situations where 14 they don't appear. I think the -- 15 COMMISSIONER WHITAKER: I see. So, 16 that maybe is the key issue, is that they are not 17 there to develop the record. They are here to bring 18 that up, and it's outside of the record. 19 MR. ATKINS: That's correct. They 20 don't appear at the hearing. After the PFD is issued, 21 then they appear before the Commission. 22 COMMISSIONER WHITAKER: Can we assure 23 that, at least by the time of the administrative 24 proceeding, that they have, in fact, signed some 25 certified notice or something indicating that somebody 117 1 there got notice? 2 MS. KIPLIN: Well, we do the very best 3 that we can, but I will tell you that there are 4 some -- and I'm thinking on the lottery side, and I'm 5 going to predict that it's on the bingo side. There 6 are some of those notices of hearing that come back 7 unclaimed. Now, we sent them regular and also 8 certified, and we don't get the regular back, but we 9 do get the certified. 10 And I want to follow up with that 11 because I understand where you're coming from from an 12 equitable perspective, but I want to talk a little bit 13 about the legal requirements. There is case law that 14 says -- and it's a Railroad Commission case, and I 15 wish I could remember the name, but I can't, but there 16 is case law that says that if you send -- if an agency 17 sends the notice to the address which is required to 18 be maintained in the agency records, that's sufficient 19 notice regardless of what happens past that. We've 20 gone further than what's required by law, and I'm not 21 criticizing it. I'm just stating a fact that we have 22 gone further than what is required by law. 23 Also, in just about every single 24 licensing or regulatory organic law of which I'm 25 familiar, there is a requirement on the licensee when 118 1 they hold that license to notify, within a particular 2 period of time -- generally it's ten days -- to notify 3 the agency of any change -- material change in license 4 information. That's their requirement, because the 5 agency can't be burdened -- and I'm speaking in 6 general now, public policy -- cannot be burdened to 7 try to keep up with the licensees on the lottery side. 8 We've got 17,000 of these licensees, and it would be a 9 tremendous burden to the governmental organization, 10 the body, to try to scout out every single different 11 address that is possible for an organization. 12 Now, I will say, on the bingo side, 13 they are doing that, but it is not legally required. 14 COMMISSIONER SADBERRY: I want to come 15 back, if I may, to the rule and your practice, Billy. 16 MR. ATKINS: Wait. What rule? 17 COMMISSIONER SADBERRY: Well, the 18 ad hoc rule first. 19 MS. KIPLIN: Your contested case 20 orders? 21 COMMISSIONER SADBERRY: No. If, 22 ordinarily speaking, a person, a license holder with 23 no adverse history, but an outstanding unpaid fee or 24 distribution or whatever that would give you grounds 25 for an administrative proceeding -- if that exists, 119 1 you will go to the -- you are in the process now of 2 going to the ALJ. You have given notices and you have 3 gotten no compliance, no other outstanding issues. 4 Your lawyer is at the judge, and that lawyer receives 5 notification there has been payment. Ordinarily 6 speaking, you would stop and not go forward with that 7 proceeding. Is that right? 8 MR. ATKINS: Unless we have previously 9 notified the licensee through either the show 10 compliance letter or whatever that we're not settling, 11 we're moving forward. 12 COMMISSIONER SADBERRY: Okay. I want 13 to get to that, and you may help me because that may 14 be the issue. So, what you're saying is, at some 15 point in time, something triggers such a letter before 16 that hearing. All right. Now, is there any 17 quantity -- I mean, the issue of three strikes you're 18 out we know is sort of a nomenclature. Is there any 19 concrete -- something you can -- data or some 20 considerations you can articulate -- What causes you 21 to reach that point where you send out that letter? I 22 guess that's what I'm trying to get at is, what is 23 your practice on this? 24 MR. ATKINS: I guess, 25 Commissioner Sadberry, what I would refer back to is 120 1 that framework in the Bingo Enabling Act that I 2 mentioned earlier that allows for the director to 3 consider the seriousness of the violation, including 4 the nature, the circumstances, the extent, the gravity 5 of the prohibited act, the history of previous 6 violations, the -- you know, whatever's necessary to 7 deter future violations, as well as efforts to correct 8 the violation. If there's any kind of -- there's no, 9 I guess, magical number. 10 COMMISSIONER SADBERRY: So, it's a 11 subjective administrative determination based on 12 objective facts that derived from the enabling 13 statute? 14 MR. ATKINS: Yes, sir. 15 MS. KIPLIN: It's an exercise of 16 prosecutorial discretion looking at an individual case 17 and its application, and I will say what he's 18 referencing is the statute that gives the -- It says 19 executive director, but I think it's been determined 20 to be deemed the director the ability to impose a 21 monetary forfeiture. Now, when he's trying to 22 decide whether to impose a monetary forfeiture -- and 23 by the way, there are agreed orders that -- I think 24 that's a part of the practice that they're striving 25 for are more agreed orders than these contested cases. 121 1 If, when looking at that, he says, you 2 know, monetary forfeiture just isn't there, then the 3 next step, of course, is suspension and revocation, 4 and that's how you get to that level, but it's 5 ultimately your decision -- When it comes to you in 6 the form of a contested case proceeding for 7 suspension, revocation or application denial, it's 8 your decision to make based on the record before you. 9 COMMISSIONER SADBERRY: I understand. 10 We have limitations on that now that the public policy 11 thing -- I want to get back to the rule because I 12 think I'm getting there. I just want to understand 13 it. 14 The safety in that practice is you have 15 sent a different kind of letter in that instance that 16 notifies the licensee that the voluntary payment 17 ad hoc rule will not apply in their case because of 18 factors. Now, it seems to me that's where the rub is, 19 then, to develop the record, when such a letter has 20 been sent, at the ALJ level to explain why, in that 21 instance, the voluntary pay ad hoc rule has been 22 deemed by the bingo director as not applicable and not 23 a safety net, not an exclusion or an excuse that will 24 be tolerated. We don't want to describe it as three 25 strikes you're out, but to develop in the record -- if 122 1 that's where you feel and if the Commission is agreed 2 or concurs to the extent -- I'm not sure if this is 3 information or if this is an action item or what, but 4 to the extent that's what you're doing and to the 5 extent that your commissioners understand it and agree 6 with it, it seems to me that's your cure is how you 7 describe it and how you develop your record at the ALJ 8 level to explain why you're taking that position and 9 it is in the record. 10 And now I agree with Kim. When it 11 comes up, we can agree, disagree or go sideways, up or 12 diagonal, but at least we have a record on which to do 13 it, and we also understand why you took that position, 14 and then, therefore, if we were inclined to support 15 your action, we are able to do that because the record 16 is there. That's just my views on it. 17 CHAIRMAN CLOWE: Very good. Billy, 18 thank you for both of your reports. They've been very 19 enlightening, and I think the discussion particularly 20 on your enforcement policy is very, very beneficial. 21 MR. ATKINS: I hope, Commissioners, it 22 was well worth the wait. 23 MS. KIPLIN: The only thing I want to 24 say is it really is -- it's really enforcement 25 practices because you all develop the enforcement 123 1 policy through the orders that you enter. He's 2 exercising prosecutorial discretion and choosing a 3 particular approach -- enforcement approach on a 4 particular set of facts. 5 COMMISSIONER SADBERRY: Well, if I 6 recall correctly, up to the extent Sara decides that 7 anything like that would apply, we amended that order 8 to not embrace those conclusions about the three 9 strike rule, which I think took care of that problem. 10 MS. KIPLIN: And I can't recall which 11 contested case proceeding that was, but -- 12 CHAIRMAN CLOWE: At this time, I'd like 13 to direct the Commission's attention to the contested 14 case docket number 362-00-0062.B, American Business 15 Women's Association Lone Star Chapter. Mr. Fenoglio 16 is in the audience, and Ms. Schultz is in the 17 audience. You're both attorneys, I believe, 18 representing the licensee and staff. I want to ask 19 your help in a matter. 20 It is, by this clock, 11:15. The 21 Commission has to go into executive session just a 22 little bit before noon, and I'm asking if there can be 23 an agreement that we can begin this case and, it looks 24 like, probably not finish it. I'd like to get started 25 in diffidence to your out-of-town folks. 124 1 Mr. Fenoglio, would that be agreeable 2 to both counsels if we find it necessary to adjourn 3 into executive session? 4 MR. FENOGLIO: Yes, Your Honor. 5 CHAIRMAN CLOWE: Are you okay with 6 that, Ms. Schultz? 7 MS. SCHULTZ: Yes. 8 CHAIRMAN CLOWE: Okay. Well, with 9 that, then, we will depart from the published agenda 10 and take up the case which I have just referred to. 11 And who is going to begin? 12 MR. FENOGLIO: May it please the 13 Commission, my name is Steve Fenoglio. I'm the 14 attorney of record for the American Business Women's 15 Association, respondent in the referenced proceeding. 16 It's my motion for rehearing and reopening, and, so, I 17 think I have the burden on that. 18 We filed a motion for rehearing 19 following a lengthy discussion about what was in the 20 case. The sole basis for the motion to reopen has to 21 do with the unavailability of a witness, Paul Caudle, 22 who was present at the last Commission meeting, and 23 the Commission decided they did not want to hear 24 testimony, two gentlemen who were here as the 25 Commission -- Ms. Whitaker, I don't believe you were 125 1 present -- and wanted to see what would be in a motion 2 for rehearing, reopen. It's before you today. 3 Mr. Caudle did not testify. Contrary 4 to the assertion of the staff in their late filed 5 reply to Respondent's motion for rehearing, Mr. Caudle 6 was unavailable, and there's no discrepancy or 7 inconsistency in the testimony of Ms. Scoggins that's 8 referenced on Page 3 of staff's reply. The Lion's 9 Club, which is the charity that's at issue as to 10 whether Mr. Caudle was present, was conducting in the 11 evenings at that time, and Mr. Caudle was working for 12 the Lion's Club at that time in the evenings. He had 13 a day job, if you will, as a deputy sheriff. 14 When we went to hearing, Mr. Caudle's 15 duties and responsibilities changed to working days 16 and, for that matter, many evenings as a backup 17 security clerk, if you will, for delivering funds to 18 banks, et cetera. So, I think that issue is the -- 19 The record is difficult to follow, but I don't think 20 there's any serious question about Mr. Caudle's 21 availability working days or evenings. That shouldn't 22 be an issue for the Commission. 23 The real issue is, Commissioners, in 24 light of the affidavit testimony of Mr. Caudle, is 25 this a case where you want to reopen, and we would 126 1 submit to you that -- and as far as the staff, if they 2 still take issue with Mr. Caudle's availability 3 working days or evenings -- it's hard for me to 4 remember what happened last week, much less in May of 5 '98, or April or May of this year, but Mr. Caudle will 6 be available for cross-examination as to whether he 7 lied in an affidavit. I think you'll find he didn't. 8 He's a former deputy sheriff for McClendon County and 9 takes seriously that oath. 10 The affidavit that's attached to the 11 motion makes it clear, at least for 28 of the 30 12 sessions, he was there at the times in question on the 13 Lion's Club, and that's the seminal issue that's 14 before you in our -- and I'll be happy to answer any 15 questions. 16 With me today is Ms. Debbie Scoggins 17 who is with -- who is referenced in the PFD who 18 testified at the hearing, and also our CPA, Ms. Mary 19 Needler who also appeared at the hearing, 20 coincidentally is the new president of ABWA when they 21 elected officers earlier. She's a licensed CPA, was 22 the bookkeeper of the organizations and testified at 23 the hearing as well. 24 CHAIRMAN CLOWE: Very good. I think 25 we'd like to hear from you now, Ms. Schultz, please. 127 1 MS. SCHULTZ: Yes, sir. If I may 2 approach, I have a chart that may benefit the 3 Commission in discussing the timetable. 4 And for the record, I'm Kaye Schultz, 5 assistant general counsel. 6 In the October meeting, the Commission 7 signed an order denying the renewal application of 8 this organization, and the basis for the denial was 9 playing outside licensed times on 30 occasions between 10 May and August, 1998. The applicant is now before you 11 stating that the record should be reopened to hear 12 testimony of Mr. Caudle that applicant used diligence 13 to obtain. Staff submits that this applicant's 14 actions do not constitute diligence. 15 In looking at the time line, applicant 16 knew and admits in its motion for rehearing that it 17 knew in March 2000, the month before the April 18 hearing, that this witness was not available for the 19 April 7th hearing. That's in applicant's motion for 20 rehearing on Page 2. Yet, the applicant did not take 21 one of several remedies that would have been available 22 to the applicant in this situation. 23 The applicant did not take the 24 deposition of Mr. Caudle and introduce that at the 25 hearing. The applicant did not request a continuance 128 1 of that April 7th hearing. The applicant did not ask 2 the administrative law judge that the record remain 3 open to allow for additional testimony. In fact, the 4 record reflects that the administrative law judge 5 specifically asked both parties was there any reason 6 to leave the record open, and that the representative 7 of the party -- the applicant indicated that there was 8 no reason to do so. 9 At no time during this hearing or at 10 any time in the exceptions to the proposal for the 11 decision filed by applicant did applicant bring up the 12 unavailability of this witness. In fact, it was not 13 brought up until the October 11th meeting at which the 14 Commission signed the order denying the renewal of 15 this license. 16 I'll submit that there are procedures 17 and there's a process in place before the State Office 18 of Administrative Hearings for situations like this, 19 for making sure that a witness' testimony is included 20 in the record. Mr. Fenoglio represented this 21 organization beginning in February of this year, 22 conducted discovery on behalf of this organization and 23 has practiced before this Commission and other 24 administrative agencies on many occasions. He's well 25 aware of the procedures and the process involved. 129 1 This is a strategic decision, decision 2 not to reschedule a hearing, not to take a witness' 3 deposition, not to ask that the record remain open, 4 and now the applicant is making a belated effort to 5 turn Monday morning quarterbacking into the fourth 6 quarter of the day before. This is not respect for 7 the process that is in place and that counsel for this 8 organization is well aware of. Nor is it abuse of the 9 Commission's discretion to say the applicant did not 10 use diligence in obtaining the testimony of this 11 witness, and I will add that the affidavit that is 12 submitted is, of course, not part of the evidence in 13 this case because this witness did not appear and did 14 not testify, nor was the record left open so that any 15 representations that were made are not part of the 16 record in this case, and we submit that that should 17 not be regarded as part of the report. 18 And, again, so that I don't sound like 19 a broken record -- but the purpose of a motion for 20 rehearing is to point out errors in the record to an 21 agency, error in the findings of fact or conclusion of 22 law, so that the agency has the opportunity to either 23 defend itself or correct that. There is nothing in 24 this record because this organization made the choice 25 not to call this witness. In fact, there was comment 130 1 by the administrative law judge in the commentary to 2 the proposal for decision that, unfortunately, neither 3 Mr. Caudle, nor Clarence Weikel, who was the elderly 4 operator of this organization, the Lion's Club, was 5 there because so many representations were made on 6 behalf of these people. So many things were 7 attributed to them. 8 I think, yes, certainly it would be 9 helpful for the administrative law judge to sort that 10 out, but that was a decision that was made by the 11 organization in not calling this witness, in not 12 rescheduling the hearing, in not asking that the 13 record be left open or in not taking the deposition of 14 this witness so that this testimony could be on the 15 record. As a result, we request that the motion for 16 rehearing be overruled. 17 CHAIRMAN CLOWE: We'll give you an 18 opportunity to respond to that, Mr. Fenoglio, if you'd 19 like. 20 MR. FENOGLIO: Thank you, Mr. Chairman. 21 MS. SCOGGINS: Can I tell him 22 something? 23 MR. FENOGLIO: I think my client would 24 like to say something, if the Commission will allow. 25 MS. KIPLIN: As long as it's within the 131 1 record, you know, and I don't know whether you've had 2 an opportunity to consult, but I'm trying to keep a 3 real clean record for purposes of judicial review. 4 MR. FENOGLIO: You know, on one hand, I 5 think my client wants to say something that's outside 6 the record. So, I'll -- We'll go on. Thank you, 7 Ms. Kiplin. 8 On the one hand, staff wants to say 9 that we're at this friendly, approachable agency, and, 10 yet, they want to put my client through extreme cost, 11 cost to depose Mr. Caudle, cost that the charity 12 didn't have the money to fork over. We could have 13 tried to have an evening hearing at a cost to the 14 charity or cost to the agency. 15 The issue's pretty simple. The seminal 16 issue is, was Mr. Caudle there. There's testimony in 17 the record that he was. It was objected to by the 18 staff and the -- on the basis of hearsay as to what 19 Mr. Caudle would state, and on Page 39 and 40 of that 20 record, over the hearsay objection, testimony of 21 Ms. Scoggins was that he was there. That he was 22 there. You know, the issue, is Mr. Caudle available. 23 He's available now. He wasn't then. 24 I understand the standard that counsel 25 for the staff wants to impose on any licensee, a very 132 1 strict standard, standard like you would have in a 2 litigation in court. That's not been the policy of 3 this Commission in the past. I would suggest to you 4 it's wrong to head that way today. 5 You have given two other charities at 6 about the time of our hearing -- actually, it was the 7 meeting before ours came up, and I referenced them in 8 my motion for rehearing, Danse Et Vous and Minor 9 Considerations. And by the way, while we're on the 10 record, there's no reference to either one of those 11 charities being women-owned or women-controlled 12 charities. The findings of fact make clear that Minor 13 Considerations was to promote other charities in the 14 Dallas County. Danse Et Vous -- My French is 15 horrible, but it's dance for disadvantaged youth. 16 But we don't have anything to hide. 17 Hindsight hopefully is always 20/20. I'd like to 18 think most of the time I get it right the second 19 go-around. The seminal issue in this case, we submit 20 to you, is Mr. Caudle's testimony. He's available 21 now. He wasn't then. I would urge you to cut through 22 the mumbo-jumbo and just decide, do you want to have 23 another hearing; we can give you another shot. 24 Staff has made some reference they're 25 not quite sure, under the Administrative Procedure 133 1 Act, what our motion for rehearing is about. To, 2 quote, fairly apprise, quote, the Commission of the 3 issue. I think you know what the issue's about. 4 There are cases that go both ways as to whether we 5 should have referenced finding of fact 16 and 20 in 6 conclusion of law 6. I think it's a distinction 7 without a difference. 8 There is a Texas Supreme Court case 9 that specifically rejected that specific reference. 10 The issue is Mr. Caudle. He's available now. He 11 wasn't then. We'd like to have a shot, clear up this 12 charity's name at another hearing. 13 CHAIRMAN CLOWE: Ms. Schultz, we'll 14 give you an opportunity to respond. 15 MS. SCHULTZ: Just briefly, Your 16 Honor -- and I'll say it's not my standard, any 17 standard that's been referred to, for how procedures 18 take place, and while I agree that the State Office of 19 Administrative Hearings, having litigated in federal 20 court, is not exactly the same as being in federal 21 court, they do have rules and they do have procedures 22 for how to go about getting a witness' testimony on 23 the record, and it is similar to the way you would do 24 it in a court of law. You can take someone's 25 deposition. 134 1 What you can do in a civil proceeding 2 that you cannot do in most courts of law at the end of 3 a hearing or trial is you can leave the record open 4 and ask that testimony be submitted later. There are 5 even provisions in the State Office of Administrative 6 Hearing rules to have a witness appear by telephone, 7 and that has been done in cases that I've participated 8 in, and, of course, there is the motion for 9 continuance which was not availed of and does not -- 10 is not any more costly to an organization than holding 11 a hearing on one particular day. That was not taken 12 advantage of in this case. 13 What we're saying is that there were 14 many opportunities for this organization to get this 15 witness' testimony on the record if he was unavailable 16 then, but the fact that he was unavailable was not 17 even mentioned, was not brought up. So, that was a 18 choice that was made by this organization not to call 19 this witness and not to depose this witness and not to 20 reschedule the hearing so that this witness could be 21 available, and at this late date to come forward and 22 say this is the crucial witness now makes a mockery of 23 the whole process. 24 If that's going to take place, then 25 every single organization that comes before you on a 135 1 revocation or a denial is going to come up with some 2 piece of evidence, some vital fact that they neglected 3 to bring forward at the hearing, and whether they're 4 represented by counsel or whether they're not, that's 5 going to reopen the door, and we might as well say 6 that we will perpetually litigate these cases at the 7 State Office of Administrative Hearings. 8 The purpose for having the rules, the 9 State Office of Administrative Hearings rules, the 10 whole Administrative Procedure Act, is so there will 11 be some orderly process for doing that, and the 12 process is in place, and this organization and its 13 counsel are well aware of it, and their options were 14 as I've outlined, and they did not take advantage of 15 these options. 16 So, to now come forward and say -- They 17 can all say they're charities. They can all say that 18 they're doing -- or trying to do good work. That 19 would be the same argument for every one because the 20 licensees in the state of Texas who are licensed to 21 play bingo are charitable organizations, and I do not 22 believe there's anything in the record having to do 23 with organizations being treated differently or 24 enforcement being taken differently because someone is 25 involved in a women's organization or the fact that 136 1 because an organization has the word women in its 2 name, it is not a women-based organization. 3 As Mr. Atkins stated to you in his 4 previous presentation, we pursue our cases on an 5 individual basis, on facts unique to that case, having 6 nothing to do with the gender or political 7 affiliations or the -- 8 MR. FENOGLIO: I'd object to that being 9 outside the record in this hearing. If we're going to 10 have that artificial rule, then you -- the same rule 11 would apply to staff. 12 MS. KIPLIN: Well, it's not an 13 artificial rule, but I think it's -- in terms of 14 having a record on appeal, but you're objecting to 15 something that she's saying that's outside the record? 16 CHAIRMAN CLOWE: I think we won't make 17 comments on that. I think there's equity there. 18 COMMISSIONER WHITAKER: Ms. Schultz, 19 can the witnesses be subpoenaed to -- before the SOAH? 20 MS. SCHULTZ: They can, but they would 21 be -- if they were outside the radius -- the 22 hundred-mile radius. 23 COMMISSIONER WHITAKER: And Mr. Caudle 24 was beyond that radius? 25 MS. SCHULTZ: Yes. He would not be 137 1 able to be subpoenaed, for example, if we wanted to 2 call him as a witness. However, he would be 3 available -- and, of course, you can always subpoena 4 someone to a deposition. It just could not be within 5 that location. 6 MS. KIPLIN: Well, wait a second. I'm 7 not sure -- I don't mean to correct anybody, but if 8 the question was, can a witness be subpoenaed under 9 the Administrative Procedure Act, yes, a witness can 10 be subpoenaed, and then the question is, is it outside 11 the subpoena range, and if you're referring to -- Is 12 it a hundred-mile radius? 13 MS. SCHULTZ: I believe it's a hundred 14 miles. 15 MS. KIPLIN: I think Waco is within a 16 hundred -- Am I wrong on that? But -- 17 CHAIRMAN CLOWE: Depends on where you 18 start measuring and where you end. Phil and I can 19 tell you it falls on both sides. 20 MS. KIPLIN: I just want to make sure 21 that there wasn't a misunderstanding or -- 22 MS. SCHULTZ: But also, 23 Commissioner Whitaker, a commission for subpoena for a 24 deposition can be applied for and issued, and that 25 deposition can take place anywhere in a contested 138 1 case. It doesn't have to be limited to that hundred 2 miles. 3 COMMISSIONER WHITAKER: Are you 4 prepared for motion? 5 CHAIRMAN CLOWE: Yes, ma'am. 6 COMMISSIONER WHITAKER: I'd move that 7 the motion be denied. 8 MS. KIPLIN: Overruled. 9 COMMISSIONER SADBERRY: Second. 10 CHAIRMAN CLOWE: Is there a second? 11 All in favor say aye. 12 COMMISSIONER WHITAKER: Aye. 13 COMMISSIONER SADBERRY: Aye. 14 CHAIRMAN CLOWE: Aye. 15 Opposed, no. 16 The vote is three zero denying the 17 petition. 18 MS. KIPLIN: It's actually -- The 19 correct phrase -- and, I'm sorry, I said it kind of as 20 I was talking -- is to actually overrule the motion 21 for rehearing. 22 CHAIRMAN CLOWE: Overrule the motion 23 for rehearing. Very good. 24 MS. KIPLIN: And, Commissioners, I will 25 get an order prepared for your signature and present 139 1 it to you before the end of today. 2 CHAIRMAN CLOWE: At this time, I move 3 the Texas Lottery Commission go into executive session 4 to deliberate the duties and evaluations of the 5 executive director, internal auditor and charitable 6 bingo operations director pursuant to Section 551.074 7 of the Texas Government Code, to deliberate the duties 8 of the general counsel and security director pursuant 9 to Section 551.074 of the Texas Government Code, to 10 receive legal advice regarding pending or contemplated 11 litigation and/or to receive legal advice pursuant to 12 Section 551.071(1)(A) or (B) of the Texas Government 13 Code and/or to receive legal advice pursuant to 14 Section 551.071(2) of the Texas Government Code, 15 including, but not limited to, matter involving the 16 Department of Justice pursuit of a complaint regarding 17 the Americans with Disabilities Act, matter involving 18 request for open records decision in Attorney General 19 open records file number 119718-98 relating to request 20 for information in connection with the lottery 21 operator audit, matter involving at the employee 22 complaint, matter involving agency purchases, matter 23 involving Attorney General opinion request regarding 24 brokerage arrangements insofar as HUB/minority 25 business participation is concerned, employment law, 140 1 personnel law, procurement law and general government 2 law. 3 Is there a second? 4 COMMISSIONER SADBERRY: Second. 5 COMMISSIONER WHITAKER: Second. 6 CHAIRMAN CLOWE: All in favor say aye. 7 COMMISSIONER WHITAKER: Aye. 8 CHAIRMAN CLOWE: Aye. 9 COMMISSIONER SADBERRY: Aye. 10 CHAIRMAN CLOWE: Opposed, no. 11 The vote is three zero. The Texas 12 Lottery Commission will go into executive session. 13 The time is 11:36 a.m. Today is December the 18th, 14 2000. 15 (Recess.) 16 CHAIRMAN CLOWE: The Texas Lottery 17 Commission is out of executive session. The time is 18 2:00 p.m. Is there any action to be taken as a result 19 of executive session? 20 If not, let's move to item 19, 21 consideration of the status and possible entry of 22 orders in numerous cases. 23 MS. KIPLIN: Commissioners, if I could 24 take up a matter that you heard this morning. This is 25 in the matter of the American Women's Business 141 1 Association. As I recall your -- you all voted to 2 overrule the motion for rehearing. This is now an 3 order that is prepared that does overrule that motion 4 for a hearing, and I'm passing it to you now 5 (furnishes document). 6 With regard to the other cases, 7 Commissioners, the -- you have a variety of -- before 8 you on the lottery side. There are some that are 9 contested case proceedings, and of those, there are 10 several that are for insufficient funds, revocation 11 for insufficient funds, and there's also a revocation 12 for a sale of a lottery ticket to a minor. 13 The remaining cases, Commissioners, are 14 agreed orders, and we are hopeful that this will be 15 the beginning of a practice so that you will 16 ultimately hopefully see more consent orders than you 17 will contested cases. 18 The ones that are before you today all 19 are in agreement, and, of course, it's your choice to 20 reject or accept. I mean, this is where you really 21 are developing that ad hoc rule making in terms of 22 setting what you consider to be the tone for the 23 violation regardless of whether the parties agree, but 24 in these cases, they're all for the retailer accepting 25 a coupon that was not issued by the Lottery Commission 142 1 in exchange for a lottery ticket, and all of them are 2 for a suspension, a license suspension for a period of 3 14 days. That suspension will commence on the first 4 day of the month following the date the consent order 5 is entered. 6 The reason for the staggered time is to 7 work with the various divisions, in particular the 8 lottery operations division, to be able to -- for them 9 to go ahead and put in effect this order in an orderly 10 way. And with that, staff does recommend that you, 11 one, sign the consent orders, and, two, you accept the 12 administrative law judge's proposal for decision and 13 recommend an order in the cases that are contested 14 case proceedings, and there is one other case that is 15 noticed that I do want to visit with you about, and 16 that's Elk's Lodge, but I'm going to be quiet so that 17 you can take a vote if you need to. 18 CHAIRMAN CLOWE: Is there a motion? 19 COMMISSIONER WHITAKER: So moved. 20 COMMISSIONER SADBERRY: Second. 21 CHAIRMAN CLOWE: All in favor say aye. 22 COMMISSIONER WHITAKER: Aye. 23 CHAIRMAN CLOWE: Aye. 24 COMMISSIONER SADBERRY: Aye. 25 CHAIRMAN CLOWE: Opposed, no. 143 1 The vote is three zero in favor. 2 Now do you want to speak about the 3 Elk's Lodge? 4 MS. KIPLIN: Yes, sir, I do. 5 Commissioners, if you'll recall, this is docket number 6 362-00-1156.B, Elk's Lodge No. 1 -- pardon me, 1105 7 Wichita Falls. Commissioners, if you'll recall, you 8 signed two orders in this case. You signed first an 9 order revoking Elk's Lodge's license to conduct bingo, 10 and then at the very last Commission meeting, you also 11 signed an order overruling their motion for a hearing, 12 and it's much to my chagrin to have to notify you of 13 this, but their license was actually denied this 14 summer, and in the license denial -- it's an 15 application, license application denial. The 16 organization has 30 days from when they receive notice 17 of the denial to request a hearing. If they do not 18 request a hearing, then, in fact, that license is 19 denied. 20 So, as of about mid-August, this 21 organization held no license. As a result, you had no 22 jurisdiction to revoke a license because no license 23 existed, and, further, you had no jurisdiction to 24 overrule a motion for rehearing in a matter that was 25 for revocation of license. There was a cease and 144 1 desist letter that was sent by the bingo division. I 2 believe it was at the end of August, and this 3 organization, it's my understanding, did not conduct 4 bingo from that point forward. 5 The only thing that I can tell you is 6 that it was on my watch out of legal, and we should 7 have done a better job in terms of communicating with 8 our client to ensure that we knew that, in fact, the 9 license had been denied. I've met with the bingo 10 division director to look at changing our process and 11 improving our process so that at no time in the future 12 will this happen, and I think that, that way, we'll 13 avoid any sort of miscommunication or a disconnect 14 between the client and the lawyer. 15 And with that, I'll be glad to answer 16 any questions that you have regarding this matter. 17 CHAIRMAN CLOWE: There's no action 18 required on this one? 19 MS. KIPLIN: No, there's no action. 20 COMMISSIONER SADBERRY: And no harm 21 done? 22 MS. KIPLIN: And no harm done. I hate 23 to say it that way because I do apologize for the 24 error. So, I guess, to the extent -- the harm is that 25 there was an error, but with regard to this particular 145 1 organization -- and I certainly don't mean to 2 trivialize the matter, but as a result of this 3 organization's license being denied effective 4 mid-August, your sit-out period actually began in 5 mid-August rather than November 29th, and what that 6 means is that they will be eligible to apply for a 7 license and have that application considered about 8 three months earlier than they would have otherwise. 9 COMMISSIONER SADBERRY: I guess the 10 only question I would have is whether it would be 11 appropriate or necessary to notify them of anything. 12 MS. KIPLIN: I'll be glad to. 13 COMMISSIONER SADBERRY: I really don't 14 know. 15 CHAIRMAN CLOWE: I think that would be 16 appropriate. 17 MS. KIPLIN: Sure. 18 CHAIRMAN CLOWE: I think that's called 19 for. 20 All right. Nothing further on that. 21 Then, we'll move to item 20, report by the executive 22 director. Linda? 23 MS. CLOUD: Commissioners, to report on 24 our transfer to the foundation school fund, December 25 the 15th we transferred $66,088,439. For FY 2000, we 146 1 transferred 28,110,597 to the multicategorical 2 teaching hospital. This was our unclaimed prize 3 money, and we've transferred another 15,439,025 in 4 year 2001, which gives a total to that fund of 5 43,549,622. 6 Robert is here to present the minority 7 report, I think, Mr. Robert Hall. Okay. 8 MR. HALL: I'm sorry, just one second, 9 Commissioners. 10 MS. CLOUD: It's under the executive -- 11 very far back. 12 MR. HALL: I apologize. 13 Commissioners, I do have an update for 14 you that I handed to executive director Ms. Cloud 15 earlier. If you had a chance to get that, I would 16 just like to cover it briefly. 17 MS. CLOUD: I didn't pass it out. I 18 didn't know you had copies of it. I'm sorry 19 (furnishes document). 20 MR. HALL: Thank you. This is a 21 slightly revised report. Section 1 of this report 22 highlights for the Commission, for us to track 23 appropriately, dollars that are spent directly with 24 our HUB or minority firms, and we're tracking that, 25 which includes -- For this report, any firm that has 147 1 an estimated contract value of over $1 million will 2 appear on this report in Section 1, and as you will 3 see in Section 1, it includes currently only the King 4 Group, which is a minority firm and which we're 5 contracting directly with. 6 Section 2 includes all of the prime 7 vendors that have a contract estimated value of 8 $1 million in which we're contracting directly with 9 and all their subcontract activity for the particular 10 month and also for the course of a year, and Section 3 11 includes the total participation directly and 12 indirectly for the Commission, and our total 13 percentage to date -- it is estimated to have spent 14 over $5 million with HUBs and minority firms, and our 15 total percent today is about 18.57 percent, and the 16 reason for -- A dramatic reason for this increase at 17 this particular point in time would have to do with 18 the King Group. 19 Now, I want to just make a special 20 note. This does not include all of the dollars that 21 we hoped to track that we're spending directly with 22 every minority firm that we're contracting with on a 23 regular basis. We hope to include this for you in the 24 near future in the same format where you will be able 25 to see, on a monthly basis, how much money is actually 148 1 being spent with those minority firms that we contract 2 directly with. 3 CHAIRMAN CLOWE: Good. I like this 4 format, Robert. 5 MR. HALL: Thank you, sir. 6 MS. KIPLIN: Mr. Hall, is this part of 7 the minority participation report or is this a 8 separate -- the minority participation report that was 9 presented earlier to the Commission and then they 10 voted three to zero to approve? 11 MR. HALL: Yes, ma'am. 12 MS. KIPLIN: Okay. So, if you're going 13 to incorporate this, then I think the Commission is 14 going to need to amend their motion and reflect this 15 new document. Is that -- 16 CHAIRMAN CLOWE: This amended document? 17 MR. HALL: Well, this amended document 18 was in the draft report that we submitted. 19 MS. KIPLIN: Okay. I'm sorry. I 20 misunderstood. I thought that this was a change from 21 what the Commission had seen earlier today. 22 MR. HALL: No. The format that you see 23 before you now is the form that will be in the report, 24 and it was in the draft report that we submitted for 25 review. 149 1 MS. KIPLIN: And the information that 2 was contained in this format is exactly the 3 information as it was handed to me right now. 4 MR. HALL: I'm sorry. The information 5 that you have before you is an update to the 6 information that we previously submitted. 7 MS. KIPLIN: Okay. Based on that, 8 then, yeah, Commission, it's my recommendation to go 9 ahead and vote to approve the minority participation 10 report as amended to incorporate this updated 11 information. 12 COMMISSIONER WHITAKER: So moved. 13 COMMISSIONER SADBERRY: Second. 14 CHAIRMAN CLOWE: Do you have any 15 comments, Robert, before we vote? 16 MR. HALL: One additional item for you 17 is that the report in the past has required the 18 chairman's signature, and I do have a copy of the 19 letter that requires the signature. I don't know if 20 we need to do that at this particular meeting or we 21 can have it sent overnight prior to sending the report 22 to our vendor for reproduction. 23 CHAIRMAN CLOWE: I think we're ready 24 for the vote. Then I'll sign. 25 All in favor say aye. 150 1 COMMISSIONER WHITAKER: Aye. 2 CHAIRMAN CLOWE: Aye. 3 COMMISSIONER SADBERRY: Aye. 4 CHAIRMAN CLOWE: Opposed, no. 5 The vote is three zero in favor. 6 Anything further, Robert? 7 MR. HALL: No, sir. Thank you very 8 much. 9 CHAIRMAN CLOWE: I'll sign that for you 10 if you like. 11 MS. KIPLIN: And your signature is 12 actually reflecting the vote of the Commission, and 13 you're signing in your representative capacity as 14 chairman and representing the Commission. 15 CHAIRMAN CLOWE: Very good. 16 MS. CLOUD: The only other item is the 17 FTE count for this month. We have 306 active FTEs. 18 We have 25 vacant positions. We have one in this 19 election, acceptance pending. We have 21 that we're 20 recruiting, screening and interviewing, and we have 3 21 vacant positions with no HR activity at the moment, 22 making our count the 335. 23 CHAIRMAN CLOWE: How are you counting 24 Robert Bell? 25 MS. CLOUD: He hasn't left us yet. So, 151 1 he's still an active employee. 2 CHAIRMAN CLOWE: We've still got him? 3 MS. CLOUD: We still got him. 4 COMMISSIONER SADBERRY: You better 5 leave the courthouse, Robert. 6 MS. CLOUD: Yeah, and that's all I have 7 to report, Commissioners. 8 CHAIRMAN CLOWE: Any questions? 9 Mr. Atkins. 10 MR. ATKINS: Commissioners, the only 11 thing I wanted to point out, if you look, it's the 12 third page of my report, the graph showing the 13 licensing activity for the month. We've changed that 14 format slightly, in that it now shows -- in addition 15 to just the pending count, it also shows on a daily 16 basis the number of licenses that were data-entered, 17 as well as those issued. So, it kind of gives you a 18 clearer picture of all the activity that takes on as 19 it relates to licensing. And other than that, I have 20 nothing to add to what's in my report already. 21 CHAIRMAN CLOWE: Very good. I want to 22 compliment you and Roy again, Billy, on your 23 presentations this morning and the discussions that 24 ensued following those. It was very beneficial, I 25 think, to all of us here at the Commission, and I 152 1 think that it was thoughtfully prepared and well 2 presented, and I want you to know that we appreciate 3 that very much. 4 MR. ATKINS: Thank you. I'll pass that 5 on to Roy. 6 CHAIRMAN CLOWE: We are now to 7 section -- or item twenty-two, public comment. Are 8 there any of those members of the public who wish to 9 appear before the Commission at this time? 10 (No reply.) 11 CHAIRMAN CLOWE: The next item is not 12 on the agenda, but I hope the general counsel will 13 allow the commissioners to wish all of the Commission 14 staff and employees here and at all the outlying 15 offices a very joyous holiday season, and thank you 16 upon the occasion of the end of the year for your hard 17 work and great efforts in the year 2000. The 18 commissioners are very mindful of the effort and work 19 that all of the employees of this Commission put forth 20 on a daily basis to making the Texas Lottery 21 Commission an agency of the State which we can be 22 proud of and set an exemplary tone for the work that 23 we do here. 24 On a personal basis, the commissioners 25 would like to urge each of you to drive very carefully 153 1 this holiday season. You'll be out on the highways, 2 and anybody that goes on I-35 has got to be extra 3 careful. 4 My understanding is this agency will 5 observe Christmas on Monday and Tuesday and will 6 resume normal business hours on Wednesday the 27th. 7 Is that correct? 8 MR. ATKINS: That's correct. 9 CHAIRMAN CLOWE: Anything to add, 10 Commissioner Sadberry? 11 COMMISSIONER SADBERRY: I concur in 12 your comments and emphasize them and wish each of you 13 a good season and wish you well. 14 CHAIRMAN CLOWE: Commissioner Whitaker? 15 COMMISSIONER WHITAKER: Do you want us 16 to sing a song or something? 17 CHAIRMAN CLOWE: Well, we haven't 18 practiced, but we can try. 19 COMMISSIONER WHITAKER: We do wish you 20 a merry Christmas. 21 CHAIRMAN CLOWE: Thank you. And with 22 that, the Texas Lottery Commission is adjourned at 23 2:27 p.m. 24 25 154 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, LEIGH ANNE WILLIAMS, Certified 7 Shorthand Reporter for the State of Texas, do hereby 8 certify that the above and foregoing pages constitute 9 a true and correct transcription of the statements 10 made on the record at the time indicated. 11 12 Witness my hand on this the 28th day of 13 December, 2000. 14 15 16 LEIGH ANNE WILLIAMS, Texas CSR 4446 17 Expiration Date: 12/31/02 1609 Shoal Creek Boulevard, Suite 202 18 Austin, Texas 78701 (512) 474-4363 19 20 JOB NO. 001218LAW 21 22 23 24 25