1 1 2 3 4 5 6 *************************************************** 7 8 TEXAS LOTTERY COMMISSION 9 MEETING 10 11 October 9, 2001 12 *************************************************** 13 14 15 16 17 18 BE IT REMEMBERED that the TEXAS LOTTERY 19 COMMISSION meeting was held on the 9th day of 20 OCTOBER, 2001, beginning at 8:33 a.m. and ending at 21 3:03 p.m., before Suzanne T. Lane, RPR, CSR in and 22 for the State of Texas, reported by machine 23 shorthand, at the Offices of the Texas Lottery 24 Commission, 611 East Sixth Street, Austin, Texas, 25 whereupon the following proceedings were had: WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 2 1 APPEARANCES 2 Chairman: 3 Mr. C. Tom Clowe, Jr. 4 Commissioners: Ms. Elizabeth D. Whitaker 5 Mr. Walter H. Criner, Sr. 6 General Counsel: Ms. Kimberly L. Kiplin 7 Executive Director: 8 Ms. Linda Cloud 9 Charitable Bingo Operations Assistant Director: Mr. Philip D. Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 3 TEXAS LOTTERY COMMISSION - 10-9-01 1 CHAIRMAN CLOWE: Good morning. We 2 are going to come to order and call this meeting of 3 the Texas Lottery Commission to order at 8:33 a.m. 4 It is October the 9th, 2001. Commissioner Criner 5 and I are here, and Commissioner Whitaker is in the 6 building and will be along shortly. 7 We have a full agenda, so we're 8 going to begin with a quorum. And we have some 9 items which involve participation from individuals 10 who have come to Austin to attend this meeting this 11 morning, so we will go immediately to those agenda 12 items out of order. 13 And the first one will be Item 5, 14 report, possible discussion and/or action on 15 lottery operator procurement and/or lottery 16 operator consultant. 17 Commissioner Criner had asked some 18 time ago, I think, in a meeting, to hear from the 19 management of Scientific Games. And we have with 20 us this morning the chairman and CEO. 21 And gentlemen, if you would come 22 forward and introduce yourselves for the record and 23 give us your -- 24 MR. WEIL: Is this -- 25 CHAIRMAN CLOWE: That's fine. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 4 TEXAS LOTTERY COMMISSION - 10-9-01 1 Mr. Weil, we're happy to have you 2 here, and we appreciate you coming to Austin from 3 New York City, and we're happy to hear from you 4 this morning. 5 MR. WEIL: Thank you very much, 6 Mr. Chairman. For the record, I'm Lorne, 7 L-o-r-n-e, Weil, W-e-i-l. And I'm the chairman and 8 chief executive of Scientific Games Corporation. 9 I'd like to just take a second and introduce some 10 members of our team who are here with me today as 11 well. And if you have questions after my prepared 12 remarks, they're here to give me all the help I 13 obviously need. 14 We have Ron Williams, who is our 15 site manager here in Texas; Sam Wakasogi, who is -- 16 CHAIRMAN CLOWE: Could they identify 17 themselves for us, please? 18 MR. WEIL: Sam Wakasogi, who is our 19 regional director in the western part of the 20 country; and Jim Kennedy, who is our vice president 21 of sales and marketing back in our headquarters in 22 Atlanta. 23 So as I said, I am the chairman and 24 chief executive of the company. I think maybe some 25 of you know that about a year ago, Scientific Games WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 5 TEXAS LOTTERY COMMISSION - 10-9-01 1 merged with a company formerly known as Autotote 2 Corporation. That issue will come up as I go 3 further along in my remarks. 4 But I have been associated, myself, 5 with Autotote Corporation for several years, and 6 I'd like to begin with a brief review of some 7 personal and corporate history so that you 8 understand what got us to the merger that we did 9 about a year ago. 10 (Commissioner Whitaker entered the 11 meeting room.) 12 MR. WEIL: I first became involved 13 with Autotote Corporation in the mid 1980s as the 14 director of the company and as a principal 15 shareholder. I had been involved, myself, in the 16 gaming technology business for a number of years. 17 I'd previously been the corporate vice president of 18 a company called General Instrument Corporation, 19 which was a diversified technology-based company 20 that in the '70s actually pioneered in 21 North America and indeed, in the world, the 22 technology in online lotteries. 23 And it was during my tenure at 24 General Instrument, again in the '70s, that the 25 first online lotteries in the United States and the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 6 TEXAS LOTTERY COMMISSION - 10-9-01 1 states of New Jersey and Maryland were initiated. 2 So I was really there when this all started. 3 In 1992, I was asked to become the 4 chairman and chief executive of the company 5 formerly known as Autotote Corporation. At that 6 time, we were a relatively small factor in the 7 pari-mutuel racing segment of the gaming technology 8 business and doing about $25 million a year in 9 revenue. 10 By the time we merged with 11 Scientific Games last year in 2000, or about eight 12 years later, our revenues had grown by nearly 13 tenfold to something totaling over 200 million a 14 year. And we had become far and away the leading 15 supplier of technology-based products and services 16 in the world in the racing business. And we had 17 used the platform that we had built in the racing 18 business to successfully diversify into the lottery 19 business as well. 20 On this last point, I think we're 21 proud of the fact that over the last two or three 22 years, we have been able to do what, frankly, no 23 other company has done in the last 20 years -- and 24 many, many have tried; many, many, much larger, 25 with much greater resources than we had. We were WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 7 TEXAS LOTTERY COMMISSION - 10-9-01 1 able to establish ourselves as a meaningful 2 participant in the North American online lottery 3 business. 4 Just in the last two or three years, 5 I believe I'm accurate in saying that despite the 6 intense -- some people would say almost 7 legendary -- nature of the competitive barriers in 8 this industry, we have captured more online lottery 9 contracts from our competitors than any other 10 company in the business. 11 And so it is against this 12 background -- or backdrop, that a year ago, we 13 merged with Scientific Games. We chose Scientific 14 Games Corporation as our parent company name so 15 that we would communicate clearly to the world our 16 commitment and total focus on the lottery business. 17 And our goal, frankly, was to become 18 the most technologically complete company in the 19 lottery business, the most focused and the most 20 agile, and to demonstrate leadership in the instant 21 ticket business, in the instant ticket cooperative 22 services business, and the online lottery business. 23 And I'm quite pleased to say this 24 morning, after about a year at this, we are 25 achieving this objective. The merger of the two WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 8 TEXAS LOTTERY COMMISSION - 10-9-01 1 companies has gone beautifully in virtually every 2 respect, including, again, I'm pleased to say, a 3 financial one. 4 Just to give you some sense of that, 5 in the third quarter of the year 2000, which was 6 the first quarter that Scientific Games and 7 Autotote were merged, we reported operating cash 8 flow of about $14 million. In a couple weeks, we 9 will be reporting our comparable third quarter for 10 this year, 2001, and I can tell you that we will be 11 reporting something in excess of $26 million of 12 operating cash flow, which is an increase, year to 13 year, of close to 90 percent. 14 Barring, please God, no serious 15 further deterioration in the American economy, we 16 expect to show a comparable rate of growth in the 17 fourth quarter. We expect that for the full year, 18 2001, we will have cash flow of something over a 19 hundred million dollars. And we are currently 20 forecasting, based upon the backlog of business 21 that we have at the present time, that our cash 22 flow in 2002 will be at least 125 million. So our 23 strategy is working from a business point of view, 24 and it seems to be working from a financial point 25 of view. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 9 TEXAS LOTTERY COMMISSION - 10-9-01 1 There are several reasons why we've 2 been able to achieve these kinds of results. 3 Basically, all of our businesses are contributing. 4 In the last 15 months alone, we have added four new 5 online lottery contracts to our online lottery 6 portfolio in the states of New Hampshire, Vermont, 7 Main, and Iowa. 8 In fact, here, I'll exercise a 9 little bit of immodest bragging rights. On two 10 occasions, two different occasions in the last 15 11 months, we were called upon to initiate the startup 12 of two different online lotteries on the same day, 13 and did this twice with excellent results. And 14 again, I think I'm probably correct in saying that 15 none of our competitors have ever done this or have 16 ever been required to do this, even once. 17 During that same period of time, we 18 have invested upwards of $25 million in our 19 North American instant ticket production capability 20 in order to significantly improve our capacity, our 21 quality, and our efficiency. I think we were the 22 leading participant in the instant ticket 23 production business in the world before this 24 investment, and I think we've widened our 25 leadership since. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 10 TEXAS LOTTERY COMMISSION - 10-9-01 1 In passing, I should also mention, 2 by the way, there are four companies, including 3 ourselves, who currently participate in the instant 4 ticket business in North America. We are the only 5 one which is an American company. The other three 6 produce here, but they are all foreign owned. 7 I think the business that we're most 8 pleased with, or certainly very pleased with, is 9 our instant ticket cooperative services business. 10 For those of you who may not be familiar with that 11 term, that's the part of our business where, in 12 essence, we work in partnership with our lottery 13 customer to assist in the running of the instant 14 ticket game itself. And I'd like to give you some 15 statistics that I think are fascinating in that 16 regard. 17 In the first quarter of the year 18 2001, which is the most recent period for which we 19 have complete data on all of the lotteries, those 20 lotteries with whom we have what we call 21 cooperative service agreements -- that would 22 include, for example, Georgia, Pennsylvania, and 23 Florida -- showed a year-to-year increase in retail 24 instant ticket sales of 17 or 18 percent. 25 Those of our customers where we are WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 11 TEXAS LOTTERY COMMISSION - 10-9-01 1 the primary supplier of instant tickets but where 2 we do not have a cooperative services 3 arrangement -- the largest customers there, of 4 course, would be Texas, Massachusetts, and 5 Illinois, as examples -- as a group, they showed a 6 year-to-year increase in the first quarter of 7 6 or 7 percent in instant ticket sales. Certainly 8 healthy growth. 9 And, sad to say, those instant 10 ticket lotteries in the country which are neither 11 those that we have cooperative service agreements 12 with nor who buy our tickets -- and that would 13 include, most noticeably, for example, Ohio and 14 Michigan -- those states actually experienced a 15 decline in instant ticket retail sales for the 16 first quarter of 2000 to the first quarter of 2001. 17 And I think these -- what these 18 statistics show is that there is a tremendous 19 amount of synergy between the design, programming, 20 and production of instant tickets on the one hand; 21 and the warehousing, inventory, management, 22 distribution, and marketing of instant tickets on 23 the other. And I think, quite honestly, it's 24 difficult to separate all these functions, and the 25 synergy amongst them is just very demonstrative. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 12 TEXAS LOTTERY COMMISSION - 10-9-01 1 I'm also pleased to say that since 2 the compiling of these statistics, the State of 3 Ohio, which as I mentioned was in the last 4 category, has made a decision to switch from its 5 current supplier to us. And I can also tell you 6 that the most recent state in the country to 7 initiate lottery legislation, which is the State of 8 South Carolina, has informed us that they intend to 9 engage our co-op services group to begin their 10 instant ticket lottery early this coming January. 11 So now we come to the $64,000 12 question. If, in fact, we are this proud and this 13 confident of the breadth and depth of expertise 14 that we have in the lottery business -- and I can 15 see Commissioner Criner smiling as I get into this 16 topic, and I know it's near and dear to his 17 heart -- why, then, did we not respond to what, for 18 a company like this, was obviously an 19 extraordinarily wonderful opportunity in the form 20 of the most recent Texas RFP. 21 And actually, it is -- to answer 22 that question, Commissioner Criner, really -- that 23 primarily -- I traveled here today from New York -- 24 and the answer, in a word, is timing. At the time 25 Texas issued its RFP, we were completely consumed WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 13 TEXAS LOTTERY COMMISSION - 10-9-01 1 with the integration of Scientific Games and 2 Autotote. 3 Given the breadth and scope and 4 complexity of the Texas RFP -- which was certainly 5 among the most comprehensive and the most demanding 6 I've ever seen in all of the years that I've been 7 in business; and, of course, this is a significant 8 credit to the Texas Lottery, certainly -- but given 9 that and the demands that we were experiencing at 10 the time on all of our resources -- and this was 11 further intensified by the major manufacturing 12 initiative happening concurrently that I alluded to 13 a moment ago -- there was simply no way, absolutely 14 no way at the time, that we could responsibly have 15 responded to the Texas RFP. Responded, yes; 16 responded responsibly, it simply was impossible at 17 that time. 18 Preparing the proposal itself 19 certainly would have been difficult. But much more 20 importantly there, in an activity or in a project 21 of that size, an enormous amount of operational 22 planning and analysis that would need to go into 23 being absolutely certain that whatever proposal we 24 submitted was done with the greatest of integrity 25 and would protect the integrity of both yourselves WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 14 TEXAS LOTTERY COMMISSION - 10-9-01 1 and us, we're mindful always of the old saw to be 2 careful of what you want, you know, you might get 3 it. And so we simply had to pass. 4 It will sound somewhat gratuitous, 5 I'm sure, but had that RFP arrived two or three or 6 four months later than it did, I can assure you 7 that we would have not only responded, but we would 8 have responded with a vengeance. 9 And I can certainly now assure 10 you -- and this, I think, is obviously not 11 gratuitous -- that we are now ready to respond to 12 any challenge that the Texas Lottery might throw 13 our way in the future, no matter when and no matter 14 what form it should happen to take. Please take 15 that as my assurance that you can count on us in 16 whatever way and whatever form you may need to, 17 beginning this afternoon and as far into the future 18 as any of us can see. 19 Of course, it goes without saying 20 that no matter the direction you take, as long as 21 we have any involvement with the Texas Lottery 22 whatsoever, we will continue to support you in 23 every possible way we can in terms of the quality 24 of our service, our commitment to you, and, perhaps 25 as importantly, with the greatest degree of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 15 TEXAS LOTTERY COMMISSION - 10-9-01 1 security and integrity. 2 And let me conclude with a couple of 3 comments on this last point. As I mentioned 4 before, I have been in this business for over 5 25 years, beginning when I was a consultant right 6 out of business school with a firm called the 7 Boston Consulting Group, and we had clients in the 8 gaming technology business right off the bat; then 9 as a vice president of General Instrument, as the 10 CEO of Autotote, and as the CEO and chairman of 11 Scientific Games. 12 Obviously, there have been a lot of 13 rewards along the way, but I can say one of the 14 things that I am particularly proud of is the 15 fact -- or is the absolutely unblemished reputation 16 for integrity that every company I have ever been 17 associated with was able to earn. 18 A number of years ago in 19 Scientific -- in Autotote, we formed a board-level 20 committee of compliance and ethics and an 21 associated company-wide compliance and ethics 22 function that I believe is among the most 23 comprehensive and most stringent in the entire 24 gaming industry. 25 And I assure you this philosophy has WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 16 TEXAS LOTTERY COMMISSION - 10-9-01 1 become a critical part of the Scientific Games 2 culture as well. We really, really understand the 3 responsibility that we have to you, the Texas 4 Lottery, and I assure you that we will never, ever 5 allow anything to happen that will cause any 6 embarrassment. 7 So to briefly conclude, our strategy 8 is working; the merger is going beautifully; we 9 have achieved our technology goals; we are pleased 10 with our financial results. We're able to do this 11 with continued commitment to security and 12 integrity, as we talked about, and we're ready now 13 for anything the Texas Lottery might ask of us. 14 I don't know whether any of you had 15 an opportunity yesterday to hear the swearing in 16 ceremony of Governor Ridge in his new cabinet post, 17 but in his confirmation speech, he quoted the model 18 of the Army Corp of Engineers, and he said: What 19 is extremely difficult, we will do today; and what 20 is impossible, that will take a little more time. 21 Back in the winter, when we received 22 your RFP, for us, with all the things that we had 23 going on at the time, that would have been 24 impossible. But by now, we've had a little time, 25 and as I said, we're ready when you are. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 17 TEXAS LOTTERY COMMISSION - 10-9-01 1 Thank you, and I'll be glad to take 2 any questions you have. 3 COMMISSIONER CRINER: Thank you so 4 very much for coming, because I can appreciate -- I 5 can't tell you how much it means to me that you 6 came to speak to us about this. It's very 7 important to me that when we put our largest bid on 8 the street, that we get a good response. 9 Competition, the public wins. The 10 State of Texas wins. When there is no response, 11 there is no competition. Then I'm a little 12 uncomfortable: Why? How come? 13 And I hear a lot of things, and 14 people tell you this is why this didn't happen and 15 that didn't happen. And I've learned over the 25 16 years -- the 23 years that I've had my own company 17 that a lot of times what you hear is not really 18 what the true story is. So I just wanted to say 19 thank you very much for telling us the true story. 20 My concern was your company didn't 21 bid, because the greatest opportunity, I think, 22 that we can put out on the street is a response. I 23 would like to ask you -- I understand everything 24 that you said; it makes perfectly good sense -- but 25 I'd like to ask you to maintain a positive WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 18 TEXAS LOTTERY COMMISSION - 10-9-01 1 relationship with our executive director and our 2 entire commission so that you are a viable bidder 3 in the future for the opportunities that are to 4 come. 5 I say that kind of -- I would 6 imagine that your company is going to be involved 7 in just about everything that Ms. Cloud is involved 8 in. She has put herself in the right positions 9 with all the right associations to be in a 10 leadership role. So I would not expect her to -- 11 her not to have some relationship with you. 12 But I'd like to -- just so that 13 Texas gets the best bang for its buck -- encourage 14 you and your company to stay in touch with us in 15 all the avenues that you think you can. 16 Besides that -- I had a lot of 17 questions. You answered them all. You're a good 18 salesman. 19 MR. WEIL: Well, thank you. 20 COMMISSIONER CRINER: Mr. Chairman, 21 thank you. 22 MR. WEIL: Anything else? 23 CHAIRMAN CLOWE: I had a question. 24 You quoted the statistics on operating cash flow. 25 And can you take that to earnings for us for the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 19 TEXAS LOTTERY COMMISSION - 10-9-01 1 similar period? 2 MR. WEIL: Yes. Actually, if I 3 could, if I could take it -- if I could take the 4 two periods and then the second period on a 5 pro forma basis to reflect the change in the 6 accounting rules that will be taking place at the 7 end of this year. 8 When -- just by way of background on 9 that, when we acquired Scientific Games, we created 10 a tremendous amount of good will because we 11 acquired Scientific Games -- or we merged with 12 them, but it was treated as, in effect, a cash 13 acquisition, and the cash acquisition price was 14 considerably in excess of their then book value. 15 So we created an amount of good will 16 which produces, obviously, a non-cash charge to 17 earnings of approximately $30 million a year. So 18 in this year, the year 2000, on roughly a hundred 19 million of operating cash flow, we will show about 20 a breakeven -- actually, maybe 4 or $5 million in 21 profit. 22 But as you probably know, Mr. Clowe, 23 the accounting rules have said that as of the -- 24 actually, January 1st, 2002, the amortization of 25 good will will no longer be required as long as the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 20 TEXAS LOTTERY COMMISSION - 10-9-01 1 underlying asset has not been impaired, which, 2 fortunately at this point, it certainly has not 3 been. So we would expect that on, let's say, the 4 125 million of operating cash flow we anticipate 5 having in 2002, our actual reported profit will be 6 around $50 million. 7 CHAIRMAN CLOWE: And your company is 8 publicly traded on the -- 9 MR. WEIL: Yes, sir. It's traded on 10 the American Stock Exchange. 11 CHAIRMAN CLOWE: On the American 12 Stock Exchange? 13 MR. WEIL: Yes, sir. 14 CHAIRMAN CLOWE: How many employees 15 do you have? 16 MR. WEIL: About 2,000. 17 CHAIRMAN CLOWE: And how many states 18 are you working with now in the United States? 19 MR. WEIL: In the lottery business, 20 we are working with probably 35 states. And in our 21 racing business, we're working with every state 22 that has racing legislation, which is probably 23 about 40. And just for the sake of completion, we 24 work in probably 60 or 70 foreign countries as 25 well. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 21 TEXAS LOTTERY COMMISSION - 10-9-01 1 CHAIRMAN CLOWE: Great. I want to, 2 again, as Commissioner Criner said, thank you for 3 coming. We were introduced this morning, before 4 the meeting was convened, by Mr. Proffitt. And you 5 told me at that time that you live in upper 6 Manhattan. And -- 7 MR. WEIL: Yes, sir. 8 CHAIRMAN CLOWE: -- in light of 9 that, I'd like to especially say how much we 10 appreciate you flying down here and being with us 11 today and answering the question that 12 Commissioner Criner posed to your company some time 13 ago and giving us the information about your 14 company that you have. We appreciate it very much. 15 MR. WEIL: Well, thank you, 16 Mr. Chairman. And we obviously appreciate the 17 opportunity to have me come. And as I said -- and 18 Commissioner Criner, you don't have to worry about 19 our continued involvement. We will drive Executive 20 Director Cloud crazy, day in and day out, for as 21 long as we're both in our respective seats. So I 22 give you my word on that one. But thanks for 23 having us, and I hope I'll have an opportunity to 24 do it again sometime. 25 CHAIRMAN CLOWE: Thank you, sir. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 22 TEXAS LOTTERY COMMISSION - 10-9-01 1 MR. WEIL: Sure. 2 CHAIRMAN CLOWE: While we are in 3 Item 5, I'd like to go ahead and finish that, if, 4 Ridgely, you have any additional information on 5 other subjects. 6 MR. BENNETT: Good morning, 7 Commissioners. For the record, my name is 8 Ridgely Bennett. I'm the deputy general counsel. 9 I don't have anything further to add 10 at this time. I'd be happy to answer any questions 11 if you have any. 12 CHAIRMAN CLOWE: Are there any 13 questions from the Commissioners on this item? 14 Thank you, Ridgely. 15 MR. BENNETT: Thank you, 16 Commissioners. 17 CHAIRMAN CLOWE: We have a number of 18 public witnesses who have signed up, I believe all 19 to speak on agenda Items 10 and 11. 20 MS. CLOUD: Commissioner Clowe, 21 before we go to Items 10 and 11, we do have another 22 group in the room that has no interest in that 23 particular agenda item. If we could take them 24 up -- that's your Item 13 -- our Millionaire Family 25 group is here, and they just wanted to speak with WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 23 TEXAS LOTTERY COMMISSION - 10-9-01 1 the Commission. 2 CHAIRMAN CLOWE: Would that be -- is 3 it Mr. Marc Jacobi -- 4 MS. CLOUD: Yes. 5 CHAIRMAN CLOWE: -- or Jacob? 6 And Johnnie Joe Naizer or Nazzer? 7 MS. CLOUD: Yes, sir. 8 CHAIRMAN CLOWE: Fine. 9 Will you come forward, please. 10 We're happy to have you here this morning and 11 appreciate you being here and are eager to hear 12 what you have to tell us. 13 MR. JACOBI: Thank you. 14 CHAIRMAN CLOWE: Would you give us 15 your names for the record and pronounce them 16 correctly, please. 17 MR. JACOBI: My name is Marc Jacobi; 18 Southlake, Texas. 19 MR. NAIZER: My name is 20 Johnnie Naizer; Granger, Texas. 21 CHAIRMAN CLOWE: Thank you. 22 MR. JACOBI: Good morning, 23 Commissioners. As I stated, I'm Marc Jacobi. I'm 24 president of the Texas Millionaire Family. That's 25 a group of lottery winners of -- that won a million WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 24 TEXAS LOTTERY COMMISSION - 10-9-01 1 dollars or more. 2 First and foremost of our meeting, I 3 wanted to -- personally and as a representative of 4 the team, I'd like to thank the Commissioners for 5 your support regarding the educational seminars 6 that were conducted in September, the weekend of 7 the 7th of September, in Austin. 8 The seminars were superb, the topics 9 were exceptionally productive. The feedback was 10 that this was really what the winners needed, and 11 the years without these seminars certainly had 12 contained a large void. 13 I also wanted to especially thank a 14 couple of people whose hard work and support 15 ensured the success of the seminars. Liaison 16 Abbie Pina was relentless in her efforts to ensure 17 the smooth coordination and then execution. 18 Executive Director Cloud issued her absolute 19 support in each of our endeavors, and without it, 20 we would not have enjoyed the success that we had. 21 Primarily because of this success 22 for those seminars, we voted unanimously, following 23 those, to request for the Commissioners to 24 reauthorize the winners' educational seminars on a 25 biannual basis. The winners, as represented by the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 25 TEXAS LOTTERY COMMISSION - 10-9-01 1 Texas Millionaire Family, hereby request that 2 September of 2003 be set aside and established as 3 the target date for the next winners' educational 4 seminars. 5 As a side note, the winners did 6 express an interest in getting a chance to thank 7 you personally and to get a chance to meet you, and 8 wanted to extend their invitation for each of you 9 to attend. 10 And in closing, the TMF wants to put 11 on the record that we absolutely pledge our support 12 in any way needed to the Lottery Commission. Thank 13 you. 14 CHAIRMAN CLOWE: Can we assume that 15 both of you-all are winners? 16 MR. JACOBI: Good assumption. 17 CHAIRMAN CLOWE: There may be 18 questions from the other commissioners. 19 One of the things that I'm 20 constantly asked about -- and I'd like to ask you 21 to comment for us on it -- is, you know, what 22 happens to these people who win these jackpots, and 23 are their lives destroyed, and are they unhappy 24 about the long-term impact of winning these large 25 amounts of money. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 26 TEXAS LOTTERY COMMISSION - 10-9-01 1 I have reviewed the handbook of 2 winners, which I think is updated through some 3 month in 2000. That's the latest printed document 4 we have. But I think the meeting of this group in 5 the forum that you've been so active in, obviously, 6 has a better read on that issue. And would you 7 just comment to us about your personal impressions 8 of how the winners, as a group, are living their 9 lives since they have won, and make any other 10 observations that might come to mind. 11 MR. JACOBI: Certainly. I'll tell 12 you, there is no universal answer. There are 13 individuals that have benefited from winning the 14 lottery whose lives today were unimaginable at the 15 point in time when they bought their ticket. It 16 has been a fairy tale ride from day one and 17 continues to be so. 18 I will tell you there's others on 19 the other end of the spectrum that have not been as 20 fortunate. Whether it be bad choices or bad 21 circumstances in their life prior to or following 22 the time that they won, they obviously have had 23 less favorable times. 24 I will tell you that one of the 25 reasons that the Texas Millionaire Family was WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 27 TEXAS LOTTERY COMMISSION - 10-9-01 1 established was that it would give an independent 2 opinion and support to winners as they claim their 3 ticket. 4 We've had a number -- I've 5 personally had a number of calls, and I know our 6 secretary/treasurer, who is not here today, has had 7 a number of calls, and I believe Johnny as well, 8 where the call comes and says: I've won. I 9 haven't claimed. I need to know. Are they going 10 to -- am I going to have a long line at my front 11 door? Do I need to change my phone number? Can I 12 go out in public? And who do I trust? 13 And we simply try and tell them, 14 this is what's -- this is what we did that we found 15 successful, and these were the experiences that we 16 have. 17 And we know -- in fact, at the 18 seminars that we had in September, I had two people 19 that we had -- that had personally contacted me 20 that I had not met before that said, I really 21 wanted to thank you for the support because I 22 didn't know where to turn. I mean, you don't know 23 whether the person you're talking to was looking to 24 gain something from you or truly is there to 25 support you, and talking to other winners has been WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 28 TEXAS LOTTERY COMMISSION - 10-9-01 1 supportive for me. 2 So it has been a -- it's been a 3 wonderful forum for the winners, and I think for 4 the most part, what we generally have concluded at 5 these sessions is -- we will break out into 6 individual discussion sessions, and we generally 7 say there is no one else in the world that can 8 relate to us other than other winners because no 9 one else has experienced the highs and the lows. 10 And one of the topics this year was 11 how to say no and feel good about it. And we 12 thought that the response from that seminar was 13 phenomenal because it was a subject that each of us 14 hit. 15 So I will tell you that not all are 16 as successful as they want to be; and certainly, 17 many of us are living the life that we dreamed. 18 CHAIRMAN CLOWE: That's a great 19 answer, and I think it satisfies some of the 20 concerns that I've had. And I'll use that answer 21 in responding to people who ask me that question. 22 And I don't think it's necessary or 23 required that the Commission authorize a future 24 seminar. I think that comes from the executive 25 director. And I think I can speak for the other WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 29 TEXAS LOTTERY COMMISSION - 10-9-01 1 Commissioners: We're all in very much wholehearted 2 support of this seminar and these meetings, and we 3 feel that concern and that wanting of success for 4 the lottery winners. It's their money, and they 5 can do with it what they will. But we want to hear 6 the kinds of things that you've told us this 7 morning. 8 Where are you gentlemen from? Where 9 do you live? 10 MR. JACOBI: I live in Southlake, 11 up in the -- outside of Grapevine, the 12 Dallas/Fort Worth area. 13 MR. NAIZER: I live about 45 14 minutes -- miles from here. I live in Granger, 15 Texas. I'm probably one of the closest -- well, 16 not the closest, but in the area, the perimeter. 17 CHAIRMAN CLOWE: You'll -- 18 COMMISSIONER WHITAKER: When did -- 19 CHAIRMAN CLOWE: Go ahead. 20 COMMISSIONER WHITAKER: When did you 21 win your jackpots? 22 MR. NAIZER: 1993. 23 MR. JACOBI: And I won in 1995. 24 CHAIRMAN CLOWE: They're the 25 millionaires next door. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 30 TEXAS LOTTERY COMMISSION - 10-9-01 1 MR. JACOBI: Almost. Almost. 2 MS. CLOUD: They have been really, 3 really great in organizing the Millionaire Family 4 group and being the support group for our 5 millionaires. I totally agree that they have been 6 an asset to the millionaires that we've had contact 7 with. 8 And not everybody that has won the 9 lottery has contacted the Millionaire Family group, 10 but the Lottery does put brochures in their packets 11 when they come in to claim their prize and show 12 them videotapes about what the millionaire group is 13 all about, so that it gives the new millionaires a 14 comfortable level with even talking to someone from 15 the Millionaire Family group. So we've been very 16 happy with their involvement. 17 COMMISSIONER WHITAKER: I really 18 appreciate you coming in. It's nice to hear warm 19 and positive feedback. I assume that you feel 20 welcome at any time to give the Commission 21 suggestions for easing that transition, and I would 22 specifically welcome you doing that. 23 MR. JACOBI: Okay. 24 COMMISSIONER WHITAKER: Thank you. 25 MR. JACOBI: Thank you. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 31 TEXAS LOTTERY COMMISSION - 10-9-01 1 CHAIRMAN CLOWE: Thank you again. 2 And now I believe we are ready to go 3 into the agenda Items 10 and 11, which is 4 consideration of possible discussion and possible 5 action on certain rules. 6 And I'm going to ask the general 7 counsel to begin this subject by giving us a 8 presentation. And then I will call on the 9 executive director to add comments, and then I will 10 call on the public witnesses. I have one person 11 signed up at this time as a public witness to, I 12 believe, make comments on this subject. And if 13 there are more, we would appreciate having those 14 commission forms signed up. 15 Kim, will you begin this, please. 16 MS. KIPLIN: Yes. Commissioners, 17 good morning. 18 What you have before you are two 19 rule making matters that are ripe for your 20 consideration for action. I'll preface it by 21 saying that the staff recommends adoption of both 22 rule makings. The rule making that is in 23 connection with Subchapter D, game rules, the staff 24 is recommending that the Commission adopt the rule 25 making but with changes to the proposed text. And WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 32 TEXAS LOTTERY COMMISSION - 10-9-01 1 the changes were in response to comment that the 2 agency received during the comment period. 3 Just to lay it out, the processes, 4 if you will recall, the staff requested authority 5 from the Commission, approval from the Commission, 6 to propose for public comment the rules that are 7 before you now that are in two rule making 8 packages. They were originally in one, the 9 Subchapter D, game rules. 10 The original text of the 11 Subchapter D, game rules, was published in the 12 May 11, 2001 Texas Register. And thereafter, there 13 were some comments that were received in connection 14 with the Lotto Texas, Texas Two Step games, 15 specifically regarding the advertised jackpot; and 16 also the position of the staff that the proposed 17 text needed clarification and it would be better to 18 withdraw that from the Subchapter D, game rules, 19 and republish for a new comment period -- which 20 occurred. 21 And those amendments to the Lotto -- 22 to the proposed amendments to the Lotto Texas and 23 Texas Two Step rules were published in the 24 August 10, 2001 issue of the Texas Register for 25 public comment. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 33 TEXAS LOTTERY COMMISSION - 10-9-01 1 The staff has received public 2 comment since the rules were published, and we 3 received comment in actually two forms: one in the 4 written format and also in the format of a 5 comment -- rule making comment hearing. 6 There were actually two comment 7 hearings that were noticed. One was noticed 8 September 14, 2001 preceding the events that 9 occurred on September 11. No appearances occurred 10 at that comment hearing. And as you know, at the 11 last meeting, the staff indicated to you-all that 12 we wanted to have an additional comment hearing 13 based on a request that we had received preceding 14 September 14th to have a comment hearing. 15 And so there was a new comment 16 hearing that was conducted on September 28, and we 17 had one commenter at that comment hearing who 18 submitted oral comment and also filed with the 19 staff written comment. 20 So we are beyond the minimum of 21 30-day comment period. And the rule makings that 22 are before you today are ripe for your action, and 23 I have indicated that the staff does recommend 24 adoption. 25 I want to talk at this point on WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 34 TEXAS LOTTERY COMMISSION - 10-9-01 1 Subchapter D, game rules, and talk a little bit 2 about the changes that the staff has requested -- 3 is requesting be made to what -- if you do adopt, 4 what you would adopt today. 5 We received two comments. And one 6 was a significant opposition to the deletion in 7 instant game rule of the requirement of a game 8 report after the game closes that would contain 9 information on the game, including prizes won. The 10 staff picked that up as something that ought to be 11 deleted from the rule because that information has 12 never been included in one document. It's included 13 in several different documents, but not in one. 14 And because of the rule review 15 process that was legislatively mandated, part of 16 that task was to review rules of an agency and make 17 recommendations on eliminating language that is 18 obsolete, no longer needed; looking at making rules 19 consistent with agency practice. 20 But in light of the comment that 21 staff received, the recommendation to the staff is 22 to retain that requirement and to have staff create 23 one game report; in other words, compile the 24 information that, to my understanding, is 25 maintained in different documents and have it in WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 35 TEXAS LOTTERY COMMISSION - 10-9-01 1 one document and have it available for the public 2 after the game closes. So that's the first change. 3 The second change has to do with the 4 Commission's requirements regarding claims for 5 high-tier prizes. The comment was in opposition to 6 the requirement that the commenters thought the 7 Commission was proposing. And that requirement 8 that the commenters thought the Commission was 9 imposing was for every prize that was considered to 10 be a high-tiered prize -- and that would be 600 or 11 more -- that we were requiring now that prize 12 winners actually come to the Commission 13 headquarters -- physically come to the Commission 14 headquarters to claim their prize. 15 CHAIRMAN CLOWE: Did you say $600? 16 MS. KIPLIN: Yes, $600 or more for a 17 high-tier prize. 18 And that was never the intent of the 19 staff, never the intent in connection with that 20 change. It was simply to try to clean up the 21 language once again and recognize a commission. 22 These rules use the phrase "Texas Lottery" 23 throughout, and that was a hanger-on from when the 24 Lottery was a division of the Comptroller of Public 25 Accounts. And so it was segregated and identified WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 36 TEXAS LOTTERY COMMISSION - 10-9-01 1 as the Texas Lottery within the Comptroller of 2 Public Accounts. 3 So part of what we were trying to do 4 was change this "Texas Lottery" to "Commission" 5 everywhere you saw it, and to make the way in which 6 a high-tiered prize is claimed consistent in both 7 the instant game rule and online game rule. 8 But we recognize that based on the 9 comment we received, we really didn't do a very 10 good job in terms of the language that was drafted 11 if we left an impression with the commenters that 12 we were trying to make them come here. 13 So we made changes to that text, 14 which was proposed for public comment, to make it 15 very clear that on high-tiered prizes, with the 16 exception of particular prizes -- for example, the 17 Lotto Texas and jackpot prize -- still, you have to 18 come here and you have to claim. 19 There were other prizes -- I think 20 there's a top-tier instant ticket prize we ran that 21 you would -- the prize winner would have to come 22 here and would have to claim. 23 CHAIRMAN CLOWE: That could be a 24 million dollars? 25 MS. KIPLIN: Yes, sir, it could. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 37 TEXAS LOTTERY COMMISSION - 10-9-01 1 MS. CLOUD: Yes, over time. 2 MS. KIPLIN: Anyway, we made changes 3 to clarify what was really meant. 4 Now, for other high-tier prizes that 5 are 600 and over, excluding the ones that we have 6 mentioned, the ones that are particular game rules 7 and those we'll control, we're -- it hasn't 8 changed. The practice will still require the 9 prizewinners to go to the claim center and file a 10 claim form. And they can do it in the mail -- by 11 mail, or they can go physically and present it in 12 person. 13 So that hasn't changed. We were 14 just trying to clean up the language, and I think 15 in doing so, we probably had a confusion. 16 That's -- those are the two changes with regard to 17 Subchapter D, game rule. 18 CHAIRMAN CLOWE: And what you're 19 saying, then, is that the practice of requiring a 20 claimant to go to the claim centers -- and there 21 are 22 of those in the state -- applies to what 22 level of prize before they have to come into 23 Austin? 24 MS. KIPLIN: Well, it applies to the 25 high-tiered prizes. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 38 TEXAS LOTTERY COMMISSION - 10-9-01 1 COMMISSIONER WHITAKER: And those 2 are defined as? 3 MS. KIPLIN: $600 or more in prizes, 4 with the exception of certain top tier prizes; for 5 example, the Lotto Texas and jackpot prize; for 6 example, the top-tiered prize in the Weekly Grand 7 case. And I'm thinking about the truck, but I may 8 be wrong on that. 9 MS. CLOUD: Well, yeah. We had to 10 deliver -- well, actually, we delivered the trucks 11 to the claimants in their locale when they won. 12 CHAIRMAN CLOWE: So if a winner is 13 looking at 300,000 or 500,000, they can go to a 14 claim center? 15 MS. CLOUD: We have had a reduction 16 in the past that the claim centers would be allowed 17 to pay up to $300,000, and we have lifted that 18 limit -- 19 CHAIRMAN CLOWE: That was my -- 20 MS. CLOUD: -- up to 999,000 -- 21 CHAIRMAN CLOWE: Okay. 22 MS. CLOUD: -- in order to -- for 23 Texas Two Step, so that when players won in the 24 field, that the Texas Two Step winners could go to 25 a claim center to claim their prize if it was less WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 39 TEXAS LOTTERY COMMISSION - 10-9-01 1 than the 999,000. 2 CHAIRMAN CLOWE: That's what I 3 wanted the clarification on. 4 MS. CLOUD: Yes. 5 CHAIRMAN CLOWE: It was 300,000 at 6 one time -- 7 MS. CLOUD: Right. 8 CHAIRMAN CLOWE: -- and you now have 9 lifted that. 10 So with the exception of the tops on 11 instant winnings -- which would be a million -- and 12 Texas Lotto, they can go to one of the 22 claim 13 centers? 14 MS. CLOUD: That's correct. 15 CHAIRMAN CLOWE: And that's been the 16 practice since you've modified -- 17 MS. CLOUD: The Texas -- It was part 18 of the Texas Two Step rule. 19 CHAIRMAN CLOWE: Okay. 20 MS. KIPLIN: We're making that 21 change in Cash 5 to lift -- and I think it's Cash 5 22 and Texas Two Step -- to lift the uppermost level. 23 Essentially, it's between 600 and a million -- or 24 999,000, I guess would be more appropriate -- 25 CHAIRMAN CLOWE: Yeah. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 40 TEXAS LOTTERY COMMISSION - 10-9-01 1 MS. KIPLIN: -- can be claimed at a 2 claim center if this package is adopted today, the 3 rule making package. So that, I guess, lays out 4 the process and it lays out the changes. 5 We received a significant amount of 6 comment on both the game report issued, the 7 proposal to delete that, and also the advertised 8 jackpot on the Lotto Texas and also the Texas Two 9 Step; but mainly the Lotto Texas. 10 I will say -- and I brought them 11 just to kind of give you a visual on the comment we 12 received, although I know each of you has had an 13 opportunity to take a look at the comment before 14 today. The comment here (indicating), just to give 15 you a visual, is a comment that was received before 16 the comment hearing. 17 And then this comment -- and the 18 comment, by the way, includes a petition. So you 19 would have a petition with an opportunity for many 20 people to enter their -- in this case, opposition. 21 And then this, of course, is the 22 other comment (indicating). 23 Commissioners, all comment that's 24 been received is opposed to the advertised jackpot 25 on the Lotto Texas and, to a large extent, on the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 41 TEXAS LOTTERY COMMISSION - 10-9-01 1 Texas Two Step. And all comment that's been 2 received was in opposition to the deletion of the 3 game report requirement, just to make sure that 4 you're clear. 5 I know you've had an opportunity to 6 review the drafts and look at the summarization of 7 the comment. But I'm -- and I'll leave that, 8 because to go through it, I think, would take an 9 inordinate amount of time. But I wanted to 10 highlight the overwhelming opposition. 11 There was no comment that was 12 received that was in favor of the advertised 13 jackpot and no comment that was received that was 14 in favor of the deletion of the game report 15 requirement. 16 With regard to the comment, part of 17 what comment we received at the rule making hearing 18 had to do with -- I'm going to characterize it as 19 an allegation that in connection with the 20 Lotto Texas jackpot prizes, the agency has not paid 21 some players all that the players were entitled to. 22 And Mr. Sanchez, the financial 23 director, is here to talk about that along with me 24 and, I think, Mr. Tirloni. So I'm going to leave 25 that. I'm just going to lay that out as part of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 42 TEXAS LOTTERY COMMISSION - 10-9-01 1 the comment. 2 I know that you've indicated that 3 you've got people here who want to comment today. 4 It is the Commission's discretion, the Commission's 5 decision, about whether you want to receive comment 6 today. I will say that as part of the rule making 7 process under the Texas Administrative Procedures 8 Act, the agency is required to summarize all 9 comment. 10 Now, we don't have to summarize each 11 individual comment, but we certainly need to 12 summarize comment. So if it's, you know, 13 consistent with what we've already received, then 14 that wouldn't be an issue for what I'm talking 15 about now. But if you receive a new comment 16 today -- you won't know until we hear it -- the 17 agency is required to summarize it. And if the 18 agency then disagrees with that comment, we -- the 19 agency is required to respond and explain why the 20 agency disagrees with it. 21 Now, I raised -- 22 CHAIRMAN CLOWE: And I would state 23 at this point, unless the commissioners object to 24 it, I would be inclined to receive comment. 25 MS. KIPLIN: Okay. What that means, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 43 TEXAS LOTTERY COMMISSION - 10-9-01 1 the result, is that it may preclude you from being 2 able to act on one or more of the rule making 3 packages today because we'll have to make those 4 changes. 5 With that in mind, I know that one 6 of the questions that was outstanding is what's the 7 end day for action for the Commission. The end day 8 for the Subchapter D, game rules, it -- the rule 9 makings under the Administrative Procedure Act must 10 have action taken within 180 days from the day that 11 it's published in the Register for proposal. 12 And I've counted it out, and if I'm 13 accurate on my counting, for Subchapter D, game 14 rules, your last day to take action -- including 15 adoption, if that's what you wanted to do -- would 16 be November 7. So I want to make sure you knew 17 that. That's because that package, if you'll 18 recall, was proposed on May 11. You've got several 19 more months on the proposed rule making on 20 Lotto Texas and Texas Two Step. 21 COMMISSIONER WHITAKER: Ms. Kiplin, 22 can I ask if we would have the opportunity to seek 23 legal advice on any of this in Executive Session 24 today? 25 MS. KIPLIN: I would think not. And WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 44 TEXAS LOTTERY COMMISSION - 10-9-01 1 the reason that I would take a conservative view, 2 Commissioner, is that these are really a matter of 3 public interest and public comment, and there has 4 been a great deal of public comment. And I think 5 that it would be a better course to specifically 6 notice that item to be taken into Executive Session 7 for the notice to the public. 8 Commissioners, with regard to -- I 9 want to pop over, if I can, to the Lotto Texas and 10 Texas Two Step -- unless there are further 11 questions -- rule making. 12 This package that's before you is 13 before you for a couple of reasons. It's -- once 14 again is part of the rule review. There were 15 proposed amendments that, when it was part of the 16 Subchapter D, game rule making, that were in part 17 to eliminate redundant, confusing, obsolete 18 language and to make the rule consistent with 19 agency practice. 20 The other, and the main part of 21 Lotto Texas is to make it very, very clear that the 22 agency intends to pay the advertised jackpot if the 23 Commission were to adopt. And that's the main 24 thrust of the Lotto Texas rule making, and that's 25 the main thrust of the comment that's been received WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 45 TEXAS LOTTERY COMMISSION - 10-9-01 1 in opposition to that proposal. 2 The Commission -- the staff's 3 reasons for wanting to go to an advertised jackpot 4 are set out in the documents. And I'll leave that 5 to you because I know you have probably had an 6 opportunity read that. I will say that it's hinged 7 on a couple of factors. One is wanting to pay the 8 jackpot that the Commission believes is in the 9 minds of the players at the time that the players 10 are purchasing their tickets. 11 And the other issue has to do with 12 the prize reserve fund and the ability to be able 13 to use the money in that prize reserve fund to 14 supplement the lower levels of the jackpots' 15 amounts, particularly the starting jackpot amount. 16 I think there is staff that's 17 available to put more information before you on the 18 reasons why the staff is recommending this, and I 19 would invite them to come to the table and be able 20 to make their presentations. And in particular, 21 I'm thinking of Mr. Tirloni and Mr. Sanchez, as 22 well, of course, as Ms. Cloud. 23 I'd be happy to answer any questions 24 that you have on that. 25 COMMISSIONER WHITAKER: Yes. I WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 46 TEXAS LOTTERY COMMISSION - 10-9-01 1 would like your view on 16 TAC 401.305, the 2 subsection that starts with "first prize, the 3 jackpot." It's specifically three small "i." 4 MS. KIPLIN: The language that's 5 underlined that the Commission is intending to 6 add -- oh, small "i," I'm sorry. 7 COMMISSIONER WHITAKER: That's all 8 right. And my the question is, do you interpret or 9 does the Commission -- do you interpret the "will 10 include the rollover" to be nondiscretionary 11 language? 12 MS. KIPLIN: I think "will" is 13 generally mandatory language. 14 COMMISSIONER WHITAKER: You 15 interpret the "may be 68.24 percent of the prize 16 pool" to be discretionary? 17 MS. KIPLIN: Yes, I do. 18 COMMISSIONER WHITAKER: Within what 19 bounds? 20 MS. KIPLIN: Within the bounds of 21 the agency. 22 COMMISSIONER WHITAKER: So it can go 23 anywhere from 0 to 68.24 percent? 24 MS. KIPLIN: I think if the agency 25 wanted to take it to that extreme, it could. I WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 47 TEXAS LOTTERY COMMISSION - 10-9-01 1 don't think that that's what's in the minds of the 2 agency, nor, if you look at past history, is 3 supported. 4 COMMISSIONER WHITAKER: What would 5 be the past -- what would the past history support? 6 What range? 7 MS. KIPLIN: I think I'll turn that 8 over to our financial folks in terms of historical 9 information on jackpots. 10 MR. SANCHEZ: For the record, my 11 name is Bart Sanchez. I'm the director of 12 financial administration. I think the point in 13 question is that when we consider to estimate the 14 jackpot, we do consider the amount of the prize 15 pool, which we look to be 68.24. 16 COMMISSIONER WHITAKER: So you 17 interpret 68.24 to be discretionary within what 18 range? 19 MR. SANCHEZ: Within the range of 20 what we consider to supplement for the prize 21 reserve. There is a certain estimate -- and Robert 22 can help me -- there is an estimate of certain days 23 that we have to ascertain and project. So we know 24 what has transpired in the previous draws; we know 25 the previous days. We do not know what will happen WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 48 TEXAS LOTTERY COMMISSION - 10-9-01 1 in the future days. So there is a range in the 2 estimation and the forecasting and the projection 3 within a reasonableness of the information that's 4 before us. 5 COMMISSIONER WHITAKER: You 6 interpret "roll over the amount." How do you 7 interpret -- or let me address this to Ms. Kiplin. 8 Under "roll over," which is a part 9 of how the indirect prize category is determined, 10 the amount not won, how is that interpreted? 11 MS. KIPLIN: Well, you know, I rely 12 on the technical staff for that because I think 13 that's appropriate in terms of an agency 14 interpretation. And it's the amount that's not 15 won. It's the -- what is generated by sales. And 16 I'll -- 17 MR. SANCHEZ: We consider -- I 18 consider what's won is when we have on the record a 19 six of six ticket that has been purchased. And if 20 a six of six ticket has not been purchased, then it 21 has not been won. So those sales from that draw 22 roll over to the next draw. 23 MS. CLOUD: For that prize pool. 24 MR. SANCHEZ: For the prize pool. 25 COMMISSIONER WHITAKER: Is there any WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 49 TEXAS LOTTERY COMMISSION - 10-9-01 1 circumstance, Mr. Sanchez, under which, if the 2 amount not won were the advertised amount for that 3 draw, that the Lottery Commission would ever be in 4 a situation with a winning six of six to pay more 5 than what was advertised for that current six of 6 six drawing, based on your interpretation of the 7 rules? 8 MR. SANCHEZ: Can you repeat that 9 question again? 10 COMMISSIONER WHITAKER: Okay. 11 If we interpret amounts won for, 12 say, draw one -- 13 MR. SANCHEZ: Yes. 14 COMMISSIONER WHITAKER: -- to be the 15 amount advertised, and that amount is rolled over, 16 is there any circumstance -- and let's assume that 17 there is a winning prize for the second one, 18 okay -- is there any circumstance under which the 19 advertised amount for the second draw would ever 20 exceed the advertised amount for that second draw 21 if we interpret "amount not won" for the first draw 22 to be the advertised amount for the first draw? 23 MR. SANCHEZ: The advertised amount 24 for the second draw will always be larger than the 25 first draw. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 50 TEXAS LOTTERY COMMISSION - 10-9-01 1 COMMISSIONER WHITAKER: And 2 therefore, under the new -- under the revisions 3 proposed today, the Lottery Commission could always 4 be in a position consistent with these rules to pay 5 what is advertised for the winning jackpot? 6 MR. SANCHEZ: Correct. 7 COMMISSIONER WHITAKER: And you've 8 thought about that long and hard, and you're 9 confident with your answer? 10 MR. SANCHEZ: Yes, I'm confident 11 based on the information I have analyzed and the -- 12 COMMISSIONER WHITAKER: Ms. Kiplin, 13 are you also convinced? 14 MS. KIPLIN: I think that's a 15 reasonable interpretation. I think great deference 16 is given to agencies regarding their interpretation 17 because of their technical expertise that's located 18 in-house. And I think Bart has that technical 19 expertise as the head of the financial division. 20 COMMISSIONER WHITAKER: And 21 Ms. Cloud, you don't disagree? 22 MS. CLOUD: I don't disagree, but I 23 want to expand on it just a little bit. 24 Every single jackpot, every 25 Wednesday night jackpot and Saturday jackpot, is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 51 TEXAS LOTTERY COMMISSION - 10-9-01 1 looked at independent of each other as to keeping 2 in mind that the rollover amount from one jackpot 3 to the other is included in the prize pool as to 4 where we go with the next advertised jackpot. 5 So you're looking at all your 6 numbers. You're looking at your sales history, the 7 days of the weeks for those sales, to make sure 8 that you're not looking at Saturday's sales when it 9 should be Wednesday night's sales. All these 10 things come into play in the forecasting of the 11 jackpot. 12 So we're not ever going to -- we're 13 never going to hit it on the head every time. 14 That's -- when you're forecasting, like Bart says, 15 you have an unknown factor; and that's usually the 16 day of the draw. So you're having to do your 17 projection, making the assumptions that the sales 18 are going to come in somewhere around that 19 particular jackpot amount in our history past. 20 So there may be times when you would 21 have -- and there have been many times when we've 22 had to supplement the particular jackpot that we 23 forecasted because sales did not come in to make 24 the advertised jackpot amount. 25 And there have been times when we've WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 52 TEXAS LOTTERY COMMISSION - 10-9-01 1 had a large -- very large jackpot and jackpots 2 maybe that we didn't have a history of that we had 3 to make some projections, which was a total unknown 4 because we had nothing to establish as being a 5 historical factor for forecasting a large jackpot. 6 But in those cases, in my experience 7 in this job, I have boosted those jackpots whenever 8 we saw that sales -- and Robert tracks when our 9 jackpot gets high and sales -- people get excited 10 about games -- Robert tracks that on an hourly 11 basis. And at that time, we can bump those 12 jackpots so that we keep the jackpot tracking with 13 the sales as best we can. And then when you 14 have -- like we had the $85-million jackpot, we had 15 a $32-million day on the last day. 16 MR. TIRLONI: That's correct. 17 MS. CLOUD: And that was -- we had 18 no history of that, so we missed the mark. So we 19 came in at a higher level than what we advertised. 20 But we had bumped that jackpot three times within 21 three days. 22 COMMISSIONER WHITAKER: And 23 Ms. Cloud, your intention when you estimate is to 24 hit, as closely as you can, actual sales. Is that 25 correct? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 53 TEXAS LOTTERY COMMISSION - 10-9-01 1 MS. CLOUD: Absolutely. 2 CHAIRMAN CLOWE: In following 3 Commissioner Whitaker's questions, when you use the 4 term "bump" or "boost" the jackpot, what you are 5 referring to there is you have increased the 6 advertised amount of the jackpot? 7 MS. CLOUD: Correct. 8 MR. TIRLONI: Commissioner -- for 9 the record, my name is Robert Tirloni, and I'm the 10 online product manager in the marketing division. 11 Since I've been the online product 12 manager, which is almost a year and a half now, 13 we've done that twice. In September 2000, we had a 14 $16-million Lotto Texas jackpot. That jackpot 15 started at 57. We bumped it to 59, or increased it 16 to 59, based on our analysis of sales. And then we 17 bumped it from 59 to 60 million, and then that was 18 the final jackpot amount. 19 And as Ms. Cloud just referred to, 20 our $85-million jackpot in March of 2001, we were 21 at a $56-million jackpot. We rolled to 77, and 22 then, based on our constant analysis of hourly 23 sales, we ended up increasing that jackpot to the 24 final jackpot amount of $85 million. 25 So when we do have large jackpots, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 54 TEXAS LOTTERY COMMISSION - 10-9-01 1 we're constantly watching sales and looking for 2 opportunities to increase the advertised amounts. 3 CHAIRMAN CLOWE: And that's totally 4 within the discretion of the executive director? 5 MS. CLOUD: Yes. 6 MS. KIPLIN: (Nodding head.) 7 CHAIRMAN CLOWE: I don't think 8 Commissioner Whitaker has any more questions at 9 this time. If you want to move into further 10 presentations on the numbers or if the executive 11 director wants to make comments, it would be 12 appropriate at this time. 13 MS. CLOUD: Commissioners, I'll ask 14 Robert to give you some historical information or 15 the present conditions in other states and how they 16 look at their Lotto jackpot, as well as some 17 current data from that. 18 MR. TIRLONI: Commissioners, I have 19 spoken with officials at the New York and 20 California Lotteries. Both states are operating 21 their Lotto games the way we were proposing to 22 operate our Lotto Texas game. 23 And basically, a quick summary is 24 this: They advertise the jackpot. If sales are 25 not strong enough to cover the jackpot that they WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 55 TEXAS LOTTERY COMMISSION - 10-9-01 1 advertise, they use their reserve fund to 2 supplement or to pay the advertised jackpot amount. 3 If their sales are stronger than 4 anticipated, the extra or excess is rolled into 5 their reserve funds. And then they use the moneys 6 in their reserve funds to supplement jackpots, 7 future jackpots in the future, if they need to. 8 And again, this is how we are proposing to operate 9 Lotto Texas. 10 In the conversations that I've had 11 with New York and California, they have discussed 12 with me how simplistic they feel this method is for 13 the public in their states and for their players. 14 The gentleman in California I spoke to told me they 15 have a little internal slogan, and they refer to it 16 as "we pay what we say," and feel that that is the 17 easiest and simplest way to operate their Lotto 18 game. 19 Commissioners, when players hear the 20 Lotto Texas jackpot amount, whether it be on 21 billboards, on our radio ads, that amount is either 22 appealing to them or it's not appealing to them. 23 When they go into a retail establishment, if that 24 jackpot amount is appealing to them and they 25 purchase a ticket, that's the amount that they are WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 56 TEXAS LOTTERY COMMISSION - 10-9-01 1 attempting or trying to win. 2 And we know from our research that 3 there are players that don't play our Lotto Texas 4 game when the jackpots are low, or they wait until 5 the jackpot is 20 million or higher before they 6 start to play. Everybody has their own threshold 7 of what's an appealing jackpot. 8 But when a player does feel that 9 they want to make a purchase, and purchase a chance 10 to win the jackpot amount, that's the amount that 11 they are expecting to win if they should have a six 12 of six ticket. 13 When talking to people in those two 14 states, they stressed that they make every attempt 15 to make their jackpot estimation as accurate as 16 possible by constantly analyzing sales, especially 17 when their jackpots become very large. And we just 18 discussed how we've done that here in the past in 19 Texas as well. 20 Besides California and New York, I 21 do have some other information. Those are the 22 states that I talked to directly because they're 23 most comparable in size, population, retailer base 24 to Texas. 25 But I do have information that the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 57 TEXAS LOTTERY COMMISSION - 10-9-01 1 big game is paying the advertised jackpot amount. 2 There is a new multi-state Lotto game. It's called 3 Lotto South, and the states involved in that game 4 are Georgia, Kentucky, and Virginia. Those -- that 5 Lotto South, that multi-state group that forms 6 Lotto South, is also paying the advertised amount. 7 In addition, the State of Washington and Oregon are 8 also paying the advertised amounts on their Lotto 9 games. 10 If you have any questions, I'll be 11 glad to answer them now. 12 COMMISSIONER CRINER: Those states 13 that are paying those advertised amounts, do they 14 have any procedures in place that tell them how to 15 do that so that it kind of works automatically? 16 MR. TIRLONI: I have -- California 17 faxed me their actual rule that they operate their 18 Lotto Texas game under. And so I have that. And 19 their rule describes what I've just described, how 20 if the -- if they advertise a jackpot and if the 21 sales are stronger, then they take that extra and 22 they roll it into their reserve fund. If sales are 23 weaker than anticipated, they utilize their reserve 24 fund. So, yes, I've received that from California. 25 COMMISSIONER CRINER: What about the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 58 TEXAS LOTTERY COMMISSION - 10-9-01 1 Kentucky group? 2 MR. TIRLONI: I have not received 3 any rules in writing -- or any faxes from Georgia, 4 Kentucky, and Virginia about how they are actually 5 operating Lotto South. But they did communicate 6 that over the phone that they are paying the 7 advertised. 8 MS. CLOUD: Florida is also paying 9 the advertised jackpot, Commissioners, but they do 10 not have a prize reserve fund. They have unclaimed 11 prize money which they use as that reserve to 12 supplement their Lotto game. 13 CHAIRMAN CLOWE: And if I remember 14 correctly, Massachusetts is one of the other states 15 that's larger than Texas. Have you talked with 16 them? 17 MR. TIRLONI: GTECH spoke with a 18 connection or a contact that they had in 19 Massachusetts. Massachusetts is paying based on 20 sales. 21 CHAIRMAN CLOWE: So they are an 22 exception? 23 MR. TIRLONI: Yes, sir, that's 24 correct. 25 CHAIRMAN CLOWE: I would like to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 59 TEXAS LOTTERY COMMISSION - 10-9-01 1 hear some more explanation on the basis of the 2 estimation of the advertised jackpot as that 3 develops. I understand that you've covered that 4 already in a general sense, but I'd like a little 5 more detail on that, please. 6 MR. TIRLONI: About how we perform 7 that, how we do that? 8 CHAIRMAN CLOWE: Yes, how you 9 communicate it to the executive director and how 10 that advertised jackpot number changes. 11 MR. TIRLONI: Sure. 12 I think the easiest way is to give 13 you an example. Let's say it's a Wednesday 14 afternoon. There is a jackpot estimation 15 spreadsheet that the financial operations division 16 and the marketing division maintains. Those two 17 speadsheets are maintained independently of each 18 other. I maintain the jackpot estimation 19 spreadsheet for marketing. Bart has staff members 20 in financial that maintain the spreadsheet for 21 financial. 22 So on a Wednesday afternoon, for 23 example, when we're trying to do our jackpot 24 estimation on a Wednesday afternoon, we know what 25 advance sales are for that Wednesday night drawing. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 60 TEXAS LOTTERY COMMISSION - 10-9-01 1 We know what the Sunday, Monday, and Tuesday sales 2 are for that Wednesday night drawing. 3 And we're usually doing jackpot 4 estimation in the late afternoon on Wednesday, 5 around 2:00 or 3:00 in the afternoon, so we know 6 what sales were from the time the system became 7 live at 6:00 a.m. on Wednesday morning through that 8 point in time. What we're forecasting on Wednesday 9 afternoon is sales from that point up until draw 10 break at 9:45 on Wednesday night. 11 I do my forecast. I then go over 12 and meet with Bart's staff, who has done their 13 forecast. We come to an agreement on what the 14 forecast should be for the Wednesday sales. And 15 then once we do that, we have an estimate of what 16 the total draw sales are for the Wednesday night 17 draw. 18 After we come to agreement on those 19 numbers, I take those numbers to Mr. Sanchez. He 20 also looks at those numbers and analyzes them. And 21 basically, when I'm meeting with his staff, we come 22 to a suggestion on what the roll amount should be 23 for Lotto. So, for example, if that Wednesday 24 night draw is a $4-million draw, we will come up 25 with a suggestion as to what the Saturday night WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 61 TEXAS LOTTERY COMMISSION - 10-9-01 1 Lotto jackpot should be if there is no six of six 2 winning tickets sold on Wednesday. 3 After Mr. Sanchez looks at those 4 numbers and signs off on those numbers, I then 5 bring those numbers to Ms. Cloud. She looks at 6 those numbers as well, and she makes the final 7 decision as to what the roll amount will be for the 8 Lotto game. 9 After Ms. Cloud signs off on what 10 the roll amount will be, I then fax over to GTECH, 11 their control room, what the roll amount will be. 12 After I have faxed that, I call to confirm that 13 they have received that amount to make sure and to 14 verify that they have that, and they confirm the 15 amount to me over the phone. 16 That amount, that fax sheet, is also 17 brought to the Lottery's internal computer room, 18 because if there is not a winner for that Wednesday 19 night draw, it is our Lottery computer room staff 20 that, through a phone system, call in, and they 21 will follow a sequence of events that will update 22 all of the billboards across the State of Texas. 23 And we repeat that process on Friday 24 afternoon when we're projecting for the following 25 Wednesday. The only difference is, on Friday, we WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 62 TEXAS LOTTERY COMMISSION - 10-9-01 1 are projecting for the rest of the day on Friday 2 and all of Saturday. 3 Is -- was that -- 4 CHAIRMAN CLOWE: That's a good 5 explanation, Robert. And let's go further in 6 there. 7 Suppose that we're looking at a 8 $65-million jackpot on Wednesday afternoon, and it 9 rolls, and you've increased that to 75 million; and 10 during the week that ensues -- Thursday, Friday -- 11 and I assume that you will work on Saturday if it's 12 a big jackpot -- 13 MR. TIRLONI: Yes. 14 CHAIRMAN CLOWE: -- the instances of 15 the three increases in the advertised jackpot for 16 the $85 million, which is the largest we've ever 17 had -- talk to us about how those adjustments come 18 about. 19 MR. TIRLONI: Sure. 20 I can tell you the 60 million that 21 we had back in September of 2000, that was for a 22 Saturday night draw. So on Thursday morning, when 23 we come into the office and we know that there was 24 no six of six winner from the Wednesday night draw, 25 we immediately start looking at sales. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 63 TEXAS LOTTERY COMMISSION - 10-9-01 1 And part of that jackpot estimation 2 spreadsheet is an hourly sales analysis. And so 3 what we basically do is we're pulling hourly sales, 4 plugging those into our spreadsheet, and constantly 5 looking at what sales are doing and if we can drive 6 the jackpot up further based on sales. We do that, 7 Commissioners, when the jackpot is large, hour by 8 hour. 9 MS. CLOUD: Commissioners, GTECH has 10 a program on our computers that is called Vision. 11 And it's transactions that happen by the second, so 12 you're tracking this information as it occurs. 13 It's not something that we are accumulating over a 14 few hours. It's actually happening minute by 15 minute, so -- 16 MR. TIRLONI: It's realtime. 17 MS. CLOUD: Realtime. 18 MR. TIRLONI: I can sit at my 19 computer in my office, look at the hourly Lotto 20 Texas sales, and just sit there and refresh and 21 just see the sales constantly being updated. 22 Bart's staff, on a large jackpot, is also doing 23 that -- again, independently. And we meet and talk 24 almost hourly when the jackpot is at those levels. 25 And again, when we feel we're at a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 64 TEXAS LOTTERY COMMISSION - 10-9-01 1 point, based on sales, that we can increase the 2 jackpot, we go through that whole process again of 3 meeting: I go to Bart with those numbers that I 4 feel that we can increase to, and then again, we go 5 to Linda for the final sign-off on increasing the 6 jackpot amount. 7 On the $85-million jackpot amount -- 8 or $85-million jackpot, that was a Wednesday, and 9 we were looking at sales up until 7:30 or 8:00 that 10 evening. We were watching sales all day long. So 11 when the jackpot gets large and gets to those 12 levels, there is that constant analysis that is 13 taking place. 14 And actually, when I was talking 15 with California, they relayed a similar story or a 16 similar sequence of events. California, on their 17 Super Lotto game, just recently had a $141-million 18 jackpot. And they talked about the same thing, how 19 they had bumped it or increased it four times 20 before they got to 141. They started at 125. And 21 they did the same thing: They watched sales by the 22 hour and increased it as they feel is necessary. 23 COMMISSIONER WHITAKER: Let's -- so 24 you meet hourly on a large jackpot like that, and 25 you establish it by you-all agreeing. And then you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 65 TEXAS LOTTERY COMMISSION - 10-9-01 1 can then -- Ms. Cloud is the one who actually does 2 the establishing. Is that correct? 3 MR. TIRLONI: Yes, ma'am, that's -- 4 COMMISSIONER WHITAKER: Her -- 5 okay -- that does the establishing. 6 MR. TIRLONI: Yes, ma'am. 7 COMMISSIONER WHITAKER: And then 8 it's authorized to the commission vendors to 9 publicize how? 10 MR. TIRLONI: That goes through the 11 fax. That goes to GTECH. Whenever we change the 12 Lotto Texas jackpot amount, I immediately fax that 13 update to the GTECH control room. And then again, 14 I call to verify to make sure they have received 15 that amount. And usually, when we're at levels 16 like that, I e-mail the entire Commission about 17 that. 18 When we increase the jackpot amount, 19 we also contact -- if it's in the middle of the 20 day, we contact our general market advertising 21 agency, and they contact the outdoor billboard 22 vendor so that they can update the billboards 23 immediately to reflect the increased jackpot 24 amount. 25 MS. CLOUD: And Commissioners, the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 66 TEXAS LOTTERY COMMISSION - 10-9-01 1 way we get the message to our retailers would be 2 through the GTECH terminals, on the message, as 3 these jackpots were being bumped. 4 CHAIRMAN CLOWE: So that's 5 electronically transmitted, and it is made 6 available at the point of sale? 7 MR. TIRLONI: Yes, sir, that's 8 correct. 9 MS. CLOUD: Right. 10 CHAIRMAN CLOWE: Robert, I want to 11 pursue my line of questioning to you in regard to 12 this activity. 13 What you've told us is that you are 14 responsible for monitoring this, along with Bart 15 and his staff, and you do that when the jackpots 16 are large. And then you take action by way of 17 meeting and resolving, in your opinion, if a 18 jackpot should be increased in the advertised 19 amount. And you go to Linda, and she makes that 20 decision. 21 MR. TIRLONI: (Nodding head.) 22 CHAIRMAN CLOWE: Now, have you 23 missed that in the past? I'd like to hear where 24 you've advertised a certain number, and either 25 sales have exceeded that amount or they have fallen WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 67 TEXAS LOTTERY COMMISSION - 10-9-01 1 short of that amount, and what that history is. 2 MR. TIRLONI: I can think of -- 3 right off the top of my head, I can think of 4 two instances. Linda referred to one, 5 Commissioner Clowe, and that was on the $85-million 6 jackpot. I like to refer to that as uncharted 7 territory. We have nine years of historical 8 information on estimating of Lotto jackpots that 9 we -- you know, we refer to when we're doing our 10 estimation. When we get up to an 85 -- when we got 11 up to our $85-million level, that had been a 12 jackpot that we had never seen in Texas. 13 So we do our best to come up with a 14 complete forecast of what sales will be. But 15 again, that's uncharted territory for us. Now, if 16 we get up to $85 million again, we have a basis; we 17 have something that we can look back on and that we 18 can refer to in the future. 19 If we were to get up to a 100- or 20 $120-million jackpot, of course, we'd be watching 21 sales hourly. But that would be, again, uncharted 22 territory for us. We'd have to continually look at 23 sales and see if we could -- if we would need to 24 bump the jackpot. But without any historical data, 25 those very large jackpot amounts are complicated. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 68 TEXAS LOTTERY COMMISSION - 10-9-01 1 And again, I've talked with other 2 states about that as well, and the consensus is the 3 best you can do is look at your hourly sales, look 4 at sales as they are coming in, and increase if you 5 need to. 6 Off the top of my head, I can 7 remember another time where we were short or where 8 we missed our estimate. That was in November of 9 2000 during the presidential election. We had a -- 10 and I don't know the exact date -- 11 CHAIRMAN CLOWE: If Bart has those 12 numbers, I'd like to be more specific than your 13 recollection if that's possible. 14 MR. TIRLONI: Okay. 15 MR. SANCHEZ: Chairman Clowe, I'm 16 thinking -- one that stands in my mind was in -- 17 right after the matrix change. It was a draw, 804, 18 July 26th of 2000. The estimated jackpot that was 19 advertised was 40 million, and we came short. We 20 had to use the reserve in the amount of 21 1.9 million. 22 I think in that one, our projections 23 or estimated forecast for that last day was not, I 24 guess in my view now, conservative enough. I mean, 25 after that, we've taken a look to try to be more WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 69 TEXAS LOTTERY COMMISSION - 10-9-01 1 conservative when you get to the bigger numbers. 2 It's -- I try -- it's not my 3 objective to agree with Robert's group all the 4 time. I mean, we try to have, in finance, a more 5 independent view and, from my perspective, a 6 conservative view. So we may have different 7 numbers. And then it's up to the executive 8 director to exercise her discretion and select the 9 estimated jackpot. 10 CHAIRMAN CLOWE: There is an 11 instance where the advertised jackpot was almost 12 $2 million in excess of what actual sales were, and 13 you dipped into the prize reserve fund and paid 14 that money out at the advertised jackpot level. 15 MR. SANCHEZ: Right. 16 CHAIRMAN CLOWE: Now, do you have 17 other instances where the sales exceeded the 18 advertised jackpot and the estimate went the other 19 way? 20 MR. SANCHEZ: Correct. I have -- 21 the most recent one, I guess, the one we had been 22 talking about, was the $85-million jackpot, 23 draw 868, March 7, 2001. The estimated jackpot, 24 even if you consider Robert's view of all the 25 activities we've done, the final sales numbers came WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 70 TEXAS LOTTERY COMMISSION - 10-9-01 1 up to pay an estimated jackpot of 89.2 million. 2 And the executive director had exercised her 3 discretion, paying the total prize. The excess 4 prize for that time was 2.4 million. If we 5 estimated the jackpot based on a 25-year annuity, 6 it would have been 89.2 million. 7 CHAIRMAN CLOWE: So we paid out 85? 8 MR. SANCHEZ: We paid out -- 9 MS. CLOUD: 89. 10 MR. SANCHEZ: -- 89.2 million in 11 estimated jackpot annuity value. 12 CHAIRMAN CLOWE: Okay. And what is 13 the rationale in these rules that makes good 14 practice? How are we going to rely on this process 15 set forth in these rules as you have laid out the 16 practice in the past, for the future? 17 MR. SANCHEZ: My view, or -- 18 CHAIRMAN CLOWE: I think maybe 19 that's directed to you, Linda. 20 I'll be glad to have your view, but 21 since she is the responsible individual -- 22 Are you comfortable with the data 23 that we've gotten? 24 MS. CLOUD: Yes. And I think the 25 practice going forward won't be much different than WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 71 TEXAS LOTTERY COMMISSION - 10-9-01 1 what we've done since I've been in this position, 2 where we have estimated the jackpot as close as we 3 could possibly make it to where we think it's going 4 to come in, and we're going to pay the advertised 5 jackpot and stay up with the sales tracking as 6 accurately as we can and bump the jackpot when we 7 see that sales are driving the jackpot higher and 8 keep changing that advertised jackpot right up to 9 the wire, right up to the draw. 10 Did that answer your question? 11 CHAIRMAN CLOWE: It answers my 12 question as far as your -- I think what you're 13 telling the Commission is that you want the jackpot 14 to be the highest that it can be -- 15 MS. CLOUD: That's right. 16 CHAIRMAN CLOWE: -- to attract 17 players. 18 And that has been your practice 19 since you've been the executive director, to 20 increase the jackpots when the sales forecasts 21 justify it. 22 MS. CLOUD: That's right. 23 CHAIRMAN CLOWE: And I think, Bart, 24 and you Robert had told us there have been some 25 misses on both sides of the advertised jackpots. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 72 TEXAS LOTTERY COMMISSION - 10-9-01 1 MR. TIRLONI: That's correct. 2 MR. SANCHEZ: Well, I wouldn't 3 consider them misses, Chairmen; I would consider 4 them overestimations and underestimations. 5 CHAIRMAN CLOWE: I'll take your 6 definition. 7 (Laughter.) 8 CHAIRMAN CLOWE: You know, you 9 either hit the target or you don't, where I come 10 from. But I understand that, and I'm wanting to 11 understand what's going to keep the executive 12 director from advertising a jackpot lower than the 13 sales forecast and building up the reserve prize 14 fund. 15 I understand that if it's estimated 16 on the high side of the sales, that's going to 17 deplete the reserve prize fund. I want to hear, as 18 a commissioner, what's going to keep that fund from 19 being built up by low advertised levels of prizes. 20 And anybody can answer that. 21 MR. SANCHEZ: I can try to answer it 22 first. 23 In my view since I've been here -- 24 my ten years is April '98 -- I don't think I've 25 seen, ever, an occurrence that there was any WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 73 TEXAS LOTTERY COMMISSION - 10-9-01 1 thought, any intention, of building the reserve. 2 When I first came, there was a state auditor's 3 control audit. They completed the report in March 4 of '97. For that fiscal year '96, the reserve was 5 40 million. So it was -- 6 CHAIRMAN CLOWE: The prize reserve 7 fund was $40 million? 8 MR. SANCHEZ: Correct. 9 CHAIRMAN CLOWE: What is it today? 10 MR. SANCHEZ: As of right now, it's 11 8 million. In the last two years, since the 12 decline in sales -- and we're trying to maintain 13 the lower jackpots; minimum jackpot is 4 million, 14 not above -- we've hit the reserves. So the last 15 two years, it's been around 7.5 million the last 16 two years. 17 CHAIRMAN CLOWE: And Bart, while 18 you've mentioned that, it's my understanding -- if 19 you can confirm this, or correct me if I'm wrong -- 20 the $4 million minimum prize, when a previous prize 21 is won, is always a loss to the Commission. Sales 22 are always less than $4 million. Is that correct? 23 MR. SANCHEZ: That's correct. 24 MS. CLOUD: And Commissioners, I 25 want to reinforce that the $4-million jackpot was a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 74 TEXAS LOTTERY COMMISSION - 10-9-01 1 conscious decision in making that the minimum 2 jackpot for Lotto Texas -- 3 CHAIRMAN CLOWE: And why did you 4 make that -- 5 MS. CLOUD: -- without regarding 6 sales. 7 CHAIRMAN CLOWE: Why did you make 8 that decision? 9 MS. CLOUD: In the beginning, we 10 started out with a lower jackpot, and sales drove 11 it, actually, up to the -- like we're saying, you 12 estimate what sales are coming in to try to be as 13 accurate as you can. And it was driving the 14 jackpot minimum up to the $4-million level. 15 And that has been that way since -- 16 I think it was back in '94 -- '93 or '94 when we 17 went to $4 million. And it's not to any advantage 18 to this agency to lower that jackpot because you 19 start -- you're going to cause your players to have 20 a total disinterest in the game in playing a 21 jackpot level of $2 million, when they're used to 22 seeing that minimum be at 4. 23 And then it takes longer to build a 24 jackpot in order to get to a level where all your 25 players come into the game, and not just your level WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 75 TEXAS LOTTERY COMMISSION - 10-9-01 1 of players that play every Lotto draw, no matter 2 what. So I think it's very important to the 3 agency, as well as to our players, that we maintain 4 a minimum level of $4 million. 5 CHAIRMAN CLOWE: And Bart, can you 6 give us an estimate -- now, we've just finished an 7 annual period with the matrix changing from 50 to 8 54 balls. And I think sales are up for Texas Lotto 9 over that period, what, 6 percent? 10 MR. SANCHEZ: Yes. 11 MS. CLOUD: You know, I was going to 12 look at that -- 13 CHAIRMAN CLOWE: Is it 6 or 14 8 percent? 15 MS. CLOUD: On Lotto? Lotto Texas, 16 percent of sales is 30.51. But this year, I think 17 we -- Toni doesn't have that. 18 Do you have this is in this report 19 today so we can give it -- 20 MS. SMITH: Do you mean for the 21 year? 22 For the record, I'm Toni Smith, 23 marketing director of the Texas Lottery Commission. 24 What was your -- what are we looking 25 for, specifically? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 76 TEXAS LOTTERY COMMISSION - 10-9-01 1 MS. CLOUD: How much Lotto Texas 2 increased at the end of the year. 3 MS. SMITH: Oh, at the end -- no, I 4 did not bring that. That was in my last commission 5 meeting report. But I can find that. 6 MS. CLOUD: Well, find that out -- 7 CHAIRMAN CLOWE: It was in the last 8 notebook? 9 MS. CLOUD: Yeah. 10 CHAIRMAN CLOWE: And I think I'm 11 thinking of overall sales being up 6 or 7 percent. 12 MS. SMITH: Yes, sir. 13 CHAIRMAN CLOWE: But I think Texas 14 Lotto, you're right, was up considerably more than 15 that. 16 MS. CLOUD: It was up higher than 17 that. But -- 18 MS. SMITH: I can go check on that. 19 CHAIRMAN CLOWE: Would you do that, 20 Toni, and let's get that in the record? 21 MS. SMITH: Yes, sir. 22 CHAIRMAN CLOWE: I want that number. 23 But Bart, the point I'm trying to 24 drive to you is that with the obvious success, by 25 virtue of the increased sales of Texas Lotto since WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 77 TEXAS LOTTERY COMMISSION - 10-9-01 1 we have established a 54-ball matrix and the 2 highest jackpot in the history of the Texas Lottery 3 operations, the prize reserve fund is still at 4 about seven and a half million dollars. 5 MR. SANCHEZ: Correct. 6 CHAIRMAN CLOWE: So that would lead 7 me to believe that the advertised jackpots have 8 been pretty accurate as far as following the sales 9 trend, and the $4-million jackpot has continued to 10 up the prize reserve fund where there has been an 11 underestimate in the past. Is that -- 12 MR. SANCHEZ: Yes. 13 CHAIRMAN CLOWE: Am I on the right 14 track here, Bart? 15 MR. SANCHEZ: Yes. 16 COMMISSIONER WHITAKER: Let me 17 ask -- go ahead, I'm sorry. 18 CHAIRMAN CLOWE: That's okay. 19 COMMISSIONER WHITAKER: I want to 20 ask a question. 21 Another thing that makes that 22 estimation difficult is that the advertised jackpot 23 actually is defined as a 20-year -- a 24 25-annual-payment payout -- 25 MR. SANCHEZ: Correct. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 78 TEXAS LOTTERY COMMISSION - 10-9-01 1 COMMISSIONER WHITAKER: -- which 2 utilizes an annuity rate that is determined the day 3 after the draw. So you're estimating before the 4 draw what that interest rate -- or that annuity 5 rate would be, and that's not known until after the 6 draw. Is that correct? 7 MR. SANCHEZ: We don't know the 8 actual interest rate factor that I need to purchase 9 the investments the day after the draw. But we do 10 use in our estimation -- on the day of the 11 estimation we're doing, we use the interest rate 12 factor given to us by the treasury as we were 13 buying investments for that day. 14 COMMISSIONER WHITAKER: So which 15 might or might not be the same interest rate the 16 day after. 17 MR. SANCHEZ: Correct. Given market 18 conditions, you know, we could say, you know, 19 whether the interest rate factor is going to change 20 from one day, two days. 21 COMMISSIONER WHITAKER: And in fact, 22 over even a few weeks' period of time, that 23 interest rate could fluctuate? 24 MR. SANCHEZ: Yes. 25 COMMISSIONER WHITAKER: And so WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 79 TEXAS LOTTERY COMMISSION - 10-9-01 1 to some extent, what it costs to buy a 2 $4-million annuity paid over 25 years, one week 3 could be different than what it would cost the next 4 week or the week after that. 5 MR. SANCHEZ: Correct. That's why 6 it's very important for us to consider that number 7 as a factor. It's a variable factor, but we have 8 to consider the best information we have at that 9 time which, for us, is to go and request it from 10 the treasury as we were buying an investment on 11 that particular day. 12 COMMISSIONER WHITAKER: Okay. So in 13 other words, there's two estimates that go into the 14 forecast. 15 MR. SANCHEZ: Yes, in your terms. 16 We consider it one overall estimate, which we 17 consider the estimate from the treasury as part of 18 the factor to consider in the big estimate. 19 COMMISSIONER WHITAKER: And that 20 would explain, in your opinion, why the amount 21 forecasted is virtually always different from what 22 is actually advertised? 23 MR. SANCHEZ: I think that's one 24 factor. I don't think that's the single factor. 25 COMMISSIONER WHITAKER: Is that the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 80 TEXAS LOTTERY COMMISSION - 10-9-01 1 major factor? 2 MR. SANCHEZ: I don't think it's, in 3 my view, the major factor. 4 COMMISSIONER WHITAKER: What's the 5 major factor? 6 MR. SANCHEZ: In my view? 7 COMMISSIONER WHITAKER: Yes. 8 MR. SANCHEZ: I think, if any, 9 it's -- 10 COMMISSIONER WHITAKER: If any. 11 MR. SANCHEZ: I think it's just 12 given my projection of how many people are going to 13 buy tickets for that particular day. 14 COMMISSIONER WHITAKER: Okay. 15 CHAIRMAN CLOWE: Sales? 16 MR. SANCHEZ: Sales, given -- 17 MS. CLOUD: Mr. Chairman, I'd like 18 to -- 19 MR. SANCHEZ: -- the weather -- 20 MS. CLOUD: I'd like to point out 21 that this is the procedure that's been in place 22 since day one, even when we were under the 23 comptroller's office, that the way we look at the 24 forecasting and the way we look at the rates and -- 25 for the treasury to purchase the annuity and making WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 81 TEXAS LOTTERY COMMISSION - 10-9-01 1 the assumptions that we're making, has been the 2 procedure from day one. 3 CHAIRMAN CLOWE: I think I 4 understand that, Linda. But the purpose of my 5 questions is to understand in greater detail the 6 process and the procedure and to understand why 7 you're proposing these rules be codified so that 8 this continues and is a stated practice of the 9 Commission. 10 Also, I wanted some comfort about 11 how you make this decision, what the procedure is 12 for the determination of sales, and how broad that 13 information is; and when it comes to you, how you 14 make that decision. I want some comfort about your 15 role in this, because in my mind, you have a great 16 deal of authority in setting that advertised 17 jackpot. And the commissioners don't enter into 18 that. This is our opportunity to -- 19 MS. CLOUD: Right. 20 CHAIRMAN CLOWE: -- enter into that. 21 MS. CLOUD: Well, I will tell you -- 22 CHAIRMAN CLOWE: That's why I've 23 asked these questions and wanted this broad 24 explanation. 25 MS. CLOUD: I don't think you'll WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 82 TEXAS LOTTERY COMMISSION - 10-9-01 1 find many occasions, when the recommendations have 2 come from marketing and from financial that the 3 estimate should be a certain figure, that I haven't 4 agreed with them. There might have been one or two 5 occasions when I did not, but I don't think there's 6 been that many. 7 CHAIRMAN CLOWE: Well, it's a big 8 responsibility for you, and I wanted to hear -- and 9 I hope the other commissioners wanted to hear -- 10 more detail, which Robert and Bart have given us, 11 on how this comes about. I'm glad you're not 12 throwing darts at a dartboard -- 13 MS. CLOUD: I'm glad we're not, too. 14 CHAIRMAN CLOWE: -- but I want a 15 very up-to-the-minute, detailed -- I'm pleased that 16 you've told us that that information that is coming 17 through the GTECH system is currently online, it's 18 up to date, and that you-all arrived at these 19 recommendations separately and then you meet and 20 you combine your information and you advise Linda. 21 That's the kind of professionalism that ought to go 22 into this. 23 MS. CLOUD: Commissioners, I have an 24 answer to your question on Lotto Texas. Percent 25 increase in the year figures unaudited, they were WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 83 TEXAS LOTTERY COMMISSION - 10-9-01 1 19.16 percent greater than last year for Lotto. 2 Overall sales were 6.33. 3 CHAIRMAN CLOWE: There are the 4 numbers. 5 MS. CLOUD: Yeah. 6 CHAIRMAN CLOWE: Okay. 7 MR. TIRLONI: Commissioners, just to 8 follow up on what Linda has said, in my experience 9 in doing jackpot estimation with Bart and Linda, I 10 don't recall any experience that we've ever gone to 11 Linda and have shown her sales figures, especially 12 at those higher level jackpots, where she has not 13 approved the bumping or the increase of the Lotto 14 Texas jackpot. 15 Our goal is always to be able to 16 drive sales and to have the largest jackpot that we 17 can have, and our goal is not to increase the prize 18 reserve fund, but to have the largest possible 19 jackpot that we can have for our players so that 20 will drive sales for an increased revenue for the 21 state. 22 COMMISSIONER CRINER: Someone 23 alluded to the fact that there were some 24 recommendations made by the auditor. 25 MR. SANCHEZ: That's correct. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 84 TEXAS LOTTERY COMMISSION - 10-9-01 1 COMMISSIONER CRINER: In the process 2 that we use, how do we incorporate any of the 3 recommendations made by the state auditor? 4 MR. SANCHEZ: I think that in my 5 view, we incorporate some. I don't think we've 6 gone literally and incorporated all of them. For 7 example, in the estimation of the jackpot, they 8 refer to some model that they consider to use, 9 regression analysis. 10 COMMISSIONER CRINER: This is quite 11 a nice process you go through. Is this documented 12 in terms of some operating procedure -- 13 MR. SANCHEZ: Yes, sir. 14 COMMISSIONER CRINER: -- or just 15 everybody knows how to do this? 16 MR. SANCHEZ: No. This is a 17 documented procedure. 18 CHAIRMAN CLOWE: I think the 19 question that Commissioner Criner asked went to the 20 state auditor's audit in, I believe, 1997. And 21 they made recommendations that were numerous and 22 broad, if I remember correctly. 23 MR. SANCHEZ: Correct. 24 CHAIRMAN CLOWE: And is that your 25 answer to Commissioner Criner's question in regard WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 85 TEXAS LOTTERY COMMISSION - 10-9-01 1 to that audit? Not our internal audit. 2 MR. SANCHEZ: Yes, with regard to 3 the estimation of sales. They also made some 4 recommendations in regards to the prize reserves. 5 It's just at that time, during that time period, we 6 were dealing with a $40-million prize reserve. 7 They were concerned that the executive director had 8 too much discretion over that amount. 9 So we -- they, in fact, researched 10 and scrutinized and recommended for us to 11 reclassify that prize reserve from classifying it 12 as a liability in our balance sheet financial 13 statements to a fund equity, to a restricted fund 14 equity. That way, it will show a financial 15 statement reader that it's a fund equity and it's 16 really -- the agency has discretion over that fund. 17 So they wanted to highlight that. 18 And at that time, my predecessor, I 19 guess, disagreed with that view and -- to the point 20 of trying to get the financial auditors and even 21 GASB, which is the Governmental Accounting 22 Standards Boards, to get their opinion. But 23 ultimately, when I became involved, I saw that it 24 was reasonable to go ahead and agree with the state 25 auditor's interpretation of classifying the prize WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 86 TEXAS LOTTERY COMMISSION - 10-9-01 1 reserve into a restricted fund equity, which right 2 now, that's where it is on our financial statement. 3 Of course, they also recommended for 4 us to set parameters of the use of the prize 5 reserve because at that time, I think in -- what is 6 it, October '97 or September '97, the agency used 7 the prize reserve for anniversary and birthday 8 celebrations and funding that jackpot of 9 $10-million increments. So they kind of regarded 10 that as maybe too much discretion. 11 CHAIRMAN CLOWE: Whose anniversary? 12 Whose birthday? 13 MR. SANCHEZ: The Lottery's 14 anniversary. 15 MS. CLOUD: Commissioners, I would 16 like to add that was before my time. 17 COMMISSIONER CRINER: Is all this 18 documented? I mean, what I'm -- my point is, there 19 is a process. A process needs to be documented. 20 Is there a -- in those SOPs, are there any 21 guidelines that limit the amount of the cash 22 reserves based on what the auditor said? In other 23 words, how big can we make that cash reserve or 24 that prize reserve, or how small does it need to 25 be? WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 87 TEXAS LOTTERY COMMISSION - 10-9-01 1 MR. SANCHEZ: At the present time, 2 our procedures do not address that. I guess given 3 the last two or three years, the reserve has been 4 declining. 5 COMMISSIONER CRINER: But, I mean, 6 even the birthday stuff, that's not in the SOPs? 7 MS. CLOUD: The reserve is to be 8 used as prizes and -- 9 COMMISSIONER CRINER: Is there a 10 written procedure on how to use the reserve? 11 That's my question. 12 MR. SANCHEZ: There was a procedure 13 back in '97, which I guess did address the use of 14 the reserve for those type of events, promotional 15 events. 16 COMMISSIONER CRINER: I -- I don't 17 want to go any further. 18 COMMISSIONER WHITAKER: Can I ask a 19 follow-up question? There is currently no SOP that 20 states that the upper level of the reverse should 21 be no more than -- or the target upper level should 22 be no more than "X" or the basement should be no 23 lower than "Y"? There's no such SOP now, is there? 24 MR. SANCHEZ: That's correct. 25 COMMISSIONER WHITAKER: In your WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 88 TEXAS LOTTERY COMMISSION - 10-9-01 1 opinion, was that something recommended by the 2 auditors or not? 3 MS. CLOUD: No, that was not. I 4 don't think it was. That was not my 5 interpretation. 6 MR. SANCHEZ: I think my 7 interpretation at that time, I think it was. 8 MS. CLOUD: It was to limit -- 9 MR. SANCHEZ: I think, in a sense, 10 because they were concerned that the reserve was 11 getting too high and how -- what the discretionary 12 use was going to be. I can see it at that point. 13 Right now, I'm sitting with a 14 reserve of 8 million. I would probably -- given 15 the direction we get from these rules, I probably 16 would start acting and trying to write up some more 17 detailed parameters of ranges of what the 18 reserve -- if the reserve goes in the neighborhood 19 of 10 to 12 million, what to do with the reserve. 20 COMMISSIONER WHITAKER: In other 21 words, being more specific makes more sense going 22 forward than it has in the recent past -- 23 MR. SANCHEZ: Correct. 24 COMMISSIONER WHITAKER: -- because 25 the levels were relatively low but nonetheless WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 89 TEXAS LOTTERY COMMISSION - 10-9-01 1 adequate -- 2 MR. SANCHEZ: Yes, because -- 3 COMMISSIONER WHITAKER: -- in needs 4 projected. 5 MR. SANCHEZ: Correct, because the 6 use of the reserves in the last two or three years 7 has been to supplement the lower jackpots. And 8 with the decline in sales, that's what we've been 9 using. And if I have -- depending on what happens 10 today, if the reserve is not going to increase, 11 then I think my recommendation is going to be to 12 only use the reserve for the lower range of the 13 jackpots and try to, I guess, consider that in my 14 estimation. 15 CHAIRMAN CLOWE: Well, I think 16 that's the answer, Bart, that is helpful to the 17 Commission. And I think it's clear, Linda, your 18 statement that the prize reserve fund is used only 19 to supplement prizes in Texas Lotto is what we want 20 to hear as well. 21 And I think we want that codified in 22 some way so that it is a written procedure that is 23 not dependent on the current officeholders within 24 the Commission, because it's evident that there was 25 one policy in practice, in place, prior to 1997 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 90 TEXAS LOTTERY COMMISSION - 10-9-01 1 which resulted in $40 million in the prize reserve 2 fund; and since your tenure has begun as executive 3 director, a different practice has resulted in 4 decisions being made which have brought that more 5 in line. 6 And it would give, I think, this 7 Commission comfort to have those issues laid out 8 and, as I say, put in place so that they can be 9 relied on. And what you're telling us is that's 10 the practice now. It's a good practice. So I 11 think it's reasonable for us to tell you we'd like 12 to see that laid down so that it can be referred 13 to. 14 MS. CLOUD: Great. 15 CHAIRMAN CLOWE: Any other questions 16 at this point from -- 17 COMMISSIONER WHITAKER: Yes, just 18 one question. 19 I understand -- two questions, 20 Ms. Cloud -- that the prize reserve fund, all that 21 money in the past history and going forward, has 22 been to go back to the players of Texas' prize 23 money. Is that correct? 24 MS. CLOUD: That's correct. 25 COMMISSIONER WHITAKER: Okay. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 91 TEXAS LOTTERY COMMISSION - 10-9-01 1 MS. KIPLIN: Can you ask that again? 2 COMMISSIONER WHITAKER: Okay. 3 The prize reserve fund is used only 4 to pay prizes to players in Texas -- to players. 5 MS. KIPLIN: I would say -- in 6 clarifying that, I would say generally, that is the 7 case; however, prior to the issuance of state 8 auditor's management controls -- the audit, there 9 were two instances that they have actually 10 indicated where the money was used for the game, 11 but not necessarily for prizes. And one was 12 promotional items, and I think another one was a 13 promotional event surrounding a Lotto Texas game. 14 COMMISSIONER WHITAKER: And that was 15 back in '97 that -- 16 MS. KIPLIN: It was pre '97. 17 COMMISSIONER WHITAKER: Many years 18 ago. Okay. 19 MS. KIPLIN: Yeah. But since then, 20 the money has been used -- it's my understanding 21 the money has been used for prizes. But your 22 question was -- 23 COMMISSIONER WHITAKER: A little bit 24 broad. 25 MS. KIPLIN: Yes. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 92 TEXAS LOTTERY COMMISSION - 10-9-01 1 COMMISSIONER WHITAKER: So thank 2 you. 3 So, then, Mr. Sanchez, let's take, 4 for example, the 9-million jackpot of August 29th 5 of this year. 6 MR. SANCHEZ: The draw number? 7 COMMISSIONER WHITAKER: 918. 8 MR. SANCHEZ: Okay. 9 COMMISSIONER WHITAKER: The reserve 10 amount -- the reserve was dipped into for almost a 11 half a million dollars. 12 MR. SANCHEZ: Correct. 13 COMMISSIONER WHITAKER: Why was the 14 estimate not closer to zero? What were the factors 15 that led to the reserve being tapped into to that 16 degree? 17 MR. SANCHEZ: I think in the 18 estimation, also what is considered is what the 19 next increment of the jackpot we want it to be in 20 order to drive sales, in order to be optimistic. 21 Or, if the direction is that I should not -- we 22 should not use the reserve after 4 million, then I 23 think we would take a different direction. 24 MS. CLOUD: And I want to say, 25 Commissioners, it is not my recommendation that we WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 93 TEXAS LOTTERY COMMISSION - 10-9-01 1 limit the reserve account to the lower jackpot 2 levels. I think if we're going to have this pool, 3 we should have no discretion about where that money 4 goes to; whatever jackpot that has the shortfall. 5 CHAIRMAN CLOWE: Anything further 6 from Robert or Bart or Linda or Kim at this point? 7 We're going to have an eight-minute 8 recess. We will reconvene at 10:30. At that time, 9 we'll look forward to hearing from Mr. Gerald 10 Busald, who is here to give testimony --I assume 11 that's right, Mr. Busald -- on this issue. 12 And anyone else who wishes to make 13 an appearance to speak to this subject, please give 14 us an appearance form. 15 (RECESS.) 16 CHAIRMAN CLOWE: We will now come 17 back to order. 18 Mr. Busald, I have your testimony 19 form here, and we're happy to hear from you this 20 morning. Would you identify yourself for the 21 record, please, sir. 22 MR. BUSALD: Good morning, 23 Commissioners. For the record, my name is 24 Gerald Busald, and I'm a professor of mathematics 25 at San Antonio College. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 94 TEXAS LOTTERY COMMISSION - 10-9-01 1 I'd like start off, first of all, by 2 thanking the Commission for the gracious way my 3 students were received last year and the changes in 4 the scratch-off games that they were able to 5 achieve. I would like to inform you that other 6 states have followed the Texas model and started 7 including the words "including breakeven prizes" in 8 their language. So Texas has had a positive 9 impact, and I feel my students have. 10 And it's kind of neat. Every time 11 they see a scratch-off ticket, they know that 12 they're the ones who did that. So I think that's 13 really great for my students. They were even 14 recognized by the governor for that accomplishment, 15 and I feel very gratified for them. 16 The only place that hasn't been 17 accomplished -- in all the new ads and so on, it's 18 been accomplished -- and the only place it has not 19 been accomplished is on the website maintained by 20 the Lottery Commission. They have not added that 21 wording or changed the odds or the statement of 22 odds on the website. I asked Toni about that about 23 six months ago, and she said it was a matter of 24 time. But It has not been accomplished, and I feel 25 it should be on the website as well. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 95 TEXAS LOTTERY COMMISSION - 10-9-01 1 COMMISSIONER WHITAKER: May I ask 2 how quickly that that could be done? 3 MS. CLOUD: Immediately. 4 MR. BUSALD: Thank you. 5 Also a year ago, my students also 6 pointed out on the $40-million jackpot, the 7 overpayment to the group in San Antonio -- and it 8 was kind of -- and because of lack of history, but 9 it was really perceived at the time as not a 10 problem. But obviously, it is a problem because it 11 impacts the reserve fund. 12 I would like to point out one thing 13 about the reserve fund with the change to the 14 54-ball matrix; and that was, the percentage of 15 sales actually going to the reserve fund was 16 increased by 10 percent because it went from 17 1 percent of sales to 1.1 percent of sales. So 18 that was a 10 percent increase in the percentage of 19 sales that went to the reserve fund. Despite that, 20 the sales have, at the low level, created a problem 21 in maintaining the $4-million jackpot. 22 So this proposed rule is obviously 23 all about the lower levels and a way to maintain 24 the reserve fund at such a level that that will be 25 possible. So we know it's really about the low WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 96 TEXAS LOTTERY COMMISSION - 10-9-01 1 level prizes. I kind of call this proposal right 2 now sort of a Robin Hood proposal because that's 3 how I perceive it, because it's to take from the 4 larger jackpot winners and give to the lower levels 5 because there is a -- kind of a dual temptation 6 here. 7 And to give you a little bit of 8 information on that $85-million jackpot, 9 Mr. and Mrs. Chodey of Austin would have been 10 contributing about two and a half million dollars 11 to the reserve fund to fund the lower level prizes 12 if that rule had been in effect at the time of the 13 $85-million jackpot. 14 I don't know if you want to contact 15 them and see if they would have cheerfully given 16 that up or not. But maybe they would have because 17 it's giving -- it's really taking money from the 18 rich and giving it to the rich. So probably, most 19 people don't care. 20 However, there is sort of a dual 21 conflict of interest, and I was pleased to hear the 22 commissioners address this, actually, in your 23 comments. One is that if the Lotto is hit several 24 times in a row at $4 million, it is going to have a 25 severe impact on the reserve fund. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 97 TEXAS LOTTERY COMMISSION - 10-9-01 1 And so, in effect, the Lottery 2 Commission sort of hopes that's something that 3 doesn't happen. We really don't want $4-million 4 winners; we want larger winners because there is 5 not enough money to cover that. And so if that 6 were to happen and the reserve fund was adversely 7 affected to where it became literally nil, then 8 there is a temptation, if the lottery prize 9 continues to build -- there has to be temptation on 10 the part of the Lottery staff to underestimate the 11 overall jackpot as it climbs. It's -- we're faced 12 with a situation. 13 And I think staff has admitted it's 14 about maintaining sales. And so we kind of -- we 15 would go from a model that's mathematically pure, 16 in that we're going to give a certain percentage of 17 sales to a winner, to a model where the integrity 18 of the Lottery Commission depends on the good will 19 and the integrity of the people in charge. 20 I in no means intend to impugn 21 anybody's integrity on the Lottery Commission -- 22 Linda or anybody else. But that's a bad model 23 administratively to have the good will -- and you 24 addressed this. What is to prevent purposely 25 underestimating the jackpot by whatever amount to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 98 TEXAS LOTTERY COMMISSION - 10-9-01 1 purposely increase the reserve funds? 2 And as Commissioner Whitaker pointed 3 out, there is no minimum percentage that goes to a 4 grand prize winner under this legislation. If 5 there needs to be a larger reserve fund to, quote, 6 manage the jackpots at the lower level -- which is 7 what we're talking about -- to me, it makes more 8 sense to increase the percentage that goes to the 9 reserve fund and decrease the percentage that goes 10 to the jackpot winner so that it can be managed 11 better. But then there is no way for the 12 Commission to underpay someone by making a 13 conscious decision that we will underestimate this 14 jackpot. And I'm not -- I don't want to impugn the 15 individuals, but the process is bad. 16 And I think, Commissioner Clowe, you 17 certainly realize what the potential problem is. 18 Despite all the good will of the Commission, it 19 just doesn't make sense to put a rule like that in 20 effect. Under identical conditions, one person is 21 going to be getting one amount and another person 22 is going to be getting another amount as a jackpot. 23 Of course, as a mathematician, it 24 sort of ruins the model for my students to study 25 because the jackpots are mathematically WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 99 TEXAS LOTTERY COMMISSION - 10-9-01 1 predictable. As a percentage of sales, however, 2 when we change it to just the estimated jackpot, 3 the usefulness is gone. But that's a minor 4 consideration. 5 The main thing I wanted to point out 6 is there is nothing bad about the word "estimate." 7 And if this rule is adopted, the use of the word 8 "estimated" would be actually false advertising, as 9 I consider it to be in Texas Two Step right now. 10 We shouldn't say "estimated" if it's not an 11 estimated jackpot if it is the jackpot. So I think 12 we have to change the wording on Two Step if we're 13 going to continue the model as it is currently in 14 effect. 15 And so, you know, we -- I'm 16 concerned about going to a model where the 17 integrity of the Commission is dependent on the 18 good will of the Commission and of the Lottery 19 itself. So I think players have a lot more 20 confidence if they know they are going to get a 21 percentage of sales. 22 And there is nothing wrong with the 23 word "estimate." There is nothing wrong with 24 missing estimates. And I personally feel there is 25 nothing wrong with missing an estimate the wrong WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 100 TEXAS LOTTERY COMMISSION - 10-9-01 1 way, as long as it's not done too much, too often. 2 And obviously, it hasn't been done. 3 But if someone actually receives 4 less than the advertised jackpot because sales 5 didn't justify it, that's not the end of the world 6 for that person. And I don't think it impugns the 7 integrity if they are paying the percentage of 8 sales that is currently in the legislation or in 9 the rules. 10 COMMISSIONER WHITAKER: Let me ask 11 you some questions. 12 The phrase has been, for the record, 13 "pay what you say." 14 MR. BUSALD: Yes. 15 COMMISSIONER WHITAKER: All right. 16 Let's assume that there is an estimated jackpot of 17 20 million and the actual sales justify an 18 $18-million payout. What would you do in that 19 circumstance? 20 MR. BUSALD: I would pay the 21 18 million, and I would be more careful and more 22 conservative with my estimates. The problem with 23 estimates is we have a dual purpose of the 24 estimates. One is using the estimates to drive 25 sales. So there is a logical need to make those WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 101 TEXAS LOTTERY COMMISSION - 10-9-01 1 estimates as large as possible. 2 But if the Commission knew that it 3 was going to come out of the reserve fund if they 4 didn't do that, then they might have a different 5 approach and actually be more accurate in their 6 estimates. 7 COMMISSIONER WHITAKER: And when you 8 have an internal sense of what is a close enough 9 estimate and what isn't, what would you say? 10 MR. BUSALD: I wouldn't say that was 11 a bad estimate at all. If it was -- if it came out 12 18 -- and I don't think the person that won that, 13 if they knew it was based on a percentage of sales 14 and legislation, is going to be going around the 15 state saying, I've been cheated, I've been cheated 16 by the Lottery Commission. 17 What this really is about is not 18 that person, however. It's really about the person 19 at the low end and maintaining the low-end prizes 20 and, as I say, about the -- building the reserve 21 fund by underestimating. And if this legislation 22 is adopted, I don't think we're going to see many 23 overestimates except on the low-end prizes. We 24 won't see overestimates on the high end because we 25 won't make a mistake that adversely impacts the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 102 TEXAS LOTTERY COMMISSION - 10-9-01 1 reserve fund on the high end, like would have 2 happened if -- with the $40-million jackpot, for 3 instance. I don't think we'll see those sorts of 4 things happening. 5 COMMISSIONER WHITAKER: So you don't 6 have a problem with the idea of starting off with a 7 $4-million jackpot? 8 MR. BUSALD: If the reserves justify 9 it. Yeah, if the reserves justify it -- 10 COMMISSIONER WHITAKER: You would 11 increase the reserve, taking a larger slice of the 12 prize pool for the reserve fund? 13 MR. BUSALD: If that's what pleases 14 the Commission. That's -- you know, I'm just 15 trying to point out -- and I'm glad to see that you 16 both really realize the problem with the 17 legislation as proposed, in that there is no 18 minimum percentage that goes to a winner and there 19 is the possibility of a conflict of interest on the 20 part of the Commission of trying to build the 21 reserve fund to supplement low-end prizes by 22 saying, well, that's a pretty good prize. They're 23 going to buy tickets at that level. There is no 24 need to bump the prize. 25 And we'll have overestimates -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 103 TEXAS LOTTERY COMMISSION - 10-9-01 1 underestimates by a considerable amount, I predict. 2 I think the reserve funds will certainly grow under 3 this new plan. 4 CHAIRMAN CLOWE: I want to correct 5 you on one point. 6 MR. BUSALD: I'm sorry? 7 CHAIRMAN CLOWE: This is not 8 legislation. It's -- that happens over there. 9 MR. BUSALD: Rule making. 10 CHAIRMAN CLOWE: This is rule 11 making. 12 MR. BUSALD: Right. I'm sorry. 13 CHAIRMAN CLOWE: And where you've 14 mentioned that, it's kind of causing me to flinch a 15 little bit. 16 COMMISSIONER WHITAKER: We're 17 sensitive to the bounds of our authority. 18 CHAIRMAN CLOWE: Yeah. 19 Any questions, Commissioner Criner? 20 COMMISSIONER CRINER: No. 21 CHAIRMAN CLOWE: Did you -- I read 22 all of the testimony that came in in writing, and I 23 read the transcript of the hearing. This is your 24 first time to make comments. 25 MR. BUSALD: Yes, because I really WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 104 TEXAS LOTTERY COMMISSION - 10-9-01 1 didn't want my comments filtered down to "he was 2 agin it." 3 CHAIRMAN CLOWE: To what? 4 MR. BUSALD: That I was against it. 5 CHAIRMAN CLOWE: Oh. 6 MR. BUSALD: I thought that my 7 comments -- 8 CHAIRMAN CLOWE: All right. I just 9 wanted to establish this is the first time we've 10 heard from you on this subject. 11 MR. BUSALD: Correct. 12 CHAIRMAN CLOWE: Very good. 13 I don't believe there are any other 14 questions. Thank you for coming very much. We 15 appreciate your appearance. 16 MS. CLOUD: Commissioners, may I -- 17 CHAIRMAN CLOWE: Sure. 18 MS. CLOUD: -- make a statement 19 here? 20 CHAIRMAN CLOWE: Sure. 21 MS. CLOUD: On the language on the 22 website, Professor, that language has been on our 23 website since March of 2000 on all games. We went 24 back to the old games and changed the language to 25 agree. It says: Overall odds of winning any prize WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 105 TEXAS LOTTERY COMMISSION - 10-9-01 1 in double dollars are 1 in 3.27, including 2 breakeven prizes. 3 MR. BUSALD: All the old games? 4 MS. CLOUD: Yes, sir. We went back 5 and made sure we added the language even to the old 6 games that were out there. 7 MS. KIPLIN: But I'll tell you -- 8 you seem pretty confident that it is. 9 And so I'm wondering if outside of 10 this commission meeting, we can take a look at that 11 and see if -- 12 COMMISSIONER WHITAKER: Sure. Yeah. 13 MS. KIPLIN: -- we're missing a page 14 or something is going on here. 15 CHAIRMAN CLOWE: Yeah. Let's deal 16 with that off the record. 17 MS. KIPLIN: Is that -- 18 MR. BUSALD: Sure. Sure. 19 CHAIRMAN CLOWE: You-all handle 20 that, if you would. 21 MR. BUSALD: Thank you. 22 CHAIRMAN CLOWE: Thank you, sir. 23 Now, I have an appearance form from 24 Ms. Dawn Nettles. Ms. Nettles, we're happy to have 25 you here still this morning. And would you give us WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 106 TEXAS LOTTERY COMMISSION - 10-9-01 1 your comments, please. 2 MS. NETTLES: Good morning. Yes, it 3 is still morning. 4 For the record, my name is 5 Dawn Nettles, and I'm from Dallas. I am the 6 publisher of the Lotto Report and the owner of the 7 website www.lottoreport.com. 8 I had intended to make a really 9 quick comment, but as I sat here and listened to 10 Bart and Robert and Linda talk, there were several 11 things that I wanted to come back on that has been 12 said here today. 13 First, I want to clarify the use of 14 the words "the jackpot is 85 million." That's the 15 amount that's put out there, and that's the amount 16 that people think is there, and you-all have been 17 referring to it that way. But that is really not 18 what the winner has won, okay? 19 The winner has really only won a 20 percentage of sales, which today is 37.532 percent. 21 So when you talk about the $85-million jackpot and 22 that they were paid 89.4 million -- I think that's 23 what you said -- the truth is, is the people 24 received $51 million because it required 25 $51 million -- or that's the amount that was in the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 107 TEXAS LOTTERY COMMISSION - 10-9-01 1 prize pool -- but the amount that it required to 2 invest to get a return of 85 million was only 3 48 million. I did not come prepared with the 4 precise numbers, though I do have them. 5 And I want that to be really clear 6 because that's what this is all about. Those 7 people got what was in the prize pool, and the 8 Commission has been paying the amount in the prize 9 pool, which is only a percentage of sales. When 10 they do their calculations, they take -- they say, 11 well, we've got -- well, take the $4-million 12 jackpot: Currently, I believe that they have got 13 like 1.3 million set aside for the six of six 14 winner. That's how much money that, quote, 15 $4-million winner, really has coming to him. 16 They really don't have $4 million; 17 they've only got 1.3 million. That's what's in the 18 prize pool, and that's the amount that the 19 Commission is supposed to take and invest. But 20 nowadays, it's costing 2.2 million to invest to get 21 a return of $4 million. 22 Also, I think it's real important -- 23 something else that was said about the investments 24 that people don't understand is that the state 25 purchases 24 securities for each winner, not one. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 108 TEXAS LOTTERY COMMISSION - 10-9-01 1 They buy 24 separate deals if the -- securities -- 2 if the winner has chosen the annual pay, and then 3 the first payment made to the winner is cash out of 4 pocket. 5 And the rest of it is invested, and 6 they come to term every year. So they have a list, 7 and the Commission receives all these checks every 8 year or every month from when this security comes 9 to term. 10 With -- I want to comment on the 11 first jackpot that they talked about, the 12 $40-million jackpot that was 1.9 million short and 13 how Linda said a while ago -- or Bart -- that sales 14 were not anywhere near what they felt they were 15 supposed to be, you know, by their estimate. 16 And I want to point out that that 17 was directly after you added the four balls and the 18 fact that sales were not up to snuff. The 19 $85-million jackpot that they were talking about 20 earlier, where they said they had no comparison, 21 well, I don't agree with that because -- and I 22 can't tell you the exact date, but at one time, the 23 Texas Lottery had a $77-million jackpot. 24 The difference between that 77- and 25 $85-million jackpot is that that $77-million WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 109 TEXAS LOTTERY COMMISSION - 10-9-01 1 jackpot was based on 32 percent of sales. And 2 that's how they arrived at the $77-million figure. 3 They had enough money to invest to bring back 4 $77 million. 5 On the $85-million jackpot, they had 6 37.532 percent of sales, which is considerably 7 more. And the truth is that the sales were higher 8 on the $77-million jackpot than they were on the 9 85, so they really did have something to compare 10 with. 11 COMMISSIONER WHITAKER: Mr. Nettles, 12 may I direct you -- 13 MS. NETTLES: Uh-huh. 14 COMMISSIONER WHITAKER: -- was there 15 a winner for the 77 million? 16 MS. NETTLES: Yes, ma'am. 17 COMMISSIONER WHITAKER: And your 18 best recollection of the year was? 19 MS. NETTLES: I really did not 20 expect to get into all this. I really don't 21 remember. '95, '94. The people who won it 22 actually were friends of mine from Duncanville, but 23 I don't remember the year. Sorry. But they can 24 tell you because I pointed it out on my website at 25 the time. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 110 TEXAS LOTTERY COMMISSION - 10-9-01 1 Okay. I want to comment on when 2 Bart and them were up here talking about the, 3 quote, unknowns: It's unknown how much sales are 4 really going to come in; it's unknown what to 5 estimate the jackpot at because these are figures 6 we can't tell until it's all finished. 7 I personally don't believe that 8 there should be any unknowns. There is no need for 9 it because if you take the money that you get and 10 just pay out what you've got, you don't have to 11 worry about the unknowns. 12 Reserve. The reserve fund. Since 13 Lotto Texas began in 1992, I think -- or '93, the 14 first drawing -- the reserve fund actually had 15 $113 million in it. And that, you can take to the 16 bank on that number. That reserve fund -- the 17 interesting part about the reserve fund that we 18 keep talking about today is that the truth is that 19 before you-all added the four balls, the winners 20 received 50 percent of total sales. 21 When you added the four balls one 22 year ago, Linda announced that she was upping that 23 to 55 percent. Well, the players have not ever 24 seen 55 percent of sales since the lottery began. 25 And the reason for it is because they withheld the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 111 TEXAS LOTTERY COMMISSION - 10-9-01 1 1.1 percent -- or 1 percent on the 50 balls that 2 has been put into the reverse fund. And that money 3 was always intended to go to the three of six 4 winners because the three of six winners is the 5 only prize that you have that is a guaranteed prize 6 amount. 7 It's a -- it was a $3 prize, and 8 then it increased to 5. And that money was set 9 aside to pay those three of six winners. The four 10 of six and the five of six winners, the Commission, 11 since day one, in all the research that I've done 12 thus far, has been very accurate in dividing that 13 exact percentage of sales, and they round down to 14 the nearest dollar to pay those prizes. 15 So if they -- for the five of six 16 winner, they may have $70 left over, not paid out 17 from that prize pool. They put it into the next 18 one and let it kind of even itself out. The same 19 on the four of six, except it's a higher number, 20 maybe $3,000. But basically, all of those funds 21 are paid out. 22 The Lotto, Lotto Texas, is a 23 pari-mutuel game. And that means -- and that's the 24 way it was set up. That means that the players are 25 supposed to get 55 percent of sales, period. If WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 112 TEXAS LOTTERY COMMISSION - 10-9-01 1 you take that 55 percent and get rid of the three 2 of six prize or get rid of it being a set prize and 3 take their share and pay it all out, you don't need 4 a reserve fund. And then the players would 5 actually get the amount of money that they're 6 actually entitled to, which is the 55 percent. 7 You also have all the unclaimed 8 prize money, which is a greater figure than the 9 reserve fund. And that money is supposed to go to 10 the players. But the players don't see it, and 11 that is really not fair. We brought the Lotto in, 12 and we were told we were going to get 50 percent of 13 sales, and then we were told we were going to get 14 55 percent of sales. Well, this commission needs 15 to pay it, and they're not doing it. 16 And so I really am opposed to the 17 rule change. I realize that the events of 18 September the 11th has given this commission an 19 added incentive to try to convince you-all to vote 20 for and adopt this rule. Their sales are down. 21 There is a fear of greater decline in sales. 22 And if you adopt this rule, then 23 they have an opportunity to recover some of that 24 lost revenue, because if they advertise the 25 $47-million jackpot and that's all they owe the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 113 TEXAS LOTTERY COMMISSION - 10-9-01 1 person if they pass this rule, even if there is 2 enough in there to bring in 52 or 55 million; and 3 they invest these numbers and they get a check 4 back, but they only have to pay the winner so much 5 money, the Commission is actually making more money 6 off these investments. And I've got that 7 documented. 8 CHAIRMAN CLOWE: I beg your pardon? 9 MS. NETTLES: And I have that 10 documented. 11 We need a game, and we need a rule. 12 If you want to give the winners 55 percent, pay 13 them 55 percent, period. We don't need to have 14 advertised amounts. We don't need to pay that way. 15 It never was intended to be estimated -- it was 16 always intended to be estimated, not pay the 17 advertised amount. 18 Some of these winners have received 19 exactly, to the penny, $4 million or 10 million or 20 20. And some of them have received under that, and 21 some of them have received over that since 1997, 22 and that's wrong. 23 You-all are the government. You're 24 a state agency. You need to just set a rule, and 25 it doesn't need to be discussed on what we should WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 114 TEXAS LOTTERY COMMISSION - 10-9-01 1 estimate it at. You just need to pay the winner 2 what's in the pot for them. Players play for 3 what's in the pot. I don't care how much it is; 4 they want to win what's in the pot. And we don't 5 want any taken out, and we'll take it if it's just 6 a little. 7 So that's all I have. I think I 8 cleared up the -- I did want to say this on the 9 19 percent increase of sales for Lotto Texas. I 10 did want that to really be known that that money 11 came in in seven draws. More than the 19 percent 12 came in in seven draws. So I did not agree with 13 you-all's philosophy that adding the four balls was 14 successful. 15 And Commissioner Clowe, you said 16 last year that -- to try it and you could always 17 change it back. And if you want your players back, 18 you need to make winners. But we created losers. 19 You've had more losers -- you had more winners in 20 the last year under 50 balls than you've had this 21 year, and yet your sales increased 19 percent. And 22 I think that's sad. And when a person keeps 23 losing, they do quit playing. 24 So paying the advertised amount is 25 not acceptable to me. I totally disagree with it. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 115 TEXAS LOTTERY COMMISSION - 10-9-01 1 I do not understand why you cannot just set the 2 percentage and pay the percentage. Invest the 3 percentage for the winner, and the money should go 4 directly to him because he's entitled to every 5 penny that that money earns. 6 So I've said my piece, and I 7 appreciate you-all hearing me. I did submit a 8 written comment, too, and I did testify, so I hope 9 you-all were able to read it. And I submitted a 10 lot of figures there. 11 CHAIRMAN CLOWE: I appreciate you 12 mentioning that because I did read your testimony. 13 And then I know you submitted quite a bit of 14 written documentation, and I think the 15 commissioners have looked at that as well. So we 16 appreciate you additionally being here today. 17 MS. NETTLES: Yeah. I just wanted 18 to reaffirm for you-all. And I have not met one 19 player who thinks that this is right. And I play 20 poker, and when I win a hand, I want to drag the 21 pot. And that's how Lotto Texas should be. And 22 I'm opposed to the Commission being able to pay the 23 amount that's advertised and make a whole lot more 24 money off of it on the side. 25 And the reserve fund and the amounts WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 116 TEXAS LOTTERY COMMISSION - 10-9-01 1 of money that has been overpaid -- oh, I wanted to 2 clarify that, too, Commissioner Clowe. I did not 3 bring this in, because I did not know I was going 4 to get into it today; but just in the last year, 5 those first 105 draws, I believe it was over 6 $10 million that was overpaid to the six of six 7 winners. Nobody in the last year has been 8 underpaid. They have all either received the exact 9 amount in the prize pool or they have received the 10 exact amount that was required to purchase 11 securities to get a return of that money. Prior to 12 that, that is not the case. So all of that 13 transpired after I put all those numbers up on my 14 website, too. I feel like that had an impact on 15 it. 16 But anyway, any questions? 17 CHAIRMAN CLOWE: Are you open to 18 questions? 19 Any questions? 20 COMMISSIONER CRINER: No. 21 COMMISSIONER WHITAKER: No. 22 CHAIRMAN CLOWE: I don't believe 23 there are any. Thank you very much. 24 MS. NETTLES: Thank you. 25 CHAIRMAN CLOWE: I'd like to ask you WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 117 TEXAS LOTTERY COMMISSION - 10-9-01 1 now, Kim, at this point, has there been testimony 2 that is outside of the record and prevents this 3 measure from being dealt with by the Commission at 4 this point in time? 5 MS. KIPLIN: Well, I heard the new 6 comment, and I would -- I don't think it prevents 7 you-all from deliberating and getting your thoughts 8 out and possibly giving some direction to the staff 9 if you can. But I would really like to have the 10 opportunity to summarize that comment and work off 11 of the transcript to make sure that I'm getting it 12 and I'm being accurate about it. And really, the 13 comment that I heard today is related solely to the 14 Lotto Texas and Texas Two Step rule making. I 15 didn't hear any new comment on the Subchapter D, 16 game rules. 17 CHAIRMAN CLOWE: So you feel that's 18 ripe for decision making? 19 MS. KIPLIN: I think that one, yes, 20 I do. I think it's ripe for your action if you 21 wish to take action. 22 CHAIRMAN CLOWE: And that's Item 10 23 on the agenda. 24 MS. KIPLIN: Yes. 25 CHAIRMAN CLOWE: Let me ask the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 118 TEXAS LOTTERY COMMISSION - 10-9-01 1 commissioners if they have any comments or 2 questions of you or Linda or anyone else at this 3 point in time, and in so doing, try to get a 4 determination of where the Commission wants to go. 5 COMMISSIONER WHITAKER: I will start 6 first if that's all right. 7 I would prefer that we pass this to 8 next time. Short of that, I have learned a great 9 number of facts this morning and also very 10 recently, and I would like to explore with staff 11 certain standards against which certain things are 12 measured and make sure that I am understanding 13 exactly what the standards are and that I'm 14 comfortable with those standards against which 15 these various actions are measured. 16 CHAIRMAN CLOWE: I would suggest, 17 Commissioner Criner, if you would agree, that we'll 18 pass both of these items. 19 COMMISSIONER CRINER: Yes. I agree. 20 CHAIRMAN CLOWE: We'll pass 21 Items 10 and 11. 22 We'll now go to -- 23 MS. KIPLIN: Commissioners, if I 24 might, just in the interest of time on 25 Subchapter D, game rules, knowing that it's due to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 119 TEXAS LOTTERY COMMISSION - 10-9-01 1 expire on November 7th, is there any sort of 2 direction that I might be able to take from the 3 Commission in terms of drafting? I'm just 4 concerned that, from a logistics point of view, if 5 there is a direction that I need to take that's 6 opposite to what is laid out, it will put us pretty 7 close up to the wire. I didn't know if -- 8 COMMISSIONER CRINER: May I say 9 something? 10 CHAIRMAN CLOWE: Sure. 11 COMMISSIONER CRINER: I've been so 12 quiet because I spent pretty much near two hours 13 last evening with staff going through this entire 14 process. And my comment to that would be to 15 redraft this and to spend as much time with each 16 one of the commissioners independently -- 17 MS. KIPLIN: Okay. 18 COMMISSIONER CRINER: -- so that we 19 really understand what we're trying to do here. 20 I'm very concerned about how we handle the reserves 21 and that there are rules of practice that are 22 documented on what that reserve is to do, when it 23 is to do it, and how. 24 I also would like us to really take 25 a real good look at the games that we're playing WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 120 TEXAS LOTTERY COMMISSION - 10-9-01 1 and how we are playing them and what our customers 2 enjoy. I don't want to take the fun out of the 3 games. But we need to be concerned about our 4 customer and that they enjoy the activities. 5 MS. KIPLIN: Thank you. 6 CHAIRMAN CLOWE: Kim, I understand 7 what your time line is. The Commission can meet in 8 November prior to the 7th if it so desires. And 9 looking at my calendar, I see two days during the 10 week of November the 1st and 2nd, and two days 11 during the week of November 5th and 6th, prior to 12 the expiration date. The Commission has not set 13 its November meeting, and we've got four days there 14 in two weeks that are possible. 15 I'm just pointing that out. 16 MS. KIPLIN: Sure. 17 CHAIRMAN CLOWE: I'm not asking the 18 commissioners to declare whether they're open or 19 not, but that gives you four day to work on it. 20 All right. Any further comments? 21 These items are passed. We're ready 22 to go to Item No. 2, recognition of length of 23 service by the internal auditor. 24 Is there a celebration here? 25 MS. KIPLIN: Commissioners, it's a WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 121 TEXAS LOTTERY COMMISSION - 10-9-01 1 practice of the agency at particular black lines of 2 tenure of service to provide a certificate of 3 recognition to that employee. Ms. McLeod has 4 served as the internal auditor for five years in 5 that capacity -- actually, in excess of five years 6 now -- and if it had been something other than a 7 direct report, the executive director or the bingo 8 director would have signed that certificate of 9 recognition. But because it's a direct report to 10 you, it actually requires an action. 11 And so it had to be noticed up for 12 an open meeting for you-all to take a look at this 13 and act on it. And I'm going to pass it around 14 with that in mind. 15 CHAIRMAN CLOWE: This requires a 16 motion, therefore? 17 MS. KIPLIN: Yes, it does. It 18 really does. 19 CHAIRMAN CLOWE: Is there a motion? 20 COMMISSIONER CRINER: So moved. 21 CHAIRMAN CLOWE: Second? 22 COMMISSIONER WHITAKER: Second. 23 CHAIRMAN CLOWE: All in favor, say 24 aye. 25 The vote is 3-0 in favor. It is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 122 TEXAS LOTTERY COMMISSION - 10-9-01 1 approved. 2 And I'd like to read it into the 3 record: 4 The state of Texas, Texas Lottery 5 Commission, is pleased to present this certificate 6 of recognition to Debra McLeod in appreciation for 7 five years of outstanding service and dedication to 8 the State of Texas and the Texas Lottery 9 Commission. 10 And the commissioners will sign 11 this. 12 (Brief pause in proceedings.) 13 CHAIRMAN CLOWE: And Debra, will you 14 come forward, please. 15 On behalf of the Commission, it 16 gives me great pleasure to be able to present this 17 to you. 18 MS. MCLEOD: Thank you very much. I 19 appreciate it. Thank you very much. 20 (Applause.) 21 CHAIRMAN CLOWE: The next item is 22 No. 3, report, possible discussion and/or action on 23 lottery sales and trends. 24 Linda and Toni. 25 MS. SMITH: Good morning again, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 123 TEXAS LOTTERY COMMISSION - 10-9-01 1 Commissioners. Let's take a look at sales. Before 2 I start, again I'm going to preface with a comment 3 that I made in our last meeting that in the last 4 fiscal year, we hit a Lotto Texas jackpot that ran 5 from 25 million to 60 million. So we're still 6 having to sort of compare where we are with the 7 start of the fiscal year. 8 So to look at it from that 9 standpoint, total fiscal year-to-date sales were -- 10 for 2002 -- are 2,666,000 -- I'm sorry, 11 266,407,481. This shows a decline of 9.47 percent 12 from fiscal year 2001 total sales of 294,281,102. 13 The current weekly sales average is 14 44,401,246 versus a weekly average in fiscal year 15 2001 of 49,046,850. And again, we're still kind of 16 combatting that comparison of those larger jackpots 17 that we experienced in the first couple of weeks of 18 last fiscal year. 19 To look, though, where we are from 20 instants and Lotto Texas, instant ticket sales for 21 fiscal year 2002 to date are 159,993,649. They 22 currently represent 60.06 percent of sales versus 23 162,993,278 in fiscal year 2001, representing 24 55.39 percent of sales. So we've seen only a 25 1.84 percent decline in instants so far in this WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 124 TEXAS LOTTERY COMMISSION - 10-9-01 1 short period of the fiscal year. 2 Lotto Texas, on the other hand, 3 that's where we see the bigger decline because of 4 those jackpots. We're currently at 64,544,365, and 5 it represents 24.23 percent of sales, versus 6 89,794,560, representing 30.51 percent sales at the 7 same time last year. So it is down 28.12 percent, 8 but that's a direct correlation with that -- we're 9 still fighting those larger jackpots even though we 10 did just experience a $40-million jackpot. 11 And then just to take a look at last 12 week so that we are on a positive note with where 13 we are with sales, sales are no longer down in the 14 sense of the direction that we are going within the 15 fiscal year. Total sales for week ending 10-6-01 16 were 56,885,499. This up 4.38 percent from the 17 previous week of 54,497,718. 18 And I think if you look -- go just 19 one more page further, and you can see sort of a 20 snapshot of the whole fiscal year by each of those 21 weeks, we have continued to climb since the events 22 of September 11th. We had some conversation about 23 that in the last commission meeting. But you see 24 that we are back on track, and we are experiencing 25 growth. And the only variance there is because of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 125 TEXAS LOTTERY COMMISSION - 10-9-01 1 the Lotto Texas jackpot, which is always jackpot 2 driven. 3 CHAIRMAN CLOWE: So, Toni, on a 4 year-to-date basis, we're actually looking at five 5 weeks? 6 MS. SMITH: Yes, sir. 7 CHAIRMAN CLOWE: And in that 8 five-week period in the prior fiscal year, we had 9 two jackpots, 129 and 160 million; and in this 10 fiscal year, we've had 140 million? 11 MS. SMITH: Yes, sir. 12 CHAIRMAN CLOWE: So we're looking at 13 a very preliminary comparison on a year-to-date 14 basis -- 15 MS. SMITH: For a very short 16 period -- 17 CHAIRMAN CLOWE: -- for a short 18 period of time? 19 MS. SMITH: Yes, sir. 20 CHAIRMAN CLOWE: And you've pointed 21 out the positive trend in the just-concluded week 22 ending October 6th as being a return from the 23 concerns that Commissioner Criner identified in our 24 last meeting about what was going to happen to 25 sales. Do you have any further comments? I think WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 126 TEXAS LOTTERY COMMISSION - 10-9-01 1 you promised him some investigation and a plan, 2 perhaps. 3 MS. SMITH: Actually, we compiled 4 some information -- had gotten information that we 5 had prepared internally, that Jim Boyer (phonetic), 6 our marketing resources manager prepared, looking 7 at some economic indicators. GTECH has submitted 8 information; Scientific Games has put together a 9 PowerPoint presentation; and we've gotten 10 information from the ad agency. But Linda has 11 requested that we not present those in this meeting 12 due to the heavy agenda. We can either send it to 13 you in a package once she has reviewed it or do a 14 presentation in the next commission meeting, 15 whichever suits the commission -- commissioners. 16 COMMISSIONER CRINER: Well, I asked 17 for it for this meeting. 18 MS. CLOUD: I'm sorry, 19 Commissioner Criner. I didn't know how long the 20 rule making process would take, and we actually 21 discouraged one vendor from presenting it at this 22 meeting. They had some very good information, but 23 they do plan to be at the next meeting to make that 24 presentation. 25 COMMISSIONER CRINER: Can we have it WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 127 TEXAS LOTTERY COMMISSION - 10-9-01 1 on the agenda for next meeting, please? 2 MS. CLOUD: Yes, we will. I'm 3 sorry. And that was my fault because I was afraid 4 that we wouldn't have the time to do it today. 5 MS. SMITH: Or we could forward some 6 of the information -- 7 MS. CLOUD: Well, I have sent part 8 of -- one of the vendors had provided us some 9 information, and I had sent that to the 10 commissioners. And I have the rest on my desk to 11 review, and I can send that to you. But I thought 12 presenting it in this meeting would be better. 13 CHAIRMAN CLOWE: And any questions 14 for Toni further? 15 And then, Toni, I think the next 16 item, if you have any report, on advertising and 17 promotions -- 18 MS. SMITH: I have nothing new, 19 other than an update on the state fair, which is 20 our largest promotion of the year. It's a 21 three-week-long event, and we have experienced 22 some positive sales. We were a little concerned 23 with the attendance, as I'm sure the state fair 24 people were with other things that are going on and 25 the public's involvement in these type of large WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 128 TEXAS LOTTERY COMMISSION - 10-9-01 1 events. 2 But we have actually seen an 3 increase. To date in sales, we have sold -- and 4 this is from 9-28 through this past Saturday, 5 October 6th -- we sold $88,423.50 of lottery 6 tickets at our booth at the fair, versus 73,965 at 7 the same time last year. So we've actually -- 8 we're up so far. And we'll continue to track these 9 numbers and share them with the commissioners. 10 CHAIRMAN CLOWE: Was the Texas-OU 11 game in that period the prior year? 12 MS. SMITH: Actually -- 13 MS. CLOUD: Yes. 14 MS. SMITH: -- yes, it was. But I'm 15 not sure which weekend. And it probably is the 16 same weekend. When you look across the page there, 17 we were at 14,000 last Saturday. And those are 18 also the biggest days throughout the fair, too, so 19 that would be a good comparison within the same 20 weekend. 21 CHAIRMAN CLOWE: And they beat us 22 last year, didn't they? 23 MS. SMITH: Yes, sir, they did. 24 CHAIRMAN CLOWE: Okay. Well, 25 lottery sales are up, so -- WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 129 TEXAS LOTTERY COMMISSION - 10-9-01 1 MS. KIPLIN: But not as bad. 2 CHAIRMAN CLOWE: It's like 3 Kevin Steele says: A lose is a lose. 4 MS. CLOUD: Commissioners, we've 5 also put a chart up. We are tracking sales daily, 6 with the desire to reach our goal at the end of the 7 year of 3.75 billion. So the chart -- I have one 8 of these in my office as well so that I can keep a 9 close eye on this. 10 Commissioner Clowe, you asked me to 11 put this out for you-all to see. And that shows 12 what Toni just gave you on last week's online and 13 instant ticket sales in total sales. The chart on 14 the left shows sales up this week to last week on 15 instant tickets; and that we're down on how much 16 money we need to be bringing in at this point in 17 the game to reach our goal. One big jackpot would 18 take care of that. So that's where we are. 19 CHAIRMAN CLOWE: Thank you for 20 putting that up. I think it's good to have 21 everybody on the staff aware of what the sales are 22 and keep that in front of everybody on a constant 23 basis. 24 MS. CLOUD: Okay. 25 CHAIRMAN CLOWE: Thank you, Toni. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 130 TEXAS LOTTERY COMMISSION - 10-9-01 1 MS. SMITH: Thank you, 2 Commissioners. 3 CHAIRMAN CLOWE: We're now in 4 Item 6, consideration and possible discussion 5 and/or action in regard to the internal auditor 6 activities. 7 Debra, do you have items for us this 8 morning? 9 MS. MCLEOD: Yes, sir. Good 10 morning, Commissioners. 11 As far as external audits go, the 12 executive director, the director of finance, and 13 myself participated in a conference with the 14 controller of public accounts. They gave us a 15 draft report of findings from their audit. We 16 anticipate a formal report. Some of the 17 information Bart needed to clarify with them, and 18 so it's in a very rough draft format at this point. 19 We anticipate getting a final report from them 20 within the next couple of months. 21 With regards to the state auditor's 22 office, the MAS group is still here performing on 23 the internal group of information technology. To 24 my knowledge, that's all the external audits in 25 addition to the CDC audit that's going on in this WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 131 TEXAS LOTTERY COMMISSION - 10-9-01 1 agency. 2 Internal audits, we're working with 3 bingo on the bingo tracking audit. That's been a 4 very, I believe, beneficial audit for both bingo 5 management and for this agency. The goal of this 6 audit is to help provide bingo management with 7 better tools to help identify trends within the 8 industry. We're working with the new CDS system in 9 developing reports so they can do a trend analysis 10 of the revenue that comes in, a better 11 understanding of what's going on in the bingo 12 halls, and what affects the players in that 13 situation. 14 I think at this juncture, that's all 15 I have to add. If you have any questions, I'll be 16 happy to take your comments. 17 MS. CLOUD: Commissioners, the 18 financial audit is going on. Debra didn't mention 19 the financial audit, but it is an external audit 20 that we have every year this time of year. And it 21 is presently ongoing in financial. 22 CHAIRMAN CLOWE: Very good. 23 Thank you, Debra. 24 We're now to Item 7, which is 25 discussion, action report on the drawing studio. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 132 TEXAS LOTTERY COMMISSION - 10-9-01 1 MS. CLOUD: Commissioners, we don't 2 have anything new to report since the last meeting. 3 Things are moving along very well. And we did get 4 our wrought iron bars up, and they are being opened 5 at 7:00 at night when our pre-draw starts. 6 So, nothing outside of positive 7 information for you today. 8 CHAIRMAN CLOWE: I looked at those 9 earlier this morning, and that's a nice job of 10 installation. They're installed flush to the wall 11 so they can be slid back. 12 MS. CLOUD: Right. 13 CHAIRMAN CLOWE: And they're not a 14 danger to the public on the street, and yet they 15 are fully away from the glass windows. 16 MS. CLOUD: Right. 17 CHAIRMAN CLOWE: And big padlocks on 18 those. 19 MS. CLOUD: Security has the key to 20 those. 21 CHAIRMAN CLOWE: Did Mike pick those 22 out? 23 MS. CLOUD: Yes. 24 CHAIRMAN CLOWE: Great. That's a 25 nice job. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 133 TEXAS LOTTERY COMMISSION - 10-9-01 1 All right. Thank you, Linda. 2 We're now to Item 8. Nelda, report, 3 possible discussion or action on the Council on 4 Competitive Government's activities. 5 MS. TREVINO: Good morning, 6 Commissioners. For the record, I'm Nelda Trevino, 7 the governmental affairs director. 8 Just a very brief report from the 9 report I gave at the last commission meeting. 10 Since the Council's project plan was provided to us 11 on September 17th, members of the project team have 12 been conducting interviews with various agency 13 staff. 14 To date, they have interviewed the 15 marketing director, the marketing assistant 16 director, the lottery operations director, the 17 communications director, all the managers in the 18 marketing division, several other employees within 19 the marketing department; and just yesterday, they 20 met with our executive director. 21 In addition, they have held 22 interviews with the two ad agencies that we do 23 business with, and they have also been on a side 24 visit to the GTECH data center and the warehouse. 25 The Council project team is WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 134 TEXAS LOTTERY COMMISSION - 10-9-01 1 scheduled to take a tour of the drawing studio next 2 week, and I think it's their hope that they will be 3 concluding their interviews with other agency staff 4 that they're interested in interviewing here in the 5 next couple of weeks. 6 Lastly, the only other thing I think 7 I have to mention is that we continue to provide 8 information and documentation to the Council as 9 they requested or as a result of the interviews 10 that they have conducted. Dan Quintreros 11 (phonetic) was here earlier. He's the director for 12 the Council on Competitive Government. He asked me 13 to apologize to you-all -- he had to leave for 14 another meeting -- but if there was any questions 15 that you had of him, if you could provide those to 16 me and I could forward them to him. And again, he 17 asked that I apologize that he could not stay with 18 us. 19 And that basically concludes my 20 report, and I'll be happy to answer any questions 21 you may have. 22 CHAIRMAN CLOWE: And Nelda, I think 23 you have a legislative briefing scheduled for later 24 this month. Is that on the 24th at 10:00 a.m.? 25 MS. TREVINO: Yes, sir. That's WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 135 TEXAS LOTTERY COMMISSION - 10-9-01 1 correct. 2 CHAIRMAN CLOWE: What participation 3 do you anticipate? 4 MS. TREVINO: We just recently, last 5 week, sent out a letter to the legislative offices 6 that we're inviting to our briefing, and we've 7 asked them to RSVP to us. And I'm not aware that 8 we've gotten any RSVPs at this point, but 9 typically, we do have participation. And I'll 10 probably be able to provide you an update before 11 the 24th as to who will be attending that 12 particular briefing. 13 CHAIRMAN CLOWE: Would you do that? 14 MS. TREVINO: Absolutely. 15 MS. KIPLIN: Commissioners, would 16 you like to have that added to the agenda for the 17 next time? 18 CHAIRMAN CLOWE: So Nelda can report 19 on it? 20 MS. KIPLIN: Yeah. I can add it 21 under report by executive director, just including 22 legislative -- 23 CHAIRMAN CLOWE: That would be good. 24 MS. KIPLIN: -- briefings. 25 CHAIRMAN CLOWE: That would be good. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 136 TEXAS LOTTERY COMMISSION - 10-9-01 1 I think those are well done, and I 2 think they're very beneficial, and I'm eager for 3 you to continue that practice. 4 MS. TREVINO: We intend to, and 5 hopefully, you can participate with us in some of 6 them. 7 CHAIRMAN CLOWE: Great. And I want 8 to ask you a question under the next item, if you 9 would just remain, please -- 10 MS. TREVINO: Okay. 11 CHAIRMAN CLOWE: -- and we'll ask 12 Gary to come forward -- 13 MS. TREVINO: Okay. 14 CHAIRMAN CLOWE: -- which is No. 9, 15 report, possible discussion and action on Sunset 16 process involving this agency. 17 Gary, would you give us an update, 18 please. 19 MR. GRIEF: Good morning, 20 Commissioners. For the record, my name is 21 Gary Grief, and I'm the lottery operations director 22 and also the project manager for our Sunset 23 project. 24 And I have no new information to 25 share with you since we last had a commission WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 137 TEXAS LOTTERY COMMISSION - 10-9-01 1 meeting. We are still awaiting appointments on the 2 House side to the Sunset Commission. After that 3 occurs, then we hope to hear somewhat of a schedule 4 from the Sunset Commission. 5 CHAIRMAN CLOWE: You've answered the 6 question I was going to ask Nelda. Thank you very 7 much. 8 You will advise us? 9 MS. TREVINO: Absolutely. 10 CHAIRMAN CLOWE: Good. Thank you 11 both very much. 12 I think now we're to Item No. 12, 13 and that's, Linda, your subject: report, possible 14 discussion or action regarding the draw times for 15 the online games. 16 MS. CLOUD: And I will ask 17 Keith Elkins to come forward to discuss this issue 18 with us. 19 Commissioners, this was planned and 20 on the agenda last meeting as well as this one, 21 based on whether or not the rule was approved. But 22 since Keith is set up and prepared, I'd like for 23 him to go ahead and make the presentation for your 24 consideration at a later date. 25 MR. ELKINS: Good morning, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 138 TEXAS LOTTERY COMMISSION - 10-9-01 1 Commissioners. For the record, my name is 2 Keith Elkins. I'm communications director of the 3 Texas Lottery. 4 While Phillip is activating the 5 PowerPoint presentation for this morning, I'd like 6 to go back to one item that you discussed earlier, 7 and that was on the jackpot estimations. 8 And one thing that was not discussed 9 was the efforts that we do in communications to 10 also get the word out to our players. As we hit a 11 $50-million-or-higher jackpot, we have staff that 12 comes in if it's a weekend. Or if it's a weekday, 13 we start notifying the media on an hourly basis 14 what the jackpot amount is or how many tickets are 15 being sold at that particular point. We have 16 noticed that throughout the day, as tickets 17 continue escalating at the higher and higher level 18 per minute, getting toward that jackpot that night, 19 it gets a lot of attention with the media. 20 For the 85 million, for example, we 21 were selling in excess of 66,000 tickets a minute. 22 And that has gotten more interest with the news 23 media. They've started covering that. So we can 24 do that at the $50-million level. And we also -- 25 not only do we fax that out on an hourly basis, but WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 139 TEXAS LOTTERY COMMISSION - 10-9-01 1 we also put out sales totals for the day as we have 2 that information. 3 Of course, we keep up with any of 4 the occasions where we do bump the jackpot, which 5 is infrequent. We send out additional news 6 releases on that, and we also put that information 7 out on the website as well. So I just wanted to 8 add that. 9 Are you having trouble with it? 10 (Discussion off the record.) 11 MR. ELKINS: Well, at least we can 12 go to the backup plan. 13 I've given you a handout for the 14 PowerPoint presentation on enhanced drawings 15 coverage. And I think we can walk through this 16 fairly simply. 17 This has been an ongoing issue with 18 the Commission for some time now, going back for at 19 least two years. In 1999, a survey was issued out 20 of the marketing division at that time. In early 21 1999, 106 television stations across Texas were 22 surveyed. Twelve stations responded to one of two 23 surveys that were issued. Three stations reported 24 that they aired the Lotto Texas drawing live. Six 25 stations reported that they aired the graphics of WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 140 TEXAS LOTTERY COMMISSION - 10-9-01 1 the drawing results, and one station said that they 2 aired the drawings on a tape-delayed basis. 3 Twelve stations out of 106, 4 unfortunately, is not a very high number of 5 response, but it's kind of typical for a survey 6 when you send out to the news media. 7 In 1999, the survey responses, while 8 they were not carrying the drawings live at that 9 time, was that the time of the drawing was 10 inconvenient due to the networks' seamless 11 advertising programming requirements handed down 12 from their affiliate networks. And they also felt 13 that the length of the drawing was simply too much 14 time to give up for a commercial time slot. 15 At that time in 1999, the 16 recommended changes as a result of that survey were 17 to change the time of the drawing, make the shorter 18 time of the drawing -- try to tighten it up a 19 little bit, and possibly compensate the station for 20 airing the live drawings. In television, there are 21 at least 20 TV markets, and to purchase time in 22 each one of those markets to air a live drawing 23 would simply be cost prohibitive for the 24 Commission. So that option was ruled out. 25 In the fall of 2000, after I WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 141 TEXAS LOTTERY COMMISSION - 10-9-01 1 returned to the agency, the second tour of duty, I 2 instructed the broadcast manager at that time to 3 send out a similar survey to our stations. That 4 survey was sent out in November of 2000. 5 One hundred TV stations were surveyed. Again, we 6 had a low response rate. In January of 2001, a 7 second survey was mailed to the TV stations, and 8 that was followed up with a third identical survey 9 in March 2001 that was conducted by telephone. 10 We had a little bit better response 11 from the three efforts. Of the stations surveyed, 12 47 percent responded, representing 22 individual 13 TV stations, saying that they did carry Lotto 14 Texas. Sixty-two percent said that they aired the 15 results of the graphics only. Seventy percent 16 reported that they would prefer shorter drawings. 17 Fifty-one percent of the stations 18 expressed an interest in a later time slot for the 19 drawings if that was coupled with a chance to 20 provide local sponsorships and keep some revenue 21 for the station. Sixty-nine percent of the 22 stations also indicated that they were interested 23 in having their websites linked to the Texas 24 Lottery Commission's home page in return for 25 carrying drawings live so that our players might be WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 142 TEXAS LOTTERY COMMISSION - 10-9-01 1 able to find out which station in their area was 2 covering the drawing. 3 COMMISSIONER WHITAKER: What does 4 that mean that they would carry the drawings live 5 if we linked -- allowed them to link to our 6 website? 7 MR. ELKINS: The issues -- the 8 two issues that we have been facing, 9 Commissioner Whitaker, is why the stations are 10 not carrying the drawings live. And then in 11 return, our players constantly are asking us, 12 either through our correspondence section 13 or through our retailers, why aren't you 14 providing the drawings live or where can I see 15 the drawings live. 16 What we told the TV stations was, if 17 you carry us live, would you be willing to have 18 your home page linked to ours. 19 It would work like this: The player 20 would be able to go to our home page. There would 21 be an icon that might say something like "Live TV 22 Stations." They could click there, and they could 23 go to the map of the State of Texas. If you lived 24 in Abilene or Amarillo or Corpus Christi, you could 25 click on your city, and then you would see a list WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 143 TEXAS LOTTERY COMMISSION - 10-9-01 1 of hyperlinks to those stations that would be 2 carrying us live so that you would be able to see. 3 That's what that question was about. 4 Twenty-seven percent of the stations 5 responded that they do not currently have a 6 website, but they would be interested in having 7 their station call letters listed on the TLC 8 website. Again, I think what this demonstrates is 9 it's -- it would be some sort of a symbiotic 10 partnership with the stations, if you will. They 11 would be getting a benefit because we would be 12 sending viewers toward them. If somebody was 13 looking for the draw, we would be getting the 14 benefit because we could tell our players where it 15 was. 16 Analyzing the results from the 2000, 17 2001 surveys, our drawings are being aired in at 18 least half of Texas' TV markets -- about 13. But 19 that's only approximately 39 percent of all TV 20 households in Texas. We have no live coverage, for 21 example, in Texas' largest markets -- Dallas and 22 Houston -- which also are our largest sales 23 markets. 24 And there is limited live coverage 25 in the San Antonio market and here in Austin. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 144 TEXAS LOTTERY COMMISSION - 10-9-01 1 We're on -- I think it's News 8, Time Warner Cable, 2 but I don't think that any of the three TV stations 3 are routinely carrying us live each night. We did 4 see, when we had the Lotto fever return in March of 5 this year with the $85-million jackpot, some 6 stations that do not carry us live carried us live 7 that night and in some of the preceding drawings 8 leading up to that because the interest had 9 returned. But they're not carrying us on a regular 10 basis. 11 Having analyzed all of these surveys 12 over the last few years, we have made a 13 recommendation to the executive director that we 14 believe that it would be best to shift the draw 15 time, which is currently at 9:59 for all of our 16 drawings right now -- in the evening -- to 17 approximately 10:12 or 10:14 p.m. at night. That 18 is about the time that most of all the TV stations 19 across Texas have finished their hard news segment 20 and are moving into weather or possibly sports. 21 It's a little lighter time for them. 22 The other thing that some of the 23 stations indicated to us this past summer, when we 24 attended the Texas Association of Broadcasters 25 Conference in San Antonio, was that in some cases, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 145 TEXAS LOTTERY COMMISSION - 10-9-01 1 it's kind of anticlimactic by the time they come on 2 the newscast. They have a reporter possibly live 3 at our studio or at some retail headquarters. All 4 they can do is say, well, just moments ago, the 5 Texas Lottery had a drawing. We'll hope to tell 6 you if somebody won in this area a little bit later 7 in the newscast. 8 By shifting the draw times, it was 9 appealing to them because they could be live before 10 the event happened, and they could say to their 11 viewers: Stay tuned for us. Just coming up in 12 just a few minutes, we'll have a drawing, and we'll 13 tell you, hopefully, if somebody won. 14 There's more of a buy-in there as 15 well. The excitement would be there. 16 The other thing that could happen if 17 we shift the draw time here, because of, 18 Commissioner Criner, your window on Sixth Street, 19 once we have a crowd out there, we could possibly 20 show video of the crowds, send that up to satellite 21 feed, stations around the state, pull that down. 22 And if they wanted to show that, 23 they could say, here's a long line outside in 24 Austin on Sixth Street getting ready for tonight's 25 drawing coming up just moments from now. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 146 TEXAS LOTTERY COMMISSION - 10-9-01 1 That would be an added feature that 2 we could provide to them -- since we already have 3 that satellite -- at the time. 4 In addition to shifting the draw 5 times, we recommended to Ms. Cloud that we shorten 6 the length of the Lotto Texas drawing to a minute 7 or less, which we have currently been able to do. 8 We would also encourage local sponsorship for the 9 stations. What this means is the station would 10 have the opportunity to possibly go out and get a 11 car dealer or somebody that is one of their loyal 12 advertisers to sponsor the Lotto Texas drawing or 13 Pick 3 or Texas Two Step -- whichever the case 14 might be -- Cash 5. 15 And they could simply come on and 16 say, tonight's Lotto Texas jackpot brought to you 17 by Henna Chevrolet, for example; and then go 18 straight into the live drawing. And then as they 19 come out of that, say good luck from Henna 20 Chevrolet and the Texas Lottery -- whoever their 21 advertiser is. 22 That would be a small portion of 23 advertising; not in the true sense of a 30-second 24 commercial, but there would be some sponsorship 25 advertising that the station would have. It would WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 147 TEXAS LOTTERY COMMISSION - 10-9-01 1 be an incentive for them to give up that time for 2 us in return for showing the live drawing. 3 And then, of course, as I mentioned 4 earlier, we would develop the TLC website tie-in to 5 the station, which we could show some -- we could 6 drive some viewers to them. The other advantage to 7 doing that is, as you know, you can monitor website 8 statistics a lot easier than you can monitor 9 viewership statistics. 10 I think that over time, we could go 11 to other competitors in that region and say this is 12 how many people we know have come to our website 13 looking for somebody in your area of station that 14 they could find a drawing on. 15 And that might encourage them to 16 also do it. 17 When we talked to the TV stations 18 and we offered these various opportunities -- that 19 we might shift the draw time to 10:12 to 10:14; we 20 might offer them a chance to do local sponsorships, 21 for example; we would offer them a tie-in to the 22 TLC website -- we had one station in every market, 23 all 20 markets across Texas, that indicated to us 24 if we did those things, that they would carry our 25 drawings live, especially for the Lotto Texas game; WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 148 TEXAS LOTTERY COMMISSION - 10-9-01 1 maybe not all games, but the Lotto Texas drawing, 2 they would. 3 If that were to happen, we would 4 have 100 percent of the TV markets in Texas 5 represented by at least one station carrying the 6 drawings live. We could put that on the website so 7 we could drive our players and viewers there as 8 well. 9 We would avoid the need for 10 exclusivity. There has been talk through the years 11 of possibly doing what some of the other lotteries 12 around the country have had to do, which is offer 13 an exclusive arrangement to simply one station. It 14 works better in some other states than it does in 15 Texas because they only have one or two or possibly 16 three TV markets that cover the state. They may 17 have one dominant station that picks up 90 percent 18 of the population. We don't have that in Texas. 19 The other thing in Texas that we 20 have is a very loyal competitiveness amongst the 21 TV stations. What we've heard in the past is, 22 while I may not be carrying you live now, if you 23 prevent me from carrying you live in the future, I 24 may fight you on that because we believe it is a 25 government service and you don't have the right to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 149 TEXAS LOTTERY COMMISSION - 10-9-01 1 do that. 2 It's an issue that we would 3 certainly have to tackle. I think we would avoid 4 any need for that if we simply continue to make it 5 available to all the commercial outlets out there. 6 They can pick it up. If their competition is, they 7 may be inclined to do that as well. I would much 8 rather be on four network affiliates in any given 9 market than on just one, just for the competition 10 standpoint. And again, we would also be able to 11 provide players with local information where they 12 could see the drawings. 13 We have also talked with the 14 marketing and financial divisions about this 15 shifting the time from -- the draw break right now 16 is at 9:45 p.m., when we stop selling tickets for 17 the drawing that takes place at 9:59. We would 18 probably have to shift that draw break, which was 19 included, I believe, in the rule changes, allowing 20 Linda the opportunity to change the time like that. 21 We would probably change the draw 22 break, I'm assuming, to about 10:00, and return for 23 the 10:12 to 10:14 drawing. And I'm told by the 24 marketing and financial departments that it would 25 have minimal impact on sales because people are not WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 150 TEXAS LOTTERY COMMISSION - 10-9-01 1 buying tickets during that 15-minute window now, as 2 it is, in large numbers. 3 COMMISSIONER WHITAKER: If we were 4 to go with these recommendations of the 106 TV 5 stations that you talked about, how many do you 6 think would cover it? 7 MR. ELKINS: Well, I can tell you 8 right now that we have 22, at least, that are 9 carrying us live, and at least 20 have said that 10 they would carry us live. I think that of the 106, 11 we would probably realistically be looking in the 12 neighborhood of 40 to 50 stations at least. 13 COMMISSIONER WHITAKER: So about 14 doubling what we have now? 15 MR. ELKINS: Yes, ma'am. 16 COMMISSIONER WHITAKER: You 17 mentioned somewhere in here about their possibly 18 requiring payment to do that. 19 MR. ELKINS: Well, they would not 20 require payment. What I mentioned earlier was that 21 in the 1999 survey that was conducted by the 22 marketing division, one of the options, I believe, 23 was that we look at buying time to air our drawings 24 live. 25 And if we were to do that, the cost WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 151 TEXAS LOTTERY COMMISSION - 10-9-01 1 would simply be prohibitive. The 10:00 news -- the 2 commercials for the 10:00 newscast are your premier 3 rates. That's the highest -- that's where they 4 have most of their viewers. It would be cost 5 prohibitive for us to do that. 6 And in return for the local 7 sponsorship, they could charge their advertisers 8 and then retain that money because that would just 9 be like selling a commercial to them. But it would 10 not be a cost to the agency. 11 COMMISSIONER WHITAKER: On the local 12 sponsorship issue, what would be issues that we 13 need to consider concerning which particular 14 sponsor and the reputation of that particular 15 sponsor, how that would perhaps impact or reflect 16 on the Lottery? 17 MR. ELKINS: It would need to be a 18 similar arrangement to what we currently have with 19 our logos, the usage of our logos or trademarks 20 with the Texas Lottery. As you know, we have a 21 policy now that we don't open it up just to 22 everyone. We don't allow people that might have 23 some interest in, say, alcohol or some other type 24 of thing -- smoking -- that we would be opposed to. 25 We retain the right to prevent them from doing WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 152 TEXAS LOTTERY COMMISSION - 10-9-01 1 that. 2 We would want to enter into the same 3 sort of arrangement with TV stations, giving them 4 as much flexibility as we could so that we're not 5 tying their hands, but letting them know these are 6 our guidelines and these types of advertisers we 7 prefer not to be in sponsorship with us. 8 COMMISSIONER WHITAKER: So that's an 9 issue you've worked with before -- 10 MR. ELKINS: Yes, ma'am. 11 COMMISSIONER WHITAKER: -- and 12 that's not a problem? 13 MR. ELKINS: I don't know that I'll 14 say it's not a problem. The intellectual property 15 issue facing the Texas Lottery, as well as, I 16 think, corporate America these days, continues to 17 be a challenging issue. It's not one that I don't 18 think that we couldn't work through. 19 MS. KIPLIN: I think that we 20 targeted the issues that need to be further 21 explored. We have very capable outside counsel for 22 intellectual property matters, and I would 23 obviously want to seek their counsel on how to set 24 this up if we were to go forward. 25 I also want to look into the WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 153 TEXAS LOTTERY COMMISSION - 10-9-01 1 potential procurement issues in terms of 2 sponsorships and see how we can work through those 3 issues. I think we've targeted the issues. It's 4 now -- 5 COMMISSIONER WHITAKER: That strikes 6 me as a little bit complex. 7 All right. And then my final 8 question is, could we have television so that the 9 folks on Sixth Street, looking through the Criner 10 window, could see themselves? 11 MR. ELKINS: We do have TV monitors 12 that face out on Sixth Street and also face into 13 the viewing area in the new studio. They can see 14 the drawing at this particular time. We don't have 15 a way for them to see themselves. We are currently 16 working to have external audio added on the Sixth 17 Street side so they can hear. 18 And we are also looking into the 19 possibility of being able to add some other 20 programming leading up to the drawing so that they 21 will possibly be able to look at some of our video 22 news releases or other aspects about the lottery, 23 possibly some of the steps that the draw team goes 24 through. 25 COMMISSIONER WHITAKER: And are we WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 154 TEXAS LOTTERY COMMISSION - 10-9-01 1 going to more prominently display a sign so that as 2 you walk by -- 3 MS. CLOUD: The signs are going to 4 be -- that part of our construction is not quite 5 complete. We still have the claim center sign on 6 that side of the building. It will be moved to the 7 other end, and the studio name will be identified 8 on the outside of the building. We have a sign 9 ordered for right out in front of the door here in 10 the courtyard area. 11 COMMISSIONER WHITAKER: Okay. 12 MR. ELKINS: Unfortunately, we do 13 have some limitations about how we can advertise on 14 the Sixth Street side because of some historical 15 considerations. And back to your question earlier 16 on the procurement of the sponsorships and on the 17 advertisements, actually, as it is now, commercial 18 stations could be doing some of this without us. 19 There is no way that I know that -- they don't have 20 to have our permission to say that Henna 21 Chevrolet -- to use the same example again -- is 22 currently responding to this. They can do that 23 without us now. There is no prohibition to that. 24 CHAIRMAN CLOWE: But they can't put 25 our logo on a lead that runs into the drawing with WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 155 TEXAS LOTTERY COMMISSION - 10-9-01 1 their name on it. 2 MR. ELKINS: I don't know that they 3 can, and I don't know that they can't. I would 4 have to seek legal -- 5 MS. KIPLIN: We'll look into it. 6 CHAIRMAN CLOWE: I think we all 7 share in Commissioner Whitaker's concern, you know, 8 that we don't want, if we can avoid it, the kind of 9 problem that other state agencies have run into, 10 where entities, industries, have taken up 11 advertising and it's reflected as being that other 12 than which the agency wants to be identified with. 13 Is that stated generally enough? 14 MR. ELKINS: Yes, sir. And I 15 understand and I hear exactly what you're saying. 16 I will say that of all the issues that I've been 17 involved in and all the options trying to address 18 this, the recommendations we may not think are the 19 best for the agency at trying to get the station 20 coverage, and I think we can work out a mutual 21 arrangement with the stations. 22 They have all indicated to me that 23 they want to help us in whatever way they can if we 24 will help them. And where we've had the issue over 25 logos or trademarks in the past, I think we've WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 156 TEXAS LOTTERY COMMISSION - 10-9-01 1 always been able to work that out satisfactorily. 2 Any other questions? 3 CHAIRMAN CLOWE: Keith, we want to 4 congratulate you on this. This is good, creative 5 work. And as you know better than I do, certainly, 6 you've got to promote and you've got to sell. And 7 you may have a great product, but you have to get 8 it out there. This is very professional, and I 9 certainly think you're on the right track. 10 How long was the video production 11 before you cut it down to one minute? 12 MR. ELKINS: I don't remember the 13 exact time, but I want to say that for Lotto Texas 14 right now, the Lotto Texas drawing itself is just 15 under 30 seconds, I think. For the Lotto Texas and 16 the Pick 3, it may be about a minute or just over a 17 minute. 18 On those drawing nights when we have 19 three games, I think that it's in excess of a 20 minute and a half. We're constantly looking for 21 ways to get the information out there without 22 lengthening it any. Some of the ways that we've 23 reduced the time, the new machines are a little 24 quicker than some of the other machines, so the 25 actual process time of the balls falling and being WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 157 TEXAS LOTTERY COMMISSION - 10-9-01 1 recorded is a little less. And since we've moved 2 over to this studio, we've also noticed that there 3 is a little bit of an increase, for whatever 4 reason. 5 So our broadcast studio manager, 6 Mr. Glenn Hill, continues looking at that, trying 7 to keep it as short as possible for the benefit of 8 the stations but also to be able to get the message 9 out clearly and succinctly. 10 CHAIRMAN CLOWE: That's good. And 11 when you are where you want to be on the production 12 style, I know that one of the things that Linda 13 spoke about was an improved format as a result of 14 moving the operation here and the taking over of 15 that by the new people. 16 And we would like to see some of 17 those draws here in a Commission meeting, so when 18 you will compile -- when you can and when you're 19 ready to compile some tapes on drawings of, you 20 know, Texas Lotto, the 3 and 5 draw game, and -- 21 let's see those when it's put on the agenda and 22 show the Commission what's happening over there, if 23 you will. 24 MR. ELKINS: We can have that ready 25 for you by the next meeting if you would prefer. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 158 TEXAS LOTTERY COMMISSION - 10-9-01 1 CHAIRMAN CLOWE: Very good. 2 MR. ELKINS: The only other thing I 3 might add very quickly is in addition to the TV 4 station enhancement, trying to get more stations to 5 carry it, we continue to have success with the 6 Internet streaming of the video. 7 I will tell you our website 8 coordinator just provided some statistics to me -- 9 and I haven't even been able to share these with 10 Linda yet, but in August we had 367,402 people that 11 visited our website. Of course, we just started 12 doing the web streaming in September -- 13 September 1st. Since then, we have had 6,063 14 viewers who have gone to our website to actually 15 look at the drawing. 16 There are two things we have noticed 17 in trending. One thing is that fewer and fewer 18 people are looking at the archived drawings that we 19 have. They go up -- it takes about two hours to 20 get them on, following the drawing. They have 21 digitize the video into the computer system and 22 then archive it in such a way that people can 23 access it. We've noticed that fewer people are 24 actually accessing archived video, but they are 25 definitely still coming to the website. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 159 TEXAS LOTTERY COMMISSION - 10-9-01 1 So the number one thing that they 2 want, according to our website analysis, is they 3 want the winning numbers. That's all they want. 4 They don't necessarily see the draw, but they want 5 the winning numbers. 6 But the increase in the number of 7 people that are actually coming to the website to 8 watch the live draw is starting to trend upward as 9 well. It's still a little early. We haven't 10 really promoted that feature yet because we're 11 getting ready for the grand opening of both the 12 studio and the claim center, and we were going to 13 roll all this out at one time. We expect that that 14 trend will probably stay the same. But what it 15 tells us is that if we can put the information on 16 the website of what the winning numbers are in a 17 prominent fashion so that the players can easily 18 access those, we are providing a service that they 19 definitely want. 20 And then for those viewers that want 21 to come back and watch the drawing live, they're 22 doing that. And then the archived video is there 23 as long as they want to come back and see that. 24 COMMISSIONER WHITAKER: How quickly 25 do we know where in the state the winning prize was WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 160 TEXAS LOTTERY COMMISSION - 10-9-01 1 drawn from? 2 MR. ELKINS: It is generally within 3 about 20 to 30 minutes, depending on the volume of 4 tickets sold and the level of the jackpot. The 5 drawing takes place at 9:59. We may know at 10:20 6 to 10:30 if there was a winning ticket and where 7 that winning ticket was sold, at least the city. 8 We don't always know the retailer until maybe later 9 that night or the next day. But that night, we 10 usually know if there was one or two or three 11 winning tickets in the cities that they were in. 12 COMMISSIONER WHITAKER: Do we post 13 that immediately? 14 MS. CLOUD: Yes. 15 MR. ELKINS: We post it on our 16 website, and then numerous of the communications 17 staff also provide that directly to the news media 18 between the 10:30 and 11:00 hour so that they can 19 get the word out as well. 20 MS. KIPLIN: But I have to be the 21 lawyer now and be a little bit persnickety. We 22 kind of use the word "winning ticket." It's not a 23 winning ticket until that ticket is actually 24 presented to the agency -- 25 MR. ELKINS: The six of six ticket, WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 161 TEXAS LOTTERY COMMISSION - 10-9-01 1 I'm sorry. 2 MS. KIPLIN: -- and determined to be 3 valid. It's a match, it's a six of six, but we've 4 actually had in the past where our position was 5 that illegal conduct was involved in the 6 acquisition of that ticket, which made that ticket 7 void. And so -- 8 COMMISSIONER WHITAKER: That's being 9 corrected? 10 MS. KIPLIN: Yeah. 11 So it's a six of six. 12 CHAIRMAN CLOWE: Keith, I know you 13 don't -- you're not asking us for a motion. Do you 14 want some indication of the commissioners' reaction 15 to this today? 16 MR. ELKINS: If you would like to 17 provide that. I wanted you to know the direction 18 that we were recommending to Linda -- 19 CHAIRMAN CLOWE: Okay. 20 MR. ELKINS: -- and the rule change 21 would address her ability to do that as far as 22 shifting the draw break time. I think that's the 23 only thing. 24 CHAIRMAN CLOWE: So you're not 25 asking us; you're talking to her at this point. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 162 TEXAS LOTTERY COMMISSION - 10-9-01 1 MS. CLOUD: Well, I mean, we wanted 2 you to be fully aware of the research that had been 3 done and be informed about this before it happens. 4 MR. ELKINS: I would only say I 5 welcome your input at any time, Commissioners. 6 CHAIRMAN CLOWE: I, for one, would 7 have no objections to moving it if the results 8 would be positive. I don't stay up that late, 9 anyway. 10 MR. ELKINS: Well, actually, I've 11 heard from some members of the marketing staff. 12 They think that if we were to move from 9:45 to 13 10:00 and extend that extra 15 minutes, we may 14 actually increase sales because a lot of people are 15 still in line, especially on the big, heavy jackpot 16 nights, wanting to buy. 17 COMMISSIONER WHITAKER: I mean, I 18 like it and I really appreciate the creative 19 thought that went behind it -- 20 MR. ELKINS: Thank you. 21 COMMISSIONER WHITAKER: -- and the 22 snappy presentation. 23 MR. ELKINS: Thank you. I'm sorry 24 about the PowerPoint, but -- 25 CHAIRMAN CLOWE: Doesn't anything WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 163 TEXAS LOTTERY COMMISSION - 10-9-01 1 ever work? 2 MR. ELKINS: Thank you very much. 3 CHAIRMAN CLOWE: Thank you. 4 Commissioners, we're now at Item 14. 5 And the executive director has indicated that she 6 would like to discuss the negotiation of the 7 lottery operator's contract in the Executive 8 Session. And therefore, I move that the Commission 9 authorize that be put on the agenda for Executive 10 Session. 11 CHAIRMAN CLOWE: Seconded? 12 COMMISSIONER WHITAKER: Second. For 13 the same reason as before. 14 CHAIRMAN CLOWE: All in favor, say 15 aye -- 16 COMMISSIONER WHITAKER: Aye. 17 COMMISSIONER CRINER: Aye. 18 MS. KIPLIN: Well, I would say that 19 the statute requires you to make a written 20 determination that you need to go into the closed 21 session because of the nature of the negotiations 22 and to have that in the public would disclose the 23 strategy and impair your ability to negotiate a 24 contract. 25 I have prepared the written WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 164 TEXAS LOTTERY COMMISSION - 10-9-01 1 determination -- 2 CHAIRMAN CLOWE: I thought maybe you 3 had. 4 MS. KIPLIN: -- and I would -- 5 CHAIRMAN CLOWE: Do we have to read 6 the whole thing? 7 MS. KIPLIN: No. But I would want 8 you to make a motion that would adopt my comments. 9 CHAIRMAN CLOWE: Let me read them 10 first. 11 MS. KIPLIN: Yeah. And I'll 12 represent to you that that document is unchanged 13 from the preceding time in terms of entering into 14 that. So I would think that you would want to make 15 a motion indicating that you've determined that to 16 discuss those negotiations and strategies in the 17 open would impair your ability to negotiate a 18 contract. 19 CHAIRMAN CLOWE: So moved. 20 COMMISSIONER WHITAKER: Second. 21 CHAIRMAN CLOWE: It's seconded. 22 All in favor say aye; opposed, no. 23 The vote is 3-0 in favor. 24 At this time, I move the Texas 25 Lottery Commission go into Executive Section to WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 165 TEXAS LOTTERY COMMISSION - 10-9-01 1 deliberate the duties and evaluation of the 2 executive director, internal auditor, and 3 charitable bingo operations director, pursuant to 4 Section 551.074 of the Texas Government Code; 5 To deliberate the duties of the 6 general counsel and security director, pursuant to 7 Section 551.074 of the Texas Government Code; 8 To receive legal advice regarding 9 pending or contemplated litigation and/or 10 to receive legal advice, pursuant to 11 Section 551.071 (1) (A) or (B) of the Texas 12 Government Code and/or to receive legal advice 13 pursuant to Section 551.071 (2) of the Texas 14 Government Code, including but not limited to: 15 TPFV Group, Inc. versus Texas 16 Lottery Commission; Retired Sergeant Majors' 17 Association et. al. versus Texas Lottery Commission 18 et. al.; 19 Contract regarding the charitable 20 bingo system employment law, personnel law, 21 procurement and contract law, general government 22 law, and lottery operator contract; 23 To deliberate the negotiation of the 24 lottery operator's contract, pursuant to 25 Section 467.030 of the Texas Government Code. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 166 TEXAS LOTTERY COMMISSION - 10-9-01 1 In connection with the deliberation 2 of the negotiation of the lottery operator's 3 contract, based on consultation with the 4 Commission's general counsel, it is my 5 understanding that the amendment to Section 467.030 6 of the Texas Government Code allows the Commission 7 to have a closed meeting if it determines in 8 writing that an open meeting would have a 9 detrimental effect on the Commission's position in 10 the negotiation. The Commission has made such a 11 determination today. 12 Is there a second? 13 COMMISSIONER CRINER: Second. 14 CHAIRMAN CLOWE: All in favor say 15 aye. 16 The vote is 3-0 in favor. 17 The Texas Lottery Commission will 18 now go into Executive Session. The time is 19 11:56 a.m. Today is 9 October 2001. Thank you. 20 (EXECUTIVE SESSION.) 21 CHAIRMAN CLOWE: The Texas Lottery 22 Commission came out of Executive Session at 2:53, 23 and there was no action to be taken. And 24 therefore, we are ready to go to the only case we 25 have to make a determination on, which is agenda WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 167 TEXAS LOTTERY COMMISSION - 10-9-01 1 Item No. 17. 2 Kim, will you help us with this? 3 MS. KIPLIN: Yes, I'll be glad to. 4 Commissioners, this is a bingo 5 contested case proceeding. The respondent in this 6 case is a conductor, Maverick Boys and Girls Club 7 of Amarillo. 8 The allegation in this case was a 9 failure to timely file a renewal application. The 10 matter went to a contested case proceeding. The 11 administrative law judge found that the application 12 was not timely filed, the renewal application, and 13 therefore has recommended denial of that renewal 14 application. 15 Staff recommends that you enter the 16 order that is consistent with the Proposal For a 17 Decision and those findings in those provisions. 18 CHAIRMAN CLOWE: Bill, do you have a 19 comment on this? 20 MR. SANDERSON: No, sir, I don't; 21 just staff recommendations to go ahead and agree 22 with the PFD. 23 COMMISSIONER WHITAKER: So moved. 24 COMMISSIONER CRINER: Seconded. 25 CHAIRMAN CLOWE: It's moved and WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 168 TEXAS LOTTERY COMMISSION - 10-9-01 1 seconded. All in favor, please say aye. 2 The vote 3-0 in favor. If you'll 3 sign the order. 4 And then Linda will go to Item 18, 5 which is your report. If you'll give us just a 6 minute here, if you will. 7 (Brief pause in proceedings.) 8 Thank you. 9 CHAIRMAN CLOWE: Linda, will you 10 proceed, please. 11 MS. CLOUD: Yes. 12 Commissioners, with the financial 13 report on September 14th, we transferred to the 14 Foundation School Fund $8,320,907, giving us a 15 total transfer since startup of $8,865,000,399.21. 16 We don't have a HUB report today. 17 Robert will be presenting a HUB report at the next 18 commission meeting. 19 COMMISSIONER CRINER: I was 20 wondering if we were out of HUBs. 21 MS. CLOUD: We're out of HUBs. 22 (Laughter.) 23 MS. CLOUD: No, no. He has a report 24 to present at the next meeting. Nothing new to 25 update you from the last meeting. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 169 TEXAS LOTTERY COMMISSION - 10-9-01 1 FTE totals, we have 316 active FTEs. 2 We have 18 vacant positions at this time. Two are 3 in the selection/acceptance pending; 9 in the 4 recruiting, screening, and interviewing. There are 5 no positions being posted at this time, and there 6 are 7 vacant positions with no activity at this 7 time. 8 Under Lottery conferences, we have 9 the national conference starting on Friday and 10 going through Tuesday in Albuquerque, New Mexico. 11 I will be leaving Thursday. I have to be there for 12 the executive committee meeting for the national 13 conference on Thursday. 14 The town hall meetings, our next 15 town hall meeting will be in El Paso on 16 October 30th. 17 And that's my report, Commissioners. 18 CHAIRMAN CLOWE: Any questions? 19 Phil, would you make the charitable 20 bingo operations report, please. 21 MR. SANDERSON: Yes, sir. 22 Commissioners, in Billy Atkins' 23 absence, I've prepared the report for the 24 charitable bingo division. There are no vacancies 25 within the division, with the exception of the one WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 170 TEXAS LOTTERY COMMISSION - 10-9-01 1 that's being held for an FTE; that's a temporary 2 contract. 3 There has been no change in the 4 project of the bingo system since the last meeting. 5 The next BAC meeting was originally scheduled for 6 tomorrow and has been canceled and rescheduled for 7 February 13. There may be a special meeting called 8 before then, but we don't have a date for that yet. 9 Quarterly reports went out at the 10 end of September to end the third quarter of 2001. 11 October 15th is the due date for those returns. 12 The only upcoming conference is the world gaming 13 conference next week in Las Vegas. 14 The bingo operator training program 15 continues. We had 44 people attend our September 16 training sessions, representing 20 organizations. 17 As of September 21st, there 130 organizations that 18 had failed to send a representative to one of the 19 training programs. We've notified them by letter, 20 informing them that they need to send somebody to 21 the next class. 22 Of those 130, there were 26 that 23 have either signed someone up or they have provided 24 documentation that someone did attend for their 25 organization. WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 171 TEXAS LOTTERY COMMISSION - 10-9-01 1 That's all I have to report for 2 bingo, sir. 3 CHAIRMAN CLOWE: Very good. Any 4 questions for Phil? 5 Is there anyone here who wishes to 6 make public comment to the Commission at this time? 7 Seeing none, the Commission has made 8 the determination that it will make an attempt to 9 announce commission meetings one month prior to the 10 time of the meeting and thereby give staff and the 11 public notice as to a commission date each month. 12 And we're going to do that in the public session, 13 where it's been done informally in the past between 14 the members of the staff and the individual 15 commissioners. 16 So you're going to have to bear with 17 us in deciding what's the best day in November. 18 But hopefully, that will give everyone a target to 19 shoot for, and we've been told that will be 20 helpful. 21 Commissioners, what's your pleasure? 22 COMMISSIONER WHITAKER: Well, I 23 understand that the 5th is really bad for -- I 24 would prefer the 5th; if that's not possible, the 25 6th. Everything else through the 7th is booked for WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 172 TEXAS LOTTERY COMMISSION - 10-9-01 1 me. Then later on in the month, I have open dates. 2 COMMISSIONER CRINER: How about the 3 6th. 4 COMMISSIONER WHITAKER: Okay. 5 CHAIRMAN CLOWE: Going once? Okay. 6 Then the Commission will set -- 7 that's election day. 8 COMMISSIONER CRINER: Is it? 9 CHAIRMAN CLOWE: Is there an 10 election on November the 6th? 11 MS. TREVINO: Constitutional 12 amendments. 13 CHAIRMAN CLOWE: Is there a conflict 14 there for anybody? 15 MS. KIPLIN: State government is 16 open as far as I know. 17 CHAIRMAN CLOWE: Hearing none, the 18 Commission will plan to meet on Tuesday, 19 November 6, at 8:30 a.m. 20 Is there any other business to come 21 before the Commission at this time? 22 We are adjourned. Thank you all 23 very much. 24 (Meeting adjourned at 3:03 p.m.) 25 WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363 173 TEXAS LOTTERY COMMISSION - 10-9-01 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, SUZANNE T. LANE, Certified Court 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter 10 set out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 16 Witness my hand on this the _______ 17 day of ______________, 2001. 18 19 20 SUZANNE T. LANE 21 Texas CSR No. 6992 Expiration Date: 12/31/01 22 1609 Shoal Creek Boulevard Suite 202 23 Austin, Texas 78701 (512) 474-4363 24 25 JOB NO. 011009STL WRIGHT WATSON STEN-TEL (800) 375-4363 (512) 474-4363