1 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 6 THURSDAY, NOVEMBER 4, 2010 § 7 8 COMMISSION MEETING 9 THURSDAY, NOVEMBER 4, 2010 10 11 BE IT REMEMBERED THAT on Thursday the 4th day 12 of November 2010, the Texas Lottery Commission meeting 13 was held from 9:05 a.m. to 11:35 a.m., at the Offices of 14 the Texas Lottery Commission, 611 East 6th Street, 15 Austin, Texas 78701, before CHAIRMAN MARY ANN 16 WILLIAMSON and COMMISSIONER J. WINSTON KRAUSE. The 17 following proceedings were reported via machine 18 shorthand by Aloma J. Kennedy, a Certified Shorthand 19 Reporter of the State of Texas, and the following 20 proceedings were had: 21 22 23 24 25 2 1 APPEARANCES 2 CHAIRMAN: 3 Ms. Mary Ann Williamson 4 COMMISSIONERS Mr. J. Winston Krause 5 OFFICE OF THE GENERAL COUNSEL: 6 Ms. Sandra Joseph 7 DEPUTY EXECUTIVE DIRECTOR: Mr. Gary Grief 8 TAXPAYER SERVICES MANAGER, CHARITABLE BINGO OPERATIONS: 9 Mr. Bruce Miner 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 TABLE OF CONTENTS 2 PAGE 3 PROCEEDINGS - THURSDAY, NOVEMBER 4, 2010........... 7 4 AGENDA ITEM NO. I - Meeting Called to Order........ 7 5 AGENDA ITEM NO. II - Consideration of and possible discussion and/or action, including 6 adoption, on amendments to 16 TAC §402.604 relating to Delinquent Purchaser................... 7 7 AGENDA ITEM NO. III - Report by the Charitable 8 Bingo Operations Director and possible discussion and/or action on the Charitable 9 Bingo Operations Division’s activities, including updates on staffing, licensing, 10 accounting and audit activities, pull-tab review, special projects, and upcoming 11 operator training.................................. 8 12 AGENDA ITEM NO. IV - Report, possible discussion and/or action on lottery sales 13 and revenue, game performance, new game opportunities, advertising, market research, 14 trends, and game contracts, agreements, and procedures......................................... 8 15 AGENDA ITEM NO. V - Report, possible 16 discussion and/or action on transfers to the State and the agency’s budget status........... 21 17 AGENDA ITEM NO. VI. Report, possible 18 discussion, and/or action on Lottery Operations and Services Contract Amendment 19 No. 8 credit calculation........................... 23 20 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, including 21 adoption, on amendments to 16 TAC §401.315 relating to Mega Millions On-Line Game Rule........ 25 22 AGENDA ITEM NO. VIII - Consideration of and 23 possible discussion and/or action, including adoption, on amendments to 16 TAC §401.308 24 relating to Cash Five On-Line Game................. 27 25 4 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. IX - Report, possible discussion and/or action on the lottery 4 operations and services procurement................ 30 5 AGENDA ITEM NO. X - Report, possible discussion and/or action, including 6 extension on the agency's instant ticket testing services contract, extension on 7 the agency’s statistical consulting services contract, and extension and/or amendment to 8 the agency’s drawings studio and production services contract.................................. 29 9 AGENDA ITEM NO. XI - Report, possible 10 discussion and/or action on the 81st Legislature and/or 82nd Legislature................ 31 11 AGENDA ITEM NO. XII - Consideration of and/or 12 report, possible discussion and/or action on external and internal audits and/or reviews 13 relating to the Texas Lottery Commission, and/or on the Internal Audit Department’s 14 activities......................................... 49 15 AGENDA ITEM NO. XIII - Report, possible discussion and/or action on GTECH Corporation...... 49 16 AGENDA ITEM NO. XIV - Report by the Executive 17 Director and/or possible discussion and/or action on the agency’s operational status, 18 agency procedures, and FTE status.................. 49 19 AGENDA ITEM NO. XV - Consideration of the status and possible entry of orders in: 20 A. Docket No. 362-10-6050 – Abba Kwik Pantry B. Docket No. 362-10-3789 – Allen Food Store 21 C. Docket No. 362-10-5876 – Economy Food & Gas #3 22 D. Docket No. 362-10-5875 – Winkleman Food Mart 23 E. Docket No. 362-10-5604 – Royal Food & Beverage/Lone Star 24 F. Case No. 2010-1011 – Economy Store G. Case No. 2010-1012 – McCart Gas & Food 25 Mart....................................... 50 5 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. XVI - Public comment................ 53 4 AGENDA ITEM NO. XVII - Commission may meet in Executive Session: 5 A. To deliberate the duties and evaluation of the Executive Director pursuant to 6 Section 551.074 of the Texas Government Code. 7 B. To deliberate the duties and evaluation of the Internal Audit Director pursuant 8 to Section 551.074 of the Texas Government Code. 9 C. To deliberate the duties and evaluation of the Charitable Bingo Operations Director 10 pursuant to Section 551.074 of the Texas Government Code. 11 D. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 12 the Texas Government Code. E. To deliberate the duties of the Human 13 Resources Director pursuant to Section 551.074 of the Texas Government Code. 14 F. To receive legal advice regarding pending or contemplated litigation pursuant to 15 Section 551.071(1)(A) and/or to receive legal advice regarding settlement offers 16 pursuant to Section 551.071(1)(B) of the Texas Government Code and/or to receive 17 legal advice pursuant to Section 551.071(2) of the Texas Government Code, including 18 but not limited to: First State Bank of DeQueen et al. v. 19 Texas Lottery Commission Texas Lottery Commission v. Leslie 20 Warren, Texas Attorney General Child Support Division, Singer Asset 21 Finance Company L.L.C., and Great-West Life & Annuity Insurance Company 22 Department of Texas, Veterans of Foreign Wars et al. v. Texas Lottery 23 Commission et al. John Doe v. Texas Lottery Commission 24 and Greg Abbott, Texas Attorney General 25 6 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. XVII (Continued) 4 Employment law, personnel law, procurement and contract law, 5 evidentiary and procedural law, and general government law 6 Lottery Operations and Services procurement and/or contract........... 53 7 AGENDA ITEM NO. XVIII - Return to open session 8 for further deliberation and possible action on any matter discussed in Executive Session....... 54 9 AGENDA ITEM NO. XIX - Adjournment.................. 54 10 REPORTER'S CERTIFICATE............................. 56 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 7 1 P R O C E E D I N G S 2 THURSDAY, NOVEMBER 4, 2010 3 (9:05 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN WILLIAMSON: Good morning. I 6 would like to call the meeting of the Texas Lottery 7 Commission to order. Today is November 4, 2010. The 8 time is 9:05. Commissioner Krause is present, so we 9 have a quorum. 10 AGENDA ITEM NO. II 11 CHAIRMAN WILLIAMSON: The next item is the 12 consideration of and possible discussion and/or action 13 on adoption or amendments to 16 TAC 402.604 relating to 14 delinquent purchaser. 15 Sandy, I believe this is your item. 16 MS. KIPLIN: Commissioners, if I could 17 request that we pass this item. We've had some 18 additional inquiries from members of the bingo industry, 19 and we would like to work with them before we actually 20 present this item for your consideration for adoption. 21 So we look forward to trying to get it before you for 22 next Commission meeting, if y'all are okay with that. 23 CHAIRMAN WILLIAMSON: That's fine. I 24 assume that doesn't require an action on our part? 25 MS. KIPLIN: No, it does not. 8 1 CHAIRMAN WILLIAMSON: All right. Great! 2 AGENDA ITEM NO. III 3 CHAIRMAN WILLIAMSON: Then let's go on to 4 Item No. III, Charitable Bingo Operations Director and 5 report of that division. Phil is out today, so Bruce 6 Miner will provide that for us. 7 Bruce. 8 MR. MINER: Thank you. Madam Chair, 9 Commissioner, in your notebook I have provided you a 10 report for the October activities of the Bingo Division. 11 One thing I want to point out is that the 12 Bingo Advisory Committee meeting is tentatively 13 scheduled for Tuesday, November 30th. If either of you 14 would like to attend, please let us know and we'll be 15 glad to coordinate your schedules. 16 I have nothing further to add. 17 CHAIRMAN WILLIAMSON: Thank you. 18 Commissioner, do you have any questions. 19 COMM. KRAUSE: No, ma'am, I sure don't. 20 CHAIRMAN WILLIAMSON: Okay. Thank you, 21 Bruce. 22 AGENDA ITEM NO. IV 23 CHAIRMAN WILLIAMSON: All right. Let's go 24 on to Item No. IV, report, possible discussion or action 25 on lottery sales, revenue, game performance, new game 9 1 opportunities, advertising, market research. 2 Kathy and Robert, this is your item, 3 please. 4 MS. PYKA: Thank you. Good morning, 5 Commissioners. My name is Kathy Pyka, Controller for 6 the Commission. With me this morning to my right is 7 Robert Tirloni, our Products Manager, and to my left, 8 David Sizemore, our Research Coordinator. 9 Commissioners, our first slide that we 10 have for you this morning reflect comparative sales 11 through the period ending October 30, 2010. Total 12 Fiscal Year 2011 sales through this nine-week period are 13 $574.6 million, a decrease of $44 million compared to 14 the $618.6 million figure for the same period last 15 fiscal year. 16 Our Fiscal Year 2011 instant ticket sales, 17 as depicted on the blue bar, are at $428.1 million, 18 which is a $19.6 million decline from last fiscal year. 19 And our on-line sales reflected on the second red bar 20 are at $146.5 million, a $24.4 million decline from 21 Fiscal Year 2010 sales for the same period. 22 Our next slide for you this morning 23 includes cumulative average daily sales again for the 24 week ending October 30, 2010. Included here are the 25 average sales for Fiscal Year 2009, 2010, and 2011 by 10 1 game. As reflected by the total cumulative sales, our 2 daily sales average for Fiscal Year 2011 is just above 3 $9.5 million, which is a 5.5 percent decline from the 4 prior fiscal year and is a 5.6 percent increase over 5 Fiscal Year 2010. 6 We'll begin with the jackpot games 7 highlighted in white, noting an average daily total of 8 $1.3 million for Fiscal Year 2011, which is a $372,000 9 decline. 10 I would like to focus on where those 11 declines are, and we'll start with Lotto Texas, which is 12 at $476,000, and wanted to note that at this point in 13 time last year, we had a Lotto Texas jackpot that was at 14 $75 million, and we certainly have not seen those 15 jackpot levels this fiscal year. 16 In similar fashion, Mega Millions is at an 17 average daily total of $376,000 for this fiscal year. 18 And at this point in time last fiscal year, we had a 19 $200 million Mega Millions jackpot, and this year we've 20 only had a jackpot up to $140 million. So as you can 21 see, the two decline areas are definitely in the jackpot 22 area. 23 Moving down to the daily games which are 24 highlighted with the green font, you can see that we 25 have a daily average this fiscal year of just under one 11 1 point million dollars, which exceeds the two prior 2 fiscal years. Beginning with our Pick 3 daily average 3 of $741,000, it's about a percent and a half over the 4 last fiscal year, and our Daily 4 sales average is just 5 at 10 percent of an increase over the prior fiscal year. 6 MR. TIRLONI: And, Commissioners, if I can 7 interject one point here. The game that we see on Pick 8 3 we believe is a result of a almost month-long 9 promotion that we ran on the Pick 3 game called our 10 Green Ball promotion. It's the promotional drawing that 11 took place after every regular Pick 3 game drawing, and 12 we do believe that that helped give us that boost on the 13 Pick 3 product. 14 CHAIRMAN WILLIAMSON: Robert, what sort of 15 promotion did y'all do for that? 16 MR. TIRLONI: After every Pick 3 game 17 drawing, we did a subsequent drawing. And in that 18 drawing machine, there were white balls and a green 19 ball. And if we drew the green ball, we increased 20 players' prizes by approximately 20 percent. And there 21 was no extra cost to the player to participate. 22 CHAIRMAN WILLIAMSON: I guess my question 23 is, how was this promoted or marketed to the player? 24 How did they know about this? 25 MR. TIRLONI: Oh, I'm sorry. We had 12 1 numerous point-of-sale pieces at the retail locations. 2 We also had radio reads, and we had website support for 3 that promotion. So it was the first time we have ever 4 done it. I think we have learned some things from it. 5 And we're going to work with Kathy's shop to look at 6 what the ROI was and see if we can maybe run it again in 7 the beginning of the next calendar year. 8 CHAIRMAN WILLIAMSON: Great. Thanks. 9 MS. PYKA: And then last I would like to 10 highlight instant ticket sales. They're at just above 11 $7.1 million, which is a decline of $204,000 from the 12 prior fiscal year. 13 So with that, that's where we stand on the 14 daily average sales comparison. And now Robert will 15 actually highlight sales by game, actual sales for the 16 fiscal year. 17 MR. TIRLONI: Thanks, Kathy. 18 So this next slide is Fiscal Year 2011 19 compared to Fiscal 2010. The slide has the same layout 20 as the previous slide, with the jackpot games up at the 21 top in white. As Kathy mentioned, the declines that 22 we're seeing in Lotto Texas and Mega Millions are 23 results of lower jackpots this fiscal year than last. 24 The Powerball and Powerplay sales, that's 25 still new sales for us, because the Powerball game did 13 1 not start until January of 2010. 2 Again, the middle of the slide is the 3 daily games in green. You'll notice on Pick 3, we're 4 showing a $100,000 decline year-over-year. And I just 5 pointed out on the previous slide that we were up. I 6 want to explain, the reason for that difference is that 7 in Fiscal Year 2011, we have one less day than in Fiscal 8 2010, so that's the reason for that difference there. 9 Overall, the daily games are down just 10 about $400,000. And as Kathy mentioned on the instants, 11 we're also seeing a decline just under $20 million. So 12 overall, year-over-year we are experiencing a 13 $44 million sales decline. 14 I did want to let you know that we are 15 tracking our sales performance compared to other lottery 16 jurisdictions of comparable size. And the states that 17 we're comparing ourselves to are New York, California, 18 Georgia, Michigan and Florida. And this is sales 19 information that GTECH is tracking for us and providing 20 us on a weekly basis. 21 And at this time our sales decline 22 situation seems to be in sync with all of those other 23 jurisdictions that we typically compare ourselves to. 24 So we are obviously going to continue looking at that 25 and monitoring that and working with GTECH and the sales 14 1 force. And if we notice any significant changes, we'll 2 obviously let you know about that. 3 CHAIRMAN WILLIAMSON: Thank you. 4 MS. PYKA: Move on to Dr. Sizemore. 5 DR. SIZEMORE: Thank you. Good morning, 6 Commissioner, Chair Williamson. I am David Sizemore, 7 the Research Coordinator for the Lottery. And today I 8 have the pleasure of presenting to you the public 9 opinion material that we collect on a monthly basis. 10 And what you'll see today are the quarterly roll-ups for 11 that data. 12 And the first slide -- well, I'm sorry to 13 start with the first side. I'll give you some 14 perspective or an overview. 15 This data or these data are drawn from a 16 broader market tracking study that was previously 17 conducted on a monthly basis, and we've been collecting 18 this data since about the 1990s, the mid-1990s. And 19 some of this material that you'll see today dates back 20 to 1994. 21 And in these studies, we present 22 respondents with a battery of questions. And typically 23 we have been surveying about 400 people a month. And 24 what you see here represents, again, the roll-up of 25 1,200, with the exception of the first quarter where we 15 1 have 2,000 respondent. And you can see on the bottom 2 the number of respondents. And that's due to the 3 segmentation study, the larger study of 1,200 people 4 that's included in those quarters. 5 And what we'll be looking at today deals 6 specifically with public opinion regarding how the Texas 7 population feels about the lottery, as well as some 8 follow-up questions. Generally speaking, though, the 9 tracking studies deal with lottery participation and 10 purchases, game awareness and exposure, advertising 11 recall, policy views and image perception, which is what 12 we'll talk about today. 13 We also, in the tracking study, have the 14 opportunity and use it as a mechanism for collecting 15 ad hoc data if there is something that we're 16 specifically interested in, in a given month and over a 17 certain period of time. We'll add in questions that 18 allow us to collect information along those lines, 19 whatever that might be. And today's presentation is 20 about, again, the opinion data. 21 The first slide deals with how well- 22 informed respondents are about the Texas Lottery. And 23 you'll note that a question is actually listed just 24 below the header, "How well informed do you feel about 25 the Texas Lottery?" about who the Texas Lottery is and 16 1 what they do. And in the most recent, quarter, the 2 fourth quarter of 2010, you'll see that about 35 percent 3 of respondents claimed to be informed about what the 4 Texas Lottery is and what it does, while 53 percent 5 claimed to not be informed, and another 12 percent were 6 neutral or didn't have an opinion. 7 COMM. KRAUSE: Question about that. What 8 kind of a response do you get -- what does a response 9 sound like when you categorize it as neutral don't know? 10 DR. SIZEMORE: Well, actually, this is set 11 up on a scale measure so that responses are one to 12 seven. And the middle categories, although you can't 13 answer, "Do not know," "I don't have an opinion," for 14 example, or you can say four, which lands right in the 15 middle, and that would be a neutral response. So one 16 would be not at all informed. Seven would be very 17 informed. 18 COMM. KRAUSE: Okay. So I don't know how 19 informed I am about this, and that gets me a four? 20 DR. SIZEMORE: Or you can say, "I don't 21 know," and you're bumped out into another separate 22 piece, basically. 23 COMM. KRAUSE: Okay. I'm not really sure 24 I see a distinction between the two blues, to tell you 25 the truth, not that that's a comment on the study. I 17 1 just -- you know, if I don't know how well-informed I 2 am, I'm not informed at all, really. 3 DR. SIZEMORE: Correct. That's a good 4 point. 5 COMM. KRAUSE: So anyway . . . 6 DR. SIZEMORE: Yes. And it could be that 7 they simply have no opinion about the question as well, 8 so that's a tough call. Again, it's a scale measure, so 9 you had that chance to say you really like it or you're 10 really well-informed about it or you're not at all 11 informed or you don't know, which I guess you could take 12 as not having an opinion or not being informed as well. 13 It's kind of a subjective call on the viewer's part, I 14 suppose. 15 COMM. KRAUSE: Okay. 16 DR. SIZEMORE: The next slide deals with 17 respondents' overall opinion of the Texas Lottery. 18 Again, the respondents are asked, "How would you 19 describe your overall opinion of the Texas Lottery?" 20 Roughly 50 percent of respondents claimed to have a 21 positive view of the lottery, while 31 percent claimed 22 to have a negative view. And, actually, these are 23 rolled up for the one to seven scores, which might give 24 a little more insight. So one to three would be bundled 25 into the positive side -- or I'm sorry. The 4, 5, 6, 18 1 7 -- 4, 5, 6 and 7 -- sorry -- would be bundled into the 2 positive side, while the 1's, 2's and 3's would be on 3 the negative side or, in this case, negative and 4 positive and the 4's are neutrals. 5 The next slide asks respondents or deals 6 with the question asking respondents whether they 7 thought the lottery was operated fairly and honestly. 8 And again, you can read the question at the top. And 9 this is asked of all respondents as well. 10 And you'll see here that 57 percent of 11 respondents agreed that the Texas Lottery was operated 12 fairly and honestly, while 24 percent disagreed and 13 19 percent were neutral. And one of the main patterns 14 you can notice here, obviously, that over time this has 15 been fairly stable, since Q1'08 I believe. 16 This next slide deals with reasons for why 17 people disagreed that the lottery was operated fairly 18 and honestly. A couple of years ago, this question was 19 added on as a response to a commissioner request dealing 20 with why people thought this way; that is to say, 21 disagreed that the lottery is operated fairly and 22 honestly. 23 So we are asking people in this first 24 slide what the source of that impression is or where 25 it's coming from. This question is open-ended, meaning 19 1 people are free to say whatever they please, once asked 2 the question. The top score for the most recent quarter 3 was, "It's just what I think," or, "It's just my 4 impression," followed by "Lack of information" and/or 5 "Have not heard enough about the lottery" and then 6 "Dishonest," "Not operated fairly" or "Fraud." 7 And with reference to the next slide, that 8 response simply parroted the question, so we wanted to 9 close off those questions and get a more precise 10 understanding of why people disagreed with the lottery. 11 So we followed it up with -- that question with a 12 follow-up closed-ended question that only gave people a 13 very specific set of responses. 14 And here you see that the top score was, 15 "I do not know enough about the operations of the Texas 16 Lottery," followed by, "I don't know where the profits 17 go," and then the respondents considering the lottery 18 profits are not going to education as publicized. 19 Now, I will make note of the second to 20 last group: "I am opposed to the idea of a state-run 21 lottery." And we do see a rather substantial increase, 22 from 33 percent making this claim to 45 percent in the 23 fourth quarter. And you'll also notice the number of 24 respondents on the legend to the right. This is only 25 asked of people who said they disagreed with the 20 1 lottery, so it's not the entire sample of 1,200 people. 2 That's all I have, if you have any 3 questions. Thank you. 4 CHAIRMAN WILLIAMSON: Commissioner? 5 COMM. KRAUSE: No, ma'am. 6 MR. GRIEF: Commissioners, could I add a 7 couple of comments, if I could? My sense is that you're 8 underwhelmed with this volume of information that's been 9 provided to you this morning. And I want to just give 10 you a little bit more background on this. 11 These are just a very small handful of 12 questions that are asked on another very large survey 13 that we do that's very helpful, especially to our 14 marketing and our GTECH colleagues, in helping design 15 our games. So we pulled out just a couple of questions 16 at a former body of commissioners' request for this 17 information. 18 And if you looked at those charts, you 19 notice that the changes over time are very unremarkable, 20 relatively constant. And we had been asked again by a 21 former body of Commissioners to present this to you on a 22 quarterly basis. So, obviously, it's at your pleasure. 23 But if you would prefer us to only bring this to you 24 when we see something that is remarkable or if you had 25 rather have it done on perhaps a less frequent basis, 21 1 perhaps an annual basis, we would be happy to do however 2 you would like to see this. So I just give that to you 3 for your consideration. 4 DR. SIZEMORE: And if I may, we're doing 5 this biannually right now. The last time we presented 6 this was April. 7 CHAIRMAN WILLIAMSON: Okay. 8 COMM. KRAUSE: I'm happy to have the 9 information. I just had that one question about the 10 difference between those responses. You know, I think 11 that any kind of organization has got to have feedback 12 from the customers. 13 CHAIRMAN WILLIAMSON: All right. Thank 14 you. 15 MR. TIRLONI: Thank you. 16 AGENDA ITEM NO. V 17 CHAIRMAN WILLIAMSON: And, Kathy, the next 18 item -- continuing on -- is yours, the transfers to the 19 state and the agency's budget status. 20 MS. PYKA: Thank you, Madam Chair. And 21 again for the record, Kathy Pyka, Controller for the 22 Commission. 23 Commissioners, Tab 5 includes information 24 on agency's transfers to the state as well as our final 25 update on the Fiscal Year 2010 operating budget. The 22 1 first report in your notebook reflects the transfers and 2 allocations to the Foundation School Fund, the Texas 3 Veterans Commission and the allocation of unclaimed 4 prizes for the period ended September 30th of 2010. Our 5 total cash transfers to the state amounted to 6 $67.7 million for the first month of the fiscal year. 7 And the second page of your notebook 8 includes the detail on that transfer. Of the 9 $67.6 million transfer to the state, $66.9 million was 10 transferred to the Foundation School Fund. $740,000 was 11 transferred to the Texas Veterans Commission, with a 12 balance of just over $25,000 transferred from unclaimed 13 lottery prizes. 14 Commissioners, this does represent a 15 $20.5 million decline from where we were last fiscal 16 year. And I wanted to note that well over half of that 17 decline is as a result of the difference in the unspent 18 admin or administrative funds transfer. So I wanted to 19 definitely make sure that that was clear in the 20 presentation. 21 And then the next document in your 22 notebook does include our cumulative transfer 23 information. And as of September of 2010, our 24 cumulative transfers to the Foundation School Fund are 25 now at $12.7 billion. 23 1 And then, Commissioners, the final item 2 under this tab is our final update on the Fiscal Year 3 2010 operating budget. Our lottery account budget for 4 the fiscal year was $207.1 million. And of this amount, 5 we expended 90.8 percent and transferred $19.1 million 6 of unspent administrative funds back to the Foundation 7 School Fund. 8 And the Bingo Operations budget funded by 9 general revenue is $15.3 million, and we did expend 10 95.7 percent of that budget at the end of the fiscal 11 year. 12 This concludes my presentation. I would 13 be happy to answer any questions that you might have. 14 CHAIRMAN WILLIAMSON: Commissioner, do you 15 have any questions? 16 COMM. KRAUSE: I have no questions. 17 CHAIRMAN WILLIAMSON: Can everybody out 18 there hear her? 19 (No audible response) 20 CHAIRMAN WILLIAMSON: Okay. 21 All right. Thank you, Kathy. 22 MS. PYKA: Thank you. 23 AGENDA ITEM NO. VI 24 CHAIRMAN WILLIAMSON: Okay. The next item 25 is yours as well, the Lottery Operations and Services 24 1 Contract Amendment No. 8 credit calculation. 2 MS. PYKA: Thank you. Again for the 3 record, Kathy Pyka, Controller for the Commission. 4 Commissioners, this morning I'm providing 5 an update an Amendment No. 8 of the Lottery Operations 6 and Services Contract and the amount due to the 7 Commission for the fourth quarter of Fiscal Year 2010. 8 Commissioners, there was not a credit due 9 to the Commission under Sections 10.3.3 of the contract 10 or 10.3.4 of the contract for the fourth quarter, and 11 that is because prize payout was flat for the fiscal 12 year. 13 I wanted to note, though, that in 14 accordance with those provisions of the contract, we are 15 required to perform a final adjustment to the credit 16 calculation at the end of the fiscal year. And while 17 doing the individual quarters, we did have a credit due 18 in the first quarter of $791,000. There was not a 19 credit due by the end of the fiscal year, and so that 20 credit has been returned to the lottery operator vendor 21 on one of their Fiscal Year 2010 invoices. 22 That concludes my presentation, and I have 23 no further information on that item. 24 CHAIRMAN WILLIAMSON: Thank you, Kathy. 25 Commissioner, do you have any questions? 25 1 COMM. KRAUSE: No, ma'am. 2 CHAIRMAN WILLIAMSON: Thank you. 3 MS. PYKA: Thank you. 4 AGENDA ITEM NO. VII 5 CHAIRMAN WILLIAMSON: On to Item VII, 6 consideration of, possible discussion and/or action on 7 amendments to 16 TAC 401.315 relating to Mega Millions 8 on-line game rule. 9 Pete, this is your item, please. 10 MR. WASSDORF: Good morning, 11 Commissioners. For the record, my name is Pete 12 Wassdorf, an Assistant General Counsel in the Legal 13 Services Division. 14 And this morning we have two rules for 15 your consideration for adoption. The first one is with 16 respect to the Mega Millions rule. And you had directed 17 that a public hearing be held, and one was held on 18 October 14th, and no member of the public appeared, and 19 we have received no written comments on this rule. 20 The purpose of the rule is to authorize a 21 non-multiplied guaranteed second tier prize of a million 22 dollars when a megaplier option is purchased, to specify 23 that the megaplier does not apply -- or that the 24 multiplier does not apply to the second tier prize or to 25 the grand prize, to eliminate the number of playboards 26 1 on a payslip, to delete the number -- or the limitation 2 at five plays per ticket, to delete the limitation on 3 the number of plays per consecutive draw and to reword 4 the cost of the megaplier play provision, to clarify 5 that the multiplier number will be used only to multiply 6 the value of the prizes for the third through the ninth 7 tiers and to retitle and subdivide Paragraph (e)(4) 8 regarding the application of the multiplier number, for 9 clarity. 10 And that's all with respect to that rule. 11 I would be happy to answer any questions if you have 12 any. The staff recommends adoption. 13 CHAIRMAN WILLIAMSON: Commissioner, do you 14 have any questions? 15 COMM. KRAUSE: I do not. 16 CHAIRMAN WILLIAMSON: Now, Gary, if I 17 understand this, this is the one that kind of clears up 18 the question we were having on the second draw, the 19 million dollar -- 20 MR. GRIEF: Second tier prize. 21 CHAIRMAN WILLIAMSON: Right; right. 22 MR. GRIEF: It makes it a fixed one 23 million dollar prize if they purchase the megaplier 24 option. 25 CHAIRMAN WILLIAMSON: Okay. All right. 27 1 MS. KIPLIN: And just to make clear, it 2 operates totally independent of whatever number for the 3 multiplier drawing is drawn. 4 CHAIRMAN WILLIAMSON: Okay. All right. 5 Commissioner, would you like to make a 6 motion? 7 COMM. KRAUSE: I make a motion that we 8 adopt this rule, based on staff's recommendation. 9 CHAIRMAN WILLIAMSON: There's a second. 10 All in favor? 11 COMM. KRAUSE: Aye. 12 CHAIRMAN WILLIAMSON: Aye. 13 Motion passes 2-0. 14 MS. KIPLIN: And, Commissioners, I have an 15 order adopting the rule that I'll hand you. 16 CHAIRMAN WILLIAMSON: All right. 17 AGENDA ITEM NO. VIII 18 MR. WASSDORF: Then we'll still go on to 19 the next item -- Pete, if you'll continue -- for 16 TAC 20 401.308 relating to Cash 5 on-line game rule. 21 MR. WASSDORF: At the last meeting, you 22 also proposed an amendment to the Cash 5 on-line game 23 rule at Texas Administrative Code, 16 Texas 24 Administrative Code Section 401.308, and you also 25 directed that a public hearing be held. And the public 28 1 hearing was held, and no member of the public appeared 2 to testify and we received no written comments with 3 respect to this rule. 4 These are very minor changes with respect 5 to this. The first thing was to delete the provision 6 relating to the number of plays that may be purchased on 7 one ticket, and then the second thing was to correct an 8 erroneous statutory cite in the rule. 9 And those are the only changes for that. 10 And the staff recommends that you adopt these 11 amendments. 12 CHAIRMAN WILLIAMSON: Thank you. 13 Commissioner, do you have any questions? 14 COMM. KRAUSE: No. But I make a motion 15 that we adopt this rule, based on staff's 16 recommendation. 17 CHAIRMAN WILLIAMSON: I second. 18 All in favor? 19 COMM. KRAUSE: Aye. 20 CHAIRMAN WILLIAMSON: Aye. 21 Motion passes 2-0. 22 MS. KIPLIN: Commissioners, I have an 23 order also on this one. 24 CHAIRMAN WILLIAMSON: Thank you, Pete. 25 29 1 AGENDA ITEM NO. X 2 CHAIRMAN WILLIAMSON: Mr. Fernandez, if 3 you'll come up while we're signing these and get to your 4 item. 5 Let's see. The next item is report, 6 discussion, extension of the agency's instant ticket- 7 testing services contracts, statistical consulting 8 services contract and drawing studio. 9 Mr. Fernandez, please. 10 MR. FERNANDEZ: Yes, ma'am. Madam Chair, 11 Commissioners, this item is a briefing item to advise 12 the Commission of staff's intent to extend three 13 contracts and amend one of those, the first being Barker 14 & Herbert, who does our instant ticket testing. We're 15 going to extend that contract, execute an option to 16 extend that contract for one year. 17 The second is Eubank & Young Statistical 18 Consulting, and they're the ones that work with our 19 Operations Products folks when we're putting out new 20 games, to review those. And again, we intend to extend 21 that contract, execute an extension for one year. 22 And then, lastly, Elephant Productions, 23 which facilitates our drawing broadcast. And we intend 24 to extend that -- execute an option to extend that 25 contract for one year and also amend it to provide for 30 1 promotional activities such as Green Ball. 2 So we wanted to advise you that we're 3 preparing those extensions. 4 CHAIRMAN WILLIAMSON: Any questions, 5 Commissioner? 6 COMM. KRAUSE: I do not. I make that -- 7 AGENDA ITEM NO. IX 8 CHAIRMAN WILLIAMSON: All right. Now 9 we'll go back to Item No. IX -- sorry about that -- 10 report on the lottery operations and services 11 procurement. 12 MR. FREDERICK: Commissioners, again this 13 is our standing item that has to do with the lottery 14 operations and services procurement. And I am here to 15 just give you a status update today, and that is that 16 the committee is well-engaged in that review. And as 17 you know, our intent was to have an announcement 18 hopefully by -- our goal was to have it by the 12th of 19 this month or at close to that date as possible, 20 although I'm not certain -- I'm very optimistic. I'm 21 not certain we're going to make that date, but we're 22 very close. 23 And the committee did have the opportunity 24 to tour all three proposal bidders' corporate sites as 25 well as one of their customers. And I believe, as a 31 1 member of that committee and the chair of the committee, 2 that it was a very beneficial exercise and will go a 3 long way and serve us well in our review process. So 4 that's where we stand, and we continue to do our work. 5 CHAIRMAN WILLIAMSON: Great! I know y'all 6 have been working really hard and have spent a lot of 7 time all together in the conference room. 8 MR. FERNANDEZ: Yes. 9 CHAIRMAN WILLIAMSON: Commissioner, do you 10 have any other questions? 11 COMM. KRAUSE: I know it's a big job, so 12 keep at it. 13 MR. FERNANDEZ: Yes, sir. Thank you. 14 CHAIRMAN WILLIAMSON: Appreciate it. All 15 right. 16 AGENDA ITEM NO. XI 17 CHAIRMAN WILLIAMSON: Item No. 11, report, 18 discussion on the 81st and 82nd Legislature. Nelda, 19 this is your item, please. 20 MS. TREVINO: Good morning, Commissioners. 21 For the record, I'm Nelda Trevino, the Director of 22 Governmental Affairs, and I have a very brief report to 23 provide for you today. 24 Included in your meeting notebook is a 25 document listing legislative dates of interest. We 32 1 previously provided you this document some months ago. 2 But as the next legislative session approaches, I 3 thought it would be helpful to review some of these 4 dates. In particular, you will note that prefiling of 5 legislation for the 82nd Legislature will begin next 6 Monday, November the 8th, and the Legislature will 7 convene its regular session on January the 11th. 8 The agency's Governmental Affairs Division 9 will be tracking filed legislation that impacts the 10 agency and providing you with regular reports during the 11 session on the status of these bills. 12 Lastly, as House and Senate committees 13 conclude their interim work and prepare their committee 14 reports, we'll keep you advised on any recommendations 15 that may be made that impact the agency. 16 That concludes my report, and I'll be glad 17 to answer any questions. 18 CHAIRMAN WILLIAMSON: Commissioner, any 19 questions? 20 COMM. KRAUSE: I do not. 21 CHAIRMAN WILLIAMSON: At this time 22 Mr. Bresnen has requested some -- 23 MR. BRESNEN: Do you have a preference to 24 where I -- 25 CHAIRMAN WILLIAMSON: There, so I can see 33 1 you. I have a hard time looking -- if you don't mind. 2 MR. BRESNEN: No, ma'am. 3 CHAIRMAN WILLIAMSON: Okay. 4 MR. BRESNEN: Thank you, Commissioners. 5 My name is Steve Bresnen, and I'm here on behalf of a 6 different client today. It's the Coalition For The 7 Survival of Charitable Bingo. 8 And what I would like to do is to make 9 comments about several items, all of which I would make 10 in the context of our preparations for the 82nd 11 Legislature's meeting. 12 I've delivered a document to you that we 13 have prepared on behalf of the coalition that has a plan 14 for video gaming in it, a rationale, our assumptions for 15 how the system would work and the variables that would 16 produce revenue for the State of Texas and for the 17 charities, the bingo charities. 18 We believe in the next biennium we could 19 produce $472 million for the State of Texas if limited 20 video gaming were implemented at charitable bingo 21 locations that are operating under licenses that have 22 been issued as of January 1, 2011, and we would propose 23 that there be nothing beyond that in terms of video 24 gaming -- in other words, you had to be in existence as 25 of that date -- so we have don't have a proliferation of 34 1 bingo locations after that. 2 As a result of two items, the charities 3 would receive about $330 million during that biennium, 4 be about five times what they could expect to get from 5 charitable bingo as it's operated today. In order to do 6 that, in order to get that money -- I don't know if you- 7 all went to the hearing that Chairman Kuempel had on 8 video gaming. There were a lot of people there. Most 9 of them had to sit in the other room, because we had 10 about 300 representatives of charities there, and we got 11 them there early to demonstrate our interest in this 12 subject. 13 The air virtually went out of the 14 assembled masses' lungs when the Controller's office 15 said that there would be no money certified from gaming 16 in the first year of the biennium and very little, if 17 any, in the second year of the biennium, due to the 18 regulatory delays that have occurred in other 19 jurisdictions. 20 So it became incumbent upon somebody to 21 put together a plan to rapidly implement video gaming, 22 if it's going to happen in Texas. Members of the 23 Legislature are not going to vote for it unless there 24 can be substantial funds delivered to school kids and 25 Medicaid and CHIP. 35 1 So we set about, visited with a number of 2 folks -- manufacturers, distributors, hall owners, 3 charities -- and devised a plan that we think would 4 allow this agency, which would be our preferred 5 regulatory body, to implement video gaming quickly in 6 the next biennium. 7 We have about 17 million customers going 8 through bingo halls right now. We do not have to go and 9 stir up customers. We have the locations. All we would 10 have to do is add a little electrical, a little HVAC. 11 Some people might beef up their restaurants a little 12 bit, add a bar. But the bottom line is, all of that can 13 be done very promptly. 14 A key part of our proposal is that the 15 agency be not only authorized but directed by the 16 Legislature to begin implementation in June of 2011. 17 That would include adequate funding from the Legislature 18 to do what you need to do next summer, even before a 19 constitutional amendment could be put before the voters. 20 I won't go jot and tittle through our 21 proposal, but I will say this: The key element of this 22 proposal for rapid implementation is that this is a 23 market-based approach. This is an approach that puts 24 you-all in the position to be regulators and not 25 operators of this system. And we believe that there 36 1 would be significant incentives at the private sector to 2 rapidly implement this. And while people are working on 3 the logistics of that, you guys could be working on the 4 rules and the regulatory apparatus. 5 Under our proposal, the manufacturers of 6 this equipment would bear all of the costs of the 7 equipment that you would need to act as regulators. The 8 agency would not be letting contracts, not be picking 9 the system operator, would not be running the games and 10 so forth. All of that would happen at a private sector 11 level with beaucoup of regulatory authority for y'all to 12 monitor and control the system all the way down to the 13 terminal level. 14 A couple of months ago, I spoke to you 15 about a five-point plan that people in charitable bingo 16 intended to execute. I want to report to you today that 17 we have either fully or partially implemented four of 18 those points. I told you at that time that we were 19 going to sue the agency to free up the use of the 20 charities' money so they could exercise their first 21 amendment rights. We fully intend, during the 82nd 22 Legislature, to have those provisions in the Bingo 23 Enabling Act repealed. And if I have my way, it will be 24 because the constitutionality of those provisions has 25 been finally decided. 37 1 One of the things I'm here to ask you to 2 do today, I notice on your executive session you have 3 that lawsuit as a subject to be discussed. I think that 4 the Attorney General's position on that, while I 5 understand they have some obligation to defend state 6 statutes and the constitutionality of them, I don't 7 think y'all have a leg to stand on. 8 I think if you read the Citizens United 9 opinion and related opinions, that you will determine 10 that Mr. Fenoglio and Mr. Barnstone have accurately and 11 fully described the law, and the Judge fully and 12 adequately -- I started to say trash, but that would be 13 unkind -- defeated or ruled against the state's 14 position. 15 The charities that brought this lawsuit 16 are spending that money. They're authorized to spend 17 that money, and they have been spending that money. If 18 the state just digs its heels in and doesn't do right by 19 them and they just have to keep spending their money, it 20 doesn't serve anybody's purposes and it's not fair. 21 And the purpose of this lawsuit is to put 22 those charities on an equal footing with the private 23 sector actors that hover around the Capitol Building all 24 day every day trying to pass gaming. We're working with 25 those folks. Everybody is cooperating and sharing their 38 1 toys. But y'all know that if you're not in the game, 2 you frequently get left out and your interests are not 3 considered. So we would ask you to take the position 4 with your lawyers at the Attorney General's office that 5 the agency doesn't want to waste any further money 6 defending that lawsuit. 7 The second thing we intend to do during 8 the 82nd Legislature is to try to put some rhyme or 9 reason in the smoking ordinances that are applicable to 10 bingo across the state. If you're in the Dallas-Fort 11 Worth area with all those different jurisdictions 12 crammed together, bingo players are literally moving 13 around in the marketplace out there as a result of 14 differing provisions in differing jurisdictions' smoking 15 ordinances. It's completely vulcanized the market. 16 It's driving a lot of people out of business or close to 17 being out of business, and it just can't be tolerated 18 anymore. 19 So we're going to work on that. We're 20 going to propose that every bingo hall have a 21 non-smoking area with separate ventilation, separate 22 entrance, the whole nine yards. People have to spend 23 some money to come into compliance. But the bottom line 24 is, it's an intolerable situation all over the state and 25 it's hurting charitable bingo. 39 1 One thing, just as an aside, I want to 2 point out to you. The staff accurately presents 3 information to you that charitable bingo had a pretty 4 good year last year, the highest on record. But if 5 you'll look back at that number, that's just barely 6 above where it was in 1991, and think about what 7 inflation has done during that time. 8 The charities peaked at the amount that 9 they got to the bottom line or distributed at about 10 $52 million. Right now they're at about $36 million. 11 But the purchasing power of that $36 million over a 12 20-year period has been dramatically reduced. So we 13 have got to look at ways to make those dollars go 14 further and make for more of them. The smoking 15 ordinances, these local ordinances, have been a huge 16 problem for bingo. Bingo players smoke. I'm sorry, but 17 they do. 18 So we're going to try to do something 19 about that. The reason I'm telling you about it is that 20 we're going to try to do it in a way that doesn't have 21 any additional regulatory demand on your agency and just 22 sets the law up in the statute without you having to 23 enforce it, which I'm sure Phil will be glad to hear 24 when he gets back. 25 The next thing that we're going to work on 40 1 is the redemption issue involving the 8-liners. You may 2 know that the Attorney General issued an opinion a 3 couple of weeks ago on that subject matter and said if 4 you're redeeming for bingo product, that that's not a 5 non-cash merchandise prize. We think that's bull. 6 And as soon as we can get either into the 7 courthouse or into the Legislature, we're going to 8 reverse that opinion. It's wrong. The Supreme Court of 9 Texas has said that the plain language of a statute will 10 govern. And the way they reached their opinion was by 11 analogizing from one statute to another. That's out of 12 bounds. We don't like it. 13 It's hurting the charities, and it leaves 14 them completely naked in the marketplace to compete 15 against gamerooms in those jurisdiction where the law 16 enforcement have not closed them down. So we don't 17 intend to tolerate that, and I'll get back to you about 18 exactly what we're going to do about that. But just to 19 let you know, at some point in time we're going to make 20 some noise about that. 21 Finally, on our five-point plan, I told 22 you we were going to organize. We now have about 25 23 major hall owners in the coalition. We have four of the 24 major bingo distributors. We have the endorsement of 25 Texas Charity Advocates. And so we're doing pretty good 41 1 on our coalition efforts. 2 I told you that we were going to hire a 3 lobby team. We've hired four people, any of whom could 4 have made a lot more money than doing this, but they're 5 doing it for all the right reasons. That would be Dan 6 Shelly, former senator, former Legislative Director for 7 two governors, former house member, who is with us here 8 today; former Sen. Kip Averitt, who just left the 9 Legislature; former State Representative Pat Haggerty; 10 Jennifer Rodriguez, been around the Capitol Building for 11 about ten years, used to work in this agency; Mike 12 Higgins, been around the Capitol Building for about 20 13 years. I intend to be available for them to teach me 14 how it's done. And so we're well on our way to fielding 15 a team of people that can work in the Capitol Building 16 to advance the interest of charitable bingo. 17 A fourth element was to draft the plan. 18 And that plan you have before you, at the back of the 19 document we have assembled a lot of information from 20 other states that we hope will be of interest to you, 21 and it's that information that served as the basis for 22 our revenue estimating. We've tried to be as explicit 23 about all of our estimates and everything that we're 24 doing so there is no doubt that we know what we're 25 talking about and what we're about. 42 1 And finally, I would like to say that we 2 would like your continued cooperation. Life at this 3 agency wasn't always so great, but it has been in recent 4 years. We appreciate your service and your contribution 5 to that, and particularly Bruce and Phil and Gary and 6 Kim. Everybody over here is working real well together. 7 I have tried to keep them informed, and I 8 will continue to keep you informed about what we're 9 doing. We're not trying to hide the ball; we're not 10 trying to put anything past anybody. And we know we're 11 trying to create work for y'all, so it's only fair that 12 we be informing you. 13 And I realize that you're -- certainly the 14 staff's ability to take positions on these things is 15 limited or non-existent. Y'all probably have a little 16 more leeway. But the bottom line is, we understand your 17 role as a state agency, and we will honor and respect 18 that. 19 On the other hand, where we need your 20 cooperation is, if you need something, if we're 21 proposing something that looks like it takes you or us 22 off the cliff, then we need somebody to run up the flag 23 and we'll solve it. This team has been solving problems 24 around here for a long time, and we will work with you 25 in every way we can to solve problems on the 43 1 Legislature. We intend to pass as much of the 2 regulatory apparatus into the statute, if the 3 Legislature moves it, in order that your rulemaking and 4 fill-in-the-blanks process would be rather limited. 5 We also intend to use a provisional 6 licensing concept that would allow a lot of people who 7 have already been licensed and passed criminal 8 background checks to be recognized on the front end, 9 while you work on some of the longer-term aspects and 10 Texas-specific aspects of the regulatory system. 11 If you have any questions, I would be 12 happy to answer those at this time. 13 CHAIRMAN WILLIAMSON: Thank you, 14 Mr. Bresnen. 15 Commissioner, do you have any questions? 16 COMM. KRAUSE: What do you attribute 17 the -- I guess the uptick to where revenue for bingo, 18 charitable bingo, is just now back to where it was 20 19 years ago? What happened to cause this trough, this 20 long-term trough? 21 MR. BRESNEN: The graph heads downward 22 with the drawing of the first instant scratch-off ticket 23 by Governor Richards in '91, '92, something like that -- 24 '92. Then in New Mexico, Oklahoma and Louisiana, you 25 had the rapid expansion of casino gaming in those 44 1 states. So on the borders of Texas in particular, or 2 not even quite so near the borders, like Dallas or, in 3 some cases, Houston, people have gone into these other 4 gaming venues. So to some extent, there has been a 5 flight of the consumers from the bingo halls as other 6 gaming venues have opened. 7 The lottery is a big headwind. I mean, 8 there's no doubt that it took the wind out of the sails. 9 One of the significant reasons that bingo has been on 10 the upswing a little bit is the action that this agency 11 took maybe three, four years ago, to authorize the event 12 ticket version of instant bingo games. That's very 13 popular; it's increased sales. On the other hand, the 14 prize payouts in bingo have increased somewhat, which is 15 one of the reasons that the bottom line has lagged. 16 So there's a number of things going on 17 there. The per-player spend is up somewhat, I guess 18 with the growth of personal income. But nothing like it 19 would have been if you grabbed the personal income and 20 put it beside bingo proceeds, or the CPI, whatever 21 measure you wanted to use, you would see we're lagging 22 way behind. Sales should be over a billion dollars, and 23 we're at like 691 or something like that right now. 24 So some of these things have been the 25 result of regulatory drag. We worked very closely with 45 1 your staff on House Bill 1474. I think that's helping 2 some. Rationalizing the regulatory system is helping 3 some. But the bottom line is, it's a market out there 4 that's very turbulent. The world and the economy right 5 now, we did pretty good last year, even in the midst of 6 that turbulent economy. But some things have to change 7 for this industry to thrive again and to be able to cope 8 with very large payouts and a different entertainment 9 components that exist at some of the other venues. 10 COMM. KRAUSE: You had mentioned some kind 11 of a grandfathering rule for, I guess, bingo halls in 12 existence on the first day of the coming year. 13 MR. BRESNEN: Yes, sir. 14 COMM. KRAUSE: And so how long would you 15 suggest that stay in place? 16 MR. BRESNEN: We have a permanent proposal 17 for that. We're not asking that it be lifted at anytime 18 in the future. 19 COMM. KRAUSE: Okay. 20 MR. BRESNEN: Members of the Legislature 21 are going to be concerned about people running down here 22 and getting bingo licenses when they really want to be 23 in the slot machine business. 24 COMM. KRAUSE: Yes. 25 MR. BRESNEN: And what we know is, if 46 1 video gaming is coming, it will kill bingo, unless we've 2 got something to work with. But we're not trying to 3 build a giant marketplace out here and, you know, line 4 the area around the tracks with, you know, alternative 5 venues or anything like that. 6 By the way, in the document you'll see 7 we've done a pretty hefty analysis of where the 8 locations are in relation to what would be the major 9 gaming venues, with racetracks and native American 10 tribes. And it turns out that we're actually -- most of 11 them are pushed back pretty significantly from the 12 tracks and I think would not pose a significant threat, 13 would serve as more of a local market, plus we're asking 14 that where a track might have 5,000 machine, we're 15 talking about, at the largest, bingo venues having 120. 16 So we're trying to create something that's 17 rational and allows them to compete, that doesn't 18 overwhelm the market, doesn't harm the tracks. But at 19 the same time, we're guarding against a proliferation of 20 locations outside the existing footprint of gaming, if 21 you will. 22 COMM. KRAUSE: That's it for me. 23 CHAIRMAN WILLIAMSON: Steve -- and you 24 don't need to go into this a great deal. You know, I 25 realize that you say this is sort of a regulatory 47 1 approach. What do you see -- how is the state going to 2 get their money out of this deal, I guess is my 3 question? 4 MR. BRESNEN: Good question. Most 5 proposals for video gaming have a tax of anywhere from 6 20 to 30 percent. If you look at the list around the 7 country, it's mind-boggling how many different 8 approaches there are for the taxation side of this. 9 The proposal that the racetracks have made 10 is a 30 percent tax on what's called gross gaming 11 revenue. It's a little bit of a misleading term, I 12 think, but it means the money that's left after prizes 13 are paid and before any other expenses are paid. 14 So the tracks have proposed a 30 percent 15 tax rate. We are proposing a 20 percent tax rate, 16 20 percent to the state, and 10 percent off the top, off 17 that gross gaming revenue to the charities at a 18 location. 19 Interestingly -- and I didn't really 20 understand the magnitude of this until we did it -- more 21 than two-thirds of the locations under our proposal 22 would be the retailer at that -- the video gaming 23 retailer at that location would be a charity, so they 24 would not only get the 10 percent statutory dedication 25 but the net revenue from operations at those locations. 48 1 So bottom line is, to answer your 2 question, 20 percent off the top would go to the state. 3 And then we have a fee structure that's spelled out in 4 the document that produces about -- I think about 15, 5 $16 million, something like that, over the biennium that 6 would be dedicated to your agency to regulate. 7 CHAIRMAN WILLIAMSON: So I assume -- then 8 this would be sort of reported to the Controller or 9 something on a monthly basis. Is that how it would 10 evolve? 11 MR. BRESNEN: I would assume -- actually, 12 probably more often than a month, certainly at the 13 larger locations. At the smaller locations where they 14 could have a maximum of 30 machines under our proposal, 15 you might do it on a little but longer basis. But it's 16 not uncommon to sweep either weekly or every couple of 17 weeks in other jurisdictions. And I think at the larger 18 locations where they may have a little more 19 sophistication and tolerance for that sort of system, 20 that that would be an appropriate thing to do. 21 CHAIRMAN WILLIAMSON: Okay. That's all I 22 have. 23 Any other questions? 24 COMM. KRAUSE: No, ma'am. 25 CHAIRMAN WILLIAMSON: Thank you. 49 1 MR. BRESNEN: Thank you very much for your 2 time. 3 AGENDA ITEM NO. XII 4 CHAIRMAN WILLIAMSON: All right. Let's 5 proceed on to Item No. XII, report, discussion or any 6 actions on external and internal audits. 7 Cat. 8 MS. MELVIN: Thank you. Chairman and 9 Commissioner, for the record, Catherine Melvin of the 10 Internal Audit Division. 11 On the audit fund, I would just like to 12 remind you that in addition to ongoing internal audit 13 work, we have three external audits currently ongoing. 14 Those are the annual financial audit, the biannual 15 security study and the State Auditor's Office audit of 16 compliance with historically underutilized business 17 requirements or HUB requirements. 18 And that's all I have today. 19 CHAIRMAN WILLIAMSON: Thank you. 20 Commissioner, do you have any questions? 21 COMM. KRAUSE: No, ma'am. 22 AGENDA ITEM NOS. XIII AND XIV 23 CHAIRMAN WILLIAMSON: Let's proceed on to 24 Item No. XIII, Gary, report on GTECH. 25 MR. GRIEF: And, Madam Chair, for this 50 1 item and also for the next one, other than what's in 2 your notebooks today, I have nothing further to report 3 on either item. 4 CHAIRMAN WILLIAMSON: Okay. That takes 5 care of XIII and XIV. Commissioner, do you have any 6 questions? 7 COMM. KRAUSE: No, ma'am. 8 CHAIRMAN WILLIAMSON: Thank you. 9 AGENDA ITEM NO. XV 10 CHAIRMAN WILLIAMSON: Item XV, 11 consideration, status and possible entry of orders in 12 cases posted on the agenda. 13 Kim, this is your item, please. 14 MS. KIPLIN: Thank you. Commissioners, 15 the docketed cases for today are all lottery-related 16 cases. Letters A through E are all cases that were 17 contested case proceedings before the State Office of 18 Administrative Hearings. With the exception of Letter 19 A, Abba Kwik Pantry, the remaining -- that's B, C, D and 20 E -- are all revocations for insufficient funds. 21 Letter A is a revocation for a 22 disqualifying criminal history in particular, which is a 23 moral turpitude case. Staff recommends that you adopt 24 the proposal for decision and sign the orders revoking 25 the licenses in each of these letters. 51 1 CHAIRMAN WILLIAMSON: So this is Letters A 2 through E? 3 MS. KIPLIN: E. Yes, correct. 4 CHAIRMAN WILLIAMSON: Commissioner, would 5 you like to make a motion? 6 COMM. KRAUSE: I make a motion to adopt 7 Staff's recommendation on those cases. 8 CHAIRMAN WILLIAMSON: Second. 9 All in 1favor. 10 COMM. KRAUSE: Aye. 11 CHAIRMAN WILLIAMSON: Aye. 12 Months passes 2-0. 13 MS. KIPLIN: Thank you, Commissioners. I 14 have orders in those cases. 15 And then if I can take up the remaining 16 two cases, which are Letters E and F. These are both 17 proposed agreed orders for your consideration, in each 18 of these cases the recommended disciplinary actions of 19 30(a) suspension. 20 For the first case, Letter F, Economy 21 Store, the violation was use of a credit card for 22 lottery tickets. In the second case, Letter G, McCart 23 Gas & Food Mart, it was an 8-liner coupon redeemed for a 24 lottery. 25 The staff is recommending a 30-day 52 1 suspension in each of these cases. And it follows and 2 tracks your past actions in cases with similar facts and 3 tracks with the standard penalty chart that you've 4 adopted as an administrative rule. 5 Staff recommends you adopt the agreed 6 orders in these cases. 7 CHAIRMAN WILLIAMSON: Thank you. 8 Commissioner, do you have any questions? 9 COMM. KRAUSE: So 8-liners are illegal and 10 somebody is presenting a coupon from an 8-liner in order 11 to buy a lottery ticket? 12 MS. KIPLIN: Yes, that's correct. 13 COMM. KRAUSE: What are we doing to follow 14 up with that to find out who is issuing this coupon? 15 MS. KIPLIN: In a case where we believe 16 there has been criminal conduct, those are referred to 17 the local venue, because gambling is a local venue 18 criminal offense for their consideration. So we follow 19 up in that regard. We take the administrative 20 disciplinary action and we make the referral, unless 21 that referral has already been made. 22 COMM. KRAUSE: Okay. 23 CHAIRMAN WILLIAMSON: Would you like to 24 make a motion? 25 COMM. KRAUSE: Make a motion that we adopt 53 1 Staff's recommendation on these cases. 2 CHAIRMAN WILLIAMSON: Second. 3 All in favor? 4 COMM. KRAUSE: Aye. 5 CHAIRMAN WILLIAMSON: Aye. 6 Motion passes 2-0. 7 MS. KIPLIN: Commissioners, I have the 8 orders in those cases I'll present to you now. 9 AGENDA ITEM NO. XVI 10 CHAIRMAN WILLIAMSON: And there is no 11 request for public comment. 12 AGENDA ITEM NO. XVII 13 CHAIRMAN WILLIAMSON: So at this time I 14 move that we go into executive session to deliberate the 15 duties and evaluation of the Executive Director, 16 Internal Audit Director and Charitable Bingo Operations 17 Director and to deliberate the duties of the General 18 Counsel and Human Resources Director, pursuant to 19 Section 551.074 of the Texas Government Code and to 20 receive any legal advice regarding pending or 21 contemplated litigation pursuant to Section 22 551.071(1)(A) or any settlement offers, according to the 23 Texas Government Code, including but not limited to 24 those items posted on the open meetings notice for 25 purposes of receiving legal advice. 54 1 Is there a second? 2 COMM. KRAUSE: Second. 3 CHAIRMAN WILLIAMSON: All in favor, say 4 "Aye." 5 COMM. KRAUSE: Aye. 6 CHAIRMAN WILLIAMSON: Aye. 7 Vote is 2-0. 8 We will now go into executive session. 9 Actually, we will take a 15-minute break before we go 10 into executive session. So right now the time is 10:05. 11 We will go into session at 10:20. Today is November 4, 12 2010. 13 MS. KIPLIN: For the record, on receiving 14 legal advice, the other statutory citation section is 15 551.071(2) of the Government Code. 16 (Off the record for executive session: 17 10:20 a.m. to 11:35 a.m.) 18 AGENDA ITEM NO. XVIII 19 CHAIRMAN WILLIAMSON: The Texas Lottery 20 Commission is out of executive session. The time is 21 11:35. There is no action to be taken as a result of 22 the executive session. 23 AGENDA ITEM NO. XIX 24 CHAIRMAN WILLIAMSON: And so at this 25 point, I don't believe there are any other items on the 55 1 agenda. So if there is a motion to -- 2 COMM. KRAUSE: I make a motion we adjourn. 3 CHAIRMAN WILLIAMSON: All in favor? 4 COMM. KRAUSE: Aye. 5 CHAIRMAN WILLIAMSON: Aye. 6 Motion pass 2-0. 7 We're adjourned. 8 (Meeting adjourned at 11:35 a.m.) 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 56 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified Shorthand 5 Reporter in and for the State of Texas, do hereby 6 certify that the above-mentioned matter occurred as 7 hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings of 9 such were reported by me or under my supervision, later 10 reduced to typewritten form under my supervision and 11 control and that the foregoing pages are a full, true 12 and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set my 14 hand and seal this 15th day of November 2010. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/10 20 Firm Registration No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25