1 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 7 REGULAR MEETING OF THE § 8 TEXAS LOTTERY COMMISSION § MONDAY, JUNE 13, 201l § 9 10 11 12 COMMISSION MEETING 13 MONDAY, JUNE 13, 2011 14 15 16 BE IT REMEMBERED THAT on Monday, the 13th 17 day of June 2011, the Texas Lottery Commission meeting 18 was held from 8:35 a.m. until 12:34 p.m., at the 19 Offices of the Texas Lottery Commission, 611 East 6th 20 Street, Austin, Texas 78701, before CHAIRMAN MARY ANN 21 WILLIAMSON and COMMISSIONER J. WINSTON KRAUSE. The 22 following proceedings were reported via machine 23 shorthand by Aloma J. Kennedy, a Certified Shorthand 24 Reporter. 25 2 1 APPEARANCES 2 CHAIRMAN: 3 Ms. Mary Ann Williamson 4 COMMISSIONER: Mr. J. Winston Krause 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Philip D. Sanderson 8 9 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 - MONDAY, JUNE 13, 2011 ................ 7 4 AGENDA ITEM NO. I - Meeting Called to Order......... 7 5 AGENDA ITEM NO. II - Report by the Bingo Advisory Committee Chairman, possible 6 discussion and/or action on the Bingo Advisory Committee’s activities, including the June 1, 7 2011 Bingo Advisory Committee meeting............... 31 8 AGENDA ITEM NO. III - Consideration of and possible discussion and/or action, including 9 proposal, on new rule relating to increase temporarily license fees for new computer 10 system costs........................................ 39 11 AGENDA ITEM NO. IV - Report by the Charitable Bingo Operations Director and possible 12 discussion and/or action on the Charitable Bingo Operations Division’s activities, including 13 updates on staffing, licensing, accounting and audit activities, pull-tab review, special 14 projects, and upcoming operator training............ 38 15 AGENDA ITEM NO. V - Report, possible discussion and/or action on lottery sales and revenue, game 16 performance, new game opportunities, advertising, market research, trends, and game contracts, 17 agreements, and procedures.......................... 8 18 AGENDA ITEM NO. VI - Report, possible discussion and/or action on transfers to the State............. 12 19 AGENDA ITEM NO. VII - Consideration of and 20 possible discussion and/or action on the Lotto Texas procedures.............................. 13 21 AGENDA ITEM NO. VIII - Report, possible 22 discussion and/or action on the 82nd Legislature.... 15 23 AGENDA ITEM NO IX - Report, possible discussion and/or action on the Sunset review process 24 involving the agency................................ 18 25 4 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. X - Consideration of and possible discussion and/or action, including 4 proposal, on amendments to 16 TAC §401.152 relating to Application for License................. 21 5 AGENDA ITEM NO. XI - Consideration of and 6 possible discussion and/or action, including proposal, on amendments to 16 TAC §401.153 7 relating to Qualifications for License.............. 23 8 AGENDA ITEM NO. XII - Report, possible discussion and/or action on amendments to the statistical 9 consulting services contract and extension on the instant ticket testing services contract............ 24 10 AGENDA ITEM NO. XIII - Consideration of and 11 possible discussion and/or action on external and internal audits and/or reviews relating to 12 the Texas Lottery Commission, and/or on the Internal Audit Department’s activities.............. 25 13 AGENDA ITEM NO. XIV - Report, possible discussion 14 and/or action on GTECH Corporation.................. 26 15 AGENDA ITEM NO. XV - Report by the Executive Director and/or possible discussion and/or action 16 on the agency’s operational status, agency procedures, and FTE status.......................... 26 17 AGENDA ITEM NO. XVI - Consideration of the 18 status and possible entry of orders in: A. Docket No. 362-11-4216 – OK Beer & Wine 19 B. Docket No. 362-11-4219 – Best Food Mart C. Docket No. 362-11-4220 – Best Fresh, Inc. 20 D. Docket No. 362-11-4303.B – Nathaniel Carandang.................................... 27 21 AGENDA ITEM NO. XVII - Public comment............... 119 22 23 24 25 5 1 TABLE OF CONTENTS (CONTINUED) 2 AGENDA ITEM NO. XVIII - Commission may meet in Executive Session: 3 A. To deliberate the duties and evaluation of the Executive Director pursuant to 4 Section 551.074 of the Texas Government Code. 5 B. To deliberate the duties and evaluation of the Internal Audit Director pursuant 6 to Section 551.074 of the Texas Government Code. 7 C. To deliberate the duties and evaluation of the Charitable Bingo Operations Director 8 pursuant to Section 551.074 of the Texas Government Code. 9 D. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 10 the Texas Government Code. E. To deliberate the duties of the Human 11 Resources Director pursuant to Section 551.074 of the Texas Government Code. 12 F. To receive legal advice regarding pending or contemplated litigation pursuant to 13 Section 551.071(1)(A) and/or to receive legal advice regarding settlement offers 14 pursuant to Section 551.071(1)(B) of the Texas Government Code and/or to receive 15 legal advice pursuant to Section 551.071(2) of the Texas Government Code, including but 16 not limited to: Texas Lottery Commission v. Leslie 17 Warren, Texas Attorney General Child Support Division, Singer Asset Finance 18 Company L.L.C., and Great-West Life & Annuity Insurance Company 19 Department of Texas, Veterans of Foreign Wars et al., v. Texas Lottery 20 Commission et al. Rafael Tapia a/k/a Rafael Demetrio 21 Tapia-Bido v. 7-Eleven et al., Willis Willis v. Texas Lottery 22 Commission, GTECH Corporation, BJN Sons Corporation d/b/a Lucky Food Store #2, 23 Barkat N. Jiwani and Pankaj Joshi Employment law, personnel law, 24 procurement and contract law, evidentiary and procedural law, 25 and general government law.............. 156 6 1 2 TABLE OF CONTENTS (CONTINUED) 3 PAGE 4 AGENDA ITEM NO. XIX - Return to open session for further deliberation and possible action 5 on any matter discussed in Executive Session........ 157 6 AGENDA ITEM NO. XX - Adjournment.................... 157 7 REPORTER'S CERTIFICATE.............................. 158 8 9 10 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 MONDAY, JUNE 13, 2011 3 (8:35 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 June 13, 2011. The time 8 is 8:35 a.m. Commissioner Krause is present, so we have 9 a quorum. 10 Today we're going to go a little out of 11 order. Commissioner, Item III is regarding a rule to 12 increase the temporary license fees for the computer 13 system for the bingo industry, the bingo agency, and I 14 know we're going to spend some time on that, and I know 15 there are people here that will want to comment on that. 16 So what we're going to do is, we're going 17 to take all of the bingo-related items, including the 18 reports -- and I believe it's going to be Items II, III 19 and IV -- we'll take those at the end before public 20 comments, just so everybody here can kind of plan. 21 Also I'm going to change a little bit of 22 the way we're doing public comments. Normally I require 23 that everybody turns everything in before we start the 24 meeting. However, I will have a break before we start 25 the bingo. So if there are people that still want to 8 1 sign up or fill out a form, I will allow that to happen 2 during that break, so we will accept witness affirmation 3 forms during the break. Now, once we start it back 4 again, I will not accept anymore, just so y'all know 5 that. So that's where we are. 6 AGENDA ITEM NO. V 7 CHAIRMAN WILLIAMSON: So we will start 8 with Item V, which is report, possible discussion and/or 9 action on lottery sales and revenue game performance, 10 new game opportunities, advertising, market research, 11 trends. 12 And, Kathy, I believe this is yours -- 13 MS. PYKA: Yes, Madam Chair. 14 CHAIRMAN WILLIAMSON: -- and Robert's. 15 MS. PYKA: Good morning, Commissioners. 16 My name is Kathy Pyka. I'm the Controller for the 17 Commission. And with me to my right is Robert Tirloni, 18 our Products Manager. 19 Commissioners, the first chart that we 20 have for you this morning reflects comparative sales 21 through the week ending June 4, 2011. This is our 40th 22 week of the fiscal year. And our total Fiscal Year 2011 23 sales through this period are $2.937 billion, which is 24 an increase of $28.1 million over the $2.909 billion 25 figure for Fiscal Year 2010. 9 1 Our Fiscal Year 2011 instant ticket sales 2 reflected on the second blue bar are at $2.19 billion, 3 which is a $51.1 million increase over the sales figure 4 for Fiscal Year 2010. And our on-line sales for Fiscal 5 Year 2011 are $746.1 million, which is a $23 million 6 decline from our Fiscal Year 2010 figure, at 7 $769.1 million. 8 Our next slide, Commissioners, reflects 9 the cumulative average daily sales for Fiscal Years 10 2009, '10 and '11. As reflected by the total cumulative 11 sales, our daily average for Fiscal Year 2011 is 12 $10.6 million, which is a five-tenths of a percent 13 decline from Fiscal Year 2010 sales and a four and a 14 half percent increase over Fiscal Year 2009 sales. 15 As we look at the jackpot games, which are 16 highlighted with the white font, note that the Fiscal 17 Year 2011 daily average is $1.6 million, which is a 18 $288,000 decline from last fiscal year and a $248,000 19 increase over Fiscal Year 2009. As noted on the slide, 20 the only on-line game with a significant decline in 21 Fiscal Year 2011 is the Lotto Texas jackpot game. And 22 as you can see, there is a $294,000 decline, and that's 23 attributed to the large jackpot rolls that we had in 24 Fiscal Year 2010. Lotto Texas had increased to 25 $76 million in October of '09 and $97 million in May of 10 1 2010. 2 And then moving down to our daily games 3 with the green font, our Fiscal Year 2011 average is 4 $1.1 million for the current year, which is a 5 2.09 percent below -- exceeding 2010 by 2.09 percent, 6 and '09 is -- slightly under '09 by 1.09 percent -- or 7 1.9 percent. 8 We wanted to highlight within this 9 grouping our Daily 4 game, which is up 10.3 percent and 10 Pick 3, which is up 1.9 percent. Instant ticket at the 11 very become of the chart is at $7.9 million, and that's 12 an increase of $212,000 over last fiscal year and an 13 increase of 228,000 over Fiscal Year 2009. 14 Robert will now highlight actual sales for 15 the last two fiscal years, by product. 16 MR. TIRLONI: Thanks, Kathy. 17 For the record, I'm Robert Tirloni, 18 Products Manager for the Commission. 19 This next slide is the fiscal year to date 20 sales comparison, and this is through the week ending 21 last Saturday, June 4th. This chart has got the same 22 format as the one we just looked at. Our jackpot games 23 are at the top in white. Overall, the jackpot games are 24 down $28 million as a category. Again, that decline is 25 as a result of the decline being realized on Lotto 11 1 Texas. As Kathy mentioned, that is due to the large 2 jackpots experienced in Fiscal 2010. 3 In the middle of the slide is our daily 4 games in green. Overall for that category, we're up 5 $5.3 million. And our instants are continuing to 6 perform very well this fiscal year. As we've discussed, 7 our twenty dollar $500 million frenzy game continues to 8 perform very well, as does the Texas Lottery Black 9 series. 10 The second game is still out. The third 11 game in the series, Series 3, is tentatively scheduled 12 to launch early July. We don't have an official launch 13 date yet. We're continuing to monitor inventory and 14 sales of the second game. But that third series should 15 start in the next few weeks. And all of that is leading 16 to that $51 million gain in instants for this year-over- 17 year. And then as a total -- and this is very similar 18 to what we saw last month -- we are up overall 19 $28 million for 2011 compared to 2010. 20 And that is the sales report for today. 21 We're happy to answer any questions you may have. 22 CHAIRMAN WILLIAMSON: Thank you. 23 Commissioner, do you have any questions? 24 COMMISSIONER KRAUSE: I do not. 25 CHAIRMAN WILLIAMSON: All right. Thank 12 1 you. 2 MR. TIRLONI: Thank you. 3 CHAIRMAN WILLIAMSON: All right, Kathy. 4 If you'll go on and report the transfers to the state. 5 AGENDA ITEM NO. VI 6 MS. PYKA: Certainly. Again for the 7 record, my name is Kathy Pyka,Controller for the 8 Commission. 9 Commissioners, Tab VI includes information 10 on the agency's transfer to the state. The first report 11 in your notebook reflects the transfers and allocations 12 to the Foundation School Fund, the Texas Veterans 13 Commission and the allocation of unclaimed prizes for 14 the period ending April 30, 2011. Our total cash 15 transfers to the state amounted to $644.3 million 16 through this eight-month fiscal period. 17 And the second page of your notebook 18 provides the detailed information for the monthly 19 transfers. Of the $644.3 million transfer to the state, 20 $607.5 million was the amount transferred to the 21 Foundation School Fund, $5.3 million to the Texas 22 Veterans Commission, and the balance of $31.5 million 23 transfer from unclaimed lottery prizes. This represents 24 a 5.4 percent decline, or $34.7 million, under the 25 amount that we transferred to the Foundation School Fund 13 1 in April of 2010. 2 Commissioners, the final document in your 3 packet reflects the cumulative report of lottery sales, 4 expenditures and transfers from Fiscal Year 1992 to 5 date. Our total cumulative transfers to the Foundation 6 School Fund through this period are now at 7 $13.3 billion. 8 This concludes my presentation. I would 9 be happy to answer any questions. 10 CHAIRMAN WILLIAMSON: Thank you. 11 Commissioner, do you have any questions? 12 COMMISSIONER KRAUSE: No, ma'am. 13 CHAIRMAN WILLIAMSON: All right. 14 Kathy, if you'll go on to the next item, 15 please, the consideration and possible discussion and/or 16 action on the Lotto Texas procedures. 17 Go ahead. 18 AGENDA ITEM NO. VII 19 MS. PYKA: Thank you, Madam Chair. 20 Commissioners, in 2008, the State 21 Auditor's office recommended that all proposed 22 procedures that affect Lotto Texas players must be 23 adequately communicated to the public and the public be 24 given an opportunity to propose changes or make comments 25 prior to approval by the Commission. 14 1 Commissioners, we have one procedure 2 included in the notebook related to Lotto Texas jackpot 3 estimation procedure. What we've done is, we have 4 modified the procedure to remove any desk procedures 5 from the document, leaving only items for Commission 6 approval that affect a Lotto Texas player, to reflect 7 the intent of that audit recommendation. 8 The procedure has been routed through our 9 Commission's formal review process, and staff has agreed 10 to the form and substance of the procedure. So, 11 Commissioners, at this time I would like to recommend 12 that procedure 0C-JE-002 be approved for publication in 13 the Texas Register and on the agency's website. If 14 approved, the procedure will be published in the Texas 15 Register and on the agency's website for a minimum of 30 16 days prior to receiving public comment on the procedure. 17 I would be happy to answer any questions. 18 CHAIRMAN WILLIAMSON: Thank you. 19 Commissioner, do you have any questions? 20 COMMISSIONER KRAUSE: I do not. 21 CHAIRMAN WILLIAMSON: And I believe this 22 is an action item? 23 MS. KIPLIN: Yes, it is. 24 COMMISSIONER KRAUSE: Then I make a motion 25 that we adopt Procedure OC-JE-002 for publication. 15 1 CHAIRMAN WILLIAMSON: I second. 2 All in favor? 3 COMMISSIONER KRAUSE: Aye. 4 CHAIRMAN WILLIAMSON: Aye. 5 Motion passes 2-0. 6 MS. PYKA: Thank you, commissioners. 7 CHAIRMAN WILLIAMSON: Thank you, Kathy. 8 Our next item is report, possible 9 discussion and/or action on the 82nd Legislature. 10 Nelda, this is yours. 11 AGENDA ITEM NO. VIII 12 MS. TREVINO: Good morning, Commissioners. 13 For the record, I'm Nelda Trevino. I'm the Director of 14 Governmental Affairs. 15 The last day of the regular session was 16 May 30th, and bills approved by the Legislature are now 17 being reviewed by the Governor. And he has until June 18 the 19th to sign or veto bills or let them become law 19 without his signature. 20 In your notebook, we provided you with a 21 report of bills the agency was tracking and have been 22 approved by the Legislature. These bills are now 23 included in the agency's Legislative Implementation 24 Project, and the final versions of these bills are now 25 being reviewed by the appropriate agency staff to see 16 1 and determine what action, if any, the agency needs to 2 take in order to implement these bills. 3 There are several bills noted in this 4 report that I would like to highlight, and these include 5 the following: 6 The first is House Bill 4, and this bill 7 provides direction to agencies regarding adjustments to 8 appropriations for the current fiscal year. The bill 9 includes the 2.5 percent budget reduction for the Bingo 10 Division that was previously identified and incorporated 11 in the agency's operating budget for this current fiscal 12 year. 13 The next bill, House Bill 2728 by 14 Rep. Senfronia Thompson, and this is the bill that 15 relates to the operation and regulation of charitable 16 bingo. The final version of this bill simply includes 17 some clarifying language relating to the term of crime 18 of moral turpitude and also clarifies procedures related 19 to the transfer of a commercial lessor license. 20 The next bill, Senate Bill 626 by 21 Sen. John Carona, and this is the bill that clarifies 22 provisions in the Lottery Act and in the Uniform 23 Commercial Code as it relates to the assignment of 24 lottery prizes. 25 Senate Bill 1342, this is the bill of that 17 1 authorizes the use of bingo proceeds as an allowable 2 expense to provide health insurance benefits for bingo 3 employees. 4 And the last bill I would like to note is 5 House Bill 1, and this is the general appropriations 6 bill for the 2012-2013 biennium. And also included in 7 your notebook is a copy of the appropriations bill 8 pattern for the Texas Lottery Commission. 9 And changes in the Commission's 10 appropriation for the next biennium primarily impacted 11 funding for the regulation of charitable bingo. 12 Included in the Commission's appropriation is the 13 funding of $2.5 million in capital budget authority for 14 the redesign of the Automated Charitable Bingo System. 15 This funding is contingent on a one-time license fee 16 increase for bingo conductors and lessors. 17 And, Chairman Williamson, as you noted 18 before, this is a topic that will be discussed in more 19 detail under a separate agenda item. 20 Separate from this contingency funding and 21 as part of the mandated five percent across-the-board 22 reduction, bingo's administrative budget was reduced by 23 $1.3 million, and the division staffing was reduced by 24 12 FTEs. 25 Lastly, the Legislature convened its first 18 1 called special session on May the 31st to consider those 2 matters specified by the Governor. We are monitoring 3 those bills that may impact the agency and, if 4 necessary, those bills will be added to the 5 implementation project. 6 And this concludes my report, and I'll be 7 glad to answer any questions. 8 CHAIRMAN WILLIAMSON: Do you have any 9 questions? 10 COMMISSIONER KRAUSE: I don't suppose 11 there is anything in the special session for us? 12 MS. TREVINO: Not at this time. 13 CHAIRMAN WILLIAMSON: Were you going to 14 have any discussion on Sunset at this point? 15 MS. TREVINO: Under the next agenda item. 16 CHAIRMAN WILLIAMSON: Okay. Then let's go 17 on to the next agenda item, possible discussion and/or 18 action on the Sunset review process. 19 AGENDA ITEM NO. IX 20 MS. TREVINO: Again, for the record, I'm 21 Nelda Trevino, the Director of Governmental Affairs. 22 And, Commissioners, as you are aware, the 23 Texas Lottery Commission is one of the agencies 24 scheduled to go through the Sunset review during this 25 next cycle. The Sunset review process is the regular 19 1 assessment of the continuing need for a state agency to 2 exist. This process is guided by a 12-member commission 3 appointed by the Lt. Governor and the Speaker of the 4 House. Assisting the Commission is a staff whose 5 reviews and reports provide an assessment of an agency's 6 programs. 7 The Sunset staff uses specific criteria 8 set by the Legislature to evaluate each of the programs 9 and functions of a state agency under Sunset review. 10 Agencies typically undergo review every 12 years, and 11 the Lottery Commission previously went through Sunset 12 review in 2003 and also in 2005. 13 Included in your meeting notebook are two 14 documents. The first document is titled "Key Dates For 15 the 2013 Sunset Cycle." And you will note the review 16 begins with the submission of the agency's self- 17 evaluation report which is due on September the 1st of 18 this year. 19 The Sunset Commission provides a 20 prescribed format for the self-evaluation report, 21 commonly referred to as the SER. And noted in this 22 document that you have in your notebook is an outline of 23 the key sections for the report. And agency staff has 24 already been in the process of drafting the agency's 25 self-evaluation report. I'm happy to report that 20 1 significant progress has already been made in preparing 2 this document. 3 Robert Elrod from the agency's 4 Administration Division is coordinating the agency's 5 efforts in preparing the SER, and it is anticipated that 6 we will bring this report for your review at your August 7 meeting. 8 In summary, during the period between 9 September 2011 and December of 2012, Sunset staff 10 conducts agency reviews. They issue a report and 11 recommendations. The agency will formally have an 12 opportunity to respond to those recommendations. The 13 Sunset Commission will hold public hearings, and the 14 Sunset Commission then makes decisions and 15 recommendations for the Legislature that convenes in 16 2012, to consider. A sunset bill for the agency will 17 then be filed, and the bill will typically just go 18 through the regular legislative process. 19 The second document in your notebook is a 20 listing of the Sunset Commission's review schedule for 21 2013. This will give you an idea of some of the other 22 agencies that will be going through the Sunset review 23 with the Lottery Commission. 24 Over the next 16 months, we will be 25 providing you updated reports related to the Sunset 21 1 review process at your scheduled meetings. 2 And this concludes my report on this 3 agenda item, and I'll be glad to answer any questions 4 that you might have. 5 CHAIRMAN WILLIAMSON: I assume bingo will 6 be underneath this sunset review process with the 7 lottery? 8 MS. TREVINO: Yes, that's right. 9 CHAIRMAN WILLIAMSON: Commissioner, do you 10 have any questions? 11 COMMISSIONER KRAUSE: No, ma'am. 12 CHAIRMAN WILLIAMSON: All right. Thank 13 you. 14 Our next item is consideration of and 15 possible discussion and/or action, including proposal, 16 on amendments to 16 TAC 401.152 relating to application 17 for license. 18 Kim, this is your item, please. 19 AGENDA ITEM NO. X 20 MS. KIPLIN: Commissioners, attached in 21 your notebook for your consideration are proposed 22 amendments to 16 Texas Administrative Code, Section 23 401.152 regarding application for license. The purpose 24 of the proposed amendments is to correct an incorrect 25 citation to a statute in the rule and put, obviously, 22 1 the correct statutory reference and then also to include 2 within the rule the statutory application of the filing 3 fees. 4 We have a rule covering it for renewal 5 license applications, but the renewal license 6 application fee and the treatment of that isn't in the 7 statute, it's just in the rule. The recommendation is 8 to include that which is in the statute for the original 9 license, if you would, in the rule, so that somebody who 10 is going and looking for what all is required with 11 licensing won't have to keep flipping back and forth. 12 So with that, the staff is recommending 13 that you-all vote to propose for public comment these 14 proposed amendments in the Texas Register. 15 I would be happy to answer any questions. 16 CHAIRMAN WILLIAMSON: Thank you. 17 Commissioner, do you have any questions? 18 COMMISSIONER KRAUSE: No, ma'am. 19 CHAIRMAN WILLIAMSON: If you'll make a 20 motion, please. 21 COMMISSIONER KRAUSE: I make a motion that 22 we initiate the rulemaking process by publishing the 23 amendments presented by the staff to 16 TAC, Section 24 401.152. 25 CHAIRMAN WILLIAMSON: I second. 23 1 All in favor? 2 COMMISSIONER KRAUSE: Aye. 3 CHAIRMAN WILLIAMSON: Aye. 4 Motion passes 2-0. 5 The next item is consideration of and 6 possible discussion and/or action, including proposal, 7 on amendments to 16 TAC 401.153 relating to 8 qualifications for license. 9 Kim, this is your item as well. 10 AGENDA ITEM NO. XI 11 MS. KIPLIN: Commissioners, this also is, 12 if you will, a clean-up amendment. It's to correct an 13 incorrect reference to a chapter in the Education Code 14 in the rule. It's to substitute Chapter 52 for 53. 15 That's the change. We recommend that you vote to 16 propose that for public comment so we can clean that 17 reference up. 18 CHAIRMAN WILLIAMSON: Thank you. 19 Commissioner, do you have any questions? 20 COMMISSIONER KRAUSE: I would hate to hear 21 what the public comment is about the way the rule was. 22 But anyway, I'm going to go ahead and make a motion that 23 we initiate this rulemaking process by publishing the 24 amendments proposed by staff to 16 TAC, Section 401.153. 25 CHAIRMAN WILLIAMSON: I second. 24 1 All in favor? 2 COMMISSIONER KRAUSE: Aye. 3 CHAIRMAN WILLIAMSON: Aye. 4 Motion passes 2-0. 5 MS. KIPLIN: And I have a T-bar memo. 6 CHAIRMAN WILLIAMSON: Thank you. 7 MS. KIPLIN: Thank you. 8 CHAIRMAN WILLIAMSON: The next item is 9 report, possible discussion and/or action on amendments 10 to the statistical consulting services contract and 11 extension on the instant ticket testing services 12 contract. 13 Mike, this is your item, please. 14 AGENDA ITEM NO. XII 15 MR. FERNANDEZ: Good morning, 16 Commissioners. For the record, I'm Mike Fernandez, the 17 Director of Administration. 18 This is a briefing item to advise the 19 Commission of staff's intent to amend and extend two 20 current contracts, one with our statistical consultant, 21 Eubank & Young, and the other with Barker & Herbert 22 Analytical Laboratories, our ticket tester. So we 23 wanted to advise the Commission of the impending action. 24 CHAIRMAN WILLIAMSON: All right. Thank 25 you. 25 1 Commissioner, do you have any questions? 2 COMMISSIONER KRAUSE: I do not. 3 CHAIRMAN WILLIAMSON: Thank you, Mike. 4 The next item is consideration of and 5 possible discussion and/or action on external and 6 internal audits and/or reviews relating to the Texas 7 Lottery Commission and/or on the Internal Audit 8 Department's activities. 9 Catherine. 10 AGENDA ITEM NO. XIII 11 MS. MELVIN: Good morning. Thank you, 12 Chairman, Commissioner. For the record, Catherine 13 Melvin, Director of the Internal Audit Division. 14 Other than current ongoing internal 15 audits, I don't have any items of update this morning 16 but am happy to answer any questions. 17 CHAIRMAN WILLIAMSON: All right. Thank 18 you. 19 Commissioner, do you have any questions? 20 COMMISSIONER KRAUSE: No, ma'am. 21 CHAIRMAN WILLIAMSON: All right. Thank 22 you, Catherine. 23 The next item is report, possible 24 discussion and/or action on GTECH Corporation. Gary is 25 not here today, so Kim will take that for us, please. 26 1 AGENDA ITEM NO. XIV 2 MS. KIPLIN: Other than what's provided to 3 you in your Commission notebook, there are no other 4 materials or information to provide. 5 CHAIRMAN WILLIAMSON: All right. Thank 6 you. 7 Commissioner, do you have any questions? 8 COMMISSIONER KRAUSE: No, ma'am. 9 CHAIRMAN WILLIAMSON: And continuing on, 10 Kim, the next item is report by the Executive Director 11 and/or possible discussion and/or action on the agency's 12 operational status, agency procedures and FTE status. 13 AGENDA ITEM NO. XV 14 MS. KIPLIN: And other than what has been 15 provided to you in the notebook, there is no additional 16 information to provide. 17 CHAIRMAN WILLIAMSON: Commissioner, do you 18 have any questions? 19 COMMISSIONER KRAUSE: No, ma'am. 20 CHAIRMAN WILLIAMSON: Thank you. 21 And let's see. At this time we'll go on 22 to consideration of the status and possible entry of 23 orders in cases posted on the meeting agenda. 24 Kim. 25 27 1 AGENDA ITEM NO. XVI 2 MS. KIPLIN: Commissioners, I have 3 actually two orders for you to sign today. One order 4 will cover Letters A, B and C, and those are lottery 5 sales agent revocations for insufficient funds being 6 available. And consistent with the way that we 7 presented the mass docket, we'll call it, last 8 Commission meeting, we'll carry through and so at this 9 time, the staff would vote that you would approve the 10 order revoking the licenses in each of these matters, 11 consistent with the Administrative Law Judge's 12 recommendation. 13 CHAIRMAN WILLIAMSON: All right. These 14 are action items? 15 MS. KIPLIN: This is an action item. 16 CHAIRMAN WILLIAMSON: Commissioner, could 17 you make a motion, please. 18 COMMISSIONER KRAUSE: I would be more than 19 happy to. I make a motion that we adopt staff's 20 recommendation to revoke the licenses of the docket 21 numbers identified as A, B and C under the -- action 22 under Agenda Item XVI. 23 CHAIRMAN WILLIAMSON: I second. 24 All in favor? 25 COMMISSIONER KRAUSE: Aye. 28 1 CHAIRMAN WILLIAMSON: Aye. 2 Motion passes 2-0. 3 MS. KIPLIN: Commissioners, the remaining 4 order is an application for someone to be on the 5 Registry of Approved Bingo Workers. There is a 6 disqualifying criminal history with regard to this 7 particular individual. The matter went to the State 8 Office of Administrative Hearings on a denial of the 9 application. That denial was upheld by the 10 Administrative Law Judge. The recommendation is that 11 you do deny the application to be on the registry, and 12 the staff would recommend that you vote to adopt the 13 Administrative Law Judge's denial of that license. 14 CHAIRMAN WILLIAMSON: Commissioner, do you 15 have any questions? 16 COMMISSIONER KRAUSE: Well, what was the 17 rationale for this person asking us to set aside our 18 rule in her case -- his case -- Nathaniel? 19 MS. KIPLIN: You know, I just -- I don't 20 know what the person's rationale was. Hang on one 21 second. I think in particular -- to get to this point, 22 the respondent had to request a hearing to contest the 23 denial. There is a notice that goes out that says 24 you've got a disqualifying criminal conviction. The 25 respondent actually did request a hearing and then did 29 1 not appear at the hearing. 2 COMMISSIONER KRAUSE: Do they get to work 3 until we say "No," or is it the other way around? 4 MS. KIPLIN: Well, they're not on the 5 registry. 6 COMMISSIONER KRAUSE: They can't work? 7 MS. KIPLIN: So my understanding is, they 8 cannot work. There may be a grace period, but my 9 understanding is that they cannot work. Now, this 10 person is an application denial, not a revocation. So 11 if somebody were to get on the registry and then we have 12 a disqualifying criminal history -- 13 COMMISSIONER KRAUSE: Okay. 14 MS. KIPLIN: -- then we would have to move 15 and they could, they could remain on the registry and 16 work until such time as the Commission enters a final 17 order revoking them or removing them from the registry. 18 CHAIRMAN WILLIAMSON: All right. 19 Commissioner? 20 COMMISSIONER KRAUSE: I'm ready to make a 21 motion that we adopt the Administrative Law Judge's 22 findings in Docket No. 362-11-4303. B. 23 CHAIRMAN WILLIAMSON: I second. 24 All in favor? 25 COMMISSIONER KRAUSE: Aye. 30 1 CHAIRMAN WILLIAMSON: Aye. 2 MS. KIPLIN: Commissioners, at this time 3 I'll present you with both of those orders. 4 CHAIRMAN WILLIAMSON: Motion passes 2-0. 5 MS. KIPLIN: Oh, sorry. 6 CHAIRMAN WILLIAMSON: I'm just seeing if 7 there are any public comment that's not related to 8 bingo. 9 Okay. At this time we will take a 10 15-minute break. And I will encourage those of you that 11 have a witness affirmation form, if you're going to 12 repeat what somebody else has said, I would suggest one 13 of two things. Either say you'll pass and we will make 14 sure this gets into the record, because if everybody is 15 repeating the same thing, I probably will not spend much 16 time. You know, we understand where your concern is. 17 So if you have something else to offer 18 besides "I'm against it," then, of course, we would like 19 to hear that. So just for the sake of time and getting 20 all the information that we possibly can that's 21 different and new and informative, I would strongly 22 encourage y'all to think about that. 23 So at this time, it is now 9 o'clock, and 24 we will come back in session at 9:15. 25 (Recess: 9:00 a.m. to 9:16 a.m.) 31 1 CHAIRMAN WILLIAMSON: Okay. Y'all ready 2 to start back up? We're back in session at 9:16. And 3 the next item is report by the BAC -- the Bingo Advisory 4 Committee Chairman, possible discussion and/or action on 5 the Bingo Advisory Committee's activities, including the 6 June 1, 2011, Bingo Advisory Committee meeting. 7 Phil, is there anyone here that -- 8 MR. SANDERSON: Kimberly was not able to 9 make it today. But Earl Silver, the Vice Chair, is in 10 attendance. 11 CHAIRMAN WILLIAMSON: Okay. 12 AGENDA ITEM NO. II 13 MR. SILVER: Good morning, Commissioners. 14 My name is Earl Silver. I'm Vice Chair of the BAC. 15 We had a meeting on June 1, 2011. It 16 started at 10:00 a.m. We had two missing members -- or 17 three missing members -- Markey Bileu, Melissa Young and 18 Kenneth Messer. 19 The second -- we just went through the 20 agenda items. I'm not going to read it to you. We 21 talked about the minutes of the previous meeting, and 22 there were just a few cosmetic changes in some of the 23 wording. 24 Ms. Trevino gave us an update on the bills 25 and the status that's going through the Legislature. 32 1 Mr. Sanderson gave us a presentation over 2 the new public service announcement, and Mr. Miner gave 3 his report over the 2011 first quarter bingo conductor 4 information. One thing he did say: Attendance, net 5 receipts, net proceeds and charitable distributions all 6 showed a decrease from 2010. Only the number of 7 occasions increased in 2011. 8 Most of the discussion, of course, was to 9 our agenda item what was Agenda Item 6 -- or 5, I 10 believe -- which is over the new rule, over the 11 temporary license fee to pay the $2.5 million needed for 12 the computer system. The staff was very informative as 13 to why the update is needed. Joan Kotal was very 14 helpful in giving us all the information that we needed. 15 All comments that we received via email 16 prior to the meeting were against the license fee 17 increase at this time. Everyone made a special 18 reference to raising the license fees to a license 19 that's on administrative hold. The fees for those 20 licenses were going to be so enormous, there is no way 21 for a charity or commercial lessor who is not generating 22 any funds from this license will be able to afford this. 23 Most all comments received at this meeting were to the 24 same opinion. 25 This update will provide quite a few new 33 1 features that will make getting a license or paying 2 prize fees easier on the staff and charity. It was 3 stated by more than one person at this time, with all 4 the numbers in bingo going down and the economy like it 5 is, that it is not the time to impose higher license 6 fees. 7 It is very clear among all that attended 8 the meeting and have knowledge of bingo that the bingo 9 industry is able to support itself. The views were the 10 same, and it's very disappointing the bingo industry is 11 not allowed to use funds that are already generated to 12 pay this computer cost upgrade. Raising license fees at 13 this time may make it so difficult for many charities to 14 renew their licenses, with the number of charities 15 playing bingo already dropping, this additional fee will 16 surely only escalate this number. The opinion is very 17 much the same. This may not be the time to raise 18 license fees. 19 The option of just fixing the system as 20 much as can be done and operating a little longer with 21 the hopes that the economy and bingo get better in the 22 near future may be what needs to happen. It just may be 23 time to get by with what we already have. 24 And then the 2010 Bingo Advisory Committee 25 annual report was given. I think it's going to be on 34 1 your next agenda item for us to present that. 2 Gross receipts have slightly increased. 3 This report showed some interesting points, like rent 4 expense went down in 2010, net receipts still showing a 5 decrease. Due to this decrease in -- this is due to 6 decrease in the card/electronic sales that have a fixed 7 prize payout and an increase in instant/event tickets 8 with a corresponding increase in prize payout and cost. 9 The nomination workgroup met or gave us 10 recommendations for the four positions. They 11 recommended five individuals. One was Kris Keller from 12 San Antonio; Nathan Bullard from Edgewood, Texas; Larry 13 Whittington from Dallas, Texas; Larry -- I'll spell it 14 K-u-c-i-e-m-b-o -- from Houston, Texas; Teresa Johniken 15 from Lufkin, Texas. 16 There was no public comment. 17 Consideration for the next BAC meeting was tentatively 18 scheduled for August 2011. Agenda items to be on that 19 meeting are the work plan and license fees. And the 20 meeting was adjourned at 11:50. 21 I would be happy to answer any questions. 22 CHAIRMAN WILLIAMSON: All right. Thank 23 you. 24 Commissioner, do you have any questions? 25 COMMISSIONER KRAUSE: In the course of the 35 1 discussion, did y'all talk about the consequences of no 2 upgrade and what that looked like? 3 MR. SILVER: Yes, sir. And we are wanting 4 better for the industry. I can't speak for the entire 5 BAC, but there is a need for updated computer system. 6 We are fully aware of that. Some of the topic of 7 conversation was maybe not do it now, maybe try to 8 band-aid it. And Ms. Kotal made a direct comment saying 9 that there may not be anymore support. And I personally 10 asked her, "Well, what kind of support do you need? 11 Somebody dialing an 800 number to answer a question or 12 fix a problem?" She said, "Yes, similar to that." 13 And I said, "Well, this should be a third- 14 party vendor that would be able to pick up the support 15 for the time being, because it was also stated there 16 that the legislative intent of the Bingo Enabling Act 17 was to never fund money to the general fund, that bingo 18 should be able to pay for itself. And I believe the 19 intent was that bingo should only give what is allowed 20 to regulate them and the rest be sent to the charities 21 for their charitable purposes. 22 So the numbers that have floated around to 23 me are 13, $15 million. I've heard $18 million going to 24 the general fund. I would like to have Phil have all 25 the resources he possibly can have in order to audit, 36 1 regulate, do his job 100 percent effectively, have the 2 staff to do that, and bingo should be able to pay for 3 itself without having to raise taxes and especially 4 raise taxes in a down economy. 5 COMMISSIONER KRAUSE: Well, of course, you 6 realize that the Legislature gets to decide all that? 7 MR. SILVER: I completely understand that, 8 and that's just been a question that I've personally 9 had: When did the money start going to the general 10 fund? And that's going to be my mission to figure out, 11 because bingo should be able to fund itself. And Phil 12 and the lottery or the Bingo Division should be able to 13 have all the resources they have to get rid of bad 14 people in bingo, to enforce the rules, enforce the laws, 15 and that is important to have. That's what the Bingo 16 Enabling Act did, was clean up bingo. 17 COMMISSIONER KRAUSE: You had made a 18 statement about -- and I didn't really quite catch 19 this -- not allowed to use some funds, you know, for the 20 upgrade, that it was a pity that the Bingo Division 21 couldn't use some particular funds. 22 MR. SILVER: Probably the funds that bingo 23 already gives to the state in the form of taxes and 24 prize fees. I mean, that should be the purpose of why 25 the charities pay all the taxes they do and all the 37 1 prize fees and winners' fees, is to be able to regulate 2 themselves. It should never go to the general fund; it 3 should be doing the cost of regulation. And if they're 4 giving that much to the general fund -- and, I mean, 5 Phil's budget was cut. I mean, that shouldn't -- that 6 shouldn't happen. Bingo should be able to fund itself 7 100 percent, and it does. The money was never supposed 8 to go to the general fund. 9 COMMISSIONER KRAUSE: Well -- 10 MR. SILVER: And I understand this is way 11 out of the realm of what we're talking about but -- 12 COMMISSIONER KRAUSE: Anything y'all want 13 to do with the Legislature is fine with us. 14 MR. SILVER: Yes, sir. We understand 15 that. 16 CHAIRMAN WILLIAMSON: All right. 17 COMMISSIONER KRAUSE: No further 18 questions. 19 CHAIRMAN WILLIAMSON: I have no further 20 questions at this time, Earl, but I may later. 21 MR. SILVER: Thank you very much. 22 CHAIRMAN WILLIAMSON: Thank you. 23 All right. The next item is report by the 24 Charitable Bingo Operations Director and possible 25 discussion and/or action on the Charitable Bingo 38 1 Operations Division's activities, including updates on 2 staffing, licensing, accounting and audit activities, 3 pull-tab review, special projects, operator training. 4 Phil. 5 AGENDA ITEM NO. IV 6 MR. SANDERSON: Commissioners, other than 7 what's in your notebook, I have no other things to add, 8 be glad to answer any questions you may have. 9 CHAIRMAN WILLIAMSON: Okay. Commissioner, 10 do you have any questions at this time? 11 COMMISSIONER KRAUSE: Not yet. 12 CHAIRMAN WILLIAMSON: Okay. 13 COMMISSIONER KRAUSE: We'll go on. 14 CHAIRMAN WILLIAMSON: All right. The next 15 item is consideration of and possible discussion and/or 16 action, including proposal, on a new rule relating to 17 increase temporarily licenses fees for new computer 18 systems. 19 Phil, this is your item. I think how I'm 20 going to approach this is, we'll have staff bring up 21 their presentations, their information I think we need, 22 the Commissioner and I, to start with, then public 23 comments. At least that's what I'm thinking right now. 24 We'll see as information evolves. But generally that's 25 sort of where I'm headed with this. 39 1 So at this time, Phil, if you'll start. 2 And, actually, I think -- Sandy, I believe you're here. 3 If y'all want to just go ahead and come on up and sit 4 here or sit here so we can -- we don't have to keep 5 shuffling back and forth. I know she's the attorney on 6 the legal procedure for the rulemaking, and we may have 7 questions for her. 8 Let's see. Mike Fernandez and whoever 9 else you want to bring, and Kathy Pyka and whoever else 10 you want to bring for now. Like I said, who knows who 11 else may be involved in questions and comments? 12 I think right now, Phil, if you'll start 13 and just kind of lay it all out for us. 14 AGENDA ITEM NO. III 15 MR. SANDERSON: I'll be glad to start and 16 lay this out to you. To kind of let you know, you know, 17 why we're here today, you know, we've got the license 18 fee rule that will temporarily increase license fees to 19 cover the cost of redesigning the Automated Charitable 20 Bingo System. 21 The agency was made aware sometime in 2008 22 that the software vendor would no longer support the 23 platform that the system is operating under after 2013. 24 And so with that in mind, the agency developed their 25 legislative appropriations request for 2009 and 2011, 40 1 requesting a funding mechanism from the general revenue 2 for $2.5 million to design the current system. Since 3 the implementation of the current system, there have 4 been many changes to the business processes, including 5 the system application changes. House Bill 2519 from 6 the 78th legislative session, along with House Bill 1474 7 from the 81st legislative session made significant 8 changes to the Bingo Enabling Act. 9 The ACBS is a mission critical 10 application, and the agency is at risk of trying to 11 support an application on a development platform that is 12 no longer supported by the vendors. This would limit 13 needed enhancements and impact the ability to restore 14 any system in case of a system failure. In addition, 15 the Bingo Division may be financially responsible for 16 maintaining a server in order to support technology that 17 is not consistent with the other applications within the 18 agency. The legislative appropriations request was laid 19 out at the August 20, 2008, Commission meeting. It was 20 adopted and approved and submitted to the LBB for 21 consideration. 22 Additionally during this time, an internal 23 audit of the Bingo Division recommended that the 24 division embark on a redesign of the ACBS, which would 25 result in improved accuracy, integrity and reliability. 41 1 Management agreed with the recommendation and indicated 2 in the request that it has been included in the LAR for 3 2010 one 2011. 4 During the hearing process for the 5 appropriation bill, the House Appropriation Subcommittee 6 did not approve the request and recommended that the 7 agency bring this request back at the next legislative 8 session. 9 During the development of the LAR for 2012 10 and '13, all state agencies were instructed to reduce 11 their budget request by five percent and that any 12 additional request had to be in the form of an 13 exceptional item request that would have no cost to the 14 bill. The agency included in the request for 2012 and 15 '13, indicating an increase in GR appropriations which 16 would be funded by a one-time license fee increase to 17 pay for the redesign of the Automated Charitable Bingo 18 System. This LAR was approved by the Commission at the 19 meeting on August 10, 2010, and submitted to the LBB. 20 Subsequent to the approval of the LAR, the 21 State Auditor's office released its report on the audit 22 of the Charitable Bingo Division. And one of the 23 recommendations was that the agency should strengthen 24 its controls over the Automated Charitable Bingo System. 25 At the November 30th BAC meeting, Nelda 42 1 Trevino, in providing her report on the 82nd legislative 2 session, reported the agency had included this 3 exceptional item as well as an additional exceptional 4 item to restore the five percent budget reduction. Both 5 of these items were supported by a fee increase. Well, 6 the ACBS redesign would be a one-time fee increase that 7 would sunset on August 31st of 2013, the increase for 8 the budget restoration for the five percent reduction 9 could or would be a permanent increase. 10 There was a lengthy exchange between 11 Ms. Trevino, myself and the BAC members on this matter. 12 The division, or the agency, based on the 13 recommendations and results of the LBB, only included as 14 an unfunded item the ACBS redesign. We did not -- we 15 decided not to pursue increased license fees for budget 16 restoration, which would have been a permanent license 17 fee increase. 18 In February of 2012, the agency provided 19 both the Senate Finance Committee and House 20 Appropriations Committee briefing documents that 21 included the unfunded exception, and a request along 22 with the proposed increase in the GR appropriation which 23 would be funded by a one-time license fee increase, 24 along with a chart showing the gross receipts, 25 charitable distributions, net revenue to the state and 43 1 allocations to local jurisdictions for the Calendar 2 Years 1994 through 2010. 3 There was a public hearing held in front 4 of the House Appropriations Subcommittee on February 14, 5 2011, where this request was laid out and presented to 6 the subcommittee. 7 At the BAC meeting on March the 9th, I 8 placed on the agenda an item for discussion and/or 9 action on the license fee increase, to cover the cost of 10 redesigning the Automated Charitable Bingo System. 11 There were additional discussions held at Commission 12 meetings on March the 31st and May the 19th, all 13 regarding the funding mechanism that would be used to 14 redesign the Automated Charitable Bingo System. 15 On May the 23rd, an email bulletin was 16 sent to the subscribers of our email alert system, which 17 included a draft rule for a one-time license fee 18 increase to fund the redesign of the ACBS that was going 19 to be discussed at the BAC meeting on June 1st and to 20 provide any comments to this rule to Kimberly Rogers, 21 the BAC chair, prior to the meeting. 22 A subsequent email was sent out on 23 May 25th, providing additional information as to the 24 reason for the request and an increase in license fees. 25 I believe Ms. Rogers received four comments as a result 44 1 of that email that was sent out. At the June the 1st 2 BAC meeting, there was a lengthy discussion on this 3 topic, along with other alternative methodologies for 4 the fee increase and formation of a workgroup. On June 5 the 2nd, an email was sent to the workgroup with a 6 revised fee schedule, which is the subject of the rule 7 that is currently in the notebooks and up for proposal 8 today, based on the discussion at the BAC meeting. 9 With that, I'll be glad to answer any 10 questions. That ends the initial report that I have. 11 CHAIRMAN WILLIAMSON: All right. Do you 12 have any questions you want to start off or do we want 13 to -- 14 COMMISSIONER KRAUSE: Well -- 15 CHAIRMAN WILLIAMSON: -- get some more 16 information? 17 COMMISSIONER KRAUSE: I'm not really sure. 18 Can I go ahead and ask a couple of questions? 19 CHAIRMAN WILLIAMSON: Sure. Jump in any 20 time. 21 COMMISSIONER KRAUSE: In our last 22 legislative session where I guess this was considered, 23 why didn't the Legislature just say, "Okay. We have to 24 do this"? Are they asking us if we want to do it or if 25 we think it's a good idea? You know, considering, you 45 1 know, the budget constraints we've got, why didn't the 2 Legislature just say, "Okay. You will do this"? 3 MR. SANDERSON: In this past session or 4 the session prior, the first time we made the request 5 for the 2010-11, the current biennium, the subcommittee 6 heard testimony, and there were some discussions about 7 the fact that it would not go out of support in 2013, so 8 why the rush to get it designed right now and come back 9 in two years and ask for the same request? 10 So with that, we were prepared to come 11 back, until the state leadership requested that there 12 would be no items or exceptional item request approved 13 unless there was no cost added to the bill. So we had 14 to come up with a mechanism to request the funding and 15 then how we would fund that request ourselves, which 16 would be -- our only option is a one-time fee increase 17 for conductors and lessors. 18 COMMISSIONER KRAUSE: So the Legislature 19 saw it as a tax that they didn't want to impose, they 20 just want us to do it. Is that -- 21 MR. SANDERSON: That would probably be a 22 fair assumption. I don't know if -- 23 COMMISSIONER KRAUSE: -- a 24 characterization of that? 25 MR. SANDERSON: It would be probably a 46 1 good characterization. They did not want to fund it 2 with any of the current funds in general revenue. And 3 they said if you -- 4 COMMISSIONER KRAUSE: Well, but they also 5 didn't tell us to increase our fees, they just -- they 6 didn't direct us to? 7 MR. SANDERSON: They did not direct us to 8 increase our fees, but they directed us that if we 9 wanted the two and a half million -- 10 COMMISSIONER KRAUSE: We had to figure it 11 out for ourselves? 12 MR. SANDERSON: -- we would have to 13 increase the fees. 14 COMMISSIONER KRAUSE: Okay. 15 MR. SANDERSON: The $2.5 million 16 appropriation is contingent on our raising of fees or 17 the revenue to support -- 18 COMMISSIONER KRAUSE: So they're matching 19 us, then? So we raise 2.5, they match 2.5? 20 MR. SANDERSON: They give it back to us, 21 yes. 22 COMMISSIONER KRAUSE: Okay. So we raise 23 it, they'll take it, and they give it back to us. Okay. 24 MR. SANDERSON: There is a lengthy 25 process -- and Ms. Pyka can give you that information 47 1 later -- but it's not as simple as, you know, "Here you 2 go. Can I have it back?" 3 COMMISSIONER KRAUSE: Is there a chance we 4 can't get it back, that we might not get it back if we 5 get it? 6 MR. SANDERSON: I'll let Ms. Pyka go to 7 that. 8 COMMISSIONER KRAUSE: Let me -- let's hang 9 on to that for a second. 10 CHAIRMAN WILLIAMSON: We're in the course 11 of finding out things. Yes, we'll find that out. 12 COMMISSIONER KRAUSE: When you were 13 talking to the BAC -- and I see the BAC as kind of a 14 leadership group, you know, amongst what I informally 15 call our customers -- I heard a little bit of testimony 16 about the fact that maybe there was some discussion 17 about alternative ways to pay for it. What did you hear 18 about that? 19 MR. SANDERSON: Well, there were not 20 alternative ways to pay for it. There were alternative 21 methodologies for the fee increase, and there was also 22 some discussion by members that why we cannot use -- 23 "Why can't we use the funds that we already collect in 24 excess of the appropriation?" 25 Currently our appropriation for the next 48 1 biennium, excluding prize fees, is a little over 2 $2.1 million, $2.2 million. And we collect license fees 3 of around $2.9 million and rental tax of another 1.1 to 4 $1.2 million. And then there are prize fees that are 5 deposited straight into general revenue, the net 6 allocations to the general revenue of around $13 million 7 a year. 8 COMMISSIONER KRAUSE: Of course, the 9 obvious answer to that is that the Legislature didn't 10 want to do that. And so, anyway, what were some of the 11 alternatives that were proposed for different ways to do 12 the fee increase that might be palatable, acceptable to 13 our customers? 14 MR. SANDERSON: The initial proposal that 15 was sent out for, a draft for comment, indicated a 16 25 percent increase for the organizations that conduct 17 bingo and a 100 percent increase for the organizations 18 that are commercial lessors. And that would be each 19 year of the biennium, 25 percent each year for the 20 conductors and basically double the license fee for the 21 commercial lessors for each year. 22 Additionally there is a license status 23 that is considered in administrative hold. Those 24 organizations have an active license, but they are not 25 conducting any bingo activities. The conductors are not 49 1 playing bingo, and the lessors are not leasing any 2 premises for bingo. Historically those are the lowest 3 of the class organizations, Class A, with a $100 license 4 fee payment. We were looking to raise those license 5 fees to a maximum of $5,000 for a commercial lessor and 6 $3,750 for a conductor. 7 There was a significant discussion at the 8 BAC meeting, along with some of the comments that were 9 received by Kimberly Rogers, that it was unfair and not 10 fair to assess that high of a license fee to someone who 11 is not conducting any bingo activities. 12 COMMISSIONER KRAUSE: So that's an 13 increase from what to $3,750? 14 MR. SANDERSON: One hundred -- 15 COMMISSIONER KRAUSE: $200 at $3,750? 16 MR. SANDERSON: Yes, or $100 to $5,000. 17 And so the second option that was discussed at the BAC 18 meeting was a methodology of utilizing a percentage of 19 gross receipts or a percentage of rental receipts to 20 come up with a license fee for this period of time. And 21 based on the information in Calendar Year 2010, the 22 commercial lessors at the highest level of gross 23 receipts could pay upwards to $10,000 per year for a 24 license; and, whereas, you know, currently it's $2,500. 25 And there was, you know, some discussion 50 1 about that methodology. When we were doing the briefing 2 for the Senate Finance and the House Appropriations, and 3 along with LBB, we provided them our initial methodology 4 which would call for a 47 percent increase across the 5 board for both conductors and lessors. So in being 6 consistent with that methodology and for the purpose of 7 presenting a rule for public comment, there was a 8 decision made to lay out the initial rule for the 9 license fee increase at 50 percent across the board. 10 Based on the current applications and licenseholders, 11 that would raise an estimated $2.6 million over the 12 biennium. 13 MS. JOSEPH: Phil, I just wanted to 14 mention one other alternative that was brought up was 15 possibly increasing fees for the manufacturers and 16 distributors. 17 MR. SANDERSON: Thank you, Sandy Joseph. 18 MS. JOSEPH: Yes. 19 MR. SANDERSON: Yes, there was some 20 discussion about, you know, why can't we raise it for 21 manufacturers and distributors? Those fees are set in 22 statute, and there is no methodology for us to increase 23 those license fees. 24 CHAIRMAN WILLIAMSON: Okay. 25 COMMISSIONER KRAUSE: So we can't just 51 1 make a rule. 2 CHAIRMAN WILLIAMSON: No. 3 (Laughter) 4 CHAIRMAN WILLIAMSON: You know, what I 5 would like to do is kind of take a step back, 6 particularly for myself. I want just a little bit of a 7 history of the bingo industry, basically why we are at 8 this point today. And I know the lottery people 9 probably don't have a clue because, from what I 10 understand -- and surely somebody out there knows this. 11 Just educate at least Winston and I and maybe other 12 people out there. And maybe some of you bingo people 13 that are here were pre-regulation days, and I may elicit 14 your comments on that. 15 You know, when was the first bill filed? 16 What were the events or event that caused the 17 Legislature to want to do that? Just background, I 18 guess, is what I'm looking for. So is there anybody out 19 there that can help us with that? 20 MR. SANDERSON: For the history of 21 bingo -- 22 CHAIRMAN WILLIAMSON: Yes. 23 MR. SANDERSON: -- in general? 24 COMMISSIONER KRAUSE: Bingo regulation. 25 CHAIRMAN WILLIAMSON: Bingo regulation. I 52 1 mean, I know you weren't here when that started, were 2 you? 3 MR. SANDERSON: I was not, but I'll start 4 off. And if someone from the public would like to jump 5 in, that's fine. 6 CHAIRMAN WILLIAMSON: I'm pointing fingers 7 right now. Surely between that -- because I don't know 8 that, and I think it would be illuminating to a certain 9 degree to understand: Why are we at this point? Why 10 are you regulated to the extent that you are, and 11 several other things that may come up as we educate 12 ourselves on this. 13 So, Phil, if you want to start. And then 14 either one of you gentlemen just, you know -- this is 15 kind of not a real structured format here. 16 MR. SANDERSON: Well, the constitution 17 that authorized bingo was in 1981, is when they passed 18 the constitutional amendment. The first licenses were 19 issued in April of 1982. In '84, they allowed -- at 20 that point in time, there was just a license fee 21 straight across the board. I don't recall what the 22 amount was for conductors and lessors. 23 In '84, they authorized the current fee 24 structure that is in place today, of the 11 licensed 25 classes, ranging from the $100 to $2,500. 53 1 CHAIRMAN WILLIAMSON: So the dollar amount 2 has not changed since 1984? 3 MR. SANDERSON: That dollar amount has 4 been the same. It's been the same since 1984. And the 5 only exception was the two years in '99 and 2000 when we 6 increased the fees for the current system we have today. 7 CHAIRMAN WILLIAMSON: And we'll get back 8 to that. But go ahead. 9 MR. SANDERSON: There was an authorization 10 of a two percent local tax. Local counties and 11 jurisdictions that authorized bingo could assess a two 12 percent gross receipts tax. In '85, the state imposed 13 an equal two percent gross receipts tax, which was then 14 raised to five percent gross receipts tax, I believe, in 15 '87 or '89. 16 CHAIRMAN WILLIAMSON: Okay. So wait a 17 minute. So in '85, we charged two percent to local. 18 Then the state jumped in, and they wanted their two 19 percent. And then the state wanted more, and they upped 20 it to -- 21 MR. SANDERSON: To five percent. 22 CHAIRMAN WILLIAMSON: So the locals get 23 two and the state gets five? 24 MR. SANDERSON: The state got five. And 25 this was based on the gross receipts. 54 1 CHAIRMAN WILLIAMSON: Okay. 2 MR. SANDERSON: In '89, they authorized -- 3 take that back. In '91, they authorized a three percent 4 rental tax for the commercial lessors. And at that time 5 they also authorized a three percent prize fee to the 6 winners of bingo prizes. 7 CHAIRMAN WILLIAMSON: Okay. 8 MR. SANDERSON: But the gross receipts tax 9 at seven percent, their organizations were struggling in 10 the early nineties to either pay their taxes or make 11 their required distributions. So there was a decrease 12 in conductors during that period of time. 13 CHAIRMAN WILLIAMSON: The number of 14 conductors? 15 MR. SANDERSON: Yes. 16 CHAIRMAN WILLIAMSON: Okay. And when was 17 that, in ninety -- 18 MR. SANDERSON: That was in the -- with 19 the increase and the -- that was in the '89-91 time 20 period. '92 is when they started to get behind, and a 21 lot of them lost their licenses for failure to pay 22 taxes. In '93, the Legislature did away with the gross 23 receipts tax and raised the prize fee tax to 24 five percent, from three to five percent. 25 CHAIRMAN WILLIAMSON: Okay. So they no 55 1 longer called it whatever they did? 2 MR. SANDERSON: They called it -- 3 CHAIRMAN WILLIAMSON: So they just called 4 it something else? 5 MR. SANDERSON: They just called it -- 6 they called it something else. And it still -- it 7 probably brought in similar revenue, and that was in 8 '93. 9 CHAIRMAN WILLIAMSON: Okay. 10 MR. SANDERSON: And since that time, there 11 has not been any change to the license fees or the 12 taxing structure since '93. 13 CHAIRMAN WILLIAMSON: Okay. Now, I'm 14 aware that bingo was not in this agency when it first 15 started. Where was it? 16 MR. SANDERSON: It was at the 17 Comptroller's office through 1989. And then from 1980 18 through the early -- '94 -- I'm sorry -- 1990 to early 19 '94, it was at Texas Alcoholic Beverage Commission, and 20 then it was transferred to the Lottery Commission in 21 October -- I'm sorry -- April of 1994. 22 CHAIRMAN WILLIAMSON: Okay. So whoever 23 can answer this, why did we regulate bingo initially? I 24 understand you may not have your best whatever. 25 MR. FENOGLIO: For the record, my name is 56 1 Stephen Fenoglio. The reason was, up until they passed 2 the constitutional amendment, there was people -- 3 charities conducting bingo -- 4 COMMISSIONER KRAUSE: It was on (referring 5 to microphone). 6 CHAIRMAN WILLIAMSON: It was on. 7 MR. FENOGLIO: I'll speak out. 8 COMMISSIONER KRAUSE: Perfect. 9 MR. FENOGLIO: Up until that time, there 10 were charities conducting bingo, and it was considered 11 illegal gambling. So the Legislature looked at it -- 12 this is in the legislative history -- and said, "Let's 13 regulate something that's going on." It was small 14 stakes -- VFW, American Legion, and church groups 15 primarily conducting bingo. 16 So the Legislature looked at it and said, 17 "We don't want to criminalize this activity; we want to 18 regulate it." And so that's when the state stepped in 19 and started the bingo regulation. 20 I want to modify something that Phil said 21 in answer to a question you had about the prize fee. 22 They didn't eliminate the gross receipts and establish 23 the prize fee. They actually had a gross receipt and a 24 prize fee. And what they did was cancel the entirety of 25 the gross receipts tax on bingo and increase from 57 1 three percent to five percent the prize fees. 2 CHAIRMAN WILLIAMSON: So basically they 3 took it off of the people that were conducting it and 4 put it on the people that won the money. Is that how I 5 can process that? 6 MR. FENOGLIO: You could look at it that 7 way. The reliability is, is as the staff knows, for low 8 stakes games, the charities, though, retain that prize 9 fee. You think about it as a pull-tab. You got a 10 dollar winner, make 95 cents to the customer and a 11 nickel for the prize fee. Most charities, up to about 12 five or $10, would eat that cost. And we changed that 13 law four years ago so that the charities could pay that 14 prize fee. But, yes, they did move it from a gross 15 receipts tax to a prize fee. 16 CHAIRMAN WILLIAMSON: Okay. 17 MR. FENOGLIO: I would be happy to answer 18 any questions. 19 CHAIRMAN WILLIAMSON: Okay. Let's see. 20 We started on it as to the why. 21 MR. FENOGLIO: Yes. 22 CHAIRMAN WILLIAMSON: And I assume there 23 were complaints or it was becoming more of a -- I mean, 24 usually there is an event or events that create the 25 Legislature to be interested in doing something about 58 1 it. 2 MR. FENOGLIO: There were several 3 prosecutions, one out of Dallas County, and it's a Court 4 of Appeals case that made it all the way up. It said 5 bingo is illegal gambling. 6 CHAIRMAN WILLIAMSON: Okay. 7 MR. FENOGLIO: And that was in -- I think 8 the prosecution started in '76, and the case made its 9 way up to the Court of Appeals in '79 and '80. And 10 there were other -- prosecutors were having questions: 11 Is this legal or not? There is prosecutorial discretion 12 involved. There is low stakes gaming. "We don't care. 13 We've got other problems." Again, the case out of 14 Dallas County Court of Appeals came up, and that was 15 kind of one of the seminal moments of: We ought to 16 regulate this. Clarify the law. And again, my 17 understanding, it was pretty well widespread all over 18 the state, this low stakes gambling. 19 CHAIRMAN WILLIAMSON: Okay. 20 MR. FENOGLIO: The prosecutors didn't want 21 to put in jail members of the Catholic church, veterans' 22 organizations, et cetera. 23 CHAIRMAN WILLIAMSON: So when we started 24 out, we just started out with a basic license fee, 25 saying, "Catholic charity," whatever, "here is your 59 1 fee," whatever that was at that time. You said it's the 2 same as it is now? 3 MR. SANDERSON: The initial fee was I 4 think fairly insignificant -- $100, $200, $300, 5 somewhere in there. 6 CHAIRMAN WILLIAMSON: Okay. 7 MR. SANDERSON: And then in '85, they 8 raised it to -- or they established the current class 9 structure of A through J. 10 CHAIRMAN WILLIAMSON: Okay. And all this 11 now is statutorily the fees that are set and those sort 12 of things? 13 MR. FENOGLIO: Yes. 14 CHAIRMAN WILLIAMSON: Those are not by 15 rule? 16 MR. FENOGLIO: Yes. 17 CHAIRMAN WILLIAMSON: Okay. And it ended 18 up -- it started off in the Controller's office? 19 MR. FENOGLIO: Correct. 20 CHAIRMAN WILLIAMSON: Okay. Who was the 21 controller back then? 22 MR. FENOGLIO: Bob Bullock. 23 CHAIRMAN WILLIAMSON: Okay. So can 24 someone -- you know, why did it get moved from the 25 Controller's office? 60 1 MR. FENOGLIO: He didn't want it. 2 (Laughter) 3 CHAIRMAN WILLIAMSON: Okay. I understand 4 that. But, you know -- 5 COMMISSIONER KRAUSE: We understand. 6 CHAIRMAN WILLIAMSON: We understand, yes. 7 MR. BRESNEN: Steve Bresnen on behalf of 8 the Coalition For Survival of Charitable Bingo. Because 9 I'm afraid that Governor Bullock might show up at any 10 minute and throttle me, I'll put it gingerly. He was 11 quoted in the newspaper as saying that he wanted to go 12 somewhere where there were peace officers authorized to 13 carry weapons, and then sent it over on the TABC. 14 I think, in fact, he was running for 15 Lt. Governor in 1990, done just about everything that 16 could be done over on the bingo side of things at that 17 point in time, and I think he felt like bingo ought to 18 be moved over to a regulatory agency. And I think he 19 sort of cleaned things up from the perspective of 20 somebody who intended to win and go on to a higher 21 office. So I think that's a little bit of the history 22 for you. 23 While I've got the mike, I might add a 24 little more context to this. Bingo lessors pay three 25 percent gross receipts tax on the rents that they 61 1 collect. There is no deduction for that. It is a gross 2 income tax. Unlike the franchise tax where retailers 3 get cost of goods sold and other people get various 4 deductions and things, bingo lessors pay three percent 5 off the top. That's been in effect for a considerable 6 period of time. 7 At the same time, if you look at the gross 8 rents collected over time, they're relatively flat. 9 There was a little bit of a blip up from about maybe 36, 10 $37 million up to about 40 and some change, maybe in the 11 last few years. But essentially since about the mid- 12 nineties, rent has been flat. You can look at your own 13 personal experience and know that expenditures of 14 operating buildings, including the property tax most 15 significantly, have not been flat since the 16 mid-nineties. 17 Bingo, the overall gross and the net 18 proceeds to charities or the distributions peaked in 19 about '93, '94, '95, at something like $52 million. 20 It's down. The most recent number is about 21 $33.9 million. And the lottery came into existence 22 during that time. Very substantial gambling occurring 23 in Louisiana, Oklahoma and New Mexico occurred during 24 that time. So while it's true that the current fee 25 structure has been in place for a long time, the cost 62 1 structure of the people acting within is significantly 2 different from the first -- the era when those fees were 3 set. Things were substantially better. Taxes were 4 lower; the distributions were higher. The gross was 5 better for the lessor and for the charities. 6 Since that time, one of the ways that 7 bingo has been able to maintain its numbers, at least on 8 the gross side of things, is that the Lottery 9 Commission, after a several-year effort by those of us 10 who appear here too often, got the -- what do you call 11 them? -- event ticket type of pull-tab authorized by the 12 Commission. That helped greatly with sales; it helped 13 with some customer retention. 14 But the prize fee on those -- the prize 15 fee has increased -- I mean, not the prize fee -- but 16 the percentage of payout on prizes relative to the gross 17 has increased. You can probably give them a number, but 18 it seems substantial to me, and it's considerably higher 19 than the lottery itself. So it would be wrong to 20 consider this current fee structure without considering 21 all the other costs that are associated -- labor costs. 22 You name it -- utilities, everything has gone up along 23 with that. 24 When the -- I guess about a decade ago 25 now, when y'all increased the fee before to pay for the 63 1 current system, nobody griped. As I recall, we accepted 2 that and supported it. Probably some of the members of 3 my organization griped some. But I think all in all, 4 that happened on a fairly easy basis. Would you agree 5 with that? 6 MR. SANDERSON: In going back and looking 7 at the adoption of that rule, there was some significant 8 comment about increasing the license fees, but it was 9 25 percent over a two-year period. So, in essence, it 10 was not near as significant as this current proposal. 11 CHAIRMAN WILLIAMSON: And we're going to 12 get into that specific in a while. 13 MR. BRESNEN: Sure. Anyway, that's the 14 context within which things have occurred. 15 I would be happy to answer any other 16 questions about history, to the extent I know it. 17 CHAIRMAN WILLIAMSON: So Bullock put it 18 over to the TABC -- 19 MR. BRESNEN: Yes. 20 CHAIRMAN WILLIAMSON: -- because he 21 recognized that it was a licensing and regulatory 22 function, which y'all did. And how long did you stay 23 there? 24 MR. BRESNEN: Bingo was there just for -- 25 what? -- about two sessions? 64 1 MR. SANDERSON: A short period of time. 2 When the session that created the Lottery Commission, 3 September 1, 1993, also moved bingo from TABC April 4 the 1st of 1994. 5 CHAIRMAN WILLIAMSON: Okay. And so my 6 question, obviously: Well, why did they move it? The 7 gaming aspect aside -- I mean, I understand the thought 8 process of some folks who might say, "Well, this is 9 gambling and this is gambling, so they're going to be 10 put together," albeit the style of the lottery being an 11 entrepreneurial sort of business as opposed to bingo, 12 which is a regulatory and licensing sort of environment 13 which to me are like apples and oranges. So what was 14 the thought process behind that whole thing, besides the 15 obvious, an easy one? 16 MR. BRESNEN: Sure. What's your thinking 17 about that, Phil? You were there. 18 MR. SANDERSON: I was there, and I'm not 19 really informed as to what the reasoning was. I was 20 kind of low level in the auditing side at TABC. There 21 was a push by then Comptroller Sharp to take over the 22 mixed beverage tax, and so they moved the auditing and 23 the taxation of mixed beverages, which is restaurants 24 and bars, to the Comptroller office. And I guess they 25 looked for a place for bingo to reside and used the 65 1 gaming aspect of it to put it over at the Lottery 2 Commission. That's my initial assumption. 3 MR. BRESNEN: I would have to say that I 4 was working for the Lt. Governor in those days, and I 5 would have to say that it was probably never a very easy 6 fit between the alcoholic beverage industry that had 7 the -- were the sole occupants, if you will, of that 8 agency for, who knows, probably since prohibition was 9 over. And the adding of bingo over there was sort of an 10 after-thought glummed on. 11 I think it was taking probably time away 12 from things that the agency historically did. And with 13 the advent of a gaming agency, it made some conceptual 14 sense to move it along although, as you pointed out, the 15 two enterprises are entirely different. 16 CHAIRMAN WILLIAMSON: And does the 17 Controller still have the auditing and tax function for 18 the TABC or does anybody know? 19 MR. SANDERSON: They still have the tax 20 auditing for mixed beverage tax. Mixed beverage is a 21 gross receipts tax. 22 CHAIRMAN WILLIAMSON: Okay. Commissioner, 23 do you have any questions? And, like I say, I'm just 24 trying to kind of educate us -- 25 MR. BRESNEN: Sure. 66 1 CHAIRMAN WILLIAMSON: -- why we are where 2 we are today. 3 COMMISSIONER KRAUSE: Any ideas for us on 4 what to do? 5 MR. BRESNEN: Well, I think -- the direct 6 answer is, I think you put your finger on it earlier. I 7 saw many, many, many fee bills die in the House, or 8 bills with fees in them die in the House, in particular 9 in the House this session. The one fee bill that I can 10 think of that passed was one that people who are 11 convicted of crimes have to pay to provide courthouse 12 security. It passed the House; it did not pass the 13 Senate. 14 There was a bill widely supported by the 15 cattle and dairy and goat industry to support a fee for 16 the Animal Health Commission to do its job by those 17 industries, and that went down on the House floor in 18 flames, even though it was widely supported by the 19 industry. 20 So I believe the short answer is, is that 21 the Legislature (A) didn't want to raise the fees 22 itself. Secondly, we offered them alternatives. I 23 think it's ridiculous that local governments get any of 24 this money that bingo generates. They have not one iota 25 of activity or involvement with bingo, with the 67 1 exception of the occasional burglary or, you know, a 2 robbery or, you know, something that might happen in a 3 parking lot. 4 CHAIRMAN WILLIAMSON: Okay. So I guess 5 the question is obvious, then. Why do they and how did 6 this come about? I mean, somebody had to have -- 7 MR. BRESNEN: I think it's a holdover from 8 the original days. My sense is, there was probably a 9 little candy in it for the local governments at that 10 time when it was getting approved. You got a better 11 sense of it. To my recollection, they've never had any 12 real regulatory duty over it. Is that correct? 13 MR. SANDERSON: As far as I can recall, I 14 do not -- you know, I've not seen any regulatory 15 authority. They do have authority, you know, as far as 16 police power, whatever, to go in and look for, you know, 17 minors. They can do some of that activity. Most of 18 them don't; the majority of them don't. 19 CHAIRMAN WILLIAMSON: Doesn't it have to 20 be approved on a local level, whether you can conduct 21 bingo in a city or a county? 22 MR. SANDERSON: There has to be a local 23 option election. 24 CHAIRMAN WILLIAMSON: Local option 25 election. 68 1 MR. BRESNEN: But it can be done at a JC 2 precinct, municipal or county-wide level. So there is, 3 you know, not necessarily a uniformity between any 4 governmental entities' law enforcement interests and the 5 jurisdiction that might do it. 6 COMMISSIONER KRAUSE: So it's a freebie 7 for them? 8 MR. BRESNEN: Yes, sir. My guess is, many 9 of them are surprised to receive it and wonder why 10 they're getting that check. Seriously, there has been a 11 place -- and it may still be there. I can't remember -- 12 where, when you got your license or applied for the 13 license down here, you had to send something to the 14 local government. And for years and years, for at least 15 the first 10 years that I represented people in bingo, 16 they would say, "We go down there," and they say, "Don't 17 give us that." Local governments don't even know what 18 to do with it. 19 CHAIRMAN WILLIAMSON: I'll have to ask my 20 local government, because I know we have bingo in Parker 21 County. I'll ask them -- 22 MR. BRESNEN: Right. 23 CHAIRMAN WILLIAMSON: -- what they do with 24 those, if anything. 25 MR. BRESNEN: So anyway, it's probably an 69 1 anomaly that should have been eliminated a long time 2 ago. We asked the Legislature. We gave them that 3 option to divert those funds to this purpose. 4 Obviously, they declined to do that. We asked them to 5 use some of what I thought was about $20 million a year 6 excess funds over what they give y'all to regulate 7 bingo, to use that source of funds for this purpose. 8 They declined to do that. So the bottom line, 9 Commissioner Krause, I think is, is that it slid 10 downhill, if you will. 11 COMMISSIONER KRAUSE: So I guess what our 12 choice is, is to either consider, you know, raising the 13 fees or foregoing the upgrade. I mean, it's kind of 14 down to that. I mean, if we raise the fees, then the 15 options are to do it in different ways. And I only 16 heard two ways, the way we proposed it and then one 17 where it's more like ability to pay, and so that's that. 18 Let me explore with you for a second 19 about, you know, what is the consequence under the 20 constitutional amendment if the Charitable Bingo 21 Division can't regulate charitable bingo? Does it, you 22 know, revert back to an illegal activity if the 23 regulatory authority is unable to provide that 24 regulatory supervision? 25 MR. BRESNEN: I don't think so. I think 70 1 you have issued licenses pursuant to a valid state 2 statute. It might be ugly regulation, but I think once 3 those licenses have been issued and you're acting in 4 conformity with your license, that you would have to 5 have some valid reason to revoke a license, and I don't 6 think you would. A constitutional amendment authorizes 7 the Legislature to enact a statute authorizing bingo and 8 then puts certain qualifications on what has to be 9 included in the statute. 10 To be real honest about it, I have serious 11 doubts about whether it's constitutional for the state 12 to be making a profit on bingo. It says it's for the 13 charities that conduct bingo. There are costs that are 14 incidental to that. You've got to have a building, 15 you've got to pay utilities, those kinds of things. 16 Regulation, I would put reasonable 17 regulation as an incidental cost of doing that. I think 18 the courts would find that that's valid. But once 19 you're getting the kind of money that the state is 20 getting out of this on a net revenue basis, it's become 21 a revenue source for the state rather than an activity 22 for the state to regulate. 23 COMMISSIONER KRAUSE: What's the 24 consequence if we don't, if we continue with this 25 software program that will be unsupported? I mean, 71 1 we'll come to a point in time to where, you know, it 2 will break down and there is nobody to fix it. 3 Now, I heard some testimony about the 4 possibility that some vendor will appear that would be 5 willing to support it for something. And so, obviously, 6 you know, that's an option. 7 MR. BRESNEN: Well, I'm no computer 8 expert. But the way I would look at it is, every other 9 state agency has taken big hits. And their ability to 10 do central facets of their job has been hamstrung by the 11 current Legislature. It's not a political statement by 12 any means on my part. They're the ones that get the 13 rocks thrown at them when they run for office. They got 14 themselves elected; they get to make the decision. 15 COMMISSIONER KRAUSE: Yes. 16 MR. BRESNEN: But this agency would not be 17 in a position that is -- unlike that that's facing lots 18 of others. School districts going to take about a 19 $2 billion cut across the board, six percent, during 20 this session. 21 By the way -- and I won't get up later, 22 for brevity purposes -- but I get sick and tired of 23 going to the Legislature and having them say, "Why don't 24 the charities get more money?" All other things being 25 equal, if you take the 2010 number, this would be a 72 1 three -- and the charities and the industry pays in, 2 it's about a 3.7 percent reduction in the bottom line to 3 the charities. That assumes that lessors pass those 4 costs on. In some cases they would not be able to do 5 that, given the real estate market. And other places, 6 they would be able to do that. So call it 3.3 or 3.7, 7 it's still going to be a reduction in the net revenue to 8 charities, on top of the fact that we already know that 9 bingo is in decline. 10 And one of the emails -- correct me if I'm 11 wrong, Phil -- but one of the emails, some of the 12 numbers had to be reconsidered in light of the fact that 13 there was a decline in number of licensees. And at its 14 peak, bingo had about 1,600 conducting organizations. 15 Now it has about 1,200 or maybe 12 and some change? 16 MR. SANDERSON: Just under 12. 1,160, 17 somewhere in that area. 18 MR. BRESNEN: That's down from 1,255 when 19 I was cranking numbers on my projections for gambling 20 revenue from bingo last year. So you've got a declining 21 industry in an era of increasing costs, looking at a 22 gargantuan fee increase in percentage terms. And I 23 understand. I testified to Rep. Darby's subcommittee 24 that I thought that the computer system, the software 25 would be a good thing. 73 1 And I trust Phil implicitly and his staff 2 when they say this is a problem. But it's a problem 3 that I think, under the economic circumstances and the 4 condition of the industry, we need to limp along for 5 another couple of years. I would start looking right 6 now -- somebody out there knows how to support this 7 system -- maybe look at this in a year and see where you 8 stand and get started. 9 I think one of the primary concerns, if I 10 understand the timeline, is you may get through the 2013 11 fiscal year. But then if you're getting started to 12 develop -- design the system and put it in place, that's 13 where you get outside the support calendar. So at a 14 minimum, I would advise you to revise the timeline and 15 the calendar on this and put some time and effort into 16 finding that additional support. 17 And, by the way, you know, this is being 18 referred to as a one-time increase. It's a two-time 19 increase, because you're going to pay for each year of 20 your license period over the next biennium. 21 So bottom line is, I think it's a 22 difficult choice, but I would urge you to come down on 23 the side of the industry and not inflict this increase 24 on them at this time. 25 COMMISSIONER KRAUSE: Well, what the 74 1 Charitable Bingo Division do? Does it benefit the 2 customers at all? And is there going to be some 3 foregoing of that benefit if they can't do their job? 4 MR. BRESNEN: Commissioner, it's hard to 5 say, because we're probably not fully apprised of what 6 the technology could do, and it's hard for people to 7 understand that benefit before it comes to them. You 8 know, I hate to -- this may doom my presentation. But, 9 you know, it's kind of like you don't know what the 10 benefits of health care reform are going to be until 11 there is health care reform. It could go either way, 12 you know. 13 COMMISSIONER KRAUSE: Well, I was not 14 going that direction. It's more like if we can't even 15 do what we're doing that, you know, then what is the 16 adverse consequence to the industry? 17 CHAIRMAN WILLIAMSON: And I'm going to 18 hold that question in abeyance -- 19 COMMISSIONER KRAUSE: Okay. 20 CHAIRMAN WILLIAMSON: -- for now, because 21 we will get to that. What I would like to do is say -- 22 Steve, thank you. 23 MR. BRESNEN: Sure. 24 CHAIRMAN WILLIAMSON: You may be called 25 again. 75 1 MR. BRESNEN: You bet! 2 CHAIRMAN WILLIAMSON: And I would like to 3 take a five-minute break, and then we'll all come back. 4 And it is 10 after 10:00. 5 (Recess: 10:10 a.m. to 10:17 a.m.) 6 CHAIRMAN WILLIAMSON: We are back in 7 session at 10:17. 8 All right. Let's talk about the actual 9 software itself. I guess, Mr. Fernandez, if you are -- 10 just kind of lay it out for us -- 11 MR. FERNANDEZ: Yes, ma'am. 12 CHAIRMAN WILLIAMSON: -- the who, why, 13 where and when and how do we get two and a half million. 14 And we'll go from there. 15 MR. FERNANDEZ: All right. Let me -- for 16 the record, my name is Mike Fernandez. I'm the Director 17 of Administration. And with me today I have Joan Kotal 18 who is our Information Resource Manager, as required by 19 the State of Texas. Every agency has one, and Ms. Kotal 20 is ours. So she has responsibility for a department 21 within Administration for the development and support of 22 all application systems. This is the technology side of 23 the house. 24 Just to give you a brief history, I would 25 say the latter part of '94, we became aware that the 76 1 current software that provides the software tool that we 2 developed in support applications was going to no longer 3 support that software. When we received that 4 information or when we found out about that information, 5 at that time they were going to eliminate support for 6 the toolset that we used in '08. Okay? So when we saw 7 that, Ms. Kotal and her staff immediately began looking 8 at conversion planning for all our applications, all our 9 business applications, to include ACBS, because that's 10 supported with that particular toolset. 11 Shortly thereafter, in 2005, we received 12 additional notification that they had then moved, 13 because they apparently got a huge outcry from their 14 install base, their customer base, about no longer 15 supporting that. They came back and said, "Well, no, 16 we're not going to -- we're going to push that support 17 to 2013." Okay? 18 And then it wasn't too terribly long after 19 that, they came back and said, "No. We're going to 20 support supporting it in 2009," and, in fact, did stop 21 supporting one of the particular pieces that -- one of 22 the particular tools that we use. And then later they 23 had a posting saying that, "We're going to support 24 indefinitely." Now, what we do know, with the exception 25 of that particular piece of the equipment -- 77 1 CHAIRMAN WILLIAMSON: I'm sorry. Did you 2 say they would support indefinitely? 3 MR. FERNANDEZ: They came back and said, 4 "We will support indefinitely." But we do know that one 5 of the tools that we use is no longer being supported. 6 It's not being listed. But what they have continually 7 said to their customer base is that (A) we will not make 8 any changes or enhancements to those tools, and we 9 strongly encourage you to move to the new release that 10 they ship their licensees, which is us. Okay? 11 So what happened when they came out and 12 said, "We're not going to support it," they shipped, 13 under the agreement that we have with them, what the new 14 toolset is, what the new tools are. And so Joan, 15 looking at our 30 some-odd applications that we have to 16 convert, and based on her plan, her staff immediately 17 started converting our applications to that. 18 CHAIRMAN WILLIAMSON: So specifically I 19 assume this is the lottery -- 20 MR. FERNANDEZ: Yes, ma'am. 21 CHAIRMAN WILLIAMSON: -- applications that 22 you're referring to? 23 MR. FERNANDEZ: Yes, ma'am, the lottery 24 applications. 25 CHAIRMAN WILLIAMSON: All right. 78 1 MR. FERNANDEZ: And of the 30 some odd 2 Joan has converted, I would say approximately 19, with a 3 plan to convert the remaining applications over the next 4 two years. At the same time, Joan was meeting with Phil 5 and her staff was reviewing the ACBS system, looking at 6 all the various components of that system as well as any 7 audits or any legislation that was outstanding that 8 needed to be included in the new system. 9 And based on that, they did an estimate. 10 Okay? And what that estimate was I would say roughly is 11 around 17,000 hours. And then when they looked at the 12 additional functionality that would be coming on-line, 13 25 to 25 percent more, our estimate was around 20,000 14 hours. Okay? 15 And I will say to you that Ms. Kotal has 16 worked for me for probably -- a long time -- 13 or 14 17 years. And we have been through this exercise a number 18 of times with the Workforce Information System of Texas, 19 with the Job Training Partnership Act, so we have had 20 the opportunity to go through this many, many times -- 21 unemployment insurance systems, et cetera. 22 So what we did after we got that estimate, 23 we looked at the various skill sets that are needed as 24 you go through that process -- right? -- and the 25 analysis phase and the design phase, et cetera. So 79 1 we're trying to put a cost to that. And based on that, 2 we look at a blended rate, and that's the rate we're 3 going to use when we go out to deal with a vendor that 4 will come in to support this application or the 5 development of this application. 6 Now, having said that, I guess, to try to 7 give you the abridged version, it boils down in my 8 opinion to three areas. One, you've already heard 9 discussed at length this morning by Phil and some of the 10 other folks that have come forward to talk about the 11 need for the new system. That's on the business side of 12 the house. Okay? And that's very good and our role is 13 to support and accommodate that. 14 But on my side of the house, on the 15 technology side, there are a couple of other issues. 16 One is, is that we know and we believe that that toolset 17 will no longer be supported. It will go out of support, 18 because the technology today is browser-based, it's 19 web-based, same look and feel both internal and 20 external, and that's where this company is going, as 21 most software houses, if not all, are going. So we know 22 that that's coming. 23 So what that boils down to, when that goes 24 out of support -- and one piece is already out of 25 support -- is if you get something in a ditch, if you 80 1 have a problem on it, then you don't have anywhere to go 2 to get it fixed. Okay? You don't have the 3 manufacturer, if you will, to go to, to have it fixed. 4 So that's about risk. It's about how much risk are you 5 willing to accept? 6 Now, I was at the Advisory Committee 7 meeting and did have the opportunity to hear some of the 8 comments made. And I heard again this morning about 9 third-party support. Well, I will say to you that I'm 10 not unfamiliar with third-party support. But my primary 11 use of third-party support has been on the application 12 side, the business application, not the toolset. And 13 what I mean by that, a good example is PeopleSoft, which 14 is an accounting system. 15 That particular piece -- that application 16 runs, is supported on a platform, on a toolset platform. 17 Now, you can go hire third parties. There are quite a 18 few that will come in and support that PeopleSoft app. 19 However, I'm unfamiliar with using a third=party that 20 supports the tool. Okay? I'm not saying you can't find 21 them. And I know if you go Google search, you can see 22 them out there. And I know that those software houses 23 are in litigation with them. 24 But the issue that I tried to run down 25 very quickly last week is, I did have the opportunity to 81 1 speak to an architect, a system architect with a global 2 development company, about this very issue. And we both 3 agreed at the end of the day, you probably can find 4 somebody to do that. The issue you get into is, that 5 third party, unless they're contracted with that 6 software house, they don't have access to their source 7 code. 8 So I guess -- long story -- my point is, 9 is that if it's not supported, we have a problem. Well, 10 Joan and her staff are going to do everything they can 11 to build the work-around and go forward with the 12 work-around, and that's what a third party would do. 13 So I'm not saying you can't explore it, 14 and I'm not saying it would be good. I guess my caution 15 on the front end, because you know, I have some 16 fiduciary responsibility, is to say, "Well, I guess I 17 had rather try to build those work-arounds myself -- we 18 do that on other systems from time to time -- before I 19 contracted a third party. So, you know, again, I think 20 that's the risk. 21 If you don't -- if you don't license, 22 relicense and go forward or choose to do that, that's 23 fine. And, you know, this is what we do for a living, 24 and we're going to do everything that we can to support 25 it. All right? That's two. 82 1 The third thing is that if we choose not 2 to do that, is that there is still going to be some 3 costs. What those costs are is, now the agency is going 4 to support two looks -- right? -- two platforms, one of 5 the old version and the new version. All right? And 6 one of the things that we would explore with our staff 7 and with that software house is, the licensing 8 requirement to be licensing both of those views. Okay? 9 Plus I suspect that there will be some 10 hardware additions, some server additions, because now 11 you're running old and new. And I would be -- I would 12 be recommending to Phil that we also pick up another 13 database administrator to support, to stay with the old 14 and maintain it. 15 So in a nutshell, those are the kinds of 16 things that, you know, I believe we're confronted with. 17 I think it boils down to risk. And I can't sit here and 18 tell you that that thing won't last another 10 years. 19 It very well might. But I also can't tell you that it 20 won't go down, you know, in three days. 21 What I can tell you is that in my 36 years 22 in government and another eight and nine in the private 23 sector, we try to run critical business systems on 24 supported platforms, because of the nature of that. But 25 from time to time things -- we do what we do. 83 1 So I'll be happy to answer any questions. 2 And again, Ms. Kotal is here and has certainly more 3 in-depth technical knowledge than I do now regarding 4 that. 5 CHAIRMAN WILLIAMSON: Okay. All right. 6 Give me a little history on the ACBS, how that came 7 about. What platform is that? What technology is that? 8 Is that Oracle? I don't know what it is. If you give 9 me more information on that. How much did that cost? 10 Did they meet the budget on the cost? Did we go over 11 budget? Did they meet the time frame to get it done? 12 Who supervised the implementation? 13 I mean, and I know you guys -- I don't 14 know if you were around back when all of this was 15 happening. Once again, you know me, I like to kind of 16 get a background and history of where we started from, 17 because I know that explains a lot of the industry's 18 experience in the past and kind of gets us up to speed. 19 And so if someone can provide that information, whoever 20 that may be. 21 MR. FERNANDEZ: You know, Phil can -- I 22 may be jaded here. I came to work for this agency in 23 2002, Madam Chairman. And my first meeting was with the 24 company that had been hired to roll this system out. 25 All right? And it was very interesting. Ms. Kipling, 84 1 our General Counsel, was there, as well as a number of 2 other staff. And at that time when I was in that 3 meeting -- and I was there to listen and did for the 4 better part of a number of hours -- was that they had 5 been working on that system for some time and there had 6 been, I think, some funds expended, and there was no 7 system. Okay? 8 So my role early on was to develop, I 9 guess, an exit plan, if you will, for that particular 10 company. Okay? Now, they had chosen a name company, 11 software that they were going to use, which is used 12 widely in this country, around the world, too. But the 13 team that had been brought on to do that development 14 work, for whatever reason, had not made it successful, 15 had not rolled anything out. 16 So what we did is that we worked with Phil 17 and his staff and we developed what they had to 18 accomplish and complete to be paid the remainder of the 19 funds that had been allocated to them, and we would 20 release them and accept that system. So we worked, I 21 guess, another year, Phil, at least, to complete that 22 system. Now, Kathy Pyka, I want to say that the cost of 23 that system was $874,000, I think. 24 MS. PYKA: The final was seven hundred 25 and -- just over $700,000 that we paid. 85 1 MR. FERNANDEZ: So that was the cost of 2 it. And again, you know, Commissioner, sometimes system 3 developments fail, as you guys read in the newspaper and 4 I'm sure see on the news, for many reasons. And, you 5 know, I don't know why or why or what happened here that 6 had delayed that development effort and resulted in the 7 place that we were in when I began working here. 8 So I would say that, you know -- this is 9 my take. And Ms. Melvin is here, and I know her staff 10 has looked at that system. I believe that probably some 11 of the design work that occurred or didn't occur is 12 reflected in the audits for additional controls. I 13 think that's why we're seeing some of those things. 14 CHAIRMAN WILLIAMSON: Okay. What platform 15 is it in now? I mean, what are we using right now? 16 What it is? 17 MR. FERNANDEZ: We're using Oracle. 18 CHAIRMAN WILLIAMSON: Oracle what? 19 MS. KOTAL: For the record, I'm Joan 20 Kotal, the Information Resources Manager. The database 21 server is Oracle 11g. Then the development toolsets 22 that this system was developed in was Oracle Designer, 23 Oracle Forms and Oracle Reports and PL/SQL on the back 24 end. 25 CHAIRMAN WILLIAMSON: Which on back? 86 1 MS. KOTAL: PL/SQL? 2 CHAIRMAN WILLIAMSON: Okay. What do they 3 no longer support for sure that they said, "We don't 4 care what you do. We're not going to support it"? 5 Which one? 6 MS. KOTAL: Oracle Designer. 7 CHAIRMAN WILLIAMSON: Okay. Designer. So 8 again, would that mean that you would not be able to fix 9 anything -- I mean, what does Designer enable you to do 10 or did it enable you to do? 11 MS. KOTAL: When this system was initially 12 developed, they used Oracle Designer to generate many of 13 the screens and the reports and even the database, the 14 back end of it. In the event that you've had a portion 15 of the system that failed, for whatever reason, then you 16 would have to rewrite that portion or you would have no 17 support from Oracle to tell you if there is a work- 18 around or that they do a patch release to help you fix 19 that problem. 20 CHAIRMAN WILLIAMSON: Okay. This has been 21 functioning for what, 10 years? 22 MS. KOTAL: I believe so. 23 CHAIRMAN WILLIAMSON: And so ideally, you 24 know, from what you're describing to me, then you're 25 saying these are bugs, for lack of a better word. No? 87 1 What would create it to fail now where it may not have 2 failed two years ago, doing the exact same thing? 3 MS. KOTAL: It could be one of many 4 issues. It could be that the -- it could be a memory 5 issue, because of something that you're doing into the 6 system. It could be -- when I say "memory," it could be 7 a log file, it could be reaching some type of threshold 8 that was supported for that. It could be and very often 9 could be that a change in the most recent database 10 doesn't support something that you've been doing. 11 It could also be a security patch, the 12 operating system of the server itself. We're running on 13 a Microsoft platform. You probably have known and read 14 in the news that Microsoft occasionally gets hacked. 15 They put out quarterly, sometimes much more often, 16 security patches and fixes, and it could be that 17 something in a fix to ensure that your server stays 18 secure actually breaks something else. 19 CHAIRMAN WILLIAMSON: Okay. How many 20 customers do we serve on that system right now? How 21 many people access it or how many people are using that 22 in the industry? 23 MR. SANDERSON: Well, the current ACBS is 24 just the database where we maintain our general 25 information, licensing and financial information 88 1 reported by the charities. As far as I know, there is 2 no direct assess from the bingo industry into the 3 system. 4 CHAIRMAN WILLIAMSON: Okay. So right now 5 we just use it internally to basically store all of our 6 information that we collect on the people that are in 7 the industry? 8 MR. SANDERSON: Joan was going to add 9 something. 10 CHAIRMAN WILLIAMSON: Okay. 11 MS. KOTAL: I think it's used in-house by 12 the Bingo Division for managing their product. 13 Additionally, it feeds information to what we call our 14 Bingo Service Center -- 15 MR. SANDERSON: Yes. 16 MS. KOTAL: -- which actually people from 17 the field access through a web app that we developed for 18 them. So the data is fed from the ACBS to the web. 19 MR. SANDERSON: There is inquiry access by 20 the industry on the website. And I want to -- I can get 21 the exact number. I believe we have about 400 22 registered users to that system that actually have the 23 ability to log in and look at their specific account 24 activities, and the rest of it is open to the general 25 public that anyone at any time can go look at financial 89 1 information or find a bingo location. 2 CHAIRMAN WILLIAMSON: Okay. So from what 3 I'm hearing, then, we have this big database. Basically 4 we use it internally, although we do allow industry to 5 go in and look at their information.? But there is no 6 interaction at all from anybody? In other words, we're 7 just loading information in it for the most part? 8 MS. KOTAL: From the website we're loading 9 information, and they can upload additional information 10 and take payments on-line for that data. 11 MR. SANDERSON: Not at this point in time, 12 we can't take payments. 13 MS. KOTAL: Okay. 14 MR. FREDERICK: Let me make sure we're 15 saying the same thing. 16 CHAIRMAN WILLIAMSON: Okay. 17 MR. FERNANDEZ: That that is an 18 application system that they run to do their business. 19 MS. KOTAL: Right. 20 MR. FERNANDEZ: So it's not -- I want to 21 make sure. It's not just that they're storing data here 22 and nobody is doing anything, other than storing data. 23 They're actually using that -- that's an application 24 system that lets them process licensing and renewals and 25 whatever the work that the business does. That is the 90 1 business application. 2 CHAIRMAN WILLIAMSON: Okay. But it's 3 still all for internal, for the most part, use? 4 MR. SANDERSON: For the most part, 5 internally. The information is data entered into the 6 system. Then when it gets time to issue a license, the 7 system goes through several edit checks to make sure 8 that the application is complete and that the ability to 9 issue it is good, there's no outstanding tax issues or 10 other conflicts, and it allows the licenses to be 11 generated and printed. 12 If somebody doesn't file a return, we get 13 a report to notify them that they need to file their 14 report and pay their prize fee or taxes. It attracts, 15 you know, some of the compliance cases that are opened 16 up for non-payment of prize fees and other activities. 17 CHAIRMAN WILLIAMSON: Okay. 18 MR. SANDERSON: So it does provide 19 information and it does go through a process, does have 20 processes that generate the application renewals to send 21 out to organizations to let them know they need to renew 22 their license. 23 CHAIRMAN WILLIAMSON: Okay. And, of 24 course, I'm sure we did this so we didn't have to have 25 massive files and people going through files every day 91 1 seeing where we -- I can appreciate that. 2 What are we required statutory -- I guess, 3 what are we required to do statutorily to keep 4 information and do these business processes, what -- 5 does this system handle that right now? 6 MR. SANDERSON: This system handles what 7 we're statutorily required to maintain, I believe, yes. 8 CHAIRMAN WILLIAMSON: Now, I know there 9 have been pushback or conversations in the past -- and 10 this is anecdotal -- that there are some things the 11 industry would like to see or are not happy with what 12 this does. I guess what I'm trying to understand is, we 13 have a system right now. We want to improve the system 14 in response to -- besides the obvious, you know, the 15 software support. Statutorily what are we required -- 16 "Industry, what would you like? What will you accept? 17 What will you -- I'm sorry, guys, this is just what 18 you're going to have to deal with." I'm trying to get a 19 sense of how this is all mixed together. 20 MR. SANDERSON: Statutorily, you know, 21 we're required -- our basic, you know, guideline is for 22 strict control and close supervision over the regulation 23 of bingo. And we issue licenses to organizations to 24 make sure they're qualified. There's certain activities 25 that, for example, a license can only be -- an 92 1 organization can only play three sessions a week and 2 there can only be seven organizations at a location. 3 And so the system we have runs all those 4 checks when we put the application information into the 5 system. So if we didn't have the application, then it 6 would be enormous amount of man-hours to review all of 7 the potential pitfalls, I guess, in issuing the license, 8 which could end up licensing an organization that's not 9 qualified to be licensed or issue a license that could 10 be in conflict with the Act. 11 CHAIRMAN WILLIAMSON: Okay. 12 MR. SANDERSON: And the system helps 13 prevent that. 14 CHAIRMAN WILLIAMSON: Okay. And it's 15 functioning at that level. So by statute, we are 16 required to meet in terms of what we have right now in 17 place. Is that correct? 18 MR. SANDERSON: Yes. 19 CHAIRMAN WILLIAMSON: Okay. You can jump 20 in. I'm still thinking. 21 COMMISSIONER KRAUSE: Well, if Oracle 22 isn't going to support Oracle Designer, will they give 23 us the source code so that we can do something with it? 24 MR. FERNANDEZ: Commissioner, no. To my 25 knowledge, most -- it's not been my experience that 93 1 those companies would do that. You know, for -- 2 COMMISSIONER KRAUSE: We haven't asked, 3 though, have we? 4 MR. FERNANDEZ: No, we have not asked. 5 That is absolutely correct. You know, generally it's 6 been my experience that there's a couple of things 7 happening here. One is that technologically the 8 industry is changing to better, more efficient toolsets 9 or to some new thing like the Internet. The other thing 10 is, it is built-in obsolescence, if you will, product 11 life cycles and that that product is going away. And I 12 suspect Oracle, not unlike any other software house or 13 company, wants you to move to their latest platform. 14 COMMISSIONER KRAUSE: Of course they do. 15 MR. FERNANDEZ: That's correct. 16 CHAIRMAN WILLIAMSON: I used QuickBooks as 17 long as I could, and they finally forced me to upgrade 18 after 10 years. 19 MR. FERNANDEZ: But you're correct, we 20 have not asked that question. 21 COMMISSIONER KRAUSE: Well, you know, with 22 built-in obsolescence and with the fact that, you know, 23 they are demonstrating an unwillingness to continue to, 24 you know, provide any of the support, that they don't 25 believe, I guess, in the platform anymore because they 94 1 don't want to do it, they want it to be browser-based 2 and we're not there and we're not going there -- maybe, 3 maybe not -- then what good is it to them to decide to 4 withhold it? I mean, how do they benefit beyond that, 5 if we're not going with a new program? 6 So anyway, I guess those would be the 7 arguments with them, that we may or may not be ready to 8 go there at this point in time. And we have a long 9 institutional memory about the way they treat us. 10 MR. FERNANDEZ: Absolutely. 11 COMMISSIONER KRAUSE: Of course, they may 12 not care about that. 13 MR. FERNANDEZ: Well, it depends on how 14 big a customer you are and what kind of licensing 15 agreement you have, how many -- 16 COMMISSIONER KRAUSE: Are we a good 17 customer, the Lottery Commission? 18 MR. FERNANDEZ: We're a good customer. 19 But when you talk about fee-based licenses -- 20 MS. KOTAL: (Indicating) 21 MR. FERNANDEZ: -- we're not like the 22 Department of Human Services or the Comptroller of 23 public accounts. 24 CHAIRMAN WILLIAMSON: True. 25 MR. FERNANDEZ: But the other thing, you 95 1 know, the state tries to get the best -- through the 2 Department of Information Resources, they try to get the 3 best number they can. 4 COMMISSIONER KRAUSE: So we may have other 5 persuasive methods to talk to them? 6 MR. FERNANDEZ: We can explore them; we 7 certainly can. 8 CHAIRMAN WILLIAMSON: So Oracle will be 9 who we go to? Their new release, is this the web-based 10 toolset? 11 MR. FERNANDEZ: We have the release 12 already. 13 CHAIRMAN WILLIAMSON: Okay. So, really, 14 the Lottery already has the toolset is what you're 15 telling me. So, really, Bingo wouldn't even be paying 16 for that? 17 MR. FERNANDEZ: No, and they don't. We 18 license -- the agency -- the Texas Lottery Commission 19 licenses that tool. 20 CHAIRMAN WILLIAMSON: Okay. So they don't 21 even have to pick up the actual software purchase, which 22 I'm sure could be substantive. So this is just strictly 23 for the man-hours to develop this web base. Will we 24 be -- and there again, I'm not real up to speed on a lot 25 of this. But it sounds like to me, are we going to have 96 1 to basically re-create the ACBS to a certain degree on 2 the web application so it will -- I mean, I assume we're 3 going to have to do that and then add the enhancements 4 on. Is that what you were talking about earlier? 5 MR. FERNANDEZ: I would say yes. Joan? 6 MS. KOTAL: Yes, that would be correct. 7 CHAIRMAN WILLIAMSON: And I assume that 8 includes converting the database that we already have, 9 that we won't lose that? 10 MS. KOTAL: That's correct. It would also 11 include not just a one-for-one conversion of the 12 database but also bring it in line in the database 13 design with the rest of the agency as there is so much 14 interaction between systems, both financial. There is a 15 case management system they use for complaints and 16 license issues. And data flows between those, so it's 17 very integrated. So it will require making some 18 additional improvements so that that happens, continues 19 to happen. 20 CHAIRMAN WILLIAMSON: So these other 21 system you're already talking about, are those already 22 on the new version, the web-based version? 23 MS. KOTAL: Some of them; some of them 24 are. 25 CHAIRMAN WILLIAMSON: Okay. So that's 97 1 what you were talking about earlier and the 19 that 2 we've already gone to this new platform, we still have a 3 certain amount to do. But then there is all of the 4 interrelated activity between just not only the database 5 specific to the bingo industry activity but all of the 6 subsequent business accounting functions and case 7 management and whatever else that goes on, that if we 8 don't convert this, then there will be costs associated 9 with trying to get them to be at least a little bit 10 friendly with each other? 11 MS. KOTAL: That would be a correct 12 assumption. 13 CHAIRMAN WILLIAMSON: Do we have any idea 14 what the cost associated with that might be in terms of. 15 "Okay. We can't afford to do this. These guys can't 16 afford to do this, you know. Come up with the money." 17 We still have to figure out a way for everybody to get 18 along in terms of the software aspect of it. So what is 19 the cost of supporting the old system if we don't do 20 anything? 21 MR. FERNANDEZ: Well, I think that, you 22 know, our initial review of that would indicate the 23 addition of eight servers at a cost of around -- around 24 $230,000 for the hardware. We're estimating a licensing 25 fee cost of around $30,000, and we're estimating a 98 1 database administrator cost of -- I'm going to say this. 2 Joan won't agree with me -- but I'm hoping to get it 3 around $70,000 annual -- 4 CHAIRMAN WILLIAMSON: I'm just trying to 5 get ballpark numbers because, you know, we've got to 6 know what we're looking at if we do X or do Y. So if we 7 do say, "We can't do this, y'all just make it work" -- 8 and, Kathy, this may be your question -- who is going to 9 pay for the extra 330 to $350,000 to have the old 10 platform and the new platform be somewhat compatible -- 11 and I hate to use that word -- but be able to 12 communicate at some level? 13 MS. PYKA: Certainly. As Mike identified, 14 about $330,000 in additional expense for that initial, 15 but there is still the ongoing expense that he would 16 still have of the license fee and the d/b/a after the 17 first year. So we're looking at, I would believe, about 18 $100,000 ongoing expense the second year for the d/b/a/ 19 and the license fee. 20 Is that correct? 21 So for the biennium, I believe that would 22 be $430,000. And there is not funding in the general 23 revenue fund appropriated to the Bingo Division at this 24 point in time to absorb that cost either. 25 COMMISSIONER KRAUSE: Well, would we still 99 1 be paying license fees for this product that's no longer 2 supported? Are they going to free that money up? 3 MR. FERNANDEZ: We'll be paying license -- 4 it's my understanding we will be paying license fees. 5 COMMISSIONER KRAUSE: Really? 6 MR. FERNANDEZ: Yes, sir. 7 CHAIRMAN WILLIAMSON: Well, still, there's 8 only one that's not supported anymore. There's still 9 three. They're just not enhancing it, which means 10 they're not making any improvements to it. 11 MR. FERNANDEZ: We still have to license 12 that product, is my understanding. That doesn't mean -- 13 you know, all of these things are, I suspect, 14 negotiable. 15 CHAIRMAN WILLIAMSON: Okay. So -- 16 COMMISSIONER KRAUSE: I think it's 17 fascinating that, you know, they treat the product with 18 such disrespect but they want to be paid retail for it. 19 MS. PYKA: And so going back to your 20 initial question, the appropriation for bingo as we look 21 at it for Fiscal Year '11 and '12 is approximately 22 $3.4 million -- excuse me. '12 and '13 -- $3.4 million 23 each year. And in the first year, there would be a cost 24 of $330,000 that would either have to come out of the 25 current baseline appropriation of $3.4 million, which is 100 1 essentially staffing today, or there would have to be a 2 fee increase to cover that. 3 CHAIRMAN WILLIAMSON: Okay. So I guess 4 the question is, if we decide to do that, can we do that 5 at this level? I mean, can the Commissioners do that if 6 we need to? 7 COMMISSIONER KRAUSE: I guess the question 8 is, if we do raise fees like a small amount, can we get 9 the money back from the general revenue fund to do what 10 we want to do? 11 MS. KIPLIN: Let me just say that 12 statutorily, you have the authority to adopt rules as it 13 relates to the commercial lessor license and the bingo 14 conductor license to increase fees to defray 15 administrative expenses. So you have the authority, you 16 have the current authority now. The question is whether 17 that money under the current rider, I guess, is 18 authorized to be appropriated. I think the rider had to 19 do with the redesign of the ACBS system. And so I'm 20 looking to Kathy Pyka. I think I better defer to her in 21 terms of LAR and appropriations issues. 22 MS. PYKA: And if we describe the item in 23 the LAR, we did describe it as the Automated Charitable 24 Bingo System redesign. And the description of it is 25 project in the amount of two and a half million will 101 1 redesign the Automated Charitable Bingo System, and it 2 goes on to explain the toolset challenge. 3 So as we further describe the request 4 schedule, we say that we're going to completely redesign 5 the ACBS system, again go on to the toolset challenges 6 and then go on to why it's a mission-critical system of 7 this agency and the business risk of not redesigning it. 8 So I think, you know, there's a little bit 9 of a question there in the fact that we submitted the 10 request, stating we were going to redesign the complete 11 system. We received a contingency rider stating that 12 that funding of the two and a half million is approved, 13 based on the redesign of the system. What Mike is 14 describing is not essentially a redesign of the system, 15 but it is the continuation of the system with the 16 current toolset. So I think we've got a little bit 17 of -- 18 CHAIRMAN WILLIAMSON: Are we talking about 19 a rock and a hard place here? 20 MS. PYKA: Correct. 21 CHAIRMAN WILLIAMSON: All right. Let's go 22 to -- and, Phil, I'm sure you can -- start us down 23 funding for the bingo agency. I know it's been spoken 24 many times that you guys raise enough money to cover 25 your costs and whatever, and I'm sure that's true, but 102 1 let's put a fine point on it. From gross, what comes 2 out of that, where does it go, how much goes to the 3 state, how much goes to local, you know, so we can get a 4 little better idea of just exactly what the money flow 5 is. 6 MR. SANDERSON: Currently the Bingo 7 Division, we collect license fees, administrative 8 penalties, rental tax and prize fees. And those 9 total -- on average have been totaling around 10 $30 million a year across the board. Now, there's 12 11 and a half million of that, approximately, that goes 12 back to local jurisdictions. 13 CHAIRMAN WILLIAMSON: Okay. I'm doing the 14 math slowly. Okay. So 12 and a half comes off of the 15 top? 16 MR. SANDERSON: Off the top. It goes back 17 to local jurisdictions. So that leaves a net revenue 18 deposit in general revenue of around 17 to $18 million 19 annually. Our appropriation is, you know, out of 20 general revenue, and it's based on the legislative 21 appropriations request. And, of course, the last 22 several years, we've had to reduce two and a half or 23 5 percent and then, of course, request another 5 percent 24 for the next biennium. So our appropriation is around 25 2.1 for the current for FY '12 and '13, I believe. 103 1 Is that correct? 2 MS. PYKA: Actually, the appropriation for 3 '12 and '13 is a baseline of $3.4 million in Fiscal Year 4 2012. 5 CHAIRMAN WILLIAMSON: So is that for the 6 year or for the two-year period? 7 MS. PYKA: That's for the first year. 8 CHAIRMAN WILLIAMSON: So it's 3.4 for the 9 first year? 10 MS. PYKA: Right. 11 CHAIRMAN WILLIAMSON: Okay. 12 MS. PYKA: And the way that the 13 appropriation is styled is, we look at the 14 administrative revenue that's generated for the bingo 15 function. And Phil described three of those fees, being 16 the bingo operators, lessors' revenue, the bingo 17 equipment and then the bingo rental tax so the sum of 18 those is $4.3 million, with $3.4 million of it directly 19 appropriated back for the regulation of charitable 20 bingo, which is a difference, then, of $900,000 -- 21 CHAIRMAN WILLIAMSON: Okay. 22 MS. PYKA: -- that is retained in general 23 revenue. 24 CHAIRMAN WILLIAMSON: Okay. So you're 25 saying the 4.5 ostensibly should be applied to funding 104 1 what the activities are. Is that what you're trying to 2 tell me? 3 MS. PYKA: Well, it's the state's method 4 of appropriation. The bingo amount that I described, 5 $3.4 million that's appropriated, is only for bingo 6 direct expenses. There's other direct expenses of bingo 7 and other indirect expenses of bingo that are not 8 covered in that appropriation. 9 CHAIRMAN WILLIAMSON: Okay. All right. 10 MS. PYKA: So then going back to Phil's, 11 as he was describing it, when we look at the bingo prize 12 fees, that's about 25, almost $26 million a year. 13 Twelve and a half million of that goes back to the 14 charities -- 15 CHAIRMAN WILLIAMSON: Okay. 16 MS. PYKA: -- or goes back (simultaneous 17 discussion). 18 CHAIRMAN WILLIAMSON: Well, give me 19 numbers -- let's go back. Are you starting at the 30 20 again? 21 MS. PYKA: Yes. 22 CHAIRMAN WILLIAMSON: The 30, is that a 23 number after some things have been taken out? 24 MR. SANDERSON: The 30 is pretty close to 25 the total collected. 105 1 MS. PYKA: Right. And then take out 2 $25 million of that as bingo prize fees. 3 CHAIRMAN WILLIAMSON: Okay. So now we're 4 looking at $5 million? 5 MS. PYKA: Yes, four and a half to 6 $5 million. 7 CHAIRMAN WILLIAMSON: Okay. So we've got 8 30. And then 25 goes back to the players. So we're 9 left with $5 million. Is that how I -- 10 FROM THE AUDIENCE: No. 11 MS. PYKA: Right back to the players. 12 It's a revenue source. 13 CHAIRMAN WILLIAMSON: For the state. 14 MS. PYKA: Right. 15 CHAIRMAN WILLIAMSON: The state gets 16 $25 million? 17 MS. PYKA: Let's round it up to 18 $26 million. 19 CHAIRMAN WILLIAMSON: Okay. So out of the 20 $30 million, the state gets $26 million, with a 21 remainder of four? 22 MS. PYKA: Yes. 23 CHAIRMAN WILLIAMSON: Okay. Forget now 24 for the 26. What happens to the four? 25 MS. PYKA: The $4 million, of that 106 1 $4 million, 3.4 is appropriated back to the Texas 2 Lottery Commission, and the balance is retained in the 3 general revenue fund by the State of Texas. 4 CHAIRMAN WILLIAMSON: Okay. So -- 5 MS. PYKA: It's not appropriated to us. 6 CHAIRMAN WILLIAMSON: Now, you say Texas 7 Lottery Commission bingo? 8 MS. PYKA: Correct. 9 CHAIRMAN WILLIAMSON: I mean, so it really 10 goes to bingo? 11 MS. PYKA: Correct. 12 CHAIRMAN WILLIAMSON: Okay. So the state 13 then, from what I understand, gets the $26 million plus 14 a little bit off the top of the four. Right? 15 MS. PYKA: Right. 16 CHAIRMAN WILLIAMSON: Okay. Now, what 17 happens to the 26? 18 MS. PYKA: Of the $26 million, $12 million 19 of that, about 12 and a half million is appropriated as 20 prize fee allocations back to the local jurisdictions. 21 CHAIRMAN WILLIAMSON: Okay. So out of 26, 22 12 and a half back to local. Okay. 23 MS. PYKA: Right. 24 CHAIRMAN WILLIAMSON: Okay. 25 MS. PYKA: And the balance of that is 107 1 retained again by the state's general revenue fund and 2 is not appropriated back to this agency but is retained 3 by the State of Texas. 4 CHAIRMAN WILLIAMSON: Okay. So what is 5 that, 13 and a half? Did I do my math right? 6 MS. PYKA: Certainly, yes. 7 CHAIRMAN WILLIAMSON: Okay. So the state 8 keeps 13 and a half plus a little bit off of the 9 $4 million? 10 MS. PYKA: Correct. 11 CHAIRMAN WILLIAMSON: And then the locals 12 get 12 and a half? 13 MS. PYKA: Correct. 14 CHAIRMAN WILLIAMSON: So is $3.4 million 15 what Phil will have 2011 and -- 16 MS. PYKA: '12. 17 CHAIRMAN WILLIAMSON: -- 2012? Now, the 18 next year after that, is there an amount set that 19 they'll get? 20 MS. PYKA: It's the exact same amount. 21 CHAIRMAN WILLIAMSON: The exact same 22 thing. Okay. Prior to all of this cutting, you know, 23 how much was budgeted back to bingo, I guess, you know, 24 prior to the two and a half -- the percentage cuts that 25 we've had to go through in the last year or so? 108 1 MS. PYKA: The percentage cut for this 2 biennium, which is the '10-11 biennium, was 3 $1.3 million, and so basically half of that. Its 4 appropriation was just a little bit over $4 million a 5 year. 6 CHAIRMAN WILLIAMSON: Okay. So we went 7 from -- 8 MS. PYKA: $4 million appropriated per 9 year to $3.4 million. 10 CHAIRMAN WILLIAMSON: Okay. So we lost 11 $600,000 per year? 12 MS. PYKA: Per year. 13 CHAIRMAN WILLIAMSON: Which -- how many 14 FTEs did we lose or will lose or whatever? 15 MR. SANDERSON: That was 12 FTEs. 16 CHAIRMAN WILLIAMSON: Okay. In what areas 17 has that occurred? Auditing -- I mean, which -- 18 MR. SANDERSON: Auditing and inspections 19 and license examiners. It's all three categories. Two 20 of the vacancies are in licensing. Three of the 21 vacancies are in the inspection area, and then three 22 other vacancies are in the auditing section currently -- 23 five vacancies in audit. So we have 10 vacancies at 24 this point in time. 25 CHAIRMAN WILLIAMSON: Okay. So we -- 109 1 MR. SANDERSON: And we're still working 2 with the two other -- 3 CHAIRMAN WILLIAMSON: So auditing has 4 five, licensing has two, inspection is three. 5 MR. SANDERSON: Yes. 6 CHAIRMAN WILLIAMSON: Is licensing here? 7 I assume that's here locally? 8 MR. SANDERSON: Yes. 9 CHAIRMAN WILLIAMSON: Inspection, is 10 that -- 11 MR. SANDERSON: They were all housed here 12 in Austin -- 13 CHAIRMAN WILLIAMSON: Okay. 14 MR. SANDERSON: -- but they come around 15 the back. 16 (Simultaneous discussion) 17 CHAIRMAN WILLIAMSON: And there was 18 someone to go out to the actual bingo halls and look? 19 MR. SANDERSON: Yes. 20 CHAIRMAN WILLIAMSON: Okay. And then 21 auditing, we know what that does. Okay. And so we have 22 two more that you -- 23 MR. SANDERSON: Two more. 24 CHAIRMAN WILLIAMSON: Okay. And, you 25 know, I am aware that there have been concerns raised by 110 1 our Internal Audit staff, and I know the state auditors 2 have raised concerns about our controls in certain 3 things regarding that. So, you know, losing five 4 auditors to me is a big deal in terms of that. 5 How much does the lottery side of the 6 house pay for bingo costs? I know there is a cost 7 function to that. 8 MS. PYKA: Certainly. There is 9 approximately $1.6 million a year that is funded out of 10 the lottery dedicated account for both bingo indirect 11 and bingo direct expenses. Bingo indirect is defined as 12 any of the support functions provided for the Bingo 13 Division. That would include Human Resources, 14 Information Resources, Procurement, Internal Audit, 15 Governmental Relations, Financial Services, any of the 16 support functions of the Lottery Commission providing 17 services to the Bingo Division. 18 CHAIRMAN WILLIAMSON: Okay. And then 1.6, 19 you said there were other bingo direct consequences? 20 MS. PYKA: That's correct. Included in 21 that amount are the costs associated with the lease of 22 this building as well as any of the field office leases 23 that are occupied by the Bingo Division, and that's 24 about $226,000 a year for bingo office space that is 25 considered a bingo direct cost and picked up by the 111 1 lottery funding source. 2 CHAIRMAN WILLIAMSON: Okay. And I assume 3 in that, you took into consideration some sort of 4 proration of all the software that we buy and 5 development hours that may be involved -- 6 MS. PYKA: Certainly. 7 CHAIRMAN WILLIAMSON: -- with making that? 8 So really -- and there again, is the lottery function 9 authorized to provide that financial support for bingo? 10 Does anybody know? 11 MS. PYKA: This has been a question that 12 has certainly come up over the years. And we've got a 13 bit of a legislative history with the funding of bingo 14 indirect expense. In Fiscal Year 2003, there was a 15 decision made to stop charging bingo for indirect 16 expenses. 17 CHAIRMAN WILLIAMSON: Who made that 18 decision? 19 MS. PYKA: That was an executive 20 management decision made at that time by the -- 21 CHAIRMAN WILLIAMSON: Here at the Lottery 22 Commission? 23 MS. PYKA: Correct. 24 CHAIRMAN WILLIAMSON: Okay. 25 MS. PYKA: In Fiscal Year 2006 and 2007, 112 1 the LAR for those two years, there was a decision made 2 to shift the bingo lease costs from bingo general 3 revenue to lottery. And that decision was made based on 4 the fact that the Commission could only submit a 5 baseline request out of general funds, could not submit 6 extra GR costs. And due to limited funding constraints 7 in the Bingo Division, those costs were shifted to 8 lottery. 9 With the next legislative cycle, beginning 10 with 2008 and Fiscal Year 2009's LAR, there was very 11 clear communication to the Legislature within the LAR 12 noting that we were seeking clarification to fund those 13 bingo indirect expenses out of the lottery dedicated 14 account. There was no action taken by the Legislature 15 to clarify that practice then. 16 It was again submitted in our Fiscal Year 17 2010-11 LAR, again seeking clarification. And we got a 18 very clear message from legislative leadership to 19 continue the practice as we were now, but the rider was 20 not revised. So, you know, as I said, there is a bit of 21 a history here with this practice. 22 CHAIRMAN WILLIAMSON: Okay. So if I 23 understand it correctly, so the 1.6 that goes to support 24 bingo then is not going to the permanent school fund. 25 That's how I can process that? 113 1 MS. PYKA: That is correct. If it were 2 not being used for bingo, it would be transferred to the 3 Foundation School Fund if the revenue -- 4 MS. KIPLIN: And I do need to say, because 5 you said, "Is it authorized?" You know, I would tell 6 you that the funding -- I just have to put this on the 7 record. This wouldn't be the first time that this issue 8 has been discussed in a Commission meeting, as Ms. Pyka 9 pointed out, and it certainly is not something that has 10 not been disclosed in terms of the legislative process. 11 But, you know, under the State Lottery 12 Act, which is Chapter 466 of the Government Code, the 13 section particularly that we're discussing is Section 14 466.355. And what it says is that, "The state lottery 15 account is a special account in the general revenue 16 fund. The account consists of all revenue received from 17 the sale of tickets, license and application fees under 18 this chapter, and all money credited to the account from 19 any other fund or source under law." 20 And then under Subsection (b), it does 21 say, "Money in the state lottery account may be used 22 only for the following purposes and shall be distributed 23 as follows:" And it enumerates, you know. For example, 24 the first one is the payment of prizes. In particular 25 what we're focused on is the provision that says, "The 114 1 payment of costs incurred in the operation and 2 administration of the lottery," and "lottery" is little 3 "l." It doesn't say "Commission." 4 These indirect expenses have been 5 something that I think has developed over time. It 6 certainly -- it has been discussed and publicly 7 disclosed. But I would say that if somebody wanted to, 8 they could certainly interpret this provision as being 9 exclusive to the operation of the lottery and not to be 10 covering the bingo side. So I need to put that on the 11 record. 12 CHAIRMAN WILLIAMSON: Thank you. 13 MS. PYKA: At this point we have been 14 extremely clear in our administrator statement of our 15 LAR -- 16 MS. KIPLIN: Yes. 17 MS. PYKA: -- the rider provisions of the 18 LAR and in our testimony for the LARs, of several LARs, 19 with regard to this practice of funding bingo indirect 20 expenses. We had a very thorough briefing in a public 21 meeting of this Commission as well about the practice. 22 So it's very well documented, no doubt, but certainly it 23 is money that would go to the Foundation School Fund if 24 not used for bingo indirect. 25 CHAIRMAN WILLIAMSON: Okay. All right. 115 1 Commissioner, do you have any -- 2 COMMISSIONER KRAUSE: Well, it seems like 3 I heard something earlier about the fact that the 4 lottery side actually benefits from having some, you 5 know, good syncing with the Bingo Division. 6 MS. PYKA: With regard to the system 7 operation? 8 COMMISSIONER KRAUSE: Yes, ma'am. 9 MS. PYKA: I will defer to Joan and Mike 10 on that with regard to the architecture of those 11 systems. I'm not I think -- 12 MR. FERNANDEZ: Well, I guess the issue 13 is -- and I may not be hearing you correctly, 14 Commissioner. The back-end systems are -- so the 15 accounting system that is feeding financial transactions 16 are the fraud case management system or lottery systems 17 that bingo has access to, not unlike what Ms. Pyka was 18 alluding to earlier, H&R systems or any back office 19 systems, so they have that benefit, so they're -- if 20 that's what you're referring to. 21 COMMISSIONER KRAUSE: Well, I mean, we're 22 tasked with doing two things. And since we're doing 23 both of them, then we're spending money to do both of 24 them, and it's actually a burden to do one differently 25 than the other. And with all of our FTEs going away, I 116 1 guess we have less HR, you know, needs. And so anyway, 2 I guess I'm just trying to understand how much 3 discretion we have about defining what this is, this 4 1.6. Does that make any sense? 5 CHAIRMAN WILLIAMSON: Oh, in other words, 6 are you saying rather than using it to do all these 7 support services, use that to -- 8 COMMISSIONER KRAUSE: At least a piece of 9 it. 10 CHAIRMAN WILLIAMSON: I guess -- I don't 11 know. 12 COMMISSIONER KRAUSE: And if -- 13 CHAIRMAN WILLIAMSON: That's an 14 interesting -- 15 COMMISSIONER KRAUSE: If it benefits the 16 lottery side to have the Bingo, you know, Division in 17 sync, you know, with the way the computer architecture 18 works, you know, then -- or, on the other hand, it's a 19 big burden to have them different, where we stay on the 20 old with the bingo and upgrade the new with the lottery, 21 then, you know, maybe we have a little flexibility 22 there. 23 CHAIRMAN WILLIAMSON: Well, my only 24 concern is, though, I'm now sure we're -- you know, 25 right now we're paying for bingo costs I'm not sure 117 1 we're authorized to pay for. And if we add -- if I hear 2 what you're saying, I don't think the lottery can come 3 close to trying to help fund this conversion for their 4 particular activity, because this is specific only to 5 bingo. There is not -- I mean, the lottery side of it 6 gets no direct benefit from that software. At least 7 that's how I see it. Maybe I'm not saying it very well, 8 but -- 9 COMMISSIONER KRAUSE: Did she say that -- 10 MR. FERNANDEZ: She said that correctly, 11 yes. 12 CHAIRMAN WILLIAMSON: Did I say that 13 correctly? 14 COMMISSIONER KRAUSE: Well, maybe, then, I 15 didn't hear accurately about, you know, how some of the 16 common functions -- well, I think now I see. Okay. 17 CHAIRMAN WILLIAMSON: In other words, 18 bingo doesn't have its own separate accounting software, 19 its own separate -- 20 COMMISSIONER KRAUSE: That's on other 21 stuff, not this. 22 CHAIRMAN WILLIAMSON: Yes. It doesn't 23 have its own separate back office functions. 24 COMMISSIONER KRAUSE: Which makes sense. 25 CHAIRMAN WILLIAMSON: I mean, they're all 118 1 one. So, I mean, if they were a separate agency and 2 they did their own thing, then they would have all that 3 stuff. But they are on one hand, from what I 4 understand, a separate agency. But under the other 5 hand, they're tasked under the Texas Lottery Commission. 6 COMMISSIONER KRAUSE: Well, it seems like 7 somebody said something about the fact that we've got 8 this database with, you know, the bingo licenses in it 9 and then somehow Lottery accesses that or there is a 10 benefit there to the Lottery being able to have access 11 to that information? 12 CHAIRMAN WILLIAMSON: No. The Lottery 13 doesn't -- 14 COMMISSIONER KRAUSE: Okay. 15 CHAIRMAN WILLIAMSON: -- have any interest 16 in that particular information. 17 MR. SANDERSON: I think it's the other way 18 around. Bingo accesses some of the systems that the 19 lottery has, for licensing purposes. 20 CHAIRMAN WILLIAMSON: The Lottery picks up 21 the tab for that; Bingo does not pay for that -- 22 COMMISSIONER KRAUSE: Okay. 23 CHAIRMAN WILLIAMSON: -- if I understand 24 that correctly. 25 COMMISSIONER KRAUSE: I understand now. 119 1 CHAIRMAN WILLIAMSON: Okay. It sounds, 2 like I said, a rock and a hard place. It's going to 3 cost us no matter what we do. 4 All right. Any other questions or 5 questions you have right now before we -- 6 COMMISSIONER KRAUSE: I'm sure they'll 7 come up later when we don't have people here to help us 8 out. 9 AGENDA ITEM NO. XVII 10 CHAIRMAN WILLIAMSON: Okay. Then at this 11 point I will start with public comments. And I think 12 Kim gave these to me in order in which they were 13 received. Please, if someone has already said what 14 you're going to say, just say, "I concur." I will read 15 that in the record where you are because, you know, for 16 the sake of being able to go through all of this. I 17 would highly encourage y'all to do that. 18 All right, the first one, Hank Anawaty. 19 And please correct my poor pronunciation. 20 FROM THE AUDIENCE: He stepped out to feed 21 the parking meter. He'll be right back. 22 CHAIRMAN WILLIAMSON: Okay. Well, we'll 23 get to him next, then. 24 Mr. Anderson, John Anderson. If you 25 would, please tell us who you are, who you're with. And 120 1 according to this you're against this license fee. So 2 if you'll go ahead. 3 COMMENTS ON BEHALF OF 4 BOYS & GIRLS CLUB OF CENTRAL TEXAS 5 MR. ANDERSON: Yes. John Anderson. I'm 6 with the Boys & Girls Club of Central Texas. We operate 7 the clubs in five cities, including Georgetown and 8 Killeen. I'll narrow my comments. 9 The calculation we did from the May 23rd 10 proposal to the June the 2nd proposal increased our fee, 11 on the organizations that we're involved with in 12 supporting the Boys & Girls Club, by 27 percent. I 13 don't know if it was exactly intended that way. We went 14 from $103,000 to $130,000. And this is just great 15 concern to the charities. And I'm speaking from the 16 charity level. I realize this is a complex interrelated 17 problem. 18 But from a charity level, where we're 19 already in a stressed financial position, reduced 20 donations, and in some ways an increased obligation in 21 the care of these children, we have over 500 in the 22 Copperas Cove-Killeen area that are military related. 23 And the prospect over a two-year period of the 24 organization having to come up with this kind of money, 25 this is truly a can that we would like to see kicked 121 1 down the road. 2 CHAIRMAN WILLIAMSON: Okay. Thank you. 3 All right. Is Mr. Anawaty -- did I say 4 that correctly? Is he back here? 5 No? Okay. Then we'll go on to the next 6 one. 7 Earl Silver, I know you made a lot of 8 comments already. 9 MR. SILVER: Yes, ma'am. I -- 10 CHAIRMAN WILLIAMSON: Do you have anything 11 new to add? 12 COMMENTS ON BEHALF OF TEJAS BINGO/PALACE BINGO 13 MR. SILVER: Just very little, just very 14 little. At the Bingo Advisory Committee meeting, I was 15 going through the transcripts, and I was concerned that 16 the $2.5 million was just for software only and that 17 there were no bids taken or anything like that, no 18 third-party bids. That's something that could possibly 19 reduce that amount. 20 And I stated before that I'm sure a new 21 computer system would be fantastic, and it would help 22 Phil be able to do his job effectively but, if possible, 23 maybe a third-party bid. In that testimony, they were 24 saying that there is going to be analysis in that 25 $2.5 million. I'm not exactly sure of the time of the 122 1 analysis, but there is analysis on working with the 2 business side to actually come up with the requirements 3 that are going to be needed for the business system. 4 Now, if you don't have the requirements 5 already intact, how are you going to know what it's 6 going to be and how do you know if it's $2.5 million, 7 $3.5 million, $1.5 million? It's just a concern I have 8 about trying to get a more accurate account of what's 9 going to happen if the $2.5 million needs to be raised. 10 And if it could be done cheaply somewhere else or 11 however else, it may want to be investigated. 12 Thank you very much for your time. 13 CHAIRMAN WILLIAMSON: All right. Thank 14 you. 15 Stephanie Colwell? 16 MS. COLWELL: (Inaudible) 17 CHAIRMAN WILLIAMSON: Oh, no testimony. 18 And she's against. And I'm going to give our reporter 19 all of these so she will be sure and have everybody's 20 names and how they feel about that. 21 William Smith. 22 COMMENTS ON BEHALF OF SEVEN POINTS BINGO 23 MR. SMITH: Morning. My name is William 24 Smith, representing Seven Points Bingo today. 25 The increase on the license fees is going 123 1 to directly correlate to the distribution of the 2 charities. If you increased the license fees up this 3 much, what that does is, it takes the money out of the 4 charities' hands, out of the Optimist clubs, out of the 5 Kiwanis clubs, out of the VFWs, out of the volunteer 6 fire departments. It takes it directly out of the 7 community. Although we recognize that this is a needed 8 deal, we ask that we find a different way to do it, a 9 different way to go about it. 10 COMMISSIONER KRAUSE: Got any ideas? 11 We're really open. 12 MR. SMITH: I wish I could look into my 13 magic crystal ball and see that. I know a lot of the 14 things -- I know that -- I think maybe that Mr. Fenoglio 15 might have a better idea about how to go about this. 16 (Laughter) 17 COMMISSIONER KRAUSE: We're ready to hear 18 it. 19 MR. SMITH: I think he's ready to tell -- 20 CHAIRMAN WILLIAMSON: He didn't mean to 21 put you on the spot. 22 MR. SMITH: No, no, no! That's quite all 23 right; that's quite all right. 24 CHAIRMAN WILLIAMSON: Okay. Denise 25 Hutchings. 124 1 FROM THE AUDIENCE: She stepped out 2 (inaudible). 3 CHAIRMAN WILLIAMSON: Okay. I'm sorry. I 4 can't hear you, so I'll just wait until she comes back 5 in. 6 Charles Hutchings? 7 MR. FENOGLIO: I guess he stepped out. 8 MS. KIPLIN: No, he's here. 9 MR. FENOGLIO: Oh, sorry. 10 MR. HUTCHINGS: No, sir, I'm just slow, 11 old. 12 Good morning. 13 CHAIRMAN WILLIAMSON: Good morning. 14 COMMENTS ON BEHALF OF AMVETS 15 MR. HUTCHINGS: My name is Charles 16 Hutchings. I'm with the AmVets organization, American 17 Veterans out of Dallas. 18 I would like to say that I know of one 19 bingo hall that has closed lately in Dallas. Others are 20 cutting back on days. You know, they're not making any 21 money. Distributions in one particular hall I know of 22 was $15,000 for the first quarter of '10. It was $4,000 23 for the first quarter of '11. Bingo is in a horrible 24 state. 25 CHAIRMAN WILLIAMSON: All right. 125 1 MR. HUTCHINGS: That's my testimony. 2 Thank you. 3 CHAIRMAN WILLIAMSON: Do you have any 4 questions or comments? 5 COMMISSIONER KRAUSE: No, not now. 6 CHAIRMAN WILLIAMSON: Okay. Thank you. 7 Kelly Marsh. 8 COMMENTS ON BEHALF OF FORT WORTH BOOKKEEPING 9 MS. MARSH: Good morning. My name is 10 Kelly Marsh, and I'm with Fort Worth Bookkeeping. And 11 we represent 84 active organizations and 17 commercial 12 lessors. 13 And since we have had four bingo halls 14 close their doors, we now have 13 organizations that are 15 on administrative hold. And with bingo as bad as it is, 16 our organizations and our commercial lessors can't 17 afford to pay this. 18 COMMISSIONER KRAUSE: What do you think is 19 making it so bad, because we haven't raised any fees 20 yet? 21 MS. MARSH: Yes. The economy. 22 COMMISSIONER KRAUSE: Is there any 23 competition from illegal activity, illegal gambling? 24 MS. MARSH: Illegal? 25 COMMISSIONER KRAUSE: Yes, ma'am. 126 1 MS. MARSH: I would not know. 2 COMMISSIONER KRAUSE: 8-liners. 3 MS. MARSH: I would not know the answer to 4 that. 5 COMMISSIONER KRAUSE: Okay. 6 MS. MARSH: Thank you. 7 CHAIRMAN WILLIAMSON: Thank you. 8 Richard Bunkley. 9 COMMENTS ON BEHALF OF LITTLEFIELD CORPORATION AND TEXAS 10 ASSOCIATION FOR THE ADVANCEMENT OF CHARITABLE BINGO 11 MR. BUNKLEY: Thank you very much. My 12 name is Richard Bunkley, speaking here today on behalf 13 of Littlefield Corporation and the Texas Association for 14 the Advancement of Charitable Bingo. 15 And, Commissioner Krause, I know the 16 answer to your question. It's yes, bingo is suffering 17 as a consequence of illegal gambling. I'm sympathetic 18 to the tough spot that you guys are in with all state 19 agencies, having to make cutbacks, but I think the 20 Legislature has been very clear. We can't afford it 21 this session. You know, let's bring it up again next 22 session. So I think the Legislature has made our 23 decision for us. We really should kick this can down 24 the road, so to speak. 25 So thank you very much. 127 1 CHAIRMAN WILLIAMSON: All right. Denise 2 Hutchings. 3 FROM THE AUDIENCE: (Inaudible) 4 CHAIRMAN WILLIAMSON: Okay. Hank Anawaty. 5 COMMENTS ON BEHALF OF TEXAS CHARITY ADVOCATES 6 MR. ANAWATY: Good morning, Commissioners. 7 I have provided you with a letter that I don't know if 8 it made it into your package or not. I believe Kim has 9 gotten it there for you. 10 MS. KIPLIN: It should be in front of you. 11 COMMISSIONER KRAUSE: Got it. 12 MS. KIPLIN: If not, I've got a copy here. 13 MR. ANAWATY: If you would like for me to 14 read the letter for the record, I can. 15 CHAIRMAN WILLIAMSON: No. We'll give it 16 to the reporter and she can put it in there. 17 MR. ANAWATY: I'll hit the high points, 18 then. What the letter does is provide for you an 19 example of the real numbers at one of the halls that I'm 20 the lessor for. I thought about composing a letter when 21 I heard about this license fee increase at the earlier 22 Bingo Advisory Committee meeting. When I composed the 23 letter, it resulted in what I thought might be the case, 24 which is that much more money is given to the State of 25 Texas than is left for the charitable distributions. If 128 1 you look at the numbers and break it down, twice as much 2 goes to the State of Texas than is left for the 3 charities. 4 I thought this information would be 5 helpful to you at this time in this format, and it's 6 probably the reason that there is so much dislike for 7 this proposed rule. 8 CHAIRMAN WILLIAMSON: Okay. 9 MR. ANAWATY: As a member of the Texas 10 Charity Advocates, we're open to working with you on a 11 more complete solution to this and may be open to this 12 reduced amount in supporting the older software. 13 CHAIRMAN WILLIAMSON: All right. Thank 14 you for making that statement. 15 MR. ANAWATY: Thank you. 16 MR. ANAWATY: Thank you for your time. 17 CHAIRMAN WILLIAMSON: All right. Denise 18 Hutchings. 19 MS. HUTCHINGS: No testimony. 20 CHAIRMAN WILLIAMSON: All right. And note 21 that she's against. 22 So I have everybody's, I believe, and they 23 will be given to the reporter. 24 COMMISSIONER KRAUSE: Anybody want to 25 testify for? 129 1 I think you might have one more witness. 2 CHAIRMAN WILLIAMSON: Okay. Well, come on 3 up. 4 COMMENTS ON BEHALF OF THE 5 COALITION FOR THE SURVIVAL OF CHARITABLE BINGO 6 MR. BRESNEN: I just want to say one more 7 thing. You have to act really quick. But if this lower 8 cost solution that helps us limp along -- I couldn't 9 quite follow the numbers there. 10 CHAIRMAN WILLIAMSON: I think it was 400 11 and something thousand for a two-year period if we leave 12 the old system in place. I can't remember if -- I think 13 that was around 400 -- 14 FROM THE AUDIENCE: Right. 15 CHAIRMAN WILLIAMSON: -- $430,000, and I 16 think that was for a two-year period. The up-front, 300 17 and something the first year and 100 for the second. 18 MR. BRESNEN: If the question is whether 19 you would have authority to do that, we would have to 20 act really, really quick. But if I had something from 21 y'all to that effect, we could go see Chairman Pitts. 22 There is legislation moving right now that could be 23 amended. It's actually passed both houses. It would 24 not surprise me if they weren't going to go outside the 25 bounds on that legislation -- 130 1 CHAIRMAN WILLIAMSON: Okay. 2 MR. BRESNEN: -- to bring some things into 3 line before the end. That's a long shot, but it might 4 be something, if need be, that we could help on. 5 CHAIRMAN WILLIAMSON: Okay. Because we've 6 got a huge problem here, as y'all can see. If we can't 7 raise fees, or we can but only to fund two and a half 8 million and everybody says, "No," I mean, frankly, I'm 9 not inclined to force the lottery side to pick up the 10 other $400,000 on top of what they already do to support 11 the bingo function to do this. So, you know, where do 12 we end up with this? And I don't know. And I -- 13 MR. BRESNEN: It may be something that the 14 LBB could help with during the interim, too, but you 15 would be far better off to ask for a clarification on 16 that at this point than not to have done anything. And 17 I'm just volunteering to help on that, if that's the way 18 the Commission decides to go. 19 CHAIRMAN WILLIAMSON: Okay. 20 MR. BRESNEN: Thank you. 21 CHAIRMAN WILLIAMSON: Thank you. 22 I do have a question. And I guess, Mike, 23 it may be for you and your group. Earl had brought this 24 up, which I think was a valid question on -- you know, 25 you came up with your two and a half million. For 131 1 example, if we were to implement this, what would the 2 process be? And like I said, he raised a very valid 3 point. I mean, you guys have kind of internally done 4 this, and I know this has to go out for bid. Is that 5 correct? 6 MR. FERNANDEZ: Well, what's going to 7 happen on this particular piece, not unlike some other 8 pieces that the Lottery Commission is converting, is 9 that we're going to select a contractor, a third-party 10 contractor off a statewide contract called DBITS. And I 11 believe that stands for some government -- delivery- 12 based IT services, and that's contracts that are bid by 13 the Department of Information Resources to pre-qualify 14 bidders. 15 So what will happen is that Joan and her 16 staff, working with Phil and his staff, will develop a 17 statement of work. And we go through those DBITS 18 contracts with some frequency to look for a variety of 19 services, because it saves state agencies the time of 20 going through that formal bid process, since it's 21 already been conducted for us. 22 And we will select a number of those 23 contractors, and we will send them the statement of 24 work. Once we receive that statement of work, then we 25 will go through that, and we will either open contract 132 1 discussions and negotiations with one or more to get to 2 that price. So that's how that will occur. 3 And I think that the gentleman had a 4 comment about doing the analysis work before you bid 5 that. Do you want to respond to that, Joan? 6 MS. KOTAL: Yes. Again, for the record, 7 it's Joan Kotal. 8 We actually did some analysis. What we 9 did is, we looked and counted the different components 10 of the current Automated Charitable Bingo System. 11 There's approximately -- and I won't go into all the 12 detail. There is a list of it -- but like 175 screens 13 or pages, there's more than 180 reports. There's stored 14 procedures, libraries, database packages. 15 And we went through and itemized and 16 evaluated those components and came up with an average 17 number of hours it would take to do like one particular 18 screen. Then we looked at the current requests that we 19 have in-house that Phil and the rest of the Bingo staff 20 have submitted, information services requests, which is 21 just shy of 250 current outstanding requests we have for 22 work for improvements and, based on that, came up with a 23 number of hours that we felt. So it was a very detailed 24 process, and I believe that the hours we came up with is 25 a conservative estimate. 133 1 CHAIRMAN WILLIAMSON: Okay. Phil, the 250 2 requests, are those for the enhancements you would like 3 to see if we have the opportunity to have a new system 4 or request on, "This is currently what we're doing, and 5 I would really like to be able to do these things" -- 6 MR. SANDERSON: Those are requests to 7 enhance the current system so that we can do our current 8 business. 9 CHAIRMAN WILLIAMSON: So those would still 10 be in play even if we didn't -- 11 MR. SANDERSON: Correct. 12 CHAIRMAN WILLIAMSON: -- upgrade? That's 13 a lot of requests. 14 MR. SANDERSON: I think we lead the agency 15 in requests. 16 MR. FERNANDEZ: That's correct. 17 MS. KOTAL: That is absolutely correct. 18 (Laughter) 19 CHAIRMAN WILLIAMSON: And I guess my 20 concern, taking Earl's point once again, ironically, I'm 21 doing this same thing in a much smaller scale in my 22 business. Fortunately, my son-in-law has a great deal 23 of experience of being a project manager for software, 24 and he's very familiar with Oracle. So, you know, he 25 has kind of educated me a little bit. 134 1 But I know, in just watching what he did, 2 he spent probably two months just getting the des- -- 3 not the design, but: What are the business needs? And 4 refining it -- because I know one of the problems with 5 software development, if you don't have that really 6 nailed down and tight and you're starting to make 7 changes -- "Oh, we want this, we want this" -- as you're 8 doing this, the costs could grow exponentially, 9 referring to the horror stories we've read about failed 10 software conversions. 11 That concerns me. I mean, you know, can I 12 say, "All right, it's two and a half million. That's it 13 regardless of what happens," or, "This will be two 14 years, and that's the drop-dead date, in two years." 15 Now, I know that this group has a great deal of 16 experience in spending a lot of time formulating their 17 technical requirements; i.e., the Lottery operator. I 18 mean, how long did y'all spend just doing the technical 19 side of that? 20 MR. FERNANDEZ: A year. 21 CHAIRMAN WILLIAMSON: A year. And I know 22 that that was a very detailed requirement. So they know 23 exactly what's expected of them, you know, and I assume 24 we haven't done this to that degree. Is that correct? 25 MS. KOTAL: We have in pieces. I believe 135 1 there was a piece done prior to the last system. And 2 then there have been, at least since I've been here, two 3 legislative changes that we actually went through 4 requirements-gathering on those. 5 CHAIRMAN WILLIAMSON: For bingo? 6 MS. KOTAL: For bingo. And part of this 7 estimate would include that requirements analysis phase 8 to document all the specific requirements and ensure 9 that we have all their current requests in place and 10 that the system would be able to function and be 11 operational as they need it. 12 CHAIRMAN WILLIAMSON: Okay. So this 13 analysis phase, would that be something that we would do 14 internally or would that be something that the third- 15 party contractor, for lack of a better word, would be 16 involved in? 17 MS. KOTAL: It would be the contractor to 18 come in. But they would work with the existing staff to 19 define specifically what those requirements -- you ask 20 the business and the customer what they want. 21 CHAIRMAN WILLIAMSON: Okay. So then I go 22 back to: Okay. I'm a third-party contractor. I don't 23 really know what exactly you guys want until we sit down 24 and talk about it. Two and a half million may not be 25 nearly enough to do that. I don't know. I'm just 136 1 saying I suppose there is that possibility. And maybe 2 just in my ignorance of this whole industry that you can 3 say, "No, Mary Ann. If we do that, it's going to be 4 that," that it will be the two and a half million and it 5 will be within two years. And I know there's no 6 guarantees, but -- 7 MR. FERNANDEZ: No. And I understand what 8 you're saying. I think the thing is, is that we have 9 done diligence, I guess, for lack of a better term, on 10 what's in, what's outstanding, and to a great level of 11 detail on some of that analysis has been conducted. So 12 we believe that the hours to accomplish this task, 13 unless something comes out of the high grass that none 14 of us are aware of, is going to be close. I believe 15 it's a conservative estimate. 16 It's been our history, both here and in 17 other places, that we do fixed fee bids. We don't do 18 T&M contracts for the very reason of which you speak. 19 What would happen on this project is that that 20 contractor, once selected, would come in and sit down 21 and go through that process. Not unlike a lottery 22 operator, we would form an oversight committee which 23 would be chaired by Phil and have his staff on it. I 24 suspect Phil would supplement that with others. 25 I don't know that from the industry, not 137 1 unlike what we've gone through. And each step of this 2 process, those folks, the stakeholders, which is very 3 common, will be involved. But I believe, Commissioner, 4 that the estimate is a reasonably good estimate. And, 5 you know, short of something that's completely 6 unforeseen, I think that it's going to be fairly close. 7 Granted, it will be plus or minus. But, 8 you know, unless there's some total surprises, I'm 9 comfortable with -- I think it's conservative, but Joan 10 and I have worked together a long time. And I expect 11 conservative numbers, because we're going to do the best 12 thing we can to negotiate that deal. 13 CHAIRMAN WILLIAMSON: Okay. But then once 14 again, that's part of the bingo indirect costs that 15 we're funding right now since you guys are -- 16 MR. FERNANDEZ: We have -- Joan has two 17 and a half positions committed to supporting that right 18 now. 19 CHAIRMAN WILLIAMSON: On the lottery side? 20 MR. FERNANDEZ: Yes. 21 CHAIRMAN WILLIAMSON: Okay. 22 MR. FERNANDEZ: It's lottery-funded staff 23 that support ACDS, 2.5 positions. 24 CHAIRMAN WILLIAMSON: Commissioner, do you 25 have any other thoughts, comments, questions? 138 1 COMMISSIONER KRAUSE: Not at the moment. 2 MR. SANDERSON: Chairman -- this is Phil. 3 CHAIRMAN WILLIAMSON: Yes. 4 MR. SANDERSON: Just to kind of add some 5 information to what Mr. Fernandez was talking about, I 6 was able to speak with the Deputy Commissioner of the 7 Michigan Lottery last week, and they are in the process 8 of converting and redesigning their system, similar to 9 ours, for their charitable gaming that they regulate, 10 and their estimate was around $2.5 million to do their 11 system, so I feel that's a very conservative estimate. 12 CHAIRMAN WILLIAMSON: Were they doing the 13 same thing, going from the -- 14 (Simultaneous discussion) 15 MR. SANDERSON: Pretty much the same 16 thing, going from a different platform, yes. 17 CHAIRMAN WILLIAMSON: Okay. 18 MR. SANDERSON: One other thing I would, 19 you know, just kind of throw out there, too. The 20 impact -- and I know there's been a lot of discussion 21 about the impact of the license fee. And I know, you 22 know, the additional $2,500 for the two years for the 23 Class J licenses and $100 for the Class A licenses over 24 the two-year period, you know, does have an impact on 25 their bottom line and how much money they have for 139 1 charities. 2 But overall, for the organizations that 3 conduct bingo, on average, with a few exceptions, it 4 would probably be less than $10 per occasion that they 5 conduct bingo. And for the commercial lessors, it would 6 be somewhere less than three dollars per occasion that 7 they lease bingo premises. There are some exceptions 8 that may be outside of that, but that's just another 9 thought I would throw out there for your consideration. 10 CHAIRMAN WILLIAMSON: Okay. And, 11 Mr. Bresnen or Mr. Fenoglio, I left y'all formally at 12 the end, so if either one of you have any other final 13 comments you would like to make. 14 COMMENTS ON BEHALF OF RIVER CITY BINGO 15 AND TEXAS CHARITY ADVOCATES 16 MR. FENOGLIO: For the record my name is 17 Stephen Fenoglio, and I'll be brief. Just say "No." 18 In answer to your question, I like a lot 19 better the roughly 4 percent increase in license fee if 20 you kick the can down the road, with bootstrapping what 21 you need, as described in the discussion earlier, the 22 $430,000 over a two-year period. You have seen the 23 numbers for the first quarter of 2011 versus 2010, and 24 they're dismal for charitable bingo. April and May are 25 worse in 2011 than they were in 2010 for the charities 140 1 that I deal with a lot, the halls I deal with a lot, 2 including River City Bingo here in Austin. 3 So if we have to have a cost increase, 4 let's kick the can down the road. That's not unlike 5 what a business would do today. If your IT person comes 6 in and says, "Okay. You need new servers, you need a 7 whole new system." 8 "I can't afford it. What can you get me 9 down the road for until I can turn it around?" 10 COMMISSIONER KRAUSE: Do you think things 11 will get better, the industry? 12 MR. FENOGLIO: I'm an eternal optimist, 13 and I hope they will. A lot of it is -- and I made this 14 comment at the BAC -- Clinton, the Clintonese comment, 15 "It's the economy, stupid." And it is very dismal for 16 the market that charitable bingo serves. It's very 17 dismal. So to the extent that the economy will come 18 back, charitable bingo will come back. If it doesn't -- 19 COMMISSIONER KRAUSE: Then we're still 20 here? 21 MR. FENOGLIO: Right. And what Phil said 22 earlier, you know. Initially when he was proposing this 23 or discussing this, it was less than 50 percent, because 24 there were more licensees. There are fewer licensees 25 today than there were five or six months ago, so he had 141 1 to plus-up the number. If the economy stays worse, the 2 number to, quote, fix the system to raise the 3 $2.5 million, you'll have to get more from the licensees 4 on the second year of that if the economy stays down. 5 Again, we hope that's not the case, but it's tough out 6 there. 7 CHAIRMAN WILLIAMSON: Okay. 8 MR. FENOGLIO: Thank you. 9 CHAIRMAN WILLIAMSON: Well, I can see 10 we're sort of in a -- I mean, it's tough. And I'm a 11 small business person. I certainly appreciate the 12 desire not to have any more fees, regulations, whatever, 13 thrown at you. Being in a business that's highly 14 regulated, I can -- I understand that. 15 On the other hand, with the cuts in the 16 bingo agency that's really handcuffed a lot of what they 17 can do, as a commissioner, I feel like we -- part of our 18 job is to: What can we do to help them deal with this? 19 And, frankly, I'm not sure what that is. I mean, we've 20 kind of, I think, hit everything we possibly can, unless 21 somebody out there has got something new. And, of 22 course, our hands are tied because of statutes and 23 regulations and certain things that we can't just wave 24 our business hats and say, "Yes, this is what we're 25 going to do." I understand that, too. 142 1 So I guess -- Kim, sort of where are we to 2 summarize what actions or inactions that we can take at 3 this time? 4 MS. KIPLIN: Sure. What you have before 5 you is consideration of a proposed new rule to increase 6 license fees, to essentially implement the approval that 7 was given in the appropriation -- the contingent 8 appropriation that was given by the Legislature, and so 9 that's what is in front of you. 10 I know that there has been discussion of 11 an alternative approach, funding approach, and maybe a 12 lesser development. That's not what's before you today. 13 And I think that that would have to be something that 14 staff would have to regroup and work on. 15 So your options for today, I think -- and 16 I'm certainly open to staff who wants to help me on 17 that -- is you can either vote to propose the new rule, 18 which is the increased license fee, and that would be 19 the 50 percent approach for all classifications for 20 licensed conductors and for licensed commercial lessors 21 for each year of the biennium and receive public comment 22 or you can not take any action today. 23 The point of the rule being presented 24 today is to try to keep on a timeline so that the rule 25 could be adopted and be effective before September 1, 143 1 which is the beginning of the new biennium. And this 2 rule triggers the process to request from the 3 Comptroller of Public Accounts, consistent with the 4 language in the contingent rider of the agency's bill 5 pattern, the finding of fact in terms of the funding for 6 that contingent rider. 7 And so it's a step process, tiered 8 process. And the first was to present this rule for 9 public comment, receive the public comment at a later 10 date. And the thinking was, no later than in early 11 August, because there is a 20-day kickoff from when a 12 commission adopts a rule and it is filed before the rule 13 can be effective. So the point of this rule, the 14 proposed rule, was to begin the process of that two and 15 a half million dollar funding through the methodology 16 that is laid out in this rule. That's one action. 17 The other action is, you do nothing and 18 you direct the staff to -- you do nothing at this time, 19 and you direct the staff to regroup, consistent with the 20 information that's been discussed, been presented, 21 determine whether there is an alternative approach. 22 I think you've heard from the Controller 23 for the Lottery Commission, Ms. Pyka, regarding the 24 specific language in the contingent rider and the fact 25 that that's really tied specifically to this redesign of 144 1 the Automated Charitable Bingo System. And so I think 2 the staff would need to regroup internally to determine 3 whether there is a need, as Mr. Bresnen had pointed out, 4 there is a need to try to address the Legislature during 5 its special session. I will defer, obviously, to those 6 that are more in touch with that process and provide 7 whatever I can, assistance to that, but need to defer. 8 So those are your options, I think. 9 One option that I think, in terms of 10 proposing a rule today that I really don't think is 11 feasible would be to propose the rule consistent with 12 the methodology -- I mean the funding that we talked 13 about in terms of that $430,000. This rule is not 14 designed for that. It's not really what is presented to 15 y'all for consideration. And I think to try to do that 16 today, I for one would think that that would be very, 17 very challenging. 18 And I'm concerned about whether you 19 actually would have the triggering of that contingent 20 rider, also because of the reason that this rule was 21 laid out to implement that contingent rider that's set 22 out. So if that's not what's needing to occur today, 23 then in terms of taking action, perhaps don't need that. 24 I would be happy to -- 25 CHAIRMAN WILLIAMSON: Okay. Even if we 145 1 post it and we get the public comments -- 2 MS. KIPLIN: Yes. 3 CHAIRMAN WILLIAMSON: -- we still have 4 another meting to have a final decision, if that's what 5 we're going to do or not? 6 MS. KIPLIN: That's right. So, you know, 7 in a nutshell, you have two options. You can either 8 propose for public comment what's before you today or 9 you do not have to -- you do not have to do that today. 10 The downside of not proposing for public comment today 11 is that the calendar, if you will, the timeline to have 12 the rule be effective before September 1, that gets off 13 kilter. Now -- 14 COMMISSIONER KRAUSE: What's the 15 consequence of that? 16 MS. KIPLIN: The consequence of that -- 17 Ms. Pyka can speak to that -- but I think you would be 18 delayed in terms of being able to request the finding. 19 MS. PYKA: For the record, Kathy Pyka. 20 As Kim alluded to earlier, there is a 21 multi-step process in order to actually receive the 22 appropriation for expenditure. And so upon final 23 adoption of a rule -- and I'm using the two and a half 24 million scenario as I describe this -- after that rule 25 is adopted, we would then as an agency present our 146 1 adopted rule, along with the schedule of the increased 2 fees that we're projecting to the Comptroller of Public 3 Accounts. The Comptroller would then certify that 4 increased fee schedule and approve the appropriation of 5 two and a half million to the agency. 6 And so until all the steps occur, we don't 7 have access to the funding for the potential for -- Mike 8 seemed to begin his work of procuring those services. 9 And I know that as we looked at the fee schedule, any 10 delay in actually receiving the fee increases then 11 causes us concern in reaching that two and a half 12 million dollar fee level. 13 COMMISSIONER KRAUSE: Well, so, if we were 14 a little bit late and we didn't have the rule adopted by 15 September the 1st, then are we completely out of the 16 hunt at all? 17 MS. PYKA: We're not out of the hunt at 18 all. 19 COMMISSIONER KRAUSE: Or if we come in a 20 month later, then we've only forfeited a month? 21 MS. PYKA: That's correct. I think then 22 Phil would want to look at how much we believe we could 23 generate in revenue with a 23-month period versus a 24 24-month period. The Comptroller will only certify what 25 they believe we can generate in that new fee revenue, 147 1 and so they'll take into account, no doubt, any delay in 2 the fee increase. 3 CHAIRMAN WILLIAMSON: So what happens if 4 we don't meet the two and a half million and if -- I 5 know I've heard there are some -- all these people are 6 going to drop out if we do that, so we end up raising 7 two million rather than 2.5. What happens? 8 MS. PYKA: Well, it's my -- I guess my 9 history in dealing with finding of fact from the 10 Comptroller's office, they're going to look at their 11 biennial revenue estimate, and they're going to look at 12 what increase we're proposing as the fee increase. And 13 they will take the facts that they have on hand at that 14 point in time, along with our fee rule, and certify at 15 that point in time. No different than us, they can't 16 project if there is going to be a two percent decline in 17 operators, lessors or a two percent increase in the 18 lessors and operators. 19 But, you know, they've already determined 20 what they believe there is going to be in revenue 21 generation. In their biennial revenue estimate, they 22 actually show a slight increase in 2013 over 2012. So 23 it's what they have at that point in time that we submit 24 our meeting transcript and our fee increase rule as well 25 as our -- 148 1 CHAIRMAN WILLIAMSON: Okay. So if they 2 approve this in August of whatever we submit it and they 3 certify the two and a half million, so will we get two 4 and a half million even if we only raise two million? 5 MS. PYKA: We will. 6 CHAIRMAN WILLIAMSON: Okay. 7 COMMISSIONER KRAUSE: Huh! Well, because 8 I was thinking that if I only had to pay $100 to, you 9 know, maintain a license that was on administrative 10 hold, I'm not going to write a check for four grand, 11 just probably wouldn't be worth it. And so I suspect 12 we'll probably lose, you know, a pretty high number of 13 our administrative hold licenses. 14 CHAIRMAN WILLIAMSON: Okay. Along this 15 other vein, say they say, "Okay. You're going to get 16 your two and a half" but we end up getting 1.5, are they 17 still going to pay the other one million? I mean, based 18 on what I just heard, the answer would be "Yes." 19 MS. PYKA: The answer is "Yes." I think 20 that certainly if there is a material difference, they 21 have the opportunity, through their revenue contingency 22 finding-of-fact process to come back to the agency if 23 there is a material difference. But again, base on what 24 they know at the time that that finding of fact is 25 submitted, they're going to analyze it based on that 149 1 information and proceed. 2 CHAIRMAN WILLIAMSON: What if they don't 3 agree with our assessments? 4 MS. PYKA: They have the opportunity to 5 provide us a reduced amount. 6 CHAIRMAN WILLIAMSON: And what if we say 7 we can't do it for that reduced amount"? 8 MS. PYKA: We're back in the ballpark of 9 coming back with a modified fee rule, if that's what's 10 required. 11 CHAIRMAN WILLIAMSON: All right. 12 COMMISSIONER KRAUSE: But they have to 13 make that determination up front? 14 MS. PYKA: Correct. 15 CHAIRMAN WILLIAMSON: The Controller's 16 office? 17 MS. PYKA: Correct. 18 COMMISSIONER KRAUSE: And then they're 19 bound by it -- 20 MS. PYKA: Correct. 21 COMMISSIONER KRAUSE: -- two years? 22 MS. PYKA: Correct. 23 CHAIRMAN WILLIAMSON: Okay. 24 (Laughter) 25 CHAIRMAN WILLIAMSON: Here is my concern. 150 1 I mean, it's going to cost us one way or the other, it's 2 just a matter of how much, who is going to have to pay 3 for whatever that is. The lower amount, if we hobble 4 along, it still has a $400,000 cost. You know, who is 5 going to pay for that? And right now I'm not sure who 6 that is. Right now the Lottery is already paying 7 $1.6 million a year for bingo. Are we going to be 8 burdened with another $4 million as well on top of that? 9 And I'm concerned about that. 10 On the other hand, a lot of the comments 11 that were made, yes, I think charities are probably 12 getting hammered quite a bit, and I do not necessarily 13 want to add to that. We just have to figure out where 14 we can go with this. 15 COMMISSIONER KRAUSE: I would like to have 16 a little bit more flexibility. 17 CHAIRMAN WILLIAMSON: Well, yes. But what 18 we do here, "flexibility" is not a word in government. 19 COMMISSIONER KRAUSE: I know; I know. But 20 I was thinking more along the line of, you know, maybe 21 scheduling an early meeting -- let's see. What is this, 22 the 12th? -- 13th, you know, maybe an early meeting in 23 July and give us a chance to develop a couple of 24 different alternatives other than go for 100 percent. 25 CHAIRMAN WILLIAMSON: True. Or we could 151 1 still post this, get our formal comments in -- 2 COMMISSIONER KRAUSE: Yes. 3 CHAIRMAN WILLIAMSON: -- with the 4 recognition that we're going to look at all of our other 5 avenues. In other words, we don't lose the clock and we 6 don't lose all the things that they said you can do but 7 still look at our other alternatives, because at the end 8 of the day, we still have to vote on the final whatever. 9 It provides the industry an opportunity to make formal 10 comments beyond just this first one and for any other 11 individuals that may be interested in interjecting their 12 feelings on this as well. So it would provide that 13 opportunity and time frame to do that. 14 MS. PYKA: And, Madam Chair, the other 15 option in going with the revised, I'll call it, the 16 upgrade platform, I just want to make sure that we're 17 all clear that we would need a revision to Rider 2, 18 which is our current capital budget rider, as well as I 19 think some clarifying language to Rider 15, which is the 20 contingent revenue rider. 21 CHAIRMAN WILLIAMSON: If we went with what 22 I call the patch. 23 MS. PYKA: Correct. 24 CHAIRMAN WILLIAMSON: The kicking the can 25 down the road, shall we call it that? 152 1 COMMISSIONER KRAUSE: Well -- 2 CHAIRMAN WILLIAMSON: Anyway. 3 COMMISSIONER KRAUSE: I would be willing 4 to vote to, you know, go ahead and post this, with the 5 following statement, and that is that I really don't 6 like being in the position of doing something that the 7 Legislature wouldn't do. Nobody elected me; I was 8 appointed. And, you know, I was -- my impression of 9 what I'm supposed to do here is to do the best job of 10 running, you know, this agency as possible. Okay? But 11 at the same time, I've got a boss, too, and that's the 12 Legislature. The Legislature didn't see fit to take 13 care of it when they could easily have done that, so I'm 14 sensitive to that. 15 I also don't feel like that I want to be 16 putting government in the coercive position of being 17 able to, you know, take from its customers in ways that 18 its customers can't take from their customers. And so, 19 anyway, I do feel like that we probably need to allow 20 ourselves some flexibility in being able to develop some 21 other alternatives. And I don't really see the harm in 22 going ahead and posting the rule, you know, having said 23 what I said about it. 24 CHAIRMAN WILLIAMSON: Okay. So, Kim, I 25 assume we need to put this in the form of a motion or 153 1 what else do we need to do? 2 MS. KIPLIN: Right. We need a motion that 3 you would move to propose the new rule, 16 Texas 4 Administrative Code, Section 402.110, relating to -- 5 COMMISSIONER KRAUSE: Where is that? 6 MS. KIPLIN: -- the temporary increase of 7 license fees, for public comment, by publishing in the 8 Texas Register. Now, one thing I would like to make 9 sure that you know. I don't know that it would impact, 10 you know, your decision, but you can only have one 11 rulemaking on a particular rule or particular subject 12 matter going at one time. 13 So if you did vote to propose and publish 14 this rule, then you would have that out. I'm thinking 15 that you're directing staff to go out and get more 16 information, look at this other option and then bringing 17 that back to you. And if that's something that you wish 18 to consider and move forward in a rulemaking in that 19 fashion, then you would have to withdraw this rule, I 20 believe. 21 CHAIRMAN WILLIAMSON: All right. 22 COMMISSIONER KRAUSE: Withdrawn -- 23 MS. KIPLIN: I just want to make sure 24 we -- 25 CHAIRMAN WILLIAMSON: Can we withdraw it 154 1 before the clock is over? 2 MS. KIPLIN: Yes, you certainly can 3 withdraw it before the clock is over. We would need to 4 come forward in a matter and take action. 5 CHAIRMAN WILLIAMSON: Okay. 6 MS. KIPLIN: The other thing is, a 7 proposed rulemaking expires by operation of law if you 8 don't take any action after 180 days. I don't think 9 you're going to have this out that long, my sense is, 10 but I need to make sure you know that. If you didn't 11 take action, it would expire on its own. 12 CHAIRMAN WILLIAMSON: Okay. All right. 13 Commissioner, would you like to make a 14 motion? 15 COMMISSIONER KRAUSE: I'm going to do my 16 best here. I don't have a rule number or anything. But 17 I'm just going to say that -- I'm going to make a motion 18 that we go ahead and propose -- okay -- for publication 19 the proposed license fee temporary increase, and that is 20 an amendment to 16 TAC, Section 402.110. 21 MS. KIPLIN: The only difference I would 22 say is, that is a new rule, not a proposed amendment. 23 COMMISSIONER KRAUSE: It is a new rule. 24 So I am proposing this new rule be published for public 25 comment. 155 1 CHAIRMAN WILLIAMSON: I second. 2 All in favor? 3 COMMISSIONER KRAUSE: Aye. 4 CHAIRMAN WILLIAMSON: Aye. 5 Motion passes 2-0. 6 Those of you that came in today from the 7 industry, thank you very much. We do listen to your 8 comments. And I would highly encourage you to get 9 engaged with whomever your elected official is if you're 10 really concerned about what's going on in your industry, 11 as I'm sure Mr. Bresnen and Mr. Fenoglio probably tell 12 you that on a regular basis. 13 So at this time there are no other 14 public -- yes? 15 MS. KIPLIN: I'm sorry. If I could say 16 that I have a T-bar memo, just for the record, for you 17 to sign. And also there is a July 14th rulemaking 18 comment hearing that is part of this preamble. That 19 will begin at 10:00 a.m., here for people who want to 20 come and provide public comment at that time, unless the 21 Commission acts earlier to withdraw. 22 CHAIRMAN WILLIAMSON: Okay. All right. 23 Thank you. 24 25 156 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN WILLIAMSON: So at this time I 3 move that the Texas Lottery Commission go into executive 4 session to deliberate the duties and evaluation of the 5 Executive Director, Internal Audit Director and 6 Charitable Bingo Operations Director and to deliberate 7 the duties of the General Counsel and Human Resources 8 Director pursuant to Section 551.074, the Texas 9 Government Code and to receive legal advice regarding 10 any pending or contemplated litigation pursuant to 11 Section 551.071(1)(A) and any settlement offers pursuant 12 to Section 551.071(B) of the Texas Government Code and 13 receive legal advice pursuant to Section 551.071(2) of 14 the Texas Government Code, including but not limited to 15 those posted on the open meetings notice. 16 Is there a second? 17 COMMISSIONER KRAUSE: Second. 18 CHAIRMAN WILLIAMSON: All in favor, "Aye." 19 COMMISSIONER KRAUSE: Aye. 20 CHAIRMAN WILLIAMSON: The vote is 2-0, and 21 the Texas Lottery Commission will go into executive 22 session. The time is 11:55. Today is June 13, 2011. 23 (Off the record for executive session: 24 11:55 a.m. to 12:37 p.m.) 25 157 1 AGENDA ITEM NO. XIX 2 CHAIRMAN WILLIAMSON: The Texas Lottery 3 Commission is out of executive session. The time is 4 12:37 p.m. Today is June 13, 2011. 5 There is no action to be taken as a result 6 of the executive session. 7 AGENDA ITEM NO. XX 8 CHAIRMAN WILLIAMSON: So at this time, is 9 there a motion to adjourn? 10 COMMISSIONER KRAUSE: I make a motion to 11 adjourn. 12 CHAIRMAN WILLIAMSON: I second. 13 All in favor? 14 COMMISSIONER KRAUSE: Aye. 15 CHAIRMAN WILLIAMSON: Aye. 16 Motion passes 2-0. 17 (Meeting adjourned at 12:37 p.m.) 18 19 20 21 22 23 24 25 158 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 22nd day of June 2011. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/12 20 Firm Registration No. 276 Kennedy Reporting Service, Inc. 21 8140 North Mo-Pac Expressway Suite II-120 22 Austin, Texas 787593 23 24 25