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 § TUESDAY, JUNE 11, 2013 § 9 10 11 COMMISSION MEETING 12 TUESDAY, JUNE 11, 2013 13 14 15 16 BE IT REMEMBERED THAT on Tuesday, the 11th 17 day of June 2013, the Texas Lottery Commission meeting 18 was held from 10:00 a.m. until 12:25 p.m., at 19 the Offices of the Texas Lottery Commission, 611 East 20 6th Street, Austin, Texas 78701, before CHAIRMAN MARY 21 ANN WILLIAMSON and COMMISSIONERS J. WINSTON KRAUSE and 22 VERONICA ANN EDWARDS; that the following proceedings 23 were reported via machine shorthand by Lou Ray, a 24 Certified Shorthand Reporter. 25 2 1 APPEARANCES 2 CHAIRMAN: Ms. Mary Ann Williamson 3 COMMISSIONERS: 4 Mr. J. Winston Krause Ms. Veronica Ann Edwards 5 GENERAL COUNSEL: 6 Mr. Robert F. Biard 7 EXECUTIVE DIRECTOR: Mr. Gary N. Grief 8 CHARITABLE BINGO OPERATIONS DIRECTOR 9 Ms. Sandra K. Joseph 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 - TUESDAY, JUNE 11, 2013 ............... 7 4 AGENDA ITEM NO. I - Meeting called to order ........ 7 5 AGENDA ITEM NO. II - Report, possible discussion and/or action on ethics, 6 administrative procedure, and open government laws pertaining to the Texas Lottery 7 Commission ......................................... 7 8 AGENDA ITEM NO. III - Report, possible discussion and/or action on lottery sales 9 and revenue, game performance, new game opportunities, advertising, market research, 10 trends, and game contracts, agreements, and procedures ..................................... 41 11 AGENDA ITEM NO. IV - Report, possible discussion 12 and/or action on transfers to the State ............ 46 13 AGENDA ITEM NO. V - Report, possible discussion and/or action on the 83rd Legislature .............. 48 14 AGENDA ITEM NO. VI - Consideration of and 15 possible discussion and/or action, including proposal, on amendments to 16 TAC § 401.315 16 “Mega Millions” On-Line Game Rule .................. 58 17 AGENDA ITEM NO. VII - Consideration of and possible discussion and/or action, including 18 proposal, on amendments to 16 TAC § 401.320 “All or Nothing” On-Line Game Rule ................. 11 19 AGENDA ITEM NO. VIII - Report, possible 20 discussion and/or action on agency contracts, including extension and/or amendments on the 21 contract for outside counsel intellectual property legal services, and amendments on the 22 contract for statistical consulting services and the contract for drawings studio and 23 production services ................................ 70 24 25 4 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. IX - Report, possible discussion and/or action on amendments to 4 the 2010 lottery operations and services contract, including whether the negotiation 5 of the lottery operator's contract in an open meeting would have a detrimental effect on the 6 Commission's position in negotiations of the lottery operator contract .......................... 71 7 AGENDA ITEM NO. X - Consideration of and possible 8 discussion and/or action on external and internal audits and/or reviews relating to the Texas 9 Lottery Commission, and/or on the Internal Audit Division’s activities ........................ 72 10 AGENDA ITEM NO. XI - Report, possible discussion 11 and/or action on GTECH Corporation ................. 73 12 AGENDA ITEM NO. XII - Report by the Executive Director and/or possible discussion and/or action 13 on the agency’s operational status, agency procedures, awards, and FTE status ................. 73 14 AGENDA ITEM NO. XIII - Report by the Charitable 15 Bingo Operations Director and possible discussion and/or action on the Charitable Bingo Operations 16 Division’s activities, including updates on licensing, accounting and audit activities, 17 pull-tab review, and special projects .............. 76 18 AGENDA ITEM NO. XIV - Consideration of the status and possible entry of orders in: 19 A. Docket No. 362-13-3120 – Evers Star Food Mart 20 B. Docket No. 362-13-3121 – Dollar Food Mart 21 C. Docket No. 362-13-3122 – La Nortenita D. Docket No. 362-13-3337 – LaPorte 22 Tobacco E. Docket No. 362-13-3338 – Seema Taco & 23 Mini Mart F. Docket No. 362-13-3339 – Mega Food 24 Mart G. Docket No. 362-13-1862.B – Joe 25 Rodarte ............................... 79 5 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. XV - Public comment .............. 82 4 AGENDA ITEM NO. XVI - Commission may meet in Executive Session: ............................ 82 5 A. To deliberate the duties and evaluation of the Executive Director pursuant to 6 Section 551.074 of the Texas Government Code 7 B. To deliberate the duties and evaluation of the Charitable Bingo Operations 8 Director pursuant to Section 551.074 of the Texas Government Code 9 C. To deliberate the duties and evaluation of the Internal Audit Director pursuant 10 to Section 551.074 of the Texas Government Code 11 D. To deliberate the duties of the General Counsel pursuant to Section 551.074 of 12 the Texas Government Code E. To deliberate the duties of the Human 13 Resources Director pursuant to Section 551.074 of the Texas Government Code 14 F. To receive legal advice regarding pending or contemplated litigation pursuant to 15 Section 551.071 (1) (A) and/or to receive legal advice regarding settlement offers 16 pursuant to Section 551.071 (1) (B) of the Texas Government Code and/or to receive 17 legal advice pursuant to Section 551.071 (2) of the Texas Government Code, including 18 but not limited to the following items: Department of Texas, Veterans of Foreign 19 Wars et al. v. Texas Lottery Commission et al. 20 Willis Willis v. Texas Lottery Commission, GTECH Corporation, BJN Sons 21 Corporation d/b/a Lucky Food Store #2, Barkat N. Jiwani and Pankaj Joshi 22 The State Lottery Act, Texas Government Code Chapter 467, the Bingo Enabling Act, 23 employment law, personnel law, procurement and contract law, evidentiary and procedural 24 law, and general government law. 25 6 1 TABLE OF CONTENTS (CONTINUED) 2 PAGE 3 AGENDA ITEM NO. XVII - Return to open session for further deliberation and possible action 4 on any matter discussed in Executive Session ....... 83 5 AGENDA ITEM NO. XVIII - Adjournment ................ 83 6 REPORTER'S CERTIFICATE ............................. 85 7 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 TUESDAY, JUNE 11, 2013 3 (10:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN WILLIAMSON: Good morning I'd 6 like to call this meeting of the Texas Lottery 7 Commission to order. Today is June 11, 2013. The time 8 is 10:00 a.m. Commissioner Krause and Commissioner 9 Edwards are present. We have a quorum; and welcome, 10 Commissioner. 11 AGENDA ITEM NO. II 12 CHAIRMAN WILLIAMSON: So let's proceed 13 with Item No. 2. The first -- this item is report, 14 possible discussion and/or action on ethics, 15 administrative procedure and open government laws 16 pertaining to the Texas Lottery Commission. 17 Bob, this is your item, please. 18 MR. BIARD: Thank you. Good morning, 19 Commissioners. For the record, I'm Bob Biard, General 20 Counsel. 21 Whenever there's a new Lottery 22 Commissioner, this agency has a tradition of reviewing 23 the laws that govern the Texas Lottery Commission at 24 that Commissioner's first meeting. These include the 25 ethics laws applicable to state officers generally, and 8 1 certain laws applicable just to the Texas Lottery 2 Commission; the Administrative Procedure Act that 3 governs the process for contested cases and rulemaking 4 proceedings; the Open Meetings Act and the Public 5 Information Act. 6 I just wanted to say a few words about 7 these and state for the record that last month 8 Commissioner Edwards and I met and discussed these laws 9 and how they apply to the Commission. So this 10 discussion today is just a brief overview. 11 I provided you a document titled Guide to 12 Ethics Laws for State Officers and Employees. This is a 13 publication from the Texas Ethics Commission. But 14 because the Texas Lottery Commission has a number of 15 additional requirements, we've annotated it to highlight 16 provisions specific to the Lottery Commission. And 17 these provisions are generally more restrictive than the 18 requirements that apply to other state agencies. 19 For instance, with respect to gifts, other 20 agencies have a de minimis exception that allows 21 acceptance of gifts that are less than $50 in value, but 22 this Commission doesn't have that exception. 23 However, this Commission does have an 24 exception for accepting gifts that are given on account 25 of a relationship that's independent of your 9 1 Commissioner status, such as kinship or personal, 2 professional or business relationship. 3 There are also two Attorney General 4 opinions that discuss the restriction on Texas Lottery 5 Commissioners regarding political fundraising. This is 6 a restriction specific to this agency and does not apply 7 to other state commissions. 8 There's also a restriction against 9 accepting employment or remuneration from a person that 10 has a significant financial interest in the lottery or a 11 bingo commercial lessor, bingo distributor or a bingo 12 manufacturer. That was a very brief overview of what 13 the ethics laws cover. 14 Moving on the Administrative Procedure 15 Act, the Commission has two key roles, to propose and 16 adopt rules, and to decide contested cases. The rules 17 are general statements of policy or practice generally 18 applicable to all persons, and you may talk to anyone 19 you wish in connection with agency rules or rule 20 proposals. 21 This agency also sits as a tribunal to 22 decide contested cases. At this agency, contested cases 23 usually involve a lottery or bingo licensee and issues 24 of suspending or revoking a license or assessing 25 penalties. In those cases, ex parte communications are 10 1 prohibited, which means you may not communicate with any 2 person or party to the case about an issue or fact or 3 law in the case unless all the parties have the 4 opportunity to participate. 5 There's an exception to this prohibition 6 that allows you to communicate with agency staff that's 7 not participating in the case, to use the agency special 8 skills or knowledge in evaluating evidence. 9 Last though, with respect to the Open 10 Meetings act and Public Information Act, I just want to 11 remind you that a new Commissioner is required to 12 complete the Attorney General's on-line training on both 13 these laws within 90 days of taking the oath of office. 14 Commissioner Edwards and I discussed these laws, and I 15 won't go into detail on those today. 16 Commissioner Edwards, there are 17 certificates that you can print the AG's website when 18 you complete the training, and the agency is required to 19 maintain those on file here. So you can give those to 20 me when you have completed that. 21 So that is a very broad overview, and I 22 just want to say please always feel free to contact me 23 if you have any questions about these laws or how they 24 apply. 25 Thanks. 11 1 CHAIRMAN WILLIAMSON: Do you have any 2 questions, Commissioner Edwards? 3 COMM. EDWARDS: No, ma'am. 4 CHAIRMAN WILLIAMSON: All right. Thank 5 you. 6 AGENDA ITEM NO. VII 7 CHAIRMAN WILLIAMSON: All right. At this 8 time we will go ahead and go to Item 7. This is 9 consideration of and possible discussion and/or action, 10 including proposal, on amendments to 16 TAC 401.320 "All 11 or Nothing" On-Line Game. 12 At this time, I'll turn it over to Gary. 13 MR. GRIEF: Thank you, Madam Chair. 14 Commissioners, as you know, I suspended 15 sales for the popular draw game All or Nothing on June 16 the 3rd, 2013 via an executive order under the authority 17 granted in the existing All or Nothing Game rule. 18 GTECH Corporation, our lottery operator, 19 identified a game design flaw related to the current 20 game structure caused in part by players' propensity to 21 play certain number combinations. We provided each of 22 you with a separate notebook that contains 23 correspondence and all other documents related to this 24 matter. 25 Note that communication from GTECH 12 1 describing the issue first occurred at a staff level on 2 May the 22nd. Subsequent letters to GTECH management, 3 first from Mike Fernandez, our director of 4 administration, and subsequently from me, were delivered 5 to GTECH management on May 31st and then on June 4th 6 respectively. All of that correspondence is also in 7 your notebook under Tab 1. 8 Following the delivery of the May 31st 9 letter from Mike Fernandez to Joe Lapinski, the account 10 development manager here at GTECH Texas, I had one of 11 many telephone conversations with Alan Eland, who is the 12 senior vice president of GTECH for North America. In 13 that conversation, I expressed serious concern to 14 Mr. Eland regarding this situation, and I asked that 15 GTECH thoroughly review and vet the issue as quickly as 16 possible. 17 Mr. Eland immediately engaged the full 18 resources of the company to review the matter over the 19 weekend. And on Monday morning, June the 3rd, I spoke 20 again with Mr. Eland, who told me that the results of 21 GTECH's review confirmed our concerns regarding the game 22 design issue. 23 While there are more than 2.7 million 24 different combinations available for play in the All or 25 Nothing Game, players were often gravitating in their 13 1 play to certain smaller subsets of number combinations, 2 most notably the evens, odds, first 12, second 12. 3 GTECH's review confirmed the potential for unusual and 4 unexpected high payouts should one of those 5 player-favored combinations be selected in our drawing. 6 Now, contrary to what has been reported in 7 some parts of the media, there were not too many winners 8 occurring, nor was there too much being paid out in 9 prizes. The game performed exactly as planned up until 10 the moment I suspended sales on June 3rd. 11 Let me repeat that for emphasis. The game 12 performed exactly as planned up until the day the game 13 sales were suspended. That decision to suspend sales of 14 the game was a precautionary measure taken to protect 15 the State from even the possibility of unanticipated 16 financial exposure should an unexpected number of 17 winners occur for an individual drawing. 18 In fact, as I stated at last month's 19 Commission meeting, the sales, but more importantly the 20 revenue to the Foundation School Fund generated by the 21 All or Nothing Game, has exceeded our expectations 22 through the first nine months of the game's lifetime. 23 In fact, it's produced significantly more net revenue 24 than we projected it would, which makes the current 25 situation even more disappointing. 14 1 While we did suspend sales on June the 2 3rd, drawings for the All or Nothing Game continued 3 until yesterday morning to allow for all the players who 4 had made advanced purchases of the game to have their 5 drawings fulfilled. We will honor all prizes for All or 6 Nothing tickets that were previously purchased by our 7 players. 8 Although there have been no negative 9 financial consequences to the state or to our players as 10 a direct result of the identified game design issue, we 11 have and will take any and all necessary steps to 12 protect the financial interests of the State of Texas, 13 hence the suspension of sales of the game. I also want 14 to assure the Commission that we are reviewing the 15 lottery operator contract to ensure that appropriate 16 action is taken in regard to GTECH's performance in this 17 situation. 18 Now, before I lay out for you the proposed 19 plan of action for a game change that will address the 20 liability issue I've described, Mr. Jaymin Patel, the 21 CEO and President of GTECH, along with Alan Eland, are 22 both here in attendance today, and they would like to 23 address the Commission and answer any questions that you 24 might have. 25 CHAIRMAN WILLIAMSON: All right. 15 1 MR. PATEL: Good morning. Thank you, 2 Chairman Williamson and Commissioners, for the 3 invitation to be here today and to present in front of 4 you. 5 I am Jaymin Patel, the President and CEO 6 of GTECH Americas. And with me is Alan Eland, the chief 7 operating officer of North America. 8 We are here today to address the matter -- 9 the issue of the suspension of the All or Nothing Game 10 as Gary Grief has outlined for you. We take this matter 11 very, very seriously. Texas is one of our most 12 important customers in the world, and I have personally 13 been involved from the beginning that this matter was 14 raised all the way through to today and going forward to 15 resolution in overseeing that this matter is handled 16 properly on behalf of the State of Texas and, of course, 17 for GTECH. We take this matter very seriously and we'd 18 like to make sure that we handle this in the most 19 professional and appropriate way to protect the State of 20 Texas and the players. 21 We have -- I've asked Alan to oversee this 22 matter on the ground here in Austin with the Texas team, 23 and so Alan has been spending the last ten or so days 24 here continuously to make sure that any questions that 25 have been raised by the staff here are properly 16 1 addressed and we are making recommendations that would 2 allow us to re-present the game at the appropriate time. 3 So at this point in time, since Alan has 4 been so close to the situation, I'm going to ask him to 5 speak, to go through a review of the incident and our 6 approach to the resolution. Then I'll come back at the 7 end with some closing comments. Thank you. 8 MR. ELAND: Thank you, Jaymin. 9 For the record, my name is Alan Eland. 10 I'm responsible for GTECH's operations in North America 11 as Jaymin said. 12 Chairman Williamson, Commissioners, what 13 I'll do is walk through a very brief history and 14 description of the problem and resolution. At any time, 15 if it's too brief, if you have any questions, would like 16 more detail, please interrupt me; I'll be happy to 17 address the questions. 18 But back in the summer of 2010, we, as our 19 normal course, met with the Lottery for the purposes of 20 trying to design and provide a new on-line game that 21 would fit into the portfolio of existing on-line games 22 that the Lottery has here. After studying quite a few 23 concepts, taking to research quite a few concepts, we 24 ended up with the Lottery -- with the All or Nothing 25 Game; brand new concept, hadn't been launched in any 17 1 other jurisdiction. 2 It fit nicely into the portfolio in Texas 3 because it differentiated itself from the Lotto games 4 and Texas Two Step, and the fixed odds numbers games, 5 Pick 3 and Pick 4. The game basically is played with a 6 field of 24 numbers where, to win the top prize, you 7 need to select 12 out of those 24 numbers, match your 12 8 with the 12 that are drawn. But it had a unique 9 characteristic as well, that if you match none of the 10 numbers that were drawn, none of your 12 selected 11 matched, that you also won the top prize. 12 The game was set up, as Gary mentioned, as 13 a fixed pay-out game. So to win that top prize to match 14 either the 12 or not to match the 12, got you the top 15 prize of $250,000. So it was a fixed top prize of 16 250,000. 17 The game went live in September of 2012. 18 After monitoring play for some period of time, it did 19 become apparent to us, as Gary mentioned, that players 20 were gravitating towards certain number combinations. 21 Most specifically all of the odd numbers, all of the 22 even numbers, the front 12 and the back 12. 23 What happens is when there's too much play 24 concentrated in any given combination, if those numbers 25 were to hit -- and again, the odds as stated are 1 in 18 1 2.7 million; there are 2.7 million combinations in 24. 2 If one of those numbers were to hit, you multiply it by 3 the 250,000, the number of winners then -- it would 4 result in, for that draw, an extraordinarily high 5 payout. Over time the payout would come back to normal, 6 but during that one period of time the payout would be 7 extraordinarily high. 8 So Gary's correct that we agreed to go 9 back and look in much more detail to make sure of our 10 analysis and the Lottery's analysis so that we could 11 accurately quantify what the risk was. We did that over 12 the weekend. We came back and recommended to Gary that 13 morning that until we could fix the game, the most 14 prudent step would be to suspend sales of the game. And 15 that's exactly what happened on Monday, June the 3rd. 16 We immediately then started to work on 17 what a resolution would be. And I know Gary is going to 18 talk in a little more detail about this, but simply put 19 there is an easy mechanism that once a certain threshold 20 is hit, that the -- the top prize then becomes 21 pari-mutuel. So it's divided amongst the number of 22 winners, and the risk then is removed that there are too 23 many winners all expecting $250,000. 24 The good thing about this solution is that 25 it is -- it is exactly the way that Texas Lotto, Texas 19 1 Two Step and Mega Millions and Powerball are played. 2 They're pari-mutuel games. It's a concept that's 3 familiar to many of the players as well. 4 So rest assured that you have my full 5 attention, that of our entire organization, to as 6 quickly as we can do the necessary software work to make 7 the top prize category pari-mutuel, and get it executed 8 as quickly as possible. 9 MR. PATEL: So let me say in closing that 10 we as a lottery operator and supplier around the world, 11 we certainly appreciate that trust and integrity is the 12 foundation of any lottery organization. And we 13 understand that you place your trust in us as being your 14 partner, your supplier and advisor. 15 And our whole approach in total on this 16 matter was to make sure that the first thing that we did 17 with Texas was to make sure that there was nothing that 18 we said to you or recommended that did not put the trust 19 and the integrity of the Texas Lottery first. So we 20 made a difficult but appropriate recommendation to Gary 21 to suspend the game in advance of coming up with an 22 approach to be able to relaunch the game, you know, with 23 the appropriate liability limits and so forth, which 24 we'll talk about in more detail -- which Gary will talk 25 about in more detail. 20 1 So on behalf of GTECH, I want to formally 2 apologize to the Commission for this error in the way 3 that we have put forward, the oversight that took place 4 in the game design process. It certainly wasn't our 5 intention. You know, we caught the matter and, as Gary 6 explained, there was no negative financial consequence 7 to the State of Texas. And so I think that we have made 8 the right recommendation, but having said that I do want 9 to say very clearly that we apologize for this 10 oversight. And I can assure you that from our group CEO 11 down to me and Alan, you have all of our resources 12 working on this matter and we will not stop until we 13 have final resolution with your staff in the coming 14 days. 15 CHAIRMAN WILLIAMSON: Thank you. 16 Commissioners, do you want to ask 17 questions now or let Gary finish and then we'll -- 18 COMM. KRAUSE: Any time is fine with me. 19 CHAIRMAN WILLIAMSON: Okay. 20 MR. GRIEF: Well, Commissioners, you've 21 heard Mr. Eland mention that the recommendation was 22 forthcoming from GTECH to put in place a cap on the 23 liability, and we have received that recommendation. At 24 this time -- and I want to emphasize at this time -- 25 that change would involve setting an overall liability 21 1 cap for the top prize, which is fixed at $250,000 of 2 $5 million, after which that prize would go pari-mutuel. 3 Robert Tirloni -- and I'll ask Robert to 4 come up. Robert is going to explain more of the details 5 of that particular game change. 6 Now, that said though, I'm not fully 7 prepared nor am I comfortable today asking you to 8 propose a rule to that effect. Staff still has work to 9 do to verify the soundness of GTECH's recommendation and 10 the viability of a plan for a liability cap. I'll speak 11 more to the process that I am recommending after I give 12 Robert an opportunity to lay out the tentative game 13 change. 14 MR. TIRLONI: Good morning, Commissioners. 15 For the record, my name is Robert Tirloni. I'm the 16 products and drawings manager for the Commission. So I 17 just have a few brief slides to show you this morning to 18 kind of give you a visual of what Alan and Gary just 19 spoke about. 20 So Alan mentioned that the GTECH 21 recommendation is to put a prize liability cap onto the 22 All or Nothing Game. And basically what that does is it 23 transforms a guaranteed top prize as to pari-mutuel 24 prizes once a certain number of top prize winners is 25 exceeded in a drawing. So here's the words behind it, 22 1 and then I have a visual on the next slide that I think 2 is a good illustration of the concept. 3 So how does the cap work? Let's use the 4 $5 million amount as an example. So with the $5 million 5 cap per drawing for the $250,000 top prize, you would 6 basically divide the 5 million by the top prize amount. 7 And so that would allow us to pay 20 top prize winners 8 per drawing. They would each get $250,000. 9 If you -- if we have a drawing where there 10 are more than 20 winners, that's when the cap -- you'd 11 exceed the cap and you'd have to change those $250,000 12 guaranteed top prizes to pari-mutuel prizes. 13 So a simple example is if you had 40 top 14 prize winners in a drawing, you would have exceeded your 15 cap. You would divide the $5 million cap by 40 top 16 prize winners, and then they would each receive $125,000 17 each. 18 And again, this is just a graph of the 19 words. This is a graph that GTECH put together. I 20 modified it to sync it up with this recommendation, but 21 there's your $250,000 prize level. As long as you have 22 a drawing or you're having drawings where you are paying 23 or you have 20 winners or less in that drawing, they're 24 all going to get $250,000. Once you cross that mark, so 25 to speak, and you have more than 20 winners, that's when 23 1 you start paying them on a pari-mutuel basis. 2 So in this example, if you had 21 winners, 3 just one winner over the 20 or over the cap, each of 4 those winners would then get $238,095 each. And as the 5 number of winners increases in that drawing, of course, 6 you're dividing that $5 million cap by more and more 7 winners, so the prize is becoming less. So in this 8 example, if you have 50 winners in the drawing, they 9 easement get $100,000. 10 MR. GRIEF: Robert, to put some 11 perspective on this -- I believe this is correct, but 12 correct me if I'm wrong -- we've had one drawing in 13 which we had two winners. Correct? Is that the maximum 14 number we've ever had -- 15 MR. TIRLONI: Yes. 16 MR. GRIEF: -- thus far? 17 MR. TIRLONI: Yes. So far we've had one 18 drawing where there have been two top prize winners. 19 And that's the visual of how you would 20 implement the liability cap and how it would work and 21 how you would change those guaranteed prizes to 22 pari-mutuel prizes. 23 MR. GRIEF: So, Commissioners, you've seen 24 the details of the game change. And I want to emphasize 25 again this is tentative. I anticipate that it will take 24 1 us at least the remainder of this week to fully vet this 2 concept, both internally and then run it through our 3 contracted statistician. And in addition, we're going 4 to utilize a third-party vendor that we already have on 5 contract, Grant Thornton, to verify that the necessary 6 software changes GTECH needs to make have indeed been 7 made. 8 A section of the Texas Government Code 9 allows the Executive Director of the Texas Lottery 10 Commission to propose rules to be adopted by the 11 Commission. But the Executive Director's proposed rules 12 have no effect until adopted by the Lottery Commission. 13 And I'd like to ask Bob Biard to explain this statute, 14 because this will play a big part in what my plan of 15 action is. 16 So, Bob? 17 MR. BIARD: Yes. Commissioners, as Gary 18 stated, this is Section 456.015(a) of the State Lottery 19 Act, which is Chapter 456 of the Texas Government Code. 20 It states, "The Commission shall adopt all rules 21 necessary to administer this chapter." Then it goes on 22 to state, "The Executive Director may propose rules to 23 be adopted by the Commission, but the Executive 24 Director's proposed rules have no effect until adopted 25 by the Commission." 25 1 So the Executive Director has independent 2 statutory authority to propose rules for the agency. If 3 the Executive Director did that, proposed rules, the 4 process would continue -- other than being initiated by 5 the Executive Director, it would be a process that 6 you're familiar with, what we normally do. The proposal 7 would be published in the Texas Register. The agency 8 would accept comments for 30 days. We would schedule a 9 public comment hearing on an appropriate day, and then 10 we would plan to bring the game rule changes back to you 11 at a later meeting. 12 We're planning on this August Commission 13 meeting to bring them back for your consideration to 14 adopt. And if adopted, the changes would take effect 20 15 days after filing with the Secretary of State. And all 16 that is the normal rulemaking process. The only 17 difference is the Executive Director would be proposing 18 it. 19 CHAIRMAN WILLIAMSON: Okay. 20 MR. GRIEF: So under that authority, 21 Commissioners, that Bob has just described to you, my 22 preference going forward would be to first take the 23 necessary time to thoroughly vet and analyze and confirm 24 the game change that's been presented to you, and then 25 make any necessary revisions that might come as a result 26 1 of that review. 2 And finally, as Bob said, in my capacity 3 as Executive Director I would propose a rule change as 4 soon as possible by filing the proposed change with the 5 Texas Register, all the while keeping each Commissioner 6 informed on an individual basis as to what that proposal 7 would be. 8 The rationale and reasoning behind my 9 preference to use this particular authority in the 10 statute is to minimize the delay in getting the 11 appropriate game change put in place and, hopefully, 12 reactivate the game as quickly as possible so we can 13 maximize revenue to the Foundation School Fund. 14 Commissioners, that concludes my comments 15 on this matter. I will be happy to answer any 16 questions, but today we're looking for your guidance and 17 for your approval on my approach that I've laid out for 18 you. 19 CHAIRMAN WILLIAMSON: All right. Thank 20 you. Commissioners, questions, comments? 21 COMM. KRAUSE: I've got both. I want to 22 start off by saying that our job here is to do two 23 things, and that is to raise money for the school 24 children of Texas, and to do that by providing fair and 25 fun games. If they're not fair and if they're not fun, 27 1 then people won't play them. And, of course, the 2 overriding goal is to raise money for public education, 3 so we're doing that. 4 And, in addition, we put a lot of effort, 5 huge amount of effort, into the renewal of the GTECH 6 contract. I think it's about two feet tall, very 7 impressive amount of paper. But one of the critical 8 things that's built into it is the significant 9 encouragement of innovation. And I believe that this is 10 a very innovative game. And I remember back to business 11 statistics with the bell curve, I now see why the 12 statistical likelihood of getting them all is exactly 13 the same as getting none, but that's the kind of thing 14 that fascinates our players. 15 So anyway, I don't consider this to be a 16 shooting offense at all, because, bottom line is is that 17 we're doing something that's never been done before. 18 And, therefore, since it's never been done, we can't 19 automatically anticipate everything that could possibly 20 happen. And so, therefore, coming back and retooling is 21 exactly what we need to do. 22 This is not like the Apollo mission that 23 blew up after takeoff. Nobody got hurt. Nobody lost 24 any money. So I think it all worked exactly the way 25 it's supposed to work. So that's my comment. 28 1 And my question is, though: Are there 2 other games where players have a tendency to play like 3 this? Have we seen this before? In a game design, 4 could we crib from other games to maybe have predicted 5 that people would do this? 6 I mean, with all the huge number of 7 combinations out there, you know, people don't have 8 super computers to make the picks for them; they're just 9 going to walk in and do something simple. So was this 10 predictable at all or is it too -- so unusual that 11 because we're going into new territory we didn't think 12 that this applied or could have applied? 13 MR. ELAND: Commissioner, very good 14 question. So there's a few parts to it, and I'll try to 15 address them all. 16 With respect to do players in other games 17 have a preference for certain combinations of numbers, 18 the answer is "yes." When you're in lotto-type games 19 that already have a pari-mutuel prize structure, you 20 don't have that risk. But you also have a much larger 21 field of numbers, so you don't see the concentration too 22 much in any given combination of numbers. But again, 23 it's pari-mutuel, so it doesn't really matter even if 24 there is. 25 There are the numbers games, Pick 3 and 29 1 Pick 4, and players do gravitate towards certain 2 preferred numbers. The most common are triple digits, 3 and triple digits have hit here in Texas from time to 4 time, so all threes or all fours or all fives. So there 5 is that gravitation, and we monitor that and the Lottery 6 monitors here as well, when that happens in the numbers 7 game, what the liability is and what the prize payout 8 is. 9 The difference between that game and All 10 or Nothing is that the top prize in Pick 3, for example 11 is only $500. The top prize in Pick 4 game is $5,000 so 12 remarkably different than the 250. So therein lies the 13 problem. 14 The final part to your question, could 15 this have been seen, given the experience that we have 16 with those other games? And the answer to that question 17 is "yes." It's something that was looked at as part of 18 the game design, but dismissed too early as an 19 unnecessary risk and therein lies the -- 20 COMM. KRAUSE: Or as unlikely? 21 MR. ELAND: -- or as unlikely because of 22 the 2.7 million combinations. And in hindsight, in the 23 rearview mirror, therein lies the mistake that was made. 24 COMM. KRAUSE: Well, you know, you were 25 going on statistical analysis and not behavioral, I 30 1 suppose. 2 MR. ELAND: Right. 3 COMM. KRAUSE: And players are people and 4 they're way less sophisticated than your statisticians. 5 So anyway, I don't see the need to stifle 6 our attempts to be innovative and create new games, you 7 know -- by, you know, overdramatizing this thing. Let's 8 just fix it and move on, start playing again. 9 CHAIRMAN WILLIAMSON: Commissioner, do you 10 have any questions or comments? 11 COMM. EDWARDS: No questions. 12 CHAIRMAN WILLIAMSON: To say I was 13 disappointed is probably an understatement in this 14 occurrence. I try -- and I know this agency tries -- to 15 be very sensitive to our players, the games. We are 16 targets of criticism easily, and I'm very sensitive to 17 that and I try to always encourage all of us to have the 18 highest level of integrity and confidence from our 19 players. So this concerns me a great deal. 20 What assurances are we going to have in 21 the future that something like this doesn't happen 22 again, particularly when we're doing new games, 23 particularly -- you know, we've talked about we've 24 gotten funding for a new studio for a game we're going 25 to propose in a year or so. 31 1 What are you going to put in place to 2 assure us that this doesn't occur again? 3 MR. PATEL: Thank you. We take your 4 comments very seriously and, of course, we are also 5 quite disappointed in the events that have turned out 6 over the last several days. 7 First of all, we take the matter itself 8 very seriously and we are addressing, you know, 9 recommendations to make sure that the new 10 recommendations that Gary and Robert described, you 11 know, will have the appropriate risk framework attached 12 to the game going forward. 13 We've also -- to address the comments made 14 by Commissioner Krause, we've also had some discussions 15 internally to make sure that this incident does not 16 stifle creativity because, on the one hand, we have to 17 protect the playing public; on the other hand, we have 18 to make sure that the creativity of these games is 19 still, you know, brought out in the recommendations that 20 we make. 21 But to address your questions 22 specifically, Chairman, we have reinforced very strongly 23 our processes within GTECH to make sure that all game 24 recommendations are put through a group of people in the 25 company that consist of people that have 25 to 30 years 32 1 of experience in the industry and, therefore, have seen 2 many, many game types and have seen issues that occur, 3 because these issues do occur in many jurisdictions from 4 time to time with the games. Combine those people with 5 experts in marketing -- our organization -- experts in 6 technology and experts in game mathematics. 7 So we have reinforced our procedures 8 internally. And in fact, as Alan was describing, the 9 process that we followed this past weekend, we had our 10 first gathering of this group to make sure that the 11 recommendation that we put forward to Gary was properly 12 vetted by this team of people that have the requisite 13 experience and knowledge. 14 So I feel confident that this will not 15 happen again, and we will do a much thorough job in 16 presenting both the benefits of a new game, but also the 17 risks and how the risks can be managed within a lottery 18 environment. 19 COMM. KRAUSE: Well, I know nothing about 20 game design, but it does seem to me that you make it 21 standard procedure in game design to always, you know, 22 make -- you know, put in the pari-mutuel patch, that 23 that could always occur and maybe even designed in a way 24 so that, you know, maybe after a certain period it goes 25 away if it's unnecessary. But I don't know how it could 33 1 ever hurt to have that. 2 MR. PATEL: Yes, we agree it's a good idea 3 and we -- you know, I think as a general approach we -- 4 when it comes to fixed odds games that have potential 5 for high pay-out, I think that establishing some kind of 6 pari-mutuel approach or liability cap is always an 7 important consideration. 8 Thank you. 9 COMM. EDWARDS: Just to clarify, you said 10 that -- you were reassuring us how the processes work to 11 ensure the integrity, but what specific change did y'all 12 make to ensure that this does not happen again? 13 MR. PATEL: The specific change, 14 Commissioner, is that all game recommendations are going 15 to go through an executive team, which I will chair, so 16 that we make sure that the communications to our 17 customers are made in a very clear and concise way. 18 Because sometimes the discussions take place with our 19 customers and with our own people at lower levels, and 20 those don't necessarily get documented fully and 21 recommended the way that we want them to be. 22 So I'm going to personally, with Alan and 23 the team, oversee all recommendations to make sure that 24 there is both benefits of the game that are presented, 25 as well as a risk mitigation profile presented so that 34 1 it's managed properly in the marketplace. 2 CHAIRMAN WILLIAMSON: And I'm not sure who 3 needs to answer this, maybe some of our staff. My other 4 concern is we brought this game out. Obviously, it has 5 been a popular game. And when you advertise a game at a 6 guaranteed prize rate, obviously that's very attractive. 7 Now that's going away. 8 So how are we going to deal with that in 9 terms of -- you know, obviously we're going to have to 10 put that information out there for our players. So how 11 do we go about doing that so they'll understand that 12 this is now -- that there's a -- it's a different -- 13 it's a different game in a way? 14 MR. TIRLONI: I think this game is going 15 to be very similar to information that we put out on the 16 Mega Millions Game, and we're going to be talking about 17 that later today. But there are certain tiers in the 18 Mega Millions Game, they're guaranteed prizes. But 19 there is a liability cap on the Mega Millions Game, and 20 sometimes those guaranteed prizes can convert to 21 pari-mutuel prizes just as we have discussed here today. 22 We're going to have to go back and look at how we 23 communicate to players on our web site and on our 24 brochures and our retail information, how we communicate 25 to them that there's that possibility. 35 1 So right off the cuff I believe that we're 2 going to still say that the top prize is $250,000 for 3 All or Nothing. We'll most likely be removing the 4 guaranteed language that we had used at the launch, and 5 then we'll have to make sure we communicate that there 6 is a liability cap on the game. And if that liability 7 cap is exceeded, those prizes will go pari-mutuel. 8 That's what we do on Mega Millions Game, and I foresee 9 us doing something very similar for All or Nothing. 10 CHAIRMAN WILLIAMSON: And I understand 11 that. But once again, you know, this is a 12 disappointment. If I were a player and I saw this and 13 said, "Oh, yeah, well they got rid of the guarantee and 14 now they're back, what else are they going to put out 15 there that they're going to start adding -- and 16 advertise a certain way and then have to go back and 17 change?" That just is not good for us to do that, and I 18 just want to make sure this does not happen again. 19 And then in discussion of-- on Gary's 20 proposal to -- for him to bring up a rule rather than it 21 comes before the Commission, he and I have been in 22 constant contact since this all started. So he's 23 communicated with me regularly, and I -- at least I know 24 one other Commissioner -- on how this has progressed. 25 So in light of the fact that we want to get this back 36 1 and up and running as soon as possible and he has the 2 authority to do that, as long as you're communicating 3 with all of us on a regular basis, and before you end up 4 putting something out there, I -- you know, I don't have 5 a problem with you proposing a rule since you are 6 authorized to do that. Unless the other Commissioners 7 certainly want to do it another way -- 8 COMM. KRAUSE: I'm fine with it. 9 CHAIRMAN WILLIAMSON: You know, there 10 again, it's not a rule unless we approve it. So for 11 whatever reason, if it's not -- doesn't end up being 12 what it needs to be, then we can certainly change that. 13 MR. GRIEF: And again I'll emphasize, 14 Chairman, that it will go through a full public comment 15 period. We will have a public comment hearing on that 16 as well, the normal process once it's proposed. 17 CHAIRMAN WILLIAMSON: Okay. Thank you, 18 gentlemen, for coming. I think that was the proper 19 thing to do anyway. I know this has been a very 20 difficult week. Certainly for, I know, the Lottery 21 staff who has worked quite a bit this week trying to get 22 to a resolution. 23 We'll move forward with this business and 24 we have other things we need to do, but we just can't 25 have this again. 37 1 MR. PATEL: We understand. Thank you very 2 much. 3 CHAIRMAN WILLIAMSON: All right. And we 4 do have one public comment, Dawn Nettles. 5 MS. NETTLES: Good morning, Commissioners. 6 For the record, my name is Dawn Nettles, and I'm with 7 the Lotto Report out of Dallas, and I do have several 8 comments to make. 9 The one thing that I haven't heard here 10 that I think should be instrumental in your thoughts 11 with regard to this game is how many -- it's not been 12 said how many players have selected the all odd, all 13 even, 1 through 12, 13 through 24. That's not even been 14 mentioned in here. 15 And the reason I ask it is because another 16 thing not mentioned is the play slip. The players fill 17 out, gives the players the option to just mark that 18 little -- to put a little x here if you want to play all 19 odd or all even or the lower 12 and the upper -- the 20 upper 24. And so I would like to know how many people 21 would be affected in the event those numbers were drawn? 22 Okay? 23 And I haven't heard any discussion on 24 that, and I think it's very important when it comes to 25 thinking about this game. Because if you -- if it's 38 1 what I think it is, which is going to be around 200 -- I 2 think 200 is the magic number. If that is the case, 3 then they talk about pari-mutuel, and believe me I'm in 4 favor of pari-mutuel prizes. That is the only way any 5 game should be played is pari-mutuel. That protects the 6 players and the state. Okay? There is no risk in 7 pari-mutuel games. 8 But if you take this game and you're 9 enticing people to play for 250,000 and if there are 200 10 winning tickets, should it be drawn, then what are the 11 people going to get? You actually think they're going 12 to be happy? They're not. Okay? It's a -- very, very, 13 very bad. 14 I absolutely -- from the life of me, I do 15 not understand how it is that anybody -- that this got 16 past anybody from the very beginning, because I picked 17 it up immediately. And I told staff there's a problem 18 with your rule, but I didn't tell them what the problem 19 was. Because -- I mean it's just logical. I don't 20 understand. It's as clear as those letters up there. 21 But anyway, the other thing I want to say 22 is that initially going back to the very inception of 23 the lottery back in 1992, the magic number for the 24 School Foundation Fund was supposed to be 38 percent 25 from sales is supposed to go to the School Foundation 39 1 Fund. That was the magic number on the draw games. And 2 this game has not given 38 percent. 3 If sales exceeded their expectations, 4 that's great. I know 20 million as gone to the School 5 Foundation Fund from this game. But that just tells me 6 that they did not figure sales correctly in the first 7 place. It's only bringing in 30 or $40,000 -- I forget 8 the numbers now -- per draw. So -- and it's a $2 game. 9 I'm sorry, it's 30,000 tickets and that's 60,000 in -- 10 per draw. I forget what the numbers are. 11 But I do want to emphasize one more thing: 12 This is a lottery, and there should be no risk to the 13 state. None. Okay? It's just impossible for there to 14 be any kind of risk. It just can't be. 15 California has no games that are not all 16 pari-mutuel. Everything is pari-mutuel in California, 17 all of their prize levels. 18 So I do not agree with this game. I don't 19 agree with the prize point. And if you come back and do 20 what you're -- put the cap on it, you will be -- I don't 21 know what the word to use is to the players, but you 22 will be -- I'm at a loss for words. 23 This would not be fair to players. If it 24 ever happened and it hit the news, it's just the total 25 opposite of had you had 200 -- and I would like for 40 1 somebody to ask -- I think y'all ought to know -- how 2 many people are involved that play these numbers. I'm 3 sure it's probably in excess of 200. So your liability 4 could be humongous. 5 And thank you very much. 6 CHAIRMAN WILLIAMSON: Thank you. 7 Commissioners, do you have any other 8 questions or comments? 9 Robert? 10 MR. BIARD: I just want to make one short 11 clarification. Gary will keep each of you informed on 12 the contents of the rule proposal until it's -- the time 13 when it's submitted. But he'll -- I just want to 14 clarify that he'll be doing that individually with each 15 of you and there won't be any further -- 16 CHAIRMAN WILLIAMSON: Right. 17 MR. BIARD: -- discussions among the 18 Commissioners -- 19 CHAIRMAN WILLIAMSON: Right. 20 MR. BIARD: -- after this meeting. 21 CHAIRMAN WILLIAMSON: Right. I understand 22 that. 23 All right. Commissioners, do you have any 24 other questions, comments, observations? Anybody else 25 want to ask any questions? 41 1 (No response) 2 CHAIRMAN WILLIAMSON: Gary, anything else, 3 you want to add? 4 MR. GRIEF: Thank you, Commissioners. 5 I'll proceed as I laid out. 6 CHAIRMAN WILLIAMSON: All right. Thank 7 you. 8 AGENDA ITEM NO. III 9 CHAIRMAN WILLIAMSON: All right. We will 10 go on to Item No. III, report, possible discussion 11 and/or action on lottery sales and revenue, game 12 performance, new game opportunities, advertising, market 13 research, trends, and game contracts, agreements and 14 procedures. 15 Kathy and Robert? 16 MS. PYKA: Good morning, Commissioners. 17 My name is Kathy Pyka. I'm the controller for the 18 Commission. With me to my right is Robert Tirloni, our 19 products manager. 20 Commissioners, the first chart that we 21 have for you this morning reflects the comparative sales 22 data through the week ending June 1, 2013. Our total 23 sales for 2013 through this 40-week period are 24 $3,339,000,000, which is an increase of $134 million, 25 for 4.2 percent as compared to the 3,205,000,00 for the 42 1 previous fiscal year. 2 Our fiscal year 2013 instant ticket sales 3 as reflected on the second blue bar are $2,449,000,000, 4 which is a $96.5 million increase over the sales figure 5 for last fiscal year. 6 Commissioners, we continue to see 7 exceptional week-over-week increases as compared to last 8 fiscal year within our instant ticket products, which 9 now gives us a 4.1 percent cumulative sales increase. 10 Our fiscal year 2013 draw sales reflected 11 on the second red bar are at $890.3 million. And last 12 Commission meeting we discussed draw sales with a 13 $15 million decline. Commissioners, following our 14 recent 61 million draw week that we had with the 15 $600 million advertised Powerball jackpot, we now have a 16 $37.7 million increase in draw sales as compared to last 17 fiscal year. 18 Our next slide includes cumulative average 19 daily sales for fiscal year years 2011, '12 and '13. 20 The overall daily sales average value for fiscal year 21 2013 is $12.2 million, which is a $620,000 increase per 22 day over the previous fiscal year. And the daily 23 increase over fiscal year 2011 is $1,629,000. 24 Our jackpot games, highlighted in the 25 white font, are at $1.9 million. That's a $12,000 43 1 decline from last fiscal year, and a $367,000 increase 2 over fiscal year 2011. Within this category you'll note 3 that Powerball, at $839,000, reflects a $400,000 sales 4 increase per day over the previous fiscal year. 5 Our daily games, highlighted in the green 6 font, include a daily average of a million $362,000. 7 That's more than a $200,000 sales increase over the 8 previous two fiscal years. And highlighted within this 9 category again are our Daily Four sales with the 10 $203,000 daily average, which is a sales increase of 11 11 percent over the previous fiscal year. 12 Our instant ticket games reflect $8.9 13 million. Again, that's an increase of 414,000 over the 14 previous fiscal year, and more than a million dollars 15 per day over fiscal year 2011. 16 So with that, Robert will now provide an 17 overview of actual sales by product. 18 MR. TIRLONI: Good morning once again. 19 Robert Tirloni, Products and Drawings Manager for the 20 Commission. 21 So this next slide is our fiscal year '13 22 compared to fiscal year '12. This is through two 23 Saturdays ago, June 1st. Same format as the previous 24 slide; our jackpot games are at the top in white. You 25 will notice increases in Mega Millions. As a reminder, 44 1 in fiscal year 2012 we had a $640 million Mega Millions 2 jackpot. We've not seen jackpot levels like that this 3 fiscal year from the Mega Millions game. 4 We have seen some very strong Powerball 5 jackpots. As Kathy mentioned, we climbed up to a $600 6 million Powerball jackpot in May of 2013, and that is 7 certainly contributing to the increase in sales this 8 fiscal over last fiscal. 9 Our daily games are in green in the middle 10 of the slide. We've talked about this in the past, but 11 we continue to see good sales growth from the Daily 4 12 Game. We believe that we are seeing people migrate from 13 Pick 3 over to Daily 4. 14 So if you look at the draw game category 15 as a whole, combining daily games and jackpot games, you 16 will see, as Kathy, mentioned that we are up $37 million 17 this physical compared to last. You'll remember for the 18 past two months we had that $15 million decline, and we 19 had told you we thought we could make that up based on 20 the way the jackpot games were rolling. And so we're 21 very happy with the fact that we got that very large 22 Powerball jackpot in May. That certainly helped us make 23 up that -- make up that deficit. 24 Our instant games continue to do very 25 well. We're realizing an almost $97 million surplus in 45 1 our instant ticket sales this fiscal compared to last. 2 And the portfolio as a whole is up just over 3 $134 million this fiscal compared to last fiscal. 4 We bring you this slide probably about 5 three or four times a year. This is our instant ticket 6 sales. Again, this is through Saturday, June 1st. This 7 represents $2.45 billion worth of instant ticket sales, 8 and it's broken down by price point. 9 Not a lot of change from the last time you 10 saw this. The $5 price point is the large golden piece 11 of the pie. It continues to be our -- the five 12 continues to be our number-one selling price point, 13 followed by the 10, and then followed by the 20. Just 14 to note, you'll see that small kind of lavender-colored 15 sliver. That is the $7 price point. That price point 16 has been phased out, and that's why that looks so small 17 in this total pie. But not a lot of change in terms of 18 the allocation by price point. 19 I have one last thing for you-all today. 20 It's just an update on a brand new game that started 21 yesterday. This is our 5X Raceway Riches Game. This is 22 our Circuit of the Americas branded or licensed game. 23 We had a Circuit of the Americas Game last year. The 24 only difference this year is that we're offering 25 Internet entry second-chance drawings for this game. So 46 1 you can win merchandise prize packs. And it also offers 2 players the opportunity to win dream race experiences 3 where they can go out to the Circuit of the Americas' 4 track for a race that they get to choose to attend. 5 They have hotel stay, hospitality suites and so on and 6 so forth. So this game just started yesterday, and 7 we're looking forward to another good game with the 8 Circuit of the Americas. 9 And that's our sales presentation for 10 today. We're happy to answer any questions you might 11 have. 12 CHAIRMAN WILLIAMSON: Thank you. 13 Commissioners, do you have any questions. 14 COMM. KRAUSE: No. 15 CHAIRMAN WILLIAMSON: All right. Thank 16 you. Go on to the next item, please. 17 AGENDA ITEM NO. IV 18 CHAIRMAN WILLIAMSON: Item IV, possible 19 discussion and/or action on transfers to the state. 20 Kathy? 21 MS. PYKA: Commissioners, again for the 22 record, my name Kathy Pyka, Controller for the 23 Commission. 24 Commissioners, while your notebook 25 includes the April transfer data, we completed the May 47 1 transfer late last week, so I'd like to give you that 2 update so that I can provide you the most current data 3 that we have. 4 Our total cash transfers and allocation to 5 the Foundation School Fund, the Veterans Commission and 6 the allocation of unclaimed prizes for the period ending 7 May 31, 2013 amounted to $863.7 million for the first 8 nine months of the fiscal year. Of that $863.7 million 9 transferred to the state; $817.5 million was the amount 10 transferred to the Foundation School Fund. We 11 transferred $4.3 million to the Texas Veterans 12 Commission, with a balance of $41.9 million transferred 13 from unclaimed lottery prizes. 14 Commissioners, this now represents a 1.3 15 percent increase or $10.1 million over the amount that 16 we transferred to the Foundation School Fund last fiscal 17 year through the same period. And this brings our 18 cumulative transfers to the Foundation School Fund now 19 to 15 and a half billion dollars. I'll be happy to 20 answer any questions. 21 CHAIRMAN WILLIAMSON: No. Thank you. 22 Commissioners, do you have any questions 23 or comments? 24 COMM. EDWARDS: No. 25 MS. PYKA: Thank you. 48 1 CHAIRMAN WILLIAMSON: Thank you. At this 2 time we will take a 10-minute break. It is 10:55, and 3 we'll be back in 10 minutes. 4 (Recess: 10:55 a.m. to 11:05 a.m.) 5 AGENDA ITEM NO. V 6 CHAIRMAN WILLIAMSON: We're back in 7 session. It's 11:05 a.m. Let's go on to our next item, 8 report, possible discussion and/or action on the 83rd 9 Legislature. 10 Nelda, please? 11 MR. TREVINO: Good morning, Commissioners. 12 For the record, I'll Nelda Trevino, the Director of 13 Governmental Affairs. 14 The last day of the regular legislative 15 session was May 27. Bills approved by the Legislature 16 are reviewed by the governor, and he has until June the 17 16th to sign or veto bills, or let them become law 18 without his signature. 19 In your notebook we have provided you with 20 a report of bills the agency was tracking that have been 21 approved by the Legislature. These 34 bills are now 22 being reviewed -- excuse me -- reviewed by appropriate 23 agency staff as part of the agency's legislative 24 implementation project to determine what action, if any, 25 the agency may need to take in order to implement the 49 1 bill. 2 There are several bills on the report that 3 I'd like to highlight today. First and foremost is the 4 agency sunset bill. This is House Bill 2197 by 5 Representative Rafael Anchia. And I'd like to provide a 6 summary of the major provisions that are included in the 7 sunset bill. 8 First of all, the bill continues the 9 Lottery Commission for 12 years by amending the agency 10 sunset date until September the 1st, 2025. Also 11 increases the size of the Commission from three to five 12 members, requires the Commission to approve major 13 contracts, requires the agency to develop a 14 comprehensive business plan aimed at improving the 15 Lottery's efficiency and performance for the benefit of 16 the Foundation School Fund, and requires the Commission 17 to adopt a comprehensive business plan no later than 18 September the 1st, 2014. 19 Also requires by Commission rule that a 20 lottery scratch-off game that contains a number or words 21 in a language other than English, must have disclosures 22 in that particular language. 23 Also requires unclaimed lottery prizes 24 currently going to the General Revenue Fund to now go to 25 the Foundation School Fund. 50 1 Next several items relate to the Bingo 2 Enabling Act. And amendments included in the sunset 3 bill includes removing the fixed bingo license amendment 4 fee from statute, and requires the Commission to adjust 5 the fee by rule; removes the fixed annual bingo license 6 fee for manufacturers and distributors from statute and 7 requires the Commission to set the fee by rule. 8 Authorizes the Commission to charge a fee 9 to cover the cost of adding bingo hall workers to the 10 registry of approved bingo workers; requires the 11 Commission to use risk analysis to select licensees for 12 bingo inspections, and requires the Commission to 13 develop a goal to audit all the highest risk bingo 14 licensees within a certain timeframe; and requires the 15 Commission to address criminal history information in 16 bingo regulation in a manner that relates directly to 17 the duties and responsibilities of the regulated 18 occupation. 19 The bill also establishes a ten-member 20 legislative review committee composed of five members of 21 the senate appointed by the Lt. Governor and five 22 members of the House of Representatives appointed by the 23 Speaker, to study the process and impacts of eliminating 24 the state lottery and to also review charitable bingo 25 and the distribution of charitable bingo revenue. This 51 1 committees will be required to provide its initial 2 report and its findings and recommendations to the 3 Legislature no later than December the 1st, 2014, and 4 may make additional supplemental reports that the 5 committee considers to be appropriate. 6 Additionally, the bill requires the 7 Lottery Commission, to the extent possible and its 8 authorized by law, to make every effort to implement the 9 findings and recommendations of the legislative review 10 committee. 11 The bill also includes provisions that 12 update and apply standard sunset across-the-board 13 recommendations to the Lottery Commission, including 14 requiring new commissioners to complete a training 15 program before their first Commission meeting. 16 The provisions of the sunset bill take 17 effect on September the 1st, 2013. The bill also 18 requires the Lottery Commission to adopt all rules, 19 policies and procedures required by changes in the law 20 made by this bill to be made no later than January the 21 1st, 2014. As agency staff works on implementing the 22 sunset bill, and in order to comply with the 23 requirements of the bill, staff will be bringing forward 24 at future Commission meetings a variety of proposed 25 administrative -- excuse me -- administrative rulemaking 52 1 for your consideration. 2 The next bill I'd like to mention is House 3 Bill 394 by Representative Senfronia Thompson. I've 4 mentioned this bill in the past, and this is the bill 5 that exempts bingo prizes from $50 or less from the 6 $2500 prize cap. 7 The next several bills that I want to 8 mention relate to state agency governmental bodies. 9 Senate Bill 984 by Senator Rodney Ellis. This bill 10 relates to the meeting of a governmental body held by 11 video conference call. This bill amends the open 12 meetings act to allow meetings of a governmental body by 13 video conference calls so long as the presiding member 14 of the governmental body is in a location open to the 15 public. 16 The bill also includes a requirement to 17 recess the video conference called meeting if the 18 meeting becomes no longer visible and audible at a 19 public location. 20 Senate Bill 1297 by Senator Kirk Watson, 21 this bill relates to written communications between 22 members of a governmental body. The bill amends the 23 Open Meetings Act to authorize a written communication 24 or exchange of information between members of a 25 governmental body about the agency's public business or 53 1 public policy, if the communication is in writing, the 2 writing is posted to an on-line message board or similar 3 Internet application that is viewable and searchable by 4 the public, and the communication is displayed in 5 realtime and displayed on the on-line message board or 6 similar Internet application for no less than 30 days 7 after the communication is first posted. 8 If the agency removes posted 9 communications after 30 days, the agency shall maintain 10 the posting for six years. 11 House Bill 2414 by Representative Angie 12 Button. This bill includes similar language -- 13 actually, it's identical language to the provisions that 14 I just outlined in Senate Bill 1297. And it also 15 addresses video conference call rules. 16 The last bill I want to mention is Senate 17 Bill 1681. This is by Senator Judith Zaffirini. This 18 bill amends the chapter in the government code regarding 19 statewide contract management and specific duties 20 related to the Comptroller of Public Accounts, and it's 21 contract advisory team. The bill also includes a new 22 provision that requires the controller to develop an 23 abbreviated contract management training program for 24 members of governing bodies of state agencies. All 25 members of the governing body of the state agency will 54 1 be required to complete at least one training course, 2 which may be provided to go with other required training 3 for members of the state agency governing bodies. 4 I also want to report and put on the 5 record that the appointment of Commissioner Veronica 6 Edwards and Commissioner Winston Krause were confirmed 7 by the Senate. 8 And last week the Legislature convened in 9 its first called session on May 27 to consider matters 10 that have been specified by the governor, and we are 11 monitoring bills that have been filed and will include 12 any bills that are enacted that impact the agency into 13 the agency's implementation project. 14 At this time Kathy Pyka is going to 15 provide an update regarding the appropriations bill, 16 which includes the agency's budget for the next 17 biennium. 18 That concludes my report. I'll be glad to 19 answer any questions now or at the conclusion of Kathy's 20 comments. 21 CHAIRMAN WILLIAMSON: Does anybody have 22 any questions of Nelda on the bills? 23 COMM. KRAUSE: No. 24 CHAIRMAN WILLIAMSON: Thank you. 25 MS. PYKA: Commissioners, Senate Bill 1 is 55 1 now finalized and the Commission's budget for fiscal 2 years 2014 and '15 include a total of appropriation for 3 lottery of $407,387,625; and the bingo appropriation is 4 $33,358,488, for a grand total of $440.7 million. 5 I've got a memo at your desk that includes 6 all the details of the Senate Bill 1 appropriation. I'd 7 like to highlight just a few of those specific to our 8 Commission's budget. We had three items that were 9 funded above and beyond our Commission's fiscal year 10 2012-13 baseline appropriation. And those three items 11 included the exceptional item for our new draw games in 12 which we received a biennial lottery appropriation of 13 just under $1.2 million for three additional FTEs, as 14 well as the capital budget appropriation to renovate the 15 drawing studio and authority for the draw equipment and 16 ball sets. 17 We also received the exceptional item for 18 the 14 bingo FTEs. This is for the restoration of the 19 funding of 14 FTEs in the bingo division at a two-year 20 cost of $1.2 million. And this appropriation is 21 contingent upon the Commission increasing revenue from 22 licensing fees to cover the cost of these new FTEs. 23 Our automated charitable bingo system 24 appropriation was granted in the value of $2.5 million, 25 and that was funded out of general revenue funding. 56 1 This will not require fee recovery as originally 2 discussed during the conference committee deliberations. 3 And, Commissioners, we also had several 4 rider revisions that were adopted within Senate Bill 1 5 I'd like to highlight, the first being the deletion of 6 the out-of-the-country and out-of-state travel rider 7 limitation. This will allow the Commission to travel 8 out of the country and will also remove the current 9 monetary restriction that we have on out-of-state 10 travel. 11 Rider 6 was modified to allow for the 12 clarification of the use of bingo rental taxes as a 13 source of revenue to cover the cost of the bingo 14 appropriation. And also we have a new rider related to 15 local bingo prize fees. We had asked that the bingo 16 strategy related to bingo prize fee allocation be 17 deleted and have that appropriation granted through 18 rider appropriation. That was done and that request was 19 consistent with recommendation for .1 of the agency's 20 sunset report. 21 Rider 9 related to retailer commissions 22 was incorporated in Senate Bill 1 to provide biennial 23 appropriation and clarify the use of unexpended balance 24 authority between the fiscal year of the biennium, and 25 that's for our retailer incentive program. And then we 57 1 were also granted a new rider related to Bingo 2 third-party reimbursements. This will give us the 3 authority to expend third-party reimbursements received 4 in the bingo area for the cost of audits and 5 investigations. 6 We did have one rider revision that we 7 requested that was not adopted within Senate Bill 1, and 8 that related to the appropriation to reimburse the 9 Lottery dedicated account for the cost of bingo indirect 10 costs. We had submitted this request consistent with 11 Recommendation 4.6 of the agency sunset report, and it 12 was not funded. So I wanted to definitely note that. 13 And then in closing the Legislature also 14 funded a 1 percent or $50 minimum across-the-board 15 salary increase for all state employees effective this 16 September. And then a secondary pay increase was also 17 funded for the following September of 2 percent or $50 18 minimum increase. I'd be happy to answer any questions 19 related to the budget. 20 CHAIRMAN WILLIAMSON: Did anyone have any 21 questions of Kathy? 22 COMM. EDWARDS: No. 23 CHAIRMAN WILLIAMSON: Thank you. 24 MS. PYKA: Thank you. 25 58 1 AGENDA ITEM NO. VI 2 CHAIRMAN WILLIAMSON: Let's go to the next 3 item, consideration of and possible discussion and/or 4 action, including proposal, on amendments to 16 TAC 5 401.315 Mega Millions On-line Game Rule. 6 Andy Marker? 7 MR. MARKER: Good morning, Commissioners. 8 My name is Andy Marker. I'm deputy general counsel of 9 the Commission. Robert has a PowerPoint presentation 10 for you. This morning staff is proposing changes to 11 Texas Lottery Rule 401.315, which is the Mega Millions 12 On-line Game. These changes are consistent with the 13 vote taken by the Mega Millions Party Lottery directors 14 recently to change the Mega Millions Game matrix and 15 also to make modifications to the Megaplier add-on game 16 feature. 17 Principally, the changes are to make the 18 game 5 of 75 and 1 of 15 game matrix, and then also had 19 the No. 5 to the Megaplier drawing. Also the Megaplier 20 will apply to all non-Grand/Jackpot prizes. The rules 21 that we are proposing would be effective starting the 22 sales beginning October 19th. That is what we are 23 proposing as the anticipated effective date of the 24 rules. The first drawing under the new game will be 25 October 22nd. 59 1 Another change that Robert, I believe, 2 will address in the PowerPoint presentation is in terms 3 of the annuity payments. Presently the annuities for 4 those grand jackpot prize winners who select the annuity 5 option, those are paid in equal annual installments over 6 26 years. One of the changes that's being proposed is 7 to lengthen that annuity period to 30 years and make 8 those payments graduated. 9 And with that, I think Robert has a 10 presentation for you. Thank you. 11 MR. TIRLONI: Good morning again, 12 Commissioners. For the record, Robert Tirloni, Products 13 and Drawings Manager for the Commission. 14 So, Commissioners, I'm going to start with 15 just a brief history. Texas joined the Mega Millions 16 game in December of 2003. And at that time, when we 17 joined Mega Millions, Texas Lottery staff worked closely 18 with GTECH on the design and implementation of the 19 Megaplier feature, which is basically a multiplier. 20 It's an add-on feature. Players can spend an extra 21 dollar to buy the Megaplier. And if they win a 22 non-Grand/Jackpot prize -- so basically any prize other 23 than the jackpot, they can increase their prize by 24 playing Megaplier. 25 When we joined the game in December of 60 1 2003, the game matrix was 5 of 52, and 1 of 52. So that 2 meant the odds of winning the jackpot prize were 1 in 3 135 million. 4 We were in the game for about a year and 5 California announced their intent to join the Mega 6 Millions Game. And because of that influx of 7 population, the game matrix needed to be changed or 8 adjusted, and it was. It was changed to 5 of 56 plus 1 9 of 46 in 2005. So that changed the odds to 1 in 176 10 million to win the jackpot. And really the game has 11 remained the same since 2005. So pretty much eight 12 years all the states that sold Mega Millions have been 13 playing the 5 of 56, 1 of 46 matrix. 14 So what's going on with the Mega Millions 15 game, back in January of 2010 there was the cross sell 16 initiative. That was the collaboration between MUSL, 17 which is the organization that runs Powerball, and the 18 Mega Millions Group. And basically states that were 19 selling Powerball started selling Mega Millions, and the 20 states that sold Mega Millions started selling 21 Powerball. 22 But what that did was it made Mega 23 Millions available in 33 jurisdictions that only had 24 previously sold Powerball. So there was another big 25 influx of population into the Mega Millions Game in 61 1 January of 2010. 2 Just last month Florida began selling Mega 3 Millions. Florida has a population of about 19 million 4 people. So once again another large influx of players 5 into the Mega Millions game. 6 So what's been the impact? Well, since 7 the matrix was changed when California joined in 2005, 8 there are -- there's been an increase of 91 percent or 9 almost 142 million population for the game. So in terms 10 of the historical purposes, both Mega Millions and 11 Powerball have changed their game matrices based upon a 12 growing population of players. 13 And just to give you some history, when 14 New Jersey joined Mega Millions in '99, they changed the 15 matrix. When New York and Ohio joined in 2002, the Mega 16 Millions matrix was changed. And then I've already 17 mentioned the 2005 change when California joined. 18 Since about this time last year, July of 19 2012, there have been nine times when the jackpot either 20 did not roll, or it rolled from 12 million to 13 21 million. So there was one time when the jackpot 22 actually had to stay at 12, because sales did not 23 support a roll -- a roll beyond that. The other eight 24 times it's rolled from 12 million to 13 million. And 25 for a game that's played all across the country, that's 62 1 not a very impressive roll on a multi-state game. 2 So lower sales and interest rates -- and 3 we've kind of talked about this when we talk about Lotto 4 Texas a few months back -- but lower sales and interest 5 rates result in lower advertised jackpots, and not very 6 much excitement in the retail space. 7 So, as you-all know, Gary is the lead 8 director for the Mega Millions game. And this slide is 9 the exact slide that he used at a meeting of the Mega 10 Millions directors this past spring, and he used this to 11 illustrate the need for change on the Mega Millions 12 Game. So this is Powerball and Mega Million sales by 13 month since January of 2012. The red line is Mega 14 Millions and the blue line is Powerball. 15 So you can see this is -- and we talked 16 about this during the sales presentation -- this is the 17 advertised $640 million jackpot that took place in March 18 of 2012 for Mega Millions. And then you'll see since 19 that jackpot, well over a year ago, pretty flat but 20 steady sales for the Mega Millions game. 21 For Powerball, we're seeing some good 22 spikes. Now, I need to note that this slide ends in 23 March, because this is right -- this slide was created 24 right before that spring director's meeting. Of course 25 we've talked about the fact that in May Powerball had a 63 1 jackpot of $600 million, so you would see a very large 2 spike on this blue line if it was carried out. And Mega 3 Millions did climb to about $190 million jackpot in May. 4 It was kind of rolling right along with Powerball 5 simultaneously. So Mega Millions would have had a bit 6 of a spike if this slide were carried out as well. But 7 the picture is pretty clear that the Mega Millions Game 8 is lacking jackpot excitement and sales levels that we 9 would like to see. 10 So there was a team put together of 11 vendors, and there was a working group made up of 12 representatives from Mega Million states, from the state 13 of Washington, Virginia and from Texas. Michael Anger, 14 Lottery Operations Director for Texas, and myself served 15 on that work group. And we were working with GTECH on 16 looking at potential Mega Millions Game matrices. It 17 was decided pretty early on that in order to complement 18 the Powerball Game, which is now at $2, that we were 19 going to leave Mega Millions at the $1 price point. 20 Three new game matrices were tested along 21 with the current version of the game. That all took 22 place in March of 2013. It included frequent players, 23 light players and basically nonplayers. Over 8,000 24 people were surveyed from every jurisdiction that plays 25 Mega Millions. U.S. Virgin Islands and Florida were 64 1 also included. Florida wasn't in the game yet, but the 2 group knew that Florida was going to begin selling the 3 game, and so they were included in the research. 4 So the matrix that was titled "5 of Many, 5 1 of Few," received the highest preference in the 6 research. It was -- when you see the matrix, you'll see 7 why it was titled that. It's a 5 of 72, 1 of 15 matrix. 8 So your -- the first field of numbers that players are 9 choosing from is a pretty large field. But then the 10 second field is pretty small, only 15 numbers. That 11 matrix has jackpot odds of 1 in 209 million. 12 The other two games that were tested were 13 actually very viable alternatives for the directors to 14 choose from. They actually tested very well. The 5 of 15 72/1 of 50 did slightly edge them out, but not by very 16 much. So what this did was it gave the directors a lot 17 of flexibility in terms of which games they could choose 18 to replace the current version of Mega Millions. 19 One of those two games had jackpot odds of 20 1 in 262 million odds for the jackpot prize. Since they 21 were considered to be viable options, the research 22 basically showed that there was an appetite for -- or 23 tolerance of jackpot odds to go up to that level. 24 So what the directors basically did was 25 tweak the 5 of many/1 of few concepts slightly. They 65 1 tweaked it slightly and made it a 5 of 75/1 of 15 2 matrix. That had jackpot odds of 1 in 258.9 million 3 odds. So basically they combined the 5 of Many/1 of Few 4 favor concept with the knowledge they had about the 5 tolerance for jackpot odds. And the Mega Millions 6 directors unanimously approved this matrix at the 7 directors meeting in New York on April 8, 2013. It was 8 at that meeting that they also agreed on the launch date 9 for the game, and I'll show you a slide with that 10 information in a few minutes. 11 So this is the new Mega Millions prize 12 structure. Again, the jackpot is here, 1 in 258 million 13 in terms of the odds of winning. This second tier does 14 increase. The current game has a $250,000 second tier 15 prize. This game has a million-dollar second tier 16 prize. 17 Adjustments have been made on some of the 18 other prize tiers. Some have increased, some have 19 decreased. A big improvement in the overall odds 20 though. The current game has overall odds of 1 in 40. 21 This revised game has odds of just under 1 in 15, 1 in 22 14.7 to be exact. There's still the exact same number 23 of prize tiers in this game, nine. 24 Andy mentioned some of these when he was 25 talking to you about the rule. Under this new version 66 1 of the game, the starting jackpot would be 15 million 2 instead of 12 million. The jackpot would increase in a 3 minimum of $5 million from draw to draw. And to bring 4 Mega Millions in line with Powerball, instead of 26 5 equal annual payments, it would move to 30 graduated 6 annual payments. 7 The next phase was to look at the add-on 8 game, the Megaplier game. And I failed to mention this 9 earlier. Texas launched the Megaplier Game, but over 10 time every Mega Millions -- every state that sells Mega 11 Millions has adopted that add-on feature. And so the 12 Megaplier feature is sold nationwide with -- along with 13 the Mega Millions Game. So that's an important focus 14 for the game is to have the right add-on -- add-on game 15 as well as the base game. 16 So a second round of research was done in 17 April and May, a couple of months after the base game 18 was decided upon. Again, same group of players, over 19 4,000 players participated again from all the 20 jurisdictions. And the Megaplier that received the 21 highest preference in that research was also approved by 22 the Mega Millions directors. Very slight change from 23 the way the Megaplier currently works. Megaplier now 24 you can increase your prizes by two, three or four 25 times. This adds a five into the mix. So that 67 1 million-dollar second-tier prize can increase up to $5 2 million. 3 One change that was made is the current 4 version of Megaplier, if you win the second tier prize 5 and then you play Megaplier, regardless of what 6 number -- regardless of what Megaplier number is drawn, 7 that prize is automatically made a million-dollar 8 prices. The players seemed to like just a straight 9 Megaplier or the straight multiplier feature better in 10 the research. So there will be no such guarantee for 11 Megaplier, meaning if you win the second tier prize and 12 you win a million dollars and we draw a 2, you would 13 receive $2 million. 14 So the communication points about this 15 game change are faster growing jackpots. Again, the 16 jackpot is starting a bit higher at 15 million and, 17 again, it will not roll in increments of less than $5 18 million. 19 We just talked about the second tier prize 20 being a million dollars. It's four times bigger than 21 the current version. And with the Megaplier feature 22 that can be multiplied by five, which would give you a 23 prize of 5 million. And I already mentioned better 24 overall odds of winning, 1 in 14.7 as opposed to 1 in 25 40. 68 1 And last but not least, it's still a 2 dollar. And the group seems to think that this is very 3 important in terms of building out the multi-state game 4 jackpot portfolio. So you could have Mega Millions at 5 the $1 price point, Powerball is already at a $2 price 6 point, and that kind of opens the door for the expansion 7 of potentially a $5 price point down the road. 8 So we're here today to ask you to propose 9 the rule as Andy mentioned. We're going to be having a 10 public comment hearing here on July 17. If -- the rule 11 would be ready for your consideration to adopt in early 12 August of this year. And if you adopt the rule, the 13 modifications are scheduled to be implemented on 14 October 19th. So what would happen is the last Mega 15 Millions draw would take place on Friday, October 18th. 16 Sales for this new version of the game would start on 17 Saturday the 19th, and then the first drawing for the 18 new game would take place a few days later on Tuesday, 19 October 22nd. 20 So we're starting to go through this whole 21 process; all of the other Mega Million states are 22 following a similar path. They're going back to their 23 boards, their commissioners, and proposing rules in 24 order to meet that October 19th launch date. 25 And that's the summary of the proposed 69 1 rule, all the changes to the game, the background on the 2 research that was done, and how that game matrix was 3 decided upon. I'm happy to answer questions. 4 CHAIRMAN WILLIAMSON: All right. Thank 5 you, Robert. 6 Does anybody have any questions or 7 comments? 8 (No response) 9 CHAIRMAN WILLIAMSON: I understand all the 10 other states are also proposing rules in line to however 11 they do that. Is that correct? 12 MR. TIRLONI: Yes, ma'am. They're all 13 moving forward on that so that they can get -- whatever 14 rule is adopted, whatever rules they need to have 15 adopted or approved so they can meet that October launch 16 date. Yes, ma'am. 17 CHAIRMAN WILLIAMSON: All right. Thank 18 you. 19 We do have one witness for this. 20 Dawn, did you want to comment? 21 MS. NETTLES: I have no comment. 22 CHAIRMAN WILLIAMSON: All right. 23 MR. BIARD: This is an action item, so we 24 need a motion to approve to publish. 25 CHAIRMAN WILLIAMSON: Approve to publish. 70 1 Okay. 2 COMM. KRAUSE: I move that this Commission 3 initiate the rulemaking process by publishing proposed 4 amendments to 16 TAC Section 401.315 in the Texas 5 Register in the appropriate period of time for our 6 filing with the APA. 7 CHAIRMAN WILLIAMSON: Is there a second? 8 COMM. EDWARDS: Second. 9 CHAIRMAN WILLIAMSON: All in favor? 10 (Those in favor so responded) 11 CHAIRMAN WILLIAMSON: Motion passes 12 three-zero. 13 MR. BIARD: I have a T-bar amendment for 14 you to show your approval. 15 AGENDA ITEM NO. VIII 16 CHAIRMAN WILLIAMSON: All right. The next 17 item, report, possible discussion and/or action on 18 agency contracts, including extension and/or amendments 19 on the contract for outside counsel, intellectual 20 property, legal services and amendments on the contract 21 for statistical and consulting services, and the 22 contract for drawings studio production services. 23 Mike Fernandez. 24 MR. FERNANDEZ: Good morning, Madam 25 Chairman, Commissioners. For the record, my name is 71 1 Mike Fernandez. I'm the Director of Administration. 2 Item No. VIII -- or this item is to advise 3 the Commission of staff's intent to extend the current 4 contract with outside counsel for intellectual property 5 services, and also to amend two other contracts. The 6 first being the drawing studio and production services, 7 and statistical consulting services. And we're amending 8 those existing contracts to accommodate additional 9 drawings for the Pick 3 and Daily 4 games. 10 If you have any questions, I'll be happy 11 to answer. 12 CHAIRMAN WILLIAMSON: All right. 13 Commissioners, do you have any questions? 14 COMM. EDWARDS: No. 15 COMM. KRAUSE: None. 16 CHAIRMAN WILLIAMSON: All right. Thank 17 you. 18 MR. FERNANDEZ: Thank you. 19 AGENDA ITEM NO. IX 20 CHAIRMAN WILLIAMSON: Let's go to the next 21 item, please. Report, possible discussion and/or action 22 on amendments to the 2010 lottery operations and 23 services contract, including whether the negotiation of 24 the lottery operators contract in an open meeting would 25 have a detrimental effect on the Commission's position 72 1 in negotiations of the lottery operator contract. 2 Mike? 3 MR. FERNANDEZ: Yes. Again, this is a 4 briefing item. And this is to advise the Commission of 5 staff's intent to amend our current lottery operations 6 contact with GTECH. And what this will do is to provide 7 clarification and also to ensure that the current 8 provisions accurately reflect operations. 9 If you have any questions, I'd be happy to 10 answer. 11 CHAIRMAN WILLIAMSON: All right. 12 Commissioners, do you have any questions? 13 COMM. EDWARDS: No. 14 AGENDA ITEM NO. 10 15 CHAIRMAN WILLIAMSON: Thank you. The next 16 item is consideration of and possible discussion and/or 17 action on external and internal audits and/or reviews 18 relating to the Texas Lottery Commission and on the 19 internal audits division's activities. 20 Catherine? 21 MS. MELVIN: Thank you, Chairman. For the 22 record, Catherine Melvin, Director of the Internal Audit 23 Division. 24 Commissioners, I have one item of update. 25 Each year our lottery operator vendor GTECH undergoes 73 1 what was previously known as the FAS 20 audit. This 2 review is now known as the SSAE 16, Statement on 3 Standards Attestation Engagement 16. In any case, this 4 is a requirement in our contract with the lottery 5 operator, and just a notice that that's about to launch 6 this month, and it's a very important audit for our 7 agency's annual financial audit. 8 CHAIRMAN WILLIAMSON: Any questions? 9 (No response) 10 CHAIRMAN WILLIAMSON: All right. Thank 11 you. 12 MS. MELVIN: Thank you. 13 AGENDA ITEM NO. XI 14 CHAIRMAN WILLIAMSON: The next item is 15 report, possible discussion and/or action on GTECH 16 Corporation. 17 Gary, please? 18 MR. GRIEF: Commissioners, other than 19 what's in your notebook, I have nothing further to 20 report on that item. 21 CHAIRMAN WILLIAMSON: Any questions? 22 COMM. KRAUSE: No questions. 23 AGENDA ITEM NO. XII 24 CHAIRMAN WILLIAMSON: We will continue on. 25 Report by the Executive Director and/or possible 74 1 discussion and/or action on the agency's operational 2 status, agency procedures, awards and FTE status. 3 Gary? 4 MR. GRIEF: Commissioners, somewhere on 5 your desk hopefully you have a copy of a letter from me 6 dated May 30, 2013. That's regarding the Texas 7 Lottery's application for membership into the Powerball 8 Game Group of the Multi-State Lottery Association, or 9 MUSL as it's known. MUSL is the organization that 10 operates the Powerball Game Group, as well as some other 11 smaller multi-state games around the country. 12 In 2010, as Robert stated, when the 13 majority of states began selling both Powerball and the 14 Mega Millions games, there was simply an agreement 15 executed among the states, what we refer to as the cross 16 sell agreement, which allowed the 12 states that were 17 previously only offering the Mega Millions Game to also 18 sell Powerball, and the 33 jurisdictions who were only 19 selling Powerball at that time to then offer Mega 20 Millions as well. 21 And since that time, all the groups have 22 been selling both games. But the two groups have 23 remained separate, and no voting rights are allowed to 24 each other's group, even though we both sell each 25 other's games. 75 1 For example, the changes that you voted to 2 propose today regarding the Mega Millions Game, the 3 decision making on that game change was limited to only 4 the 12 legacy Mega Million states. The 33 other 5 jurisdictions who sell Mega Millions had no input into 6 the deliberation or decision making of the game change. 7 That has long been a concern of mine, 8 particularly now that Powerball has overwhelmed Mega 9 Millions as the multi-state game of choice here in 10 Texas. So to that end, Texas is now formally applying 11 for membership in the Powerball Game Group. And if that 12 application is accepted, Texas would become the first 13 jurisdiction to have membership in both groups. But 14 more importantly, would allow us to have a vote on any 15 potential game changes in the future to Powerball. So 16 that MUSL vote on the Texas application should occur 17 next week in Seattle at the Annual Spring Directors 18 meeting of the North American Association of State 19 Lotteries directors meeting. And I'll be joined at that 20 meeting by the lottery directors from all around the 21 country, and I will keep you apprised of the results of 22 that vote. 23 Other than that item and what is in your 24 notebook already, I have nothing further to report on 25 this item. 76 1 CHAIRMAN WILLIAMSON: Thank you. 2 Commissioners, any comments or questions? 3 COMM. KRAUSE: A question. These groups 4 don't merge and if everybody is playing everybody's 5 game, then what's the purpose of having two different 6 groups? 7 MR. GRIEF: I agree with you, 8 Commissioner. I've worked in that regard over the last 9 two years with very limited success. We do now allow 10 co-attendance at each other's meetings. So, in other 11 words, I'm allowed to sit in on a MUSL meeting. I can't 12 vote and make motions or anything to that effect. 13 So what I'm hopeful is that this step, if 14 approved, would be the first in that domino effect of 15 joining each other's associations and then ultimately 16 merging. 17 CHAIRMAN WILLIAMSON: Thank you, Bob. 18 Hopefully MUSL will be receptive to your application, 19 and we look forward to hearing how that -- 20 MR. GRIEF: Thank you. 21 AGENDA ITEM NO. XIII 22 CHAIRMAN WILLIAMSON: The next item is a 23 report by the Charitable Bingo Operations Director and 24 possible discussion and/or action on the Charitable 25 Bingo Operations Division's activities, including 77 1 updates on licensing, accounting, audit activities, pull 2 tab review and special projects. 3 Sandy? 4 MS. JOSEPH: Thank you, Commissioners, 5 Chairman. 6 In addition to what's in your notebook, I 7 wanted to report to you of our attendance at the NAGRA 8 conference last week. Debbie Parpounas, audit manager, 9 and I attended this conference and came away with a lot 10 of what we hope will be useful ideas and information 11 about what's going on in other jurisdictions in 12 particular. 13 Several jurisdictions talked about their 14 efforts to educate nonprofit organizations about 15 conducting bingo. They were doing such things as 16 putting on line a guide to assist nonprofit 17 organizations in understanding the operation of bingo, 18 developing a best practices guide. Minnesota had 19 developed an internal control form for use by 20 organizations. It was an optional form, but something 21 that could well assist organizations. 22 And in Michigan they had developed a 23 profitability analysis for organizations optional use in 24 looking at their costs. Some of this certainly seems to 25 tie in with concerns that were expressed by some members 78 1 of the Legislature, and that will probably be considered 2 in the upcoming study. 3 In addition, we found that several other 4 jurisdictions have already implemented on-line 5 applications and payments. We hope to do this as we 6 develop our new ACBS statement. We hope to -- excuse 7 me, ACBS system. We hope to incorporate that ability to 8 improve the efficiency. This would eliminate a lot of 9 staff data entry. 10 Another thing we heard about was that a 11 number of states have started allowing electronic pull 12 tab dispensers; that these pull tab dispensers do not 13 contain random number generators. They -- the one I 14 looked at -- they had some there that I could actually 15 look at, which was helpful. The one I saw actually 16 dispenses paper, but it also has the option to -- in 17 addition to getting the paper, to look at a computer 18 screen and reveal whether the ticket you have just 19 bought are winners or not. 20 One state said that they had concern at 21 first that this would diminish the sale of the regular 22 pull tab tickets, paper tickets, but in fact it hadn't. 23 It seems to be that there's some people that still like 24 just to play the straight paper, and others that like 25 the electronic. 79 1 Then, in addition, there's one state that 2 has developed a guide to assist players that they've put 3 on-line. And it also has an interactive system to teach 4 players how to play various kinds of bingo games. That 5 was interesting; trying to educate the players. 6 And finally we learned that Colorado has 7 recently completed a charitable bingo gaming study 8 wherein they looked at ways that revenues could be 9 increased, players could be increased. I haven't had a 10 chance to look at that yet, but I'm certainly curious to 11 see what they looked at in their study that might be of 12 use to us. 13 Other than that, certainly we're going to 14 be working hard the next number of months to implement 15 the various provisions that came out of the Legislature 16 that positively affect bingo. And we're pleased that 17 we're going to have some money to work with developing a 18 new system and to get some more staff. 19 CHAIRMAN WILLIAMSON: Sounds like it was a 20 good conference. 21 MS. JOSEPH: It was. 22 CHAIRMAN WILLIAMSON: Y'all brought some 23 good information back. We'll look forward to hearing 24 how it progresses. 25 Commissioners, any questions or comments? 80 1 COMM. KRAUSE: Nothing. 2 AGENDA ITEM NO. XIII 3 CHAIRMAN WILLIAMSON: Thank you. Let's go 4 to the next item, consideration of the status and 5 possible entry of orders in cases posted on the Open 6 Meeting agenda. 7 Bob? 8 MR. BIARD: Thank you, Commissioners. We 9 have seven enforcement cases today. We have A through F 10 for review that I would like to take up together. Tab G 11 is a bingo enforcement case. 12 Tabs A through F are recommended lottery 13 license revocations. These cases were presented at the 14 State Office of Administrative Hearings for revocation 15 on grounds the licensee failed to have sufficient funds 16 available to cover electronic funds transfers to the 17 Lottery Commission's account. 18 The SOAH Administrative Law Judge 19 recommends revocation in each of these cases, and staff 20 recommends that you vote to approve the order in each 21 case, revoking the license. 22 If you approve, I have a single order that 23 covers all six of these cases. 24 CHAIRMAN WILLIAMSON: All right. Thank 25 you. 81 1 Commissioners, do you have any questions 2 about the revocations? 3 Is there a motion? 4 COMM. KRAUSE: I move that we adopt the 5 Judge's recommendation to revoke these licenses. 6 CHAIRMAN WILLIAMSON: Is there a second? 7 COMM. EDWARDS: I second. 8 CHAIRMAN WILLIAMSON: All in favor? 9 (Those voting in favor so responded) 10 CHAIRMAN WILLIAMSON: Motion passes 11 three-zero. 12 MR. BIARD: Thank you. I have orders for 13 you to sign. 14 Tab G is a final order in a hearing to 15 remove an individual from the registry of bingo workers 16 for a conviction of a felony in a crime of moral 17 turpitude. The Respondent did not appear in the 18 hearing. The SOAH Administrative Law Judge concludes 19 that the Commission is required to remove the name of 20 the Respondent from the Registry of Approved Bingo 21 Workers. 22 Staff recommends that you vote to approve 23 the order doing so. 24 CHAIRMAN WILLIAMSON: All right. Are 25 there any questions? 82 1 COMM. EDWARDS: No. 2 CHAIRMAN WILLIAMSON: Is there a motion? 3 COMM. KRAUSE: I make a motion that we 4 approve the Judge's recommended order to remove Joe 5 Rodarte from the Registry of Bingo Workers. 6 CHAIRMAN WILLIAMSON: Is there a second? 7 COMM. EDWARDS: I second. 8 CHAIRMAN WILLIAMSON: All in favor? 9 (Those voting in favor so responded) 10 CHAIRMAN WILLIAMSON: Motion passes 11 three-zero. 12 MR. BIARD: Thank you. I have an order 13 for you. 14 CHAIRMAN WILLIAMSON: All right. Thank 15 you. 16 AGENDA ITEM NO.XV 17 CHAIRMAN WILLIAMSON: The next item is 18 public comment, and I have no forms for that. 19 AGENDA ITEM NO. XVI 20 CHAIRMAN WILLIAMSON: So at this time I 21 move the Texas Lottery Commission go into executive 22 session to deliberate the duties and evaluation of 23 Executive Director, Charitable Bingo Operations Director 24 and Internal Audit Director, and deliberate the duties 25 of the General Counsel and Human Resources Director 83 1 pursuant to Section 551.074, and Texas Government Code; 2 to receive legal advice for impending or contemplated 3 litigation and/or settlement offers pursuant to Section 4 551-071(1)(a) and (b), and receive legal advice pursuant 5 to Section 551.0712 of the Texas Government Code, 6 including but not limited to those items posted on the 7 Open Meetings notice for purposes of receiving legal 8 advice. 9 Is there a second? 10 COMM. EDWARDS: I second. 11 CHAIRMAN WILLIAMSON: All in favor.? 12 (All those voting in favor so responded) 13 CHAIRMAN WILLIAMSON: Vote is three/zero. 14 The Texas Lottery Commission will go into 15 executive session. The time is 11:50 a.m. Today is 16 June 11, 2013. 17 (Recess: 11:50 a.m. to 12:25 p.m.) 18 AGENDA ITEM NO. XVII 19 CHAIRMAN WILLIAMSON: The Texas Lottery 20 Commission is out of the Executive Session. The time is 21 12:25 p.m. 22 There is no action to be taken as a result 23 of the Executive Session. 24 AGENDA ITEM NO. XVIII 25 CHAIRMAN WILLIAMSON: Is there a motion to 84 1 adjourn? 2 COMM. EDWARDS: Motion to adjourn. 3 COMM. KRAUSE: Second. 4 CHAIRMAN WILLIAMSON: All in favor? 5 (Those voting in favor so responded) 6 CHAIRMAN WILLIAMSON: Motion passes 7 three-zero. 8 The Texas Lottery Commission is adjourned 9 as of 12:25 p.m., today, June 11, 2013. 10 (Proceedings concluded at 12:25 p.m.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 85 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Lou Ray, Certified Shorthand Reporter in and 5 for the State of Texas, do hereby certify that the 6 above-mentioned matter occurred as hereinbefore set out. 7 I FURTHER CERTIFY THAT the proceedings of such 8 were reported by me or under my supervision, later 9 reduced to typewritten form under my supervision and 10 control and that the foregoing pages are a full, true, 11 and correct transcription of the original notes. 12 IN WITNESS WHEREOF, I have hereunto set my hand 13 and seal this 19th day of June, 2013. 14 15 _______________________________ LOU RAY 16 Certified Shorthand Reporter CSR No. 1791 - Expires 12/31/13 17 Firm Registration No. 276 18 Kennedy Reporting Service, Inc. 1016 La Posada Drive, Suite 294 19 Austin, Texas 78752 512.474.2233 20 21 22 23 24 Job No. 110383 25