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 § 9 10 11 12 OPEN MEETING 13 WEDNESDAY, DECEMBER 11, 2013 14 15 16 BE IT REMEMBERED THAT on Wednesday, the 11th 17 day of December 2013, the Texas Lottery Commission 18 meeting was held from 10:00 a.m. until 1:35 p.m., at the 19 Offices of the Texas Lottery Commission, 611 East 20 6th Street, Austin, Texas 78701, before CHAIRMAN J. 21 WINSTON KRAUSE, and COMMISSIONERS VERONICA ANN EDWARDS, 22 KATIE DICKIE STAVINOHA and JODIE G. BAGGERTT; that the 23 following proceedings were reported via machine 24 shorthand by Lou Ray, a Certified Shorthand Reporter. 25 2 1 APPEARANCES 2 CHAIRMAN: Mr. J. Winston Krause 3 COMMISSIONERS: 4 Ms. Veronica Ann Edwards Ms. Katie Dickie Stavinoha 5 Ms. Jodie G. Baggett 6 GENERAL COUNSEL: Mr. Robert F. Biard 7 EXECUTIVE DIRECTOR: 8 Mr. Gary N. Grief 9 CHARITABLE BINGO OPERATIONS DIRECTOR 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, WEDNESDAY, DECEMBER 11, 2013 .......... 10 4 I. The Texas Lottery Commission will call the meeting to order .......................... 10 5 II. Report, possible discussion and/or action 6 on lottery sales and revenue, game performance, new game opportunities, 7 advertising, market research, trends, and game contracts, agreements, and procedures .... 87 8 III. Report, possible discussion and/or action 9 on transfers to the State and the agency’s budget status ................................. 87 10 IV. Report, possible discussion and/or action on 11 FY 2014 Itemized Operating Budget ............. 87 12 V. Report, possible discussion and/or action on the 2013 demographic report on lottery 13 players ....................................... 96 14 VI. Report, possible discussion and/or action on the 83rd Legislature, including implementation 15 of legislation .......................... NOT HEARD 16 VII. Consideration of and possible discussion and/or action, including adoption, on new 17 rules and rule amendments to implement the Commission’s sunset legislation (HB 2197) 18 and legislation relating to limits on prizes for bingo games (HB 394): .............. 19 19 Procedural Rules 20 A. Consideration of and possible discussion 21 and/or action, including adoption, on new 16 TAC §401.105 Major Procurement Approval 22 Authority and Responsibilities 23 B. Consideration of and possible discussion and/or action, including adoption, on new 24 16 TAC §403.115 Negotiated Rulemaking and Alternative Dispute Resolution 25 4 1 TABLE OF CONTENTS 2 PAGE 3 C. Consideration of and possible discussion and/or action, including adoption, on 4 amendments to 16 TAC §401.203 Contested Cases and §401.211 Law Governing Contested 5 Cases 6 D. Consideration of and possible discussion and/or action, including adoption, on new 7 16 TAC §403.600 Complaint Review Process 8 Lottery Rule 9 E. Consideration of and possible discussion and/or action, including adoption, on new 10 16 TAC §401.321 Instant Game Tickets Containing Non-English Words 11 Bingo Rules 12 F. Consideration of and possible discussion 13 and/or action, including adoption, on amendments to 16 TAC §402.200 General 14 Restrictions on the Conduct of Bingo 15 G. Consideration of and possible discussion and/or action, including adoption, on 16 amendments to 16 TAC §402.400 General Licensing Provisions 17 H. Consideration of and possible discussion 18 and/or action, including adoption, on amendments to 16 TAC §402.402 Registry of 19 Bingo Workers 20 I. Consideration of and possible discussion and/or action, including adoption, on 21 amendments to 16 TAC §402.403 Licenses for Conduct of Bingo Occasions and to Lease Bingo 22 Premises, and 16 TAC §402.411 Late License Renewal 23 24 25 5 1 TABLE OF CONTENTS 2 PAGE 3 J. Consideration of and possible discussion and/or action, including adoption, on 4 amendments to 16 TAC §402.404 License and Registry Fees 5 K. Consideration of and possible discussion 6 and/or action, including adoption, on amendments to 16 TAC §402.410 Amendment of 7 a License – General Provisions 8 L. Consideration of and possible discussion and/or action, including adoption, on 9 amendments to 16 TAC §402.420 Qualifications and Requirements for Conductor’s License 10 M. Consideration of and possible discussion 11 and/or action, including adoption, on amendments to 16 TAC §402.700 Denials; 12 Suspensions; Revocations; Hearings 13 N. Consideration of and possible discussion and/or action, including adoption, on new 14 16 TAC §402.702 Disqualifying Convictions ..... 130 15 O. Consideration of and possible discussion and/or action, including adoption, on new 16 16 TAC §402.703 Audit Policy 17 P. Consideration of and possible discussion and/or action, including adoption, on new 18 16 TAC §402.705 Inspection of Premises 19 VIII.Consideration of and possible discussion and/or action, including adoption, 20 on Commission Policy Number P-002 Division of Responsibilities ........................... 110 21 IX. Consideration of and possible discussion 22 and/or action, including adoption, on amendments to 16 TAC §401.317 “Powerball” 23 On-Line Game Rule ............................. 113 24 25 6 1 TABLE OF CONTENTS 2 PAGE 3 X. Consideration of and possible discussion and/or action, including adoption, on new 4 16 TAC §403.102 Items Mailed to the Commission .................................... 114 5 XI. Consideration of and possible discussion 6 and/or action on Proposal for Decision in SOAH Docket No. 362-12-8100.B - Texas 7 Gaming International, Inc. .................... 66 8 XII. Report, possible discussion and/or action, including approval of Evaluation 9 Committee Recommendation and Announcement of Apparent Successful Proposer, on proposals 10 for internal audit services (RFP No. 362-14-0001) ......................... 106 11 XIII.Report, possible discussion and/or 12 action on agency contracts, including extension of the contract for surveillance 13 camera products and related services; extension of the contract for audit services; and 14 procurement for drawing studio and production services ...................................... 109 15 XIV. Consideration of and possible discussion 16 and/or action on external and internal audits and/or reviews relating to the Texas Lottery 17 Commission, including the FY 2013 annual financial audit and agreed upon procedures 18 engagements, and/or on Internal Audit activities .................................... 15 19 XV. Report, possible discussion and/or action 20 on GTECH Corporation .......................... 116 21 XVI. Report by the Executive Director and/or possible discussion and/or action on the 22 agency’s operational status, implementation of a potential new draw game, agency 23 procedures, awards, and FTE status ............ 118 24 25 7 1 TABLE OF CONTENTS 2 PAGE 3 XVII.Report by the Charitable Bingo Operations Director and possible discussion 4 and/or action on the Charitable Bingo Operations Division’s activities, including 5 updates on licensing, accounting and audit activities, pull-tab review, and special 6 projects ...................................... 124 7 XVIII.Consideration of the status and possible entry of orders in: .................. 125 8 Lottery NSF License Revocation Cases (Default 9 Unless Otherwise Noted) 10 A. Docket No. 362-13-4897 – Sun Food Mart B. Docket No. 362-13-4902 – Scott Business Center 11 (licensee appeared) C. Docket No. 362-13-5350 – Burnet St. Drugstore 12 D. Docket No. 362-13-5352 – Dunk Donuts E. Docket No. 362-13-5834 – Park Street Tobacco 13 F. Docket No. 362-13-5836 – Luckey Food Mart G. Docket No. 362-13-5587 – Silva’s Mini Mart #3 14 H. Docket No. 362-13-5588 – Dew Truck Stop One I. Docket No. 362-13-5589 – Super K Grocery 15 J. Docket No. 362-13-5591 – Richland Texaco K. Docket No. 362-13-6061 – JR Produce #3 16 L. Docket No. 362-13-6062 – Shoppers Mart M. Docket No. 362-13-6063 – Rocket Quick Stop 17 N. Docket No. 362-13-6064 – Shell Food Mart O. Docket No. 362-13-6066 – Country Boys 18 P. Docket No. 362-14-0127 – S&S Beverage Q. Docket No. 362-14-0129 – Rick’s Wine & Liquor 19 R. Docket No. 362-14-0132 – Nice and Easy 20 Other Lottery License Revocation Case (Default) 21 S. Docket No. 362-13-5880 – Johnny’s Country Corner Lottery Agreed Order 22 T. Case No. 2013-916 – Peng’s Brother, Corp. DBA 7-Eleven Convenience Store # 34356 23 24 25 8 1 TABLE OF CONTENTS 2 PAGE 3 Bingo Agreed Orders 4 U. Docket No. 362-13-5323.B – Garland Emergency Corps, Inc. 5 V. Docket No. 362-13-5324.B – Gary Engleman, Bingo Worker Registration 6 XIX. Public comment ................................ 31 7 XX. Commission may meet in Executive Session: ..... 125 8 A. To deliberate personnel matters, including the 9 appointment, employment, evaluation, reassignment, duties, discipline, or dismissal of the Executive 10 Director, the Charitable Bingo Operations Director, and/or the Internal Auditor pursuant to Section 11 551.074 of the Texas Government Code 12 B. To deliberate the duties of the General Counsel and/or the Human Resources Director pursuant 13 to Section 551.074 of the Texas Government Code 14 C. To receive legal advice regarding pending or contemplated litigation pursuant to Section 15 551.071(1)(A) and/or to receive legal advice regarding settlement offers pursuant to Section 16 551.071(1)(B) of the Texas Government Code and/or to receive legal advice pursuant to Section 17 551.071(2) of the Texas Government Code, including but not limited to legal advice regarding the 18 following items: Department of Texas, Veterans of Foreign Wars et al. 19 v. Texas Lottery Commission et al Willis Willis v. Texas Lottery Commission, GTECH 20 Corporation, BJN Sons Corporation d/b/a Lucky Food Store #2, Barkat N. Jiwani and Pankaj Joshi 21 Legal advice regarding the State Lottery Act, Texas 22 Government Code Chapter 467, the Bingo Enabling Act, the Open Meetings Act, the Administrative Procedure 23 Act, employment law, personnel law, procurement and contract law, evidentiary and procedural law, and 24 general government law. Legal advice regarding any item on this open meeting agenda 25 9 1 TABLE OF CONTENTS 2 PAGE 3 XXI. Return to open session for further deliberation and possible action on any 4 matter discussed in Executive Session ......... 130 5 XXII. Adjournment .................................. 131 6 REPORTER'S CERTIFICATE ............................. 132 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 1 P R O C E E D I N G S 2 WEDNESDAY, DECEMBER 11, 2013 3 (10:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN KRAUSE: All right. We're going 6 to call this thing to order right now. It is 7 December 11. The time is 10 o'clock, and we've got 8 Commissioners Edwards, Baggett and Stavinoha present, 9 and of course I'm here; we have a quorum. 10 We have some very important business to 11 take care of right off the bat, so I'd like to call up 12 Mary Anne Williamson up to the witness stand while we're 13 here. 14 (Laughter) 15 COMM. WILLIAMSON: This one or this one? 16 CHAIRMAN KRAUSE: Wherever you want to 17 Miss Former Chairman. 18 COMM. WILLIAMSON: Am I supposed to say, 19 for the record I'm the ex-chairman of the Texas Lottery 20 Commission. My name is Mary Anne Williamson. 21 CHAIRMAN KRAUSE: We're just going to give 22 you the floor. And then Gary, too. 23 MR. GRIEF: This morning she has to let us 24 do all the talking. 25 Commissioners, it's my pleasure to welcome 11 1 back Mary Anne Williamson, Commissioner for the Texas 2 Water Development Board. This morning we're going to 3 honor Mary Anne and recognize her for her years of 4 service to the Texas Lottery Commission. And I -- I'd 5 like to offer my comments first of all this morning. 6 In October of 2008, Governor Perry 7 appointed Mary Anne to the Lottery Commission. And 8 shortly thereafter in March of 2009, Governor Perry 9 appointed Mary Anne as the Chair of the Lottery 10 Commission, a position she held until very recently when 11 is the governor abruptly took her from us, and sent her 12 on a higher calling with her recent appointment to the 13 Water Development Board. And I believe we all know and 14 appreciate the importance that the governor has placed 15 on the water needs here in Texas. 16 When Mary Anne joined the Commission in 17 2008, she brought with her a strong business and finance 18 background, honed from many years of owning and 19 operating her own natural gas company in Weatherford, 20 Texas. I cannot begin in a few words to do justice to 21 the impact that Mary Anne had on this agency during her 22 tenure as Chair. She brought stability, competence, and 23 a renewed focus on transparency and clear communication 24 with the Legislature. 25 Among her many accomplishments, she 12 1 shepherded the agency through several challenging and 2 difficult budget processes with the legislative session. 3 She helped us, in countless ways, become a better 4 resource to the Legislature when there was pending 5 legislation that could impact bingo or lottery. And she 6 became the first chairman in the history of the Lottery 7 Commission to take us through and get a successful 8 sunset bill passed after many years of attempting to 9 have that done. 10 She instilled and re-enforced to the 11 management team that the Texas Lottery was a business. 12 And to be effective and to generate revenue, we needed 13 to run it efficiently, with integrity and keep a steady 14 focus on the bottom line. And Mary Anne's leadership 15 paid off with record sales and revenue results. 16 I want to thank Mary Anne for her support 17 and her business savvy and the time that she gave to the 18 Texas Lottery and to me personally during her tenure as 19 Chair. I take it as a very high complement to the work 20 that this agency did under Mary Anne's leadership that 21 the governor has now called upon her to lead the water 22 efforts for the State of Texas. 23 I am obviously deeply saddened that she is 24 no longer a part of our organization. But as a Texan, I 25 feel good knowing that the future of our water needs 13 1 here are in good hands, and that Mary Anne will play a 2 key role in that initiative. 3 Commissioners, we have a small token of 4 our appreciation to Mary Anne that we would like to give 5 to her today, but I'd like to wait to do that until 6 after the Commissioners have a chance to make any 7 comments you might want to make. Mr. Chairman? 8 CHAIRMAN KRAUSE: Does anybody else have 9 any comments? 10 (No response) 11 CHAIRMAN KRAUSE: When I came onto the 12 Lottery Commission, just like some of my new 13 commissioners on either side of me, I didn't know what 14 the heck was going on. I had no idea what we did here 15 at the Lottery, had no idea what in the world charitable 16 bingo was. And so it was my great fortune to have 17 Mary Anne be the chairman and be a good example of not 18 only a leader, but to help me understand what it is that 19 we do, why it's important, and how we can do it in a 20 great way. 21 And so I want to thank you for that, 22 Mary Anne. You've been really patient with me. I know 23 I've been really thick from time to time -- 24 COMM. WILLIAMSON: But you learn quickly. 25 (Laughter) 14 1 CHAIRMAN KRAUSE: Well, thank you. I 2 always, you know, want to make you happy as the 3 Chairman, and I always do everything that my chairman 4 says to do, including shut up when the time is 5 appropriate to be quiet and that kind of thing. Not all 6 of my fellow Commissioners, you know, were able to do 7 that, but I think that I did that pretty well. 8 (Laughter) 9 CHAIRMAN KRAUSE: And so I feel like I've 10 learned a little bit from Mary Anne about how to be a 11 good leader. I think I've learned virtually everything 12 about how to be a good chairman from Mary Anne. Thank 13 you for that. 14 Now, I will never be able to equal you in 15 your savvy and your political acumen, because, I mean, 16 you've lived Texas politics all your life, and I have 17 avoided it as much as possible. 18 (Laughter) 19 CHAIRMAN KRAUSE: And so I will never be 20 able to do all the kinds of things that you did, have 21 the relationships with the senators and the state reps 22 that you have built up over the years. And, you know, 23 the entree into their good graces that you just -- just 24 owned. 25 And so I have a great legacy to try -- to 15 1 follow with that, and, you know -- so I just hope that I 2 can do a third of what you've done. Thank you very 3 much. And I was really proud to serve with you. 4 Let's honor this woman. 5 MR. GRIEF: With that, Mary Anne, we have 6 a gavel that we want to present to you. And it's 7 inscribed Texas Lottery Commission, Mary Anne 8 Williamson, Chairman, 2008 to 2013. We want to thank 9 you for your service. 10 COMM. WILLIAMSON: Thank you. 11 (Applause) 12 CHAIRMAN KRAUSE: We're going to now take 13 just a few-minute break to memorialize this moment. 14 COMM. WILLIAMSON: I told you no video. 15 MR. GRIEF: You didn't say anything about 16 photography. 17 (Recess: 10:10 a.m. to 10:12 a.m.) 18 CHAIRMAN KRAUSE: All right. Now our 19 recess is over, and Mary Anne Williamson, was a -- is a 20 great woman and was an outstanding chairman. 21 COMM. WILLIAMSON: Thank you. 22 AGENDA ITEM NO. XIV 23 CHAIRMAN KRAUSE: The numbers on our 24 agenda do not indicate the order that we're going to 25 take them in. And so to accommodate our various 16 1 witnesses, the next thing we're going to take up is Item 2 14. We're going to have presentation from our internal 3 -- from our independent financial auditor. And we're 4 paying for him. 5 Kathy? 6 MS. PYKA: Good morning, Commissioners. 7 My name is Kathy Pyka. I'm the controller for the 8 Commission. With me this morning is Kevin Sanford. 9 He's our engagement partner with Weaver & Tidwell, who 10 performed our recent financial audit on the 2013 11 financial statements, as well as the agreed-upon 12 procedures related to our Mega Millions and Powerball 13 games. 14 So with that, Kevin, I'll let you take 15 over. 16 MR. SANFORD: Okay. Very good. Good 17 morning, Chairman Krause and Commissioners. It's my 18 pleasure to be here today. I am the partner on the 19 engagements for the Lottery Commission, and I'm here to 20 present the results of those agreed upon procedures and 21 audits to you today. 22 I'll start with the financial statement 23 audit, which is the bound document that I believe you 24 have a copy of. And our opinion on those financial 25 statements is on Page No. 4 of that document. And 17 1 pleased to report that our opinion is an unqualified 2 opinion on the financial statements. That is the 3 highest levels of assurance that independent auditors 4 can give a set of financial statements. And it states 5 that in all material aspects those financials are 6 accurately presented. 7 The financials themselves begin on Page 8 No. 17, with the statement of net position, and I'm 9 actually going to go to the statement of revenues and 10 expenses for the Lottery Fund itself, which is on Page 11 No. 26. The Lottery had operating revenues this year of 12 4,377,667,037. The total expenses were just a hair over 13 4.4 billion, leaving operating income expenses over 14 revenues of 22,600,000. 15 The net change in fair value of the 16 investments was a decrease of about 68 million, leaving 17 a change in net position of a decrease of about 18 90 million for the year, and a lottery fund end of the 19 year with net position of $58,451,000 '82. 20 And the last item that I was going to 21 present is the last document in the report, which begins 22 on Page 67 and 68. It is our report on the Lottery's 23 internal control over financial reporting and on 24 compliance. And pleased to report that also this 25 opinion is unqualified as well. There were no 18 1 significant deficiencies and material weaknesses noted 2 in our audit over the Commission's internal controls 3 over financial reporting and on its compliance with 4 rules and regulations. So obviously good reports there. 5 And also want to add that this was our 6 first year to do the audit. As you know, we were new 7 auditors for this year on rotation. And we're very 8 pleased with the support we got from management. I 9 thought from a first-year engagement perspective it was 10 very smooth and we got full cooperation and full access 11 on anything that we needed to complete the audit. 12 CHAIRMAN KRAUSE: What-is your personal, 13 informal evaluation of our internal controls. 14 MR. SANFORD: Good. We made some minor -- 15 and I will stress the word minor -- recommendations to 16 management. You know, I think new eyes is always a good 17 thing when you come into a new entity, especially with 18 the size and scope of operations of the Lottery 19 Commission; and that we communicated those to 20 management, and I know from talking to them multiple 21 occasions I think they're going to take those to heart 22 and make any, again, minor recommendations that we had 23 to be implemented this year. 24 CHAIRMAN KRAUSE: Terrific. Anything 25 else? 19 1 MS. PYKA: No, sir. 2 CHAIRMAN KRAUSE: Comments? Questions? 3 Action item or no? 4 MR. BIARD: No. 5 CHAIRMAN KRAUSE: Thank you for giving 6 this report. We're happy to have a clean opinion and a 7 stamp of good on our internal controls. 8 MR. SANFORD: Yes, sir. My pleasure. 9 MS. PYKA: Thank you, Commissioners. 10 AGENDA ITEM NO. VII 11 CHAIRMAN KRAUSE: Segueing now to Item 7, 12 we have witnesses on the bingo rules. So let's go ahead 13 and take those up. Bob, how do you want to handle this? 14 Can we do the ones with the witnesses first? 15 MR. BIARD: That's fine if you want to 16 take the witness first. I have a short presentation -- 17 well, hopefully a short presentation that I'll make, but 18 I can do that either before or after the witnesses. 19 CHAIRMAN KRAUSE: Well, is the 20 presentation going to be helpful in connection with 21 the -- 22 MR. BIARD: I think it might be. 23 CHAIRMAN KRAUSE: Okay. Please go. 24 MR. BIARD: Thanks. Commissioners, for 25 the record, I'm Bob Biard, General Counsel. In this 20 1 Item 7, we recommend that the Commission adopt 18 new or 2 amended rules to implement the Commission's sunset 3 legislation and House Bill 394 which exempts prizes of 4 $50 or less from the calculation of the prize cap for a 5 bingo occasion. The Commission voted at the August 5th 6 meeting to publish some of these rules, and at the 7 September 19th meeting to publish the rest of them for 8 public comment. 9 Most of these rules relate to bingo. 10 Those are Tabs F through P in your notebooks. The staff 11 conducted a bingo rule comment hearing on October 16th 12 where several commenters appeared. In addition, the 13 Staff extended the comment period an additional two 14 weeks beyond the normal 30 days we give, and we 15 conducted three stakeholder meetings with industry 16 representatives. 17 With your indulgence I would like to just 18 read the list of these rules for the record before you 19 vote, and indicate whether they're new or amended, and 20 if they're recommended for adoption with or without 21 changes to the proposal. There's one rule I'd like to 22 discuss in a little more detail, and we'll be happy to 23 discuss any others if you'd like. And then after the 24 comments, you may consider adoption with one vote, if 25 you -- if your will is adopt all these, that would cover 21 1 all the rule adoptions. I do have a separate order, 2 however, for each of the proposals for you to sign. 3 CHAIRMAN KRAUSE: (Inaudible) 4 MR. BIARD: Sorry. Just this one time. 5 These rules are all in Title 16 of the Texas 6 Administrative Code. We have a few procedural rules: 7 New 401.105, Major Procurement Approval Authority and 8 Responsibilities, with changes to the proposal; new 9 403.115, Negotiated Rulemaking and Alternative Dispute 10 Resolution, recommended to adopt without changes; 11 amended 401.203 contested cases, and 401.211, Law 12 Governing Contested Cases with some nonsubstantive 13 changes; new 403.600, Complaint Review Process without 14 changes. 15 We have one lottery rule, new 401.321, 16 Instant Game Tickets Containing NonEnglish Words, 17 recommended without changes. 18 Then we get to the bingo rules: Amended 19 402.200, General Restrictions on the Conduct of Bingo, 20 with changes; amended 402.400, General Licensing 21 Provisions without changes; amended 402.402, Registry of 22 Bingo Workers with nonsubstantive changes; amended 23 402.403, Licenses for Conduct of Bingo Occasions and to 24 Lease Bingo Premises; and 402.411, Late License Renewal 25 without changes; amended 402.404, License and Registry 22 1 Fees without changes; amended 402.410, Amendment of a 2 License, General Provisions, without changes; amended 3 402.420, Qualifications and Requirements for Conductor's 4 License, with changes; amended 402.700, Denial, 5 Suspensions, Revocations and Hearings, without changes; 6 402 point -- new 402.702, Disqualifying Convictions, 7 with changes; new 402.703, Audit Policy, with changes; 8 and new 402.705, Inspection of Premises, with changes. 9 The rule 402.702 that I mentioned, 10 Disqualifying Convictions, is the one where we have 11 several commentors signed up to speak. This was the 12 subject of most of the comment and discussion. This 13 rule responds to the Sunset bill's requirement that the 14 Commission adopt rules and guidelines necessary to 15 comply with Chapter 53 of the Texas Occupations Code 16 when using criminal history record information to issue 17 or renew a bingo license or a bingo worker listing on 18 the bingo worker registry. 19 Among other things, Chapter 53 allows 20 licensing agencies like the Commission to look at 21 criminal convictions, that relate to the activity being 22 licensed, and allow the agency to treat certain deferred 23 adjudications as if they were convictions in deciding 24 whether to issue a license. There were two major issues 25 that came up. The first issue we discussed was 23 1 grandfathering. Several commenters asked for the 2 Commission to grandfather existing licensees with 3 respect to their criminal history as it existed on 4 September 1, 2013, the effective date of the bill. So 5 these percentages would not be subject to review under 6 Chapter 53. 7 We discussed this with the industry 8 representatives in detail, and we ultimately put the 9 question to the Sunset Commission staff who are the ones 10 who recommended that we do this. And their response to 11 us was that they are of the opinion that the law does 12 not allow grandfathering bingo licenses to the Chapter 13 53 requirement. And in any event, whether -- even if -- 14 there was some -- maybe some agreement about whether the 15 law allows it or not. They clearly indicated that they 16 did not intend for existing licensees to be 17 grandfathered. I don't question it. I think some of 18 the industry folks may question whether the bill allows 19 grandfathering. But sunset clearly indicated they did 20 not intend for existing licensees to be grandfathered. 21 The second big issue we discussed is 22 whether Chapter 53 applies to directors and officers and 23 other individuals associated with a license -- licensee 24 that is a corporation or another nonindividual business 25 entity. Chapter 53 applies to the entire Occupations 24 1 Code, and it was drafted, I think we can say, with an 2 eye to traditional occupational licenses that are held 3 by individual people such as plumbers, electricians, 4 cosmetologists, barbers; there's a lot of others. These 5 are humans who are licensed. By it's plain language 6 Chapter 53 only applies to the entity receiving the 7 license, and it does not even address the situation 8 where the licensee is a corporation with directors or 9 officers. 10 We discussed among ourselves and with 11 commenters whether the agency can look at the criminal 12 history of directors and officers of a corporation under 13 Chapter 53. The Bingo Act says the Commission can look 14 at directors and officers for three types of offenses: 15 Convictions for criminal fraud, gambling and gambling 16 related offenses. But the question we had with Chapter 17 53 is can we use Chapter 53 to expand that review of 18 directors and officers? 19 As I said, the plain language of Chapter 20 53 suggests it only applies to the entity receiving the 21 license. And generally, under Texas law, the courts 22 have told state agencies that they are supposed to apply 23 the plain language of the statutes and certainly not 24 create new powers. 25 Our concern with this rule is to not go 25 1 beyond the plain language, and we don't want to 2 recommend a rule that we think a court would be likely 3 to invalidate. 4 In the course of our deliberations, I 5 asked the Department of Licensing and Regulation, which 6 handles the bulk of occupational licensing in Texas how 7 they handle corporate or other business licensees and 8 whether they use Chapter 53 as independent authority to 9 look at the criminal history of directors and officers. 10 And their general counsel, who's also written a law 11 review article on Chapter 53, the only law review 12 article on that I found, told us that they do not. 13 They have -- they do have some licensees 14 like tow trucks where -- tow truck services which are 15 corporations, and they do not use Chapter 53 to look at 16 the officers and directors. But I do want to bring to 17 your attention that by not applying Chapter 53 to 18 officers and directors, we may have some anomalous 19 situations come up. 20 For instance, as a hypothetical, I just 21 wanted to suggest there may be a case where an 22 individual has a deferred adjudication for a gambling 23 offense. Say this individual is a sole proprietor with 24 a commercial lessor license, but he's also the officer 25 of a charity that has a bingo conductor's license. As a 26 1 sole proprietor under Chapter 53, we could look at his 2 deferred adjudication for gambling and determine that 3 he's disqualified as a commercial lessor. But for the 4 corporate charity's license, the deferred adjudication 5 would not disqualify the charity or wouldn't even be 6 considered as a factor if Chapter 53 does not reach to 7 officers of a corporation, so the license of the charity 8 would be issued. 9 So if the Commission determined that it 10 would disqualify the commercial lessor for the deferred 11 adjudication, we would have the same person associated 12 with both licensees, but different results depending on 13 whether the licensee is an individual or a corporation. 14 So this was the subject of debate both 15 within our own staff with differing opinions, and with 16 industry representatives. The rule we're recommending 17 for adoption today would not apply Chapter 53 to 18 officers and directors. We believe this is the cautious 19 approach consistent with the conservative interpretation 20 of the statutory language. 21 However, after discussion with Commission 22 Edwards, who is our designated bingo commissioner, and 23 Sandy Joseph, the bingo directer, we agreed this would 24 be a good issue for the Commission to present to the 25 Attorney General for an opinion. This is not something 27 1 that you need to vote on as a Commission, but we have 2 prepared a request for the chairman to submit to the 3 AG's office if he is in agreement, and I wanted to bring 4 that to your attention. 5 Two other quick items on this rule, first 6 we've added an individual's veteran status as a 7 mitigating factor to weigh in favor of issuing a license 8 to a person with an otherwise disqualifying offense. 9 And last, the statute and the rule require the 10 Commission to issue written guidelines that go into 11 greater detail on how the Commission will treat specific 12 crimes when applying Chapter 53, and that is something 13 that under the rule the bingo director would be able to 14 do, create these guidelines, and they would ultimately 15 be published in the Texas Register. 16 So with that, we recommend that the 17 Commission adopt the new and amended rules under Tab 7. 18 That would be items A through P under Item 7 in your 19 notebooks. 20 CHAIRMAN KRAUSE: So the thing about 21 deferred adjudication, that's in our sunset bill? 22 MR. BIARD: The requirement to adopt rules 23 and policies to apply Chapter 53 is the exact language 24 in the Sunset bill. And Chapter 53 gives the Commission 25 discretion to consider deferred adjudications. It's not 28 1 mandatory, but it gives the agency discretion to 2 consider deferred adjudications, in some instances as if 3 they were convictions. 4 CHAIRMAN KRAUSE: Okay. But we also have 5 the discretion to apply mitigating factors. 6 MR. BIARD: That's true. 7 CHAIRMAN KRAUSE: And to me, a deferred 8 adjudication is the local judge applying mitigating 9 factors, and so we ought to be able to do that as well. 10 MR. BIARD: That's right. 11 CHAIRMAN KRAUSE: Is James Parson -- 12 Persons (sic) going to talk about this at all or did we 13 cover his area? 14 MR. BIARD: I think we've covered -- the 15 two big areas I mentioned were the two major points of 16 comments. If you have any specific questions, he's 17 available, but -- 18 CHAIRMAN KRAUSE: Well, if Mr. Persons 19 wants to come give us his perspective, I'm happy to have 20 that. 21 MR. BIARD: Is James here? 22 CHAIRMAN KRAUSE: Then I'm going to go to 23 the witnesses. 24 MR. PERSON: Thank you, Mr. Chairman. 25 James Person, Assistant General Counsel for the record. 29 1 I don't really have anything specific to 2 add to what Bob had said. We worked at these 3 stakeholder meetings, and we've, I think, hammered out 4 pretty good deals on all these rules except for 402.702. 5 That's been the one area where there has been a lot of 6 debate, and that's why we ultimately recommended that 7 the AG kind of weigh in on that issue. 8 CHAIRMAN KRAUSE: Now, that's actually not 9 both the grandfathering and the officer or directors -- 10 MR. PERSON: Yeah. The AG opinion would 11 only be on the officer and director issue. The 12 grandfathering issue, there's no legal issue with the 13 grandfathering request. That's more of a policy call. 14 CHAIRMAN KRAUSE: Policy call? 15 MR. PERSON: Yeah. There's no legal 16 impediment, I believe, until you look at the Sunset act, 17 and that's specifically said we're supposed to apply it 18 when renewing a license. So that's Sunset believes is 19 the legal requirement. There was some question whether 20 Chapter 53 kind of added some discretion to that, but 21 after talking to Sunset, we were of the opinion that it 22 did not. 23 MR. BIARD: The Sunset Commission stated 24 clearly that they did not believe we had the legal 25 authority to grandfather. 30 1 CHAIRMAN KRAUSE: Okay. 2 MR. PERSON: Yeah. 3 CHAIRMAN KRAUSE: Okay. Is there any 4 reason to believe that there's a difference of opinion 5 between the staff and the actual reps and senators 6 that -- 7 MR. PERSON: The Sunset staff? 8 CHAIRMAN KRAUSE: Yes, uh-huh. 9 MR. PERSON: I have nothing -- 10 CHAIRMAN KRAUSE: I hate giving the staff 11 more weight than they're entitled to. 12 MR. PERSON: No, no, I mean, I can't speak 13 to that. I know the Sunset staff made that 14 recommendation. I don't know what the individual reps 15 and senators were thinking when they -- 16 MR. BIARD: I'd like -- I can give you -- 17 I think from -- my perspective is on it if the Chapter 18 53 is largely discretionary with the agency and how they 19 want to apply this criminal history to licensees. And 20 in that discretion it's arguable that the Commission 21 could decide that they just were not going to apply that 22 discretion to anybody who had an existing license. 23 So, in effect, we actually would be saying 24 that those people are subject to Chapter 53, but the 25 agency is going to exercise their discretion just not to 31 1 apply those standards to anybody who had an existing 2 license. 3 AGENDA ITEM NO. XIX 4 CHAIRMAN KRAUSE: Okay. I think I'm ready 5 for the witnesses. We play favorites around here, and 6 so we're going to hear Phil Sanderson first because he's 7 our former bingo director, Mountain Man Phil. 8 (Laughter) 9 CHAIRMAN KRAUSE: Then we'll hear from 10 Steve Fenoglio after Phil. 11 MR. SANDERSON: Thank you, Chairman 12 Krause, Commissioners. For the record, Phil Sanderson, 13 a consultant in Austin. I'm here representing Texas 14 Charity Advocates today. 15 First, I want to, you know, recall that I 16 did provide testimony at your September 19th meeting 17 when you proposed these rules. I also testified on 18 behalf of TCA at the public comment hearing, as well as 19 supplied written comments during the comment period. 20 I want to thank staff and the Commission 21 for inviting us to participate in the stakeholder 22 meetings that took place on this particular rule 23 402.702, as well as there are a couple of other rules 24 that we discussed. 25 And I believe, for the most part, the 32 1 industry's concerns -- or TCA's concerns were addressed 2 with a few exceptions. And, of course, the one 3 exception being grandfathering of individuals for 4 purposes of the -- exercising their discretion on 5 Chapter 53 for those individuals that have been involved 6 in bingo for several years. 7 I think even with the statute, the sunset 8 bill taking out the ten-year look-back, even had some 9 bearing on individuals that may have had a conviction or 10 a deferred adjudication for years -- years 20, 30 years 11 ago. So I would hope that the Commission would consider 12 grandfathering, or at least put in some, you know, 13 additional mitigating factors that would allow the 14 discretion for those individuals that have been involved 15 for numerous years up to this point in time that were 16 not disqualified or they were eligible based on the 17 current statute at the time. 18 I look forward to participating when they 19 develop the guidelines, if that's possible. We'd be 20 glad to participate with that. Additionally, if the 21 Commission is going to look at identifying who the 22 individuals are that are considered active and employed 23 as it relates to commercial lessors, manufacturers and 24 distributors, we'd also like to participate in those 25 rulemaking proceedings. And I'll be glad to answer any 33 1 questions. 2 CHAIRMAN KRAUSE: Would it be satisfactory 3 if we, you know, used as a mitigating factor the fact 4 that the people who have been employed in the past 5 without a problem, even though they might have had a 6 distant conviction, that we consider, you know, staying 7 in good standing in the meantime as a mitigating factor? 8 MR. SANDERSON: A distant conviction 9 and/or deferred adjudication. I think a lot of 10 individuals that, you know, they may have pleaded to 11 some offense that would get them a deferred 12 adjudication, that would allow them to continue 13 participating in bingo, so I would think that if that 14 was a mitigating factor that, yes, I think that would 15 help. 16 CHAIRMAN KRAUSE: It would only -- it 17 would just help? It wouldn't really make anybody happy? 18 MR. SANDERSON: Depends on how it's 19 applied. 20 (Laughter) 21 CHAIRMAN KRAUSE: All right. Well, you 22 know, I think that we want to be fair with people. And, 23 you know, if they've been good in the past, we want to 24 reward them for that. So do you have any other 25 comments? 34 1 MR. SANDERSON: I agree with you. I think 2 that if -- I think the fairness issue is one that is 3 very, you know, good to follow, and I think that the 4 Commission has always been fair in the past with 5 individuals and/or licensees. So I would hope so, yes, 6 sir. 7 CHAIRMAN KRAUSE: Thank you, sir. 8 Anything else? 9 MR. SANDERSON: Nothing else. 10 CHAIRMAN KRAUSE: All right. 11 MR. PERSON: Mr. Chairman, can I just add 12 something really quick? 13 CHAIRMAN KRAUSE: Yes, please. 14 MR. PERSON: In the current rule that we 15 changed a little bit, there is a mitigating factor for 16 current licensees who have a -- the absence of a 17 violation history as a current licensee. So we did 18 provide that as a mitigating factor in the rule. 19 CHAIRMAN KRAUSE: How much of a mitigating 20 factor are deferred adjudications? And the reason I ask 21 is that, you know, it just -- the whole reason for 22 having a deferred adjudication at the local law level is 23 to give people a second chance. And it makes me 24 uncomfortable that we're going behind that. 25 MR. PERSON: I understand. Chapter -- 35 1 CHAIRMAN KRAUSE: The Sunset staff thinks 2 that they can tell us that that's what we have to do. 3 MR. PERSON: Right. Chapter 53 doesn't 4 allow us to consider all deferred adjudications. We 5 have to go through some processes first to say what 6 deferred we're going to use. And I don't have the exact 7 parameters in front of me, but they essentially -- one 8 of the big ones would be if it's a crime that someone 9 received a deferred adjudication for, if giving them a 10 license in whatever occupation here, being in the bingo 11 industry, would allow them the opportunity to repeat 12 that offense or, you know, make it easier for them to 13 repeat that offense, then we could consider that 14 deferred adjudication, but it doesn't give us blanket 15 authority to just consider any deferreds. 16 CHAIRMAN KRAUSE: Okay. But still, even 17 if we consider it, you know, deferred adjudication is, 18 basically, a nonconviction once the deferred period is 19 over with. 20 MR. PERSON: Yes, sir. 21 CHAIRMAN KRAUSE: Okay. So we're going to 22 apply mitigating consideration to that. I mean -- 23 MR. BIARD: Excuse me, the discretionary 24 factor of Chapter 53 (inaudible) the person may pose a 25 continued threat to public safety or employment of the 36 1 person in the licensed occupation would create a 2 situation where the person has an opportunity to repeat 3 the activities. 4 CHAIRMAN KRAUSE: I understand. And those 5 are good things. That's why we have to take them into 6 account. 7 MR. PERSON: Yes, sir. 8 CHAIRMAN KRAUSE: But we can't -- if we 9 have discretion, we have to use it wisely. 10 MR. PERSON: Right. And I think that's -- 11 that's at the core of Chapter 53. It's about 12 discretion. 13 CHAIRMAN KRAUSE: Any questions for this 14 witness, Mr. Sanderson? 15 MR. BIARD: And when Sandy Joseph as the 16 bingo director develops these guidelines that have 17 greater detail in them, this is an opportunity to go 18 into that level of detail and say, well, how are we 19 going to look at deferred adjudication. 20 CHAIRMAN KRAUSE: I believe in Sandy 21 Joseph's good judgment. 22 Mr. Fenoglio? 23 MR. FENOGLIO: Mr. Chairman, 24 Commissioners, for the record, my name is Stephen 25 Fenoglio. I'm an attorney in Austin, Texas. 37 1 I wear various hats, as you know. I'm a 2 board member of the Texas Charity Advocates. I've been 3 the primary contact for River City Bingo, which is a 4 group of five charities that own their own bingo 5 business in Austin, Texas, Braker Lane-I-35. We're the 6 haul that the Bingo Division points to as this is how 7 charity bingo should be conducted, at least in part. 8 The charities do everything. We're the 9 commercial lessor. We're the conductors. We have a 10 management team that meets monthly for about three hours 11 and goes over our business plan and supervises the 12 employees and makes strategic decisions. 13 I also represent commercial lessors, 14 licensed distributors, and there's a case up after this 15 of a bingo distributor enforcement action. 16 I want to turn first to the last issue, 17 Mr. Chairman, that you asked about deferred 18 adjudication. And what I would suggest is it t'ain't 19 fair. I, as a lawyer, have represented bingo workers 20 who were charged with various crimes. And in the 21 negotiation that went on about how you resolve this 22 crime, one of the options is a deferred adjudication. 23 And my advice, based on the state of the law -- I 24 haven't done it since the law changed and the Commission 25 is now trying to adopt a new rule. But before that we 38 1 would look at the charge that's made. A deferred 2 adjudication up until September -- September 1, 2013 3 would not in any way impact a license that's issued by 4 the Texas Lottery Commission for any charitable bingo 5 licensee or a member of -- a bingo worker. 6 So that that legal advice was given by me 7 and other lawyers -- dozens of other lawyers across the 8 state who read the statute and say deferred adjudication 9 is not a bar. Now we're changing the rule, and I would 10 suggest it t'ain't fair. If they've got an otherwise 11 clean record with no -- nothing other than that deferred 12 adjudication. 13 And I would suggest to you, if the 14 Commission wants to send that clear signal, at the 15 bottom of Page 22, you should add a new subparagraph 16 that says deferred adjudication. That provision, 17 Mr. Chairman, says under Paragraph H, around Lines 20 18 through 22, pursuant to Chapter 53, the Occupations 19 Code, the Commission may consider mitigating factors, 20 which is what you just talked about with Mr. Sanderson 21 and what you had the discussion with Mr. Biard about. 22 Deferred adjudication is not mentioned in 23 that mitigation factor. Now, you can backdoor it by 24 looking at Chapter 53, which is referenced in other 25 provisions in this Rule 402.702. 39 1 But if you want to make it up front, 2 crystal clear, deferred adjudication will be, without 3 question, a mitigating factor that Ms. Joseph or whoever 4 takes her place -- hopefully not very soon in the 5 future; I think she's still drinking out of a fire hose 6 trying to get up to speed with these rules and a number 7 of other issues. But put mitigation -- or deferred 8 adjudication in that issue. That would give comfort to 9 many licensees who've wondered, okay, am I not going to 10 be able to be a bingo worker or am I not going to be 11 able to have a license because I took Fenoglio's advice 12 or some other lawyer's advice and did a deferred 13 adjudication. 14 There needs to be a bright line that they 15 know that. We'd ask that you give it to them. 16 The other issue I want to turn to -- and 17 this is where the rubber meets the road for 18 manufacturers and distributors. And I regularly 19 represent manufacturers and distributors in licensing 20 matters and trying to get product approved in the case 21 of manufacturers, and in a host of compliance issues. 22 You've got a provision in your statute -- 23 or, I'm sorry -- well, you do have it in your statute 24 under the manufacturer and distributer licensing 25 provisions, which is Section 2001.207 in the case of the 40 1 manufacturer and 2001.209 in the case of a distributor. 2 And specifically those provisions are referenced at the 3 bottom of Page 18 of the Commission rule. 4 I've got a contested case that highlights 5 this issue. It's Texas Gaming International that's 6 coming up shortly. Here's the regulatory environment 7 they live under. You can't be a bingo worker and be 8 active or employed in a distributor or manufacturer 9 license. A bingo manufacturer now needs to know any 10 person who, according to the PFD, is interested in the 11 business of the bingo manufacturer distributor. Look at 12 yours truly. 13 I represent a manufacturer. I represent a 14 distributor. I represent a commercial lessor. I 15 represent hundreds of charities. Am I active in that 16 charity business? Under the PFD, yes. That means a 17 manufacturer and a distributor can employ an attorney 18 who works for a charity, a CPA who works for a charity, 19 a bookkeeper, an information technology consultant, a 20 janitor. There's no bright line anymore. What does a 21 manufacturer or distributor do? Who do they cull on the 22 list? It's not just their officers and directors and 23 own employees. It's the consultant's. There's no 24 bright line anymore under that provision of the rule 25 under subparagraph (b) and (c). And we've asked 41 1 repeatedly that it be clarified. 2 So for those reasons we're opposed -- 3 first to sum up, we'd ask that that deferred 4 adjudication language be put in subparagraph (h). 5 CHAIRMAN KRAUSE: Which one is more 6 important to you. 7 MR. FENOGLIO: It depends on which hat I 8 wear. 9 (Laughter) 10 MR. FENOGLIO: I think there's a 11 manufacturer who wants to speak on this issue, so I'll 12 let Multimedia Games address that issue. But it's a 13 huge issue for the entire industry when you -- a 14 manufacturer or distributor doesn't know who they need 15 to do a background on, do a cull, ask the questions of. 16 It would -- I don't think -- I would suggest to you that 17 no manufacturer or distributor would ever have to think, 18 Okay, do I need to ask if our CPA or our janitor has -- 19 does any work for any of the charities or commercial 20 lessors that we do business with? 21 CHAIRMAN KRAUSE: James, what do you think 22 what he's talking about there on the more remote 23 connections to a director or manufacturer. 24 MR. PERSON: I believe the ALJ addressed 25 that specifically. And I know we're supposed to be 42 1 taking up this case later on in the Commission meeting. 2 I don't know if it's okay to address now -- 3 CHAIRMAN KRAUSE: Are we muddling the 4 specific case versus the rule that we're trying to 5 adopt? 6 MR. PERSON: It just troubles me that 7 we're -- you know, we're not applying it in a 8 hypothetical situation. It's actually a contested case 9 that's coming before the Commission later today. 10 MR. BIARD: Mr. Chairman, the issue of 11 what is active or employed means is an issue that's been 12 around a long time. It's not a new issue that's come 13 with this Sunset legislation. The new issue is the 14 deferred adjudications. I think that the whole issue 15 about what persons are active or employed in the 16 manufacturer/distributor is sort of a longstanding 17 issue. 18 And I think Sandy can probably maybe speak 19 to it better than I can, but I think there is -- there 20 are some plans to have some additional meetings with the 21 industry to start trying to hammer those issues out. 22 CHAIRMAN KRAUSE: Does that mean that we 23 might not be adopting the rule today on this particular 24 issue. 25 MS. JOSEPH: No, I believe that -- that I 43 1 would recommend the Commission adopt the rule, but my 2 plan is to, again, convene stakeholder meetings with 3 interested persons to work on a definition or 4 delineation of who is considered active or employed in 5 an organization. And I think most likely that would be 6 in a different rule, a separated rule. 7 CHAIRMAN KRAUSE: Okay. 8 MR. FENOGLIO: And my only response to 9 that -- it's very quick -- is subparagraph (c)(1), Page 10 19 of the rule, an offense that directly relates to the 11 duties and responsibilities of the distributor or 12 manufacturer. It says licensed or registered activity 13 of the distributor or manufacturer. 14 So what is it that it directly relates to. 15 We've got a PFD that says if they're interested in the 16 business, they're out as a consultant. 17 CHAIRMAN KRAUSE: Well, yeah, I feel like 18 I'm a little hemmed in between our statute and trying to 19 make it workable with the rule. 20 MS. JOSEPH: I would say we need to, you 21 know, for -- retain discretion to look at individual 22 fact situations to determine the level of involvement of 23 an employee. But certainly I would say a janitor would 24 not be one that we would be concerned about, you know. 25 So I think we can hash out some guidelines that will 44 1 provide relief to the anxiety that they're feeling. 2 CHAIRMAN KRAUSE: Well, you know, it's not 3 our job to make the people that we regulate, you know, 4 business impossible. And that's -- you know, that's not 5 regulation, that's killing. So, anyway, Mr. Fenoglio, 6 you got anything else? 7 MR. FENOGLIO: That's it. Thank you, 8 Mr. Chairman, Commissioners. 9 CHAIRMAN KRAUSE: Mr. Don -- Dan West. 10 MR. WEST: Good morning, Chairman and 11 Commissioners. For the record, my name is Dan West. I 12 work with the Texas Veterans of Foreign Wars. I was 13 given this binder here so I could attempt to initiate a 14 filibuster, but judging by that Texas Ranger cowboy hat 15 you got on your desk, sir, I'm going to be brief so I 16 can bright and then be gone. 17 (Laughter) 18 CHAIRMAN KRAUSE: Good judgment. 19 MR. WEST: VFW, Veterans of Foreign Wars 20 has submitted written comments through our attorney, Kim 21 Kiplin. And, as you may recall, I committed -- or 22 commented on this rule at your September 19, 2013 23 meeting -- I'm a little nervous -- when the Commission 24 considered proposing the rule. 25 I've had some opportunity to do a little 45 1 homework here. In the state of Texas, we have 348, 349, 2 VFW posts, and over 100 of those posts have a bingo 3 license. And approximately -- I haven't been able to 4 nail this number down -- there are 1500 veterans who 5 serve as an officer or director and as a bingo worker 6 registered through the Bingo Commission in those 100 7 posts. 8 Doing a criminal history check on those 9 1500 people is going to be very expensive, and probably 10 cost prohibitive for a lot of them, because many of them 11 are out in rural areas where there's not that great 12 source of income. 13 During the course of this rulemaking, 14 Commission staff convened several stakeholder meetings, 15 and we participated in those meetings. And the draft 16 revisions that we've seen satisfied many of the VFW's 17 concerns and we appreciate greatly -- I appreciate 18 greatly what the staff has been able to do working with 19 us. Because in my organization, I'm the staff. So for 20 the staff, thank you, for your hard work. I greatly 21 appreciate your responsiveness in addressing our 22 concerns. 23 In connection with the staff's most recent 24 revised draft rule, we still have two concerns. Of 25 course, that is the grandfathering one, and I -- I 46 1 heard -- I'm sorry, I don't know your name -- 2 MR. BIARD: Bob Biard. 3 MR. WEST: -- Bob Biard say what the 4 Sunset Commission had to say about grandfathering. And 5 to me that brings up concerns. Are they actually saying 6 that when a law is passed, it's retroactive? Because 7 that's kind of what I'm hearing. 8 I've always been told -- grandfathering 9 means if -- all right. If you were licensed and you had 10 this before this law was passed, then you're good to go. 11 But now I'm being told, no, that's not possible anymore 12 and I'm not really sure what the legalities of all that 13 is. I'll leave that to more educated people than me, 14 and I will do my best to follow that law. 15 But it is a concern for us that 16 grandfathers people who are licensed and who have not 17 been in trouble and have been doing a good job, could be 18 literally kicked and told you no long can participate or 19 volunteer, help your community, or even bring in a 20 little income for your family. 21 The second concern we have is -- and I 22 certainly appreciate hearing that veteran's preference 23 in there. Just to go on the record here, that a veteran 24 who has been set up through a veteran's court, has been 25 vetted by the judicial system and that judge as 47 1 deserving of a second chance. They have been vetted by 2 the Veterans Administration working with that judicial 3 system as a veteran deserving of a second chance. 4 That veteran is required to participate in 5 a veterans service organization. And part of our 6 mandate to that veteran who we've been told is deserving 7 of a second chance, is to give them an opportunity to be 8 useful to their community again. And many times we ask 9 them to participate in bingo and get them registered and 10 all that so they can feel useful and helpful again. 11 So I would again like to go on record that 12 a veteran who has been through the veterans court, who 13 has been vetted by that court, who has been vetted by 14 the Veterans Administration, how has been vetted by that 15 veteran service organization, should have an outright 16 exemption, because you've got all of these other people 17 saying -- but I appreciate the fact that it's a 18 mitigating factor now because that's a lot more than we 19 had before. So thank you, staff. Thank you four 20 commissioners for putting that on there. 21 Of course, if it's a veteran that's been 22 convicted of a felony, you know, we draw the line on 23 that, no felony convictions and all that. 24 So on behalf of the Veterans of Foreign 25 Wars and our 348 or 49 posts -- depends on what's going 48 1 on a minute -- and our 80,000 members, I'd like to thank 2 each one of you Commissioners for the dedication and 3 contribution of time and talent that you give to the 4 citizens of the state of Texas, as well as the staff for 5 what y'all do for helping us veterans. 6 Thank you. I can answer questions, but I 7 may not be good at it though. 8 CHAIRMAN KRAUSE: We'll excuse you from 9 that obligation. 10 MR. WEST: Thank you very much, sir. 11 CHAIRMAN KRAUSE: Todd McTavish. 12 MR. McTAVISH: Good morning, Chairman 13 Krause, Commissioners Baggett, Stavinoha and Edwards. 14 My name is Todd McTavish. I'm senior vice president, 15 general counsel and chief compliance officer of 16 Multimedia Games. With me today is Elizabeth Highsol 17 (phonetic), she's our licensing manager, and Kimberly 18 Kiplin, our counsel. 19 I'm here today to introduce Multimedia 20 Games and myself to the Commission and express our 21 interest in the proposed rule. And first I want to tell 22 you a little bit about Multimedia Games to put our 23 interests in perspective. 24 Our company has been in Austin for over 23 25 years. We have two locations. Our headquarters is west 49 1 of downtown. We have a manufacturing plant in North 2 Austin. We employ about 500 people nationwide. There's 3 about 350 in Austin alone. We're publicly traded under 4 the ticker symbol mgam. We're one of the largest gaming 5 device manufacturers in the country. We're the only 6 major gaming device manufacturer in Texas. 7 We also provide the Lottery Central System 8 in New York and Washington. That's an electronic 9 system. We run the back-end system for the states of 10 New York and Washington. It's a system that connects 11 VLT's video lottery terminals in racinos around the 12 state to our servers, which are actually located in the 13 Lottery Commission's offices. And our offices are, in 14 fact, in the Lottery Commission's in those states, and 15 we work very collaboratively with those -- with those 16 commissions on a daily basis. 17 In 2012 and 2013, we were voted by the 18 Austin Business Journal as one of the best places to 19 work. Our CFO was voted best CFO by the Austin Business 20 Journal. Our company holds licenses in over 200 21 jurisdictions, including Nevada, and our officers and 22 directors each hold or are pursuing hundreds, literally 23 hundreds, of licenses in all of these jurisdictions 24 including myself. 25 We've experienced rapid growth in terms of 50 1 market, profitability and people. We interact with 2 licensing regulators on a daily basis, literally 3 hundreds of times between our entire licensing staff. 4 Licensing regulators visit our headquarters almost 5 weekly to conduct investigations. And I'm happy to say 6 that we're known in the industry as having one of the 7 best, most organized licensing function. So safe to say 8 that MGam has deep ties to the community and a strong 9 interest in this rule. 10 I sent you a letter this past Monday 11 identifying our remaining concerns with the rule and how 12 the new rule will impact MGam. I use MGam as -- it's 13 just how we refer to Multimedia Games. It's an 14 abbreviation of the ticker symbol. 15 So we must know who we need to vett so our 16 license isn't it at risk. And the combined lack of 17 clarity regarding the individuals we must vett with no 18 grandfathering over current license holder will require 19 MGam to now revisit the criminal histories of all 20 individuals currently affiliated with or employed by 21 MGam. This is due to the fact that there is now not a 22 ten-year look-back limitation and our heightened concern 23 regarding the Commission's interpretation of who is 24 active or employed. 25 Staff has indicated that it will convene 51 1 stakeholder's meetings to clarify this list of 2 individuals in connection with a prospective rulemaking, 3 MGam will participate in these discussions and looks 4 forward to working with staff. And we would request the 5 Commission limit it to review for license eligibility 6 and/or enforcement actions relating to disqualifying 7 convictions to only officers, directors and more than 8 10 percent owners. 9 That's all I have. I'm happy to answer 10 any questions. 11 CHAIRMAN KRAUSE: Are you believing that 12 our new rule is going to apply to all, what, 250 or 300 13 of your employees, even if they're not working on 14 bingo-related -- Texas bingo-related -- We recognizes 15 Kim Kiplin. 16 MS. KIPLIN: Thank you. Kim Kiplin. I'm 17 an attorney here in town with Dykema Gossett, and I'm 18 representing MGam. 19 The problem is -- and that's true. The 20 list is -- can you hear me -- is currently in the law 21 and it's been in the law. The rulemaking heightens the 22 issue. It's causing the revisitation, plus you now have 23 a proposal for decision that's trying to construe who's 24 active or employed. 25 Multimedia, they're a good corporate 52 1 license holder. They just want to know who they need to 2 vett. The question is: Do they think that they need to 3 go and vett all employees at this point? I would like 4 to think that that is not the answer. I think to the 5 point that's been made, there are people that are just 6 not -- they're just not materially involved. 7 But the problem is for an entity that 8 holds licenses in 200 jurisdictions, they don't want to 9 do anything that's going to jeopardize their license in 10 one jurisdiction. You know, they have to disclose it to 11 other jurisdictions, and, plus, they're a good corporate 12 license holder. So we're looking for clarity on the 13 interpretation of who is an active or -- active in the 14 manufacture or who is employed. That's what we'd like. 15 To this point what we'd like is to give 16 assurances to license holders like Multimedia that the 17 staff is going to stand down on who is active or 18 employed until we can get an interpretation. Because it 19 puts somebody who's trying to hire, somebody who's 20 trying to enter into a contract, it puts them in a 21 quandary on how to go about vetting that individual. 22 Is that responsive? 23 CHAIRMAN KRAUSE: I guess so. 24 (Laughter) 25 MS. KIPLIN: The question was -- 53 1 CHAIRMAN KRAUSE: Okay, let me ask you 2 this. Is this the grandfathering issue or is the office 3 and director of a corporation issue? 4 MS. KIPLIN: It's more the list -- the 5 active or employed. But because of the lack of 6 grandfathering, it's now causing -- because now there's 7 no ten-year look-back for gambling, gambling related and 8 criminal fraud, it would cause a current license holder 9 to have to -- have to go and revisit. And unless we 10 can -- we can immediately get into discussions and come 11 forward with a rule on the active or employed, and in 12 the interim agree to be -- not to be presumptuous -- but 13 be reasonable about the interpretation on a 14 going-forward basis. 15 CHAIRMAN KRAUSE: Well, when we had the 16 ten-year look-back rule, wasn't there some kind of due 17 diligence that the employer had to do to satisfy that? 18 MS. KIPLIN: Yes, and we've discussed 19 that. And I think there is due diligence. It's not 20 just this state, but there are other jurisdictions. But 21 now there is no ten-year look-back. 22 And now the issue, to the point that you 23 made, the issue of who's active or employed, it's become 24 heightened because of the scrutiny in terms of this -- 25 the rulemaking that's going on on disqualifying 54 1 convictions. And I have to say, for the first time I 2 think, an interpretation that's before you today on what 3 is active or employed. So those are the -- those are 4 the issues. The elements are coming together to cause 5 the concern to bubble to this point. 6 CHAIRMAN KRAUSE: Okay. Thank you. 7 Anything else? 8 MR. McTAVISH: No, Mr. Chairman. 9 MS. KIPLIN: Thank you. 10 CHAIRMAN KRAUSE: Rob Kohler? 11 MR. KOHLER: (Inaudible) .200. 12 CHAIRMAN KRAUSE: Oh, it's a different 13 rule? 14 MR. KOHLER: Yes. 15 CHAIRMAN KRAUSE: Let's wait then. 16 Okay. Before we take any action, we're 17 going to take a five-minute break. So we're in recess 18 for five to ten minutes. 19 (Recess: 11:04 a.m. to 11:23 a.m.) 20 CHAIRMAN KRAUSE: Okay. Recess is over. 21 (Laughter) 22 CHAIRMAN KRAUSE: Okay. For the time 23 being, the rule under 16 TAC Section 402.702, we're 24 going to defer consideration until after executive 25 session. 55 1 We are now going to take up -- because 2 there are two witnesses -- I believe it is 16 TAC 3 402.200. And, let's see, who's is that? Who has 4 responsibility for that? That would be James -- 5 MR. PERSON: Shocking. 6 (Laughter) 7 CHAIRMAN KRAUSE: You may stay on the hot 8 seat. 9 MR. PERSON: All right. I know Bob kind 10 of touched on this in his general introduction to all 11 the rules, but I'll go into more specifics with this 12 rule. We're recommending that you adopt certain 13 amendments to Section 402.200. And this is the rule 14 that governs the general restrictions on the conduct of 15 bingo. 16 The recommended -- the recommended 17 amendments have been changed since they were originally 18 proposed. We worked with several commenters on this 19 draft amendment, and I think we came up with a product 20 that serves both their needs and our needs. 21 The amendments dictate how certain game 22 information must be conveyed to the players prior to the 23 start of a bingo occasion under this rule. They would 24 be required to provide a game schedule listing all their 25 regular scheduled games, and that would include the 56 1 prizes for those games and various other information, 2 the type of game it was. 3 There was some concern that we're 4 requiring this written schedule before the session 5 started, that they could no -- that these bingo 6 conductors could not conduct $50 or less games on the 7 fly. So if they hadn't reached their $2500 cap limit 8 and they still had time under their occasion, they could 9 continue to play games. So we made some changes to make 10 it explicitly clear that they could amend the game 11 schedule during the play of the occasion to reflect how 12 the games were actually conducted. 13 And to help implement HB 394 -- yeah, HB 14 394, which is the house bill that allowed bingo games 15 that award prizes of $50 or less, those do not count 16 toward the $2500 cap. That's set in statute; there's 17 nothing we can do about that. 18 What we did with the rule, we added a 19 subsection that made it explicitly clear that we're 20 going to look at the total amount of prizes awarded for 21 a game to determine whether that game qualifies for the 22 $50 or less exemption. 23 So if a game awards one prize of $50, that 24 would qualify for the exemption. But if a game -- a 25 hundred dollar game is won by two people, or each 57 1 receive $50, we're not going to look at the individual 2 prize that was awarded. We're going to look at what the 3 game awarded as a whole. So in that instance, that 4 would not qualify for the exemption. And like I said, 5 we worked with the stakeholders on that. 6 CHAIRMAN KRAUSE: What were the 7 stakeholders' concerns. 8 MR. PERSON: I think their principal 9 concern was the ability to conduct games on the fly, 10 these $50 or less games on the fly. And I'm sure some 11 of them can speak more in detail to that, but I believe 12 that was their principal concerned. And that was never 13 our intent with the proposed rule to restrict that. So 14 we made it explicitly clear that they could. 15 CHAIRMAN KRAUSE: That they could? 16 MR. PERSON: Yes, sir. 17 CHAIRMAN KRAUSE: But we have a statute we 18 have to honor. 19 MR. PERSON: Yes, sir. 20 CHAIRMAN KRAUSE: And tell me what that 21 says real quickly. 22 MR. PERSON: HB 394 specifically says -- 23 well, under current law for a bingo occasion, bingo 24 conductors can only award $2500 or less in prizes. 25 That's the limit they can do. Pull-tabs are exempt from 58 1 that. And what HB 394 did was add another exemption to 2 that. So if a game awards a prize of $50 or less, that 3 does not count toward the $2500 cap. 4 So, in essence, this is going to allow 5 them to conduct a lot more lower-level games. 6 CHAIRMAN KRAUSE: Okay. 7 MR. PERSON: But that was the purpose of 8 HB 394. 9 CHAIRMAN KRAUSE: Questions? 10 (No response) 11 CHAIRMAN KRAUSE: Okay. If you will 12 remain in the hot seat we're going to have Rob Kohler 13 come up and testify. 14 MR. KOHLER: Good morning, Commissioners. 15 My name is Rob Kohler. I'm here representing the 16 Christian Life Commission of the Texas Baptists. 17 I come to these meetings pretty much every 18 month and try to stay in our own lane. What my mission 19 is -- what my charge is, is to make sure that bingo 20 games don't turn into something other than what they are 21 intended to be. 22 The legislation that the chairman just 23 mentioned, we participated in the meeting and 24 Representative Senfronia Thompson's office with Sandy 25 and Nelda. And to cut to the chase, what we're asking 59 1 for is for you to postpone this. This new language -- I 2 have a background in gambling. If I can't understand 3 it, then we need to slow the train down and just make 4 sure that everybody is on the same page. 5 You need to know that there's a long 6 history at this agency of an attempt that -- we believe 7 to turn mom and pop bingo, which we're not against, into 8 something that operates and closely resembles a slot 9 machine. 10 So words mean -- I'm not an attorney, just 11 so you know -- but words take on so many meanings in 12 this business. So I'm here to ask you -- and, Chairman, 13 you've seen me here at a lot of meetings, and I try to 14 stay in my own lane. But you need to know as a 15 representative of the people that if you can't make 16 sense of something, then let's slow it down and let's 17 take a look at it. And I'll tell you that we'll work 18 with your staff, Sandy. And at the end of the day, we 19 may still be a no, but at least we're going into 20 something we know what we're talking about, not 21 guessing. 22 CHAIRMAN KRAUSE: Were you involved by 23 coming to the meetings and giving input? 24 MR. KOHLER: No. No. 25 CHAIRMAN KRAUSE: Okay. So after we had 60 1 the stakeholders testify at the public hearings and all 2 that, then the result of what the staff has written 3 seems ambiguous or incomprehensible to you? 4 MR. KOHLER: Well, I'll -- if you look on 5 Page 10, H -- I'll read this, "And the prizes to be paid 6 for each game include the value of any noncash bingo 7 prizes as set in subsection (F) and (G) semicolon. 8 Go down to (F), which is this new 9 language, "The entrance fee and the of cards associated 10 with the entrance fee, if any, and (G) the prize of each 11 type of bingo card offered for sale." 12 I would just say I don't know what the 13 rest could possibly be, why we wouldn't just everybody 14 make sure that we know what we're talking about. It's 15 under the backdrop of this. 16 You have in language in the rules that 17 were adopted by this Commission the ability to do the 18 electronic representation of the outcome of a pull tab 19 ticket, which to you and me -- that gets in the weeds an 20 awful lot. But to do a slot machine or that type of 21 game, that's one of the main things that you need is the 22 ability to electronically represent the outcome of a 23 pull-tab ticket. 24 And so there's an attorney general's 25 opinion that's out there, and I just would simply ask 61 1 that we slow down. 2 CHAIRMAN KRAUSE: What do you think about 3 what -- about the -- 4 MR. PERSON: And I completely understand 5 where he's coming from, but the (f) and (g) that he's 6 referring to, those aren't the correct (f) and (g). If 7 you look at it -- if you look at the rule, it says 8 subsection (f) and (g), and that's on Page 8 and 9. The 9 (f) and (g) you're looking to -- and this is just 10 restricted to us because the Texas Register format 11 you're going to have lower case f's and upper case f's. 12 And that's, I think, the distinguishing issue here. The 13 (f) we're referring to in this rule is lower case f and 14 the F that Mr. Kohler is looking to is upper case F. 15 MR. KOHLER: But again -- I would say even 16 more the copies aren't -- aren't underlined or red line, 17 which you would expect to making changes so you would 18 specifically know where the changes are made. And so 19 that's another reason why I would ask that we slow this 20 down and make sure we -- you know, we can still disagree 21 at the end of the day, but at least we -- you know, we 22 know what we're talking about. 23 CHAIRMAN KRAUSE: All right. Thank you. 24 Glenn Deshields. 25 MR. DESHIELDS: Glen Deshields with Texas 62 1 Charity Advocates. I was intimately involved with the 2 passage of HB 394 with Chairwoman Thompson and Senator 3 Van de Pute's office. 4 Mr. Kohler was against HB 394 in the House 5 hearing. He's had multiple opportunities to comment; I 6 think three or four. We've had multiple stakeholder 7 meetings. I think everybody here kind of understands 8 what the rules do. 9 This completely complies with the 10 legislative intent of this bill. I was in those offices 11 daily trying to get this bill passed. 12 What it does, it gives charities the 13 flexibility to play these $50 games, you know, but they 14 still have to amend that game schedule. So everything 15 is going on the game schedule. 16 I don't know what he doesn't understand. 17 But, you know, there's been multiple opportunities to 18 comment. This has nothing to do with slot machines. I 19 don't know where he came up with that, but I'll answer 20 any questions. 21 CHAIRMAN KRAUSE: Do you understand the 22 rule that we're dealing with today? 23 MR. DESHIELDS: Yes, sir. Yes, sir. I've 24 been at all the stakeholder meetings and we've given 25 comment. 63 1 CHAIRMAN KRAUSE: Okay. Did you make any 2 contributions to the language that's in here? 3 MR. DESHIELDS: Well, Phil Sanderson works 4 with us, and Steve Bresnen. We all work together to 5 come up with -- the staff was great on this bill. I 6 mean, they helped us out and showed us where we needed 7 to be, and it all worked out fine. 8 I mean, I don't understand what he doesn't 9 understand about this game schedule. I think he's 10 looking at the wrong subsections, but I don't know. 11 This has been going on for a while. There's been 12 multiple times to comment. I don't believe he's 13 commented yet. 14 CHAIRMAN KRAUSE: All right. Well, 15 we're -- we'll take what you and he say under 16 advisement. Thank you. 17 MR. DESHIELDS: Thank you, sir. 18 CHAIRMAN KRAUSE: Well, having completed 19 all of the -- the witness attestations, what I'd like to 20 do is to go ahead and move on to other bingo rules. 21 Do we have any individual discussion of 22 the other bingo rules, Mr. Biard? 23 MR. BIARD: No, sir. 24 CHAIRMAN KRAUSE: We have procedural 25 rules. We have lottery rules. We've got bingo rules. 64 1 Why don't we go ahead and discuss all the rest of them 2 and then we'll vote. 3 MR. BIARD: All right. We weren't -- 4 would you like -- we can make brief presentations, but 5 most of these rules there were no comments filed, and 6 then most of the rules were adopted with no changes or 7 with just minor nonsubstantive -- 8 CHAIRMAN KRAUSE: Are we ready to vote on 9 them? 10 MR. BIARD: I believe -- if there's still 11 discussion to be had on the disqualifying convictions 12 bingo rule, that's Tab N -- 13 CHAIRMAN KRAUSE: Yeah. Let's hold that 14 one out and vote on all the rest of them. 15 MR. BIARD: All right. Then if one of the 16 Commissioners -- 17 (Simultaneous discussion) 18 MR. BIARD: -- a motion to adopt the new 19 rules presented under Item 7, Tabs A through P, except 20 for N, as recommended by the staff, that would -- that 21 would get all of the proposed rules that are before you 22 today except for that one. And I have a separate order 23 for each one. 24 COMM. EDWARDS: I move that we adopt the 25 new rules and rule amendments presented under Item 7, 65 1 Tabs A through P, with the exception of N, of today's 2 meeting agenda, as recommended by Commission staff. 3 CHAIRMAN KRAUSE: Do I have a second? 4 COMM. STAVINOHA: I will. 5 CHAIRMAN KRAUSE: Okay. All approved, say 6 "aye." 7 (All those voting in favor so responded) 8 CHAIRMAN KRAUSE: Any opposed? 9 (No response) 10 CHAIRMAN KRAUSE: None, it carries by 11 acclamation. 12 MR. BIARD: Thank you, Commissioners. I 13 have a set of tabbed orders -- 14 CHAIRMAN KRAUSE: Can we do that in 15 executive session? 16 MR. BIARD: Yeah. There's no rush to sign 17 it right this minute, but I'll go ahead and hand it to 18 you. 19 CHAIRMAN KRAUSE: Yeah, go ahead. 20 Why don't we finish up doing the 21 procedural rules and then the lottery rules. 22 MR. BIARD: Actually, these include all -- 23 CHAIRMAN KRAUSE: Oh, everything. 24 MR. BIARD: That includes all of them. 25 CHAIRMAN KRAUSE: My goodness; 7 is done. 66 1 MR. BIARD: Except for -- 2 CHAIRMAN KRAUSE: Except for N. 3 MR. BIARD: -- N. 4 AGENDA ITEM NO. XI 5 CHAIRMAN KRAUSE: Next let's go to the 6 SOAH Docket No. 362-12-8100.B, Texas Gaming 7 International. 8 Bob, would you please tee us up? 9 MR. BIARD: Sure. Thank you, Chairman. 10 This matter is a contested bingo case 11 that's being presented to the Commission for final 12 decision. Assistant General Counsel Steve White 13 represented the Commission in this matter, and he'll 14 make the presentation of the case. And I believe that 15 Mr. Fenoglio is here representing the Respondent in this 16 case and has filed a witness affirmation form. 17 Before I turn it over to Steve, I wanted 18 to state for the record that I have discussed with each 19 of the three other Commissioners, the newer 20 Commissioners, separately how litigated cases are 21 handled at the State Office of Administrative Hearings, 22 which we call SOAH, and what the Commission's role is in 23 deciding a contested case. 24 And before I turn it over to Steve, I just 25 wanted to briefly highlight that discussion, that a 67 1 contested case is a proceeding where the legal rights or 2 duties of a party are determined after the opportunity 3 for a hearing. And it's a matter where the Commission 4 sits as the tribunal to decide the dispute between 5 parties. 6 At this agency, contested cases are 7 usually when the Commission files a compliant against a 8 licensee, either on the bingo side or the lottery side, 9 alleging the licensee violated the Commission's rules, 10 or it is a matter where an applicant is ineligible for a 11 license. 12 When the Commission staff files a case, 13 it's docketed at SOAH. SOAH is a separate state agency 14 that's essentially made up of administrative law judges, 15 and all they do is hear cases from different agencies 16 throughout the state. And the administrative law judge, 17 called the ALJ, is the one who evaluates all the 18 evidence, the testimony and the arguments in these 19 proceedings. 20 And the ALJ makes a recommendation to the 21 agency in the form of findings of fact and conclusions 22 of law, and the recommended final action. And the 23 recommendation is called a proposal for decision, or 24 PFD, and that is what is presented to the agency to vote 25 on, and that's what we have in this case is a PFD from 68 1 SOAH about a bingo dispute. 2 Very few of our cases are fully litigated, 3 so when they are, we separately docket them, the 4 Commission meeting for your decision. 5 The enforcement cases that we take up 6 every week in our mass dockets and agreed orders, those 7 are also contested cases, but they're disposed of 8 informally, which means there's not really a dispute to 9 decide between the parties. Either the licensee didn't 10 show up, or the parties have settled the matter. 11 In making a final decision, and in 12 considering the PFD that comes from SOAH, the Commission 13 can only consider the evidence developed at the hearing, 14 along with the agency's prior decisions, rules and 15 policies. You can hear -- you may hear arguments from 16 the parties as long as they limit themselves to the 17 record that was developed at SOAH. 18 And although the PFDs are only proposals, 19 the law does protect the impartial role of the 20 administrative law judge by limiting the reasons why the 21 Commission can change the ALJ's recommendations. 22 There's three basic reasons, and these are a technical 23 error, such as I would say something like a wrong name, 24 wrong address, wrong date; the judge's failure to 25 properly apply the law, agency rules or agency policy; 69 1 or, basically, if the Commission decides it wants to 2 change a policy. 3 If the Commission does want to change a 4 PFD, it has to state so in writing. So in that case you 5 would send the case back to the staff, basically us. We 6 would redraft the order and state in writing why you're 7 changing the judge's recommendation. 8 Once the Commission issues a final order, 9 it can be appealed to Travis County District Court. And 10 it sort of follows the regular appeals process. It can 11 go all the way up to the Supreme Court if someone wants 12 to appeal it. 13 And with that abbreviated overview, I'll 14 turn it over to Steve White who represented the 15 Commission in this case. 16 MR. WHITE: Thank you. For the record, my 17 name is Steven White, assistant general counsel with the 18 Texas Lottery Commission. 19 Chairman and Commissioners, at Tab 11 in 20 your notebooks, you have a number of documents related 21 to this item, including the Administrative Law Judge's 22 original proposal for decision, and her amended proposal 23 for decision, exceptions and replies to the 24 Administrative Law Judge's proposal for decision, and 25 two one-page summaries of this matter submitted -- one 70 1 by counsel for Texas Gaming, and by myself for -- to 2 summarize the case. 3 Texas Gaming International, Inc., is a 4 licensed distributor of bingo supplies and equipment. 5 After a contested case hearing, the Administrative Law 6 Judge determined that Texas Gaming violated Charitable 7 Bingo Act 2001.207 by paying a licensed commercial 8 lessor and two bingo hall managers over $136,000 in a 9 one-year period to clean and maintain card-minding 10 devices while the same commercial lessor and bingo hall 11 manager entered into contracts with Texas Gaming worth 12 tens of thousands of dollars. 13 The Bingo Division sought to denial the 14 renewal of Texas Gamings application for licensure. The 15 Administrative Law Judge recommended an assessment of a 16 $20,000 penalty as a condition of the renewal of the 17 license rather than denying the license outright. 18 Section 2001.27 of the Charitable Bingo 19 Act prohibits a corporation from being licensed as a 20 bingo distributor if an officer or owner of a commercial 21 lessor, or a person who conducts, promotes or 22 administers bingo -- e.g. a bingo worker or bingo hall 23 manager -- is, quote, "active or employed in the 24 corporation." 25 Texas Gaming asserts it did not violate 71 1 this provision because it paid the commercial lessor and 2 bingo hall managers as independent contractors and, 3 therefore, were not active or employed by Texas Gaming. 4 The staff and, ultimately, the 5 Administrative Law Judge disagreed, and her analysis of 6 that is in her proposal for decision. 7 Summarizing the specific facts of this 8 case, three individuals, again a commercial lessor and 9 two bingo hall managers were paid over $136,000 a year 10 by Texas Gaming to clean, maintain card-minding devices. 11 CHAIRMAN KRAUSE: Mr. White? 12 MR. WHITE: Yes, sir. 13 CHAIRMAN KRAUSE: $160,000 each? 14 MR. WHITE: Total. 15 CHAIRMAN KRAUSE: Okay. They split that. 16 MR. WHITE: It's various different 17 amounts. There were different bingo halls. But the 18 total of the three was $136,000. 19 CHAIRMAN KRAUSE: So more than 50 grand a 20 piece? 21 MR. WHITE: On average, yes. 22 CHAIRMAN KRAUSE: Okay. That's good work. 23 MR. WHITE: Yes, sir. These same three 24 individuals unilaterally entered into contracts with 25 Texas Gaming to lease bingo card-minding devices from 72 1 Texas Gaming for the charities they worked for. These 2 payments began -- these payments by Texas Gaming 3 actually began within one month of the date Texas Gaming 4 was licensed to distribute bingo products and continued 5 for almost 12 years. 6 The Judge found that Texas Gaming 7 continued these payments, even after a 2009 advisory 8 opinion alerted distributors that they could not employ 9 persons who operated bingo games. The Judge also found 10 it should have been apparent to Texas Gaming that these 11 payments to the bingo operators could have unduly 12 influenced them to continue the contracts to the -- that 13 the bingo conductor organizations had with Texas Gaming. 14 When the charities of one of the bingo 15 halls found out about the payments being made to their 16 bingo hall manager, they renegotiated their contracts 17 with Texas Gaming, resulting in a reduction in the 18 amount charged for the bingo equipment by the same 19 amount Texas Gaming had been paying the bingo hall 20 manager. The staff believes this shows the original 21 amount being charged by the charities by Texas Gaming 22 was excessive, excessive at least to the amount they 23 were paying the bingo hall manager. 24 In conclusion, the bingo hall -- the bingo 25 division recommends the Commission adopt the 73 1 Administrative Law Judge's proposal for decision and 2 deny the renewal application of Texas Gaming unless it 3 pays the recommended $20,000 administrative penalty. 4 And that's -- 5 CHAIRMAN KRAUSE: I suppose we can infer 6 that they've $20,000 if they're paying those people 160 7 to clean the machines. 8 MR. WHITE: Yes, sir. In fact, in the PFD 9 there's actually a discussion exactly how much Texas 10 Gaming was making, and it was a fair amount. 11 CHAIRMAN KRAUSE: -- came out of the 12 pockets of our charitable organizations. 13 MR. WHITE: That's my opinion, yes, sir. 14 CHAIRMAN KRAUSE: All right. Do you have 15 anything else to add before we listen -- before we hear 16 from Mr. Fenoglio? 17 MR. WHITE: No, sir, unless you have any 18 questions. 19 CHAIRMAN KRAUSE: Mr. Fenoglio? 20 MR. FENOGLIO: Thank you, Commissioners. 21 For the record, my name is Steven Fenoglio, and I have 22 some handouts that are within the record that I think 23 will crystallize the issue. 24 CHAIRMAN KRAUSE: All right. 25 MR. FENOGLIO: And I'll give one to Sandy 74 1 and Mr. Biard. I'll have another one here in just a 2 moment. 3 And this is for counsel. 4 Okay. I hate to give -- someone to give 5 me something and then start talking -- and have someone 6 talk. So when y'all are ready, let me know. 7 CHAIRMAN KRAUSE: Mr. Fenoglio? 8 MR. FENOGLIO: Yes, Mr. Chairman. 9 CHAIRMAN KRAUSE: So you testified in this 10 hearing. 11 MR. FENOGLIO: No, I did not. I asked 12 questions. This is an excerpt of the hearing that my 13 client paid for, and this is Ms. Joseph. 14 CHAIRMAN KRAUSE: So you're examining 15 Ms. Joseph? 16 MR. FENOGLIO: Yes, sir. 17 CHAIRMAN KRAUSE: Gotcha. 18 MR. FENOGLIO: We lawyers try not to 19 testify at a hearing when we're defending -- 20 CHAIRMAN KRAUSE: I was wondering. 21 Y'all ready? 22 Okay. We'd be happy for you to put this 23 in context. 24 MR. FENOGLIO: Thank you. First, this is 25 the very first time this issue has been presented to the 75 1 Commission. Period, end of sentence. I've been 2 practicing in front of the Commission since 1994 when 3 the Commission took over bingo, charitable bingo. This 4 issue has never come up to the Commissioners like it is 5 today. Period, end of sentence. 6 So what I handed out first are the -- 7 what's the statutory regime? There is no rule that 8 defines active or employed. And you can see what a 9 distributor does is they obtain bingo equipment, in this 10 case card-minders, sort of like a tablet where you can 11 play up to 66 digital bingo cards at one time. That's a 12 card-minders. It's considered bingo equipment. 13 So that my client obtained that equipment, 14 and he furnished it to different charities, different 15 bingo halls cross the state, for the charity's use in 16 selling, or technically renting, to a customer to play 17 those card-minders. So that's the business of Texas 18 Gaming International. And under 207, Section 2001.207, 19 a distributor is eligible for a license if -- and good 20 luck interpreting Subsection (9) (a) and (b). I would 21 suggest to you that if we got six lawyers in a room who 22 had time to read an digest these provisions that I've 23 given you, we'd get at least six different answers on 24 who has to be vetted, quote-unquote, and determined to 25 be active or employed by a distributor, and that person, 76 1 can they or can they not, work for a charity? So, the 2 statute is very confusing. 3 The second page of my handout is a rule 4 the Commission adopted several years ago that determines 5 the charity, 16 TAC 42.200 subparagraph (b), the 6 charity -- and I highlight, emphasis added -- the last 7 sentence, "The charity, a licensed authorized 8 organization, has the continuing responsibility to 9 ensure that all bingo equipment," the card-minders in 10 this case, "used by it are in proper working condition." 11 Now let's come back to my case. TGI 12 distributes this bingo equipment. It made a business 13 decision, Mr. White was correct, for -- on the case of 14 several charities several years ago, to pay an 15 individual, the case in front of you is three 16 individuals -- by the way, the payment is not 136,000 a 17 year. Under finding of fact 7 it's actually a two-year 18 period for three employees. And under finding of fact 19 7, page 11 of the amended PFD, they lay out those. But 20 it's not an inconsequential amount I'll grant you. 21 TGI, the record evidence is, has two 22 full-time employees, the owner, officer and director, 23 Mr. Bill Motz, who testified at the hearing, and one 24 other employee. It services -- and this is in the 25 record -- bingo halls from Sherman, Texas down to the 77 1 Valley, including Waco, Dallas area, Austin, goes out to 2 Kerrville, at one time went out to El Paso, goes over to 3 East Texas, two employees. 4 The individuals who were paid, the record 5 evidence is clear, did minor things. These card-minders 6 are touch screens. We all have an iPhone -- or most of 7 us do, or some sort of sport phone -- smart phone, and 8 it gets smudged. So someone's got to wipe those down at 9 the end of a session. And you can imagine in a smoky 10 bingo hall people touching those buttons, maybe they're 11 eating greasy food, they've got to be wiped down. The 12 rule says the charities have to make sure it's properly 13 functioning, not the distributor but the charity. 14 Mr. Motz made a business decision: Does 15 he want to go -- or have someone up in Sherman, Texas 16 every day wipe down that equipment? No, not 17 necessarily? Or San Antonio? Or Austin? Why not have 18 someone local do it. Those employees -- they were not 19 employees of the TGI. They were issued 1099s pursuant 20 to IRS tax code. The Judge found they were employees. 21 Where the rubber meets the road is were 22 they active in -- and this is where the Judge and I and 23 Mr. White and I disagree. I say the active in in 207 24 means active in the corporation. There's no evidence -- 25 and I would submit to you no one asked that question 78 1 because it's so obvious -- but Mr. Hello, or Mr. Keller, 2 didn't do anything. They're not an officer, a director 3 or a paid employee of the distributor. They're not 4 active in the corporation. They're not directing the 5 corporation to do anything. 6 Are they providing a service as an 7 independent contractor? Of course. They're wiping down 8 the screams. Occasionally -- these are battery operated 9 and batteries fail. They can change out the battery. 10 Again under 402.200, the Commission's own rule, the 11 charity is responsible for maintaining it and keeping it 12 in good working condition, not the distributor. That's 13 not the distributor's business. And under the rule, 14 again, the charity has to do that. 15 They also would change -- sometimes the 16 handles would break. Well, they would put a new handle 17 on it. Again, making sure the equipment is in proper 18 working condition. 19 So TGI is very small, two employees, 20 full-time employees. In 2012 -- this is in the record 21 and in the PFD at finding of fact 19, they had a loss of 22 $25,000 in 2012 after the owner, Mr. Motz, paid himself 23 $42,000. Not a lot of money. 24 TGI never tried to conceal what they were 25 doing when asked, finding of fact 18. No evidence of 79 1 any prior violations by TGI, finding of fact 20. No 2 evidence that the payments that were made were tying 3 using TGI's equipment with the payment. That's finding 4 of fact 9 -- or, I'm sorry, PFD Page 9. So the Judge 5 listened to all the evidence and they Judge said there's 6 no tying arrangement here where we pay Mr. Hello so much 7 money, and Mr. Hello you turn around and use our 8 equipment. Absolutely no evidence of that. 9 TGI stopped making the payments after it 10 became aware of this enforcement action. That's finding 11 of fact 19. So it's not a bad actor. It's a small 12 business; 20,000 means a lot to a small business. A 13 heck of a lot. 14 The TLC rule says those charities have to 15 keep that equipment in good working condition. It is 16 not the duty of the manufacturer or the distributor. 17 That's what was going on. 18 Let's go back to where the rubber meets 19 the road on the rule. Who's active or employed? How 20 does TGI know? And this is where my examination of 21 Ms. Joseph. And I said in the -- number one, 22 Ms. Joseph's definition of active, which is what the 23 Judge found, they do something. Does a distributor file 24 a tax return? It better. Does a distributor hire a 25 janitor to clean its floor, its office? It has to. 80 1 Is that something that the distributor 2 does? Of course, it is. Does the distributor 3 occasionally have to hire a lawyer? Maybe not often 4 enough from my perspective but, yes, they do. That's 5 something the distributor does. Does the distributor 6 advertise? Most good businesses are going to do some 7 sort of advertising. 8 So what does that mean? I'm the lawyer. 9 This gentleman is a CPA. He provides, I provide 10 services to TGI. We also provide those same services, 11 as a lawyer or a CPA, to a charity? Now all of a sudden 12 the distributor or the manufacturer can lose their 13 license under the holding in this rule because, 14 according to the Judge and Ms. Joseph, they're doing 15 something. They're doing something. 16 That cannot be the rule of law this 17 Commission wants to enforce or interpret for the very 18 first time and punish my client to the tune of $20,000. 19 It's ridiculous to say that Fenoglio or this gentleman 20 are active in that company because they're an outside 21 contractor providing those services. 22 And on Page 127, 128 -- and again, I only 23 give a portion of it. I heard the Chairman say don't 24 cover us up with a lot of paper, so I didn't give the 25 entire transcript. At the bottom of Page 127, Line 21, 81 1 so if a CPA is providing tax advice to my client, a 2 licensed distributor, is also providing tax advice to a 3 licensed authorized organization, the charity, that fact 4 would disqualify my client, the distributor, from having 5 a license. Is that correct? That would be a 6 possibility. 7 What? Hiring a CPA disqualifies? How 8 does Multimedia know who all of its supplier CPAs are? 9 How does it know if it's distributing -- or 10 manufacturing product for sale in the state of Texas, 11 does it know that some of those CPAs aren't providing 12 services to charities who are consuming a Multimedia 13 Game product. There's no way they'll know, unless they 14 hire a lot of lawyers, which might not be a bad thing. 15 And I say that tongue in cheek. It's crazy. It's a 16 stupid rule. It's a stupid policy. 17 Ms. Joseph continues, "That's not what 18 we're looking at today." That's true. It's not. But 19 it's the premise. 20 Well, what do you need to look at? You 21 already said active means doing something. She's tied 22 to that. The Judge said so, too. And the hypothetical 23 is he's providing tax advice to both entities. So 24 that's doing something. Correct? Yes. That's what she 25 says, yes. And just based on that, I would say that is 82 1 a problem. 2 Oh, then she volunteers, "I think it would 3 further look at the level of involvement and the kind of 4 involvement." Well, wait a minute. We need a rule. We 5 need a bright line rule. This isn't a bright line rule. 6 Now we've got to talk about the 7 involvement. Well, what does that mean? Well, if they 8 provide tax advice once, that's okay. But, wait a 9 minute, some CPAs have a bookkeeping service and so they 10 might do bookkeeping service on a regular basis for a 11 charity, and also do bookkeeping service for a 12 distributor. 13 That can't be the rule. What you come 14 back to is the word "active," is it meaning doing 15 something for the business, or the simple answer -- and 16 I submit to you the logical conclusion is -- active in 17 the corporation, the licensee that's subject to the 18 licensing sanctions under section 2007. That's what it 19 has to mean. 20 If Mr. Hello were directing the business 21 of TGI -- he's one of the employees who was paid by TGI. 22 If he we were actively directing the business of TGI 23 while he's being paid as a bingo worker, I would submit 24 to you that's a clear violation. That's the type of 25 prohibition you don't want to have happen. That invites 83 1 chaos. That invites sweetheart, quiet deals. 2 But Mr. Hello doesn't do anything for TGI 3 as a corporation. He merely does what your rule says he 4 has to do as a bingo employee is to maintain the 5 equipment. 6 Bottom line, there should be no sanction, 7 period, because there's no violation, the bottom line. 8 And if you're going to take this position, 9 what you ought to do is announce it so everyone knows 10 what the rule is. Everyone knows who they can hire as a 11 consultant, as an advertising agency, as a lawyer, as a 12 CPA or a bookkeeper. But don't penalize this guy, 13 because this is the first time this issue has ever come 14 up in front of you. 15 We do appreciate that the Lottery 16 Commission had asked for the death penalty, the 17 revocation of license. We appreciate that that's not 18 what the Judge is recommending. And we would suggest 19 that if you do have to penalize my client, it ought to 20 be a thousand dollars, not 20. 21 I'll be happy to answer any questions. 22 MR. WHITE: And, Chairman, if I may 23 just -- if I can respond briefly to the issue 24 Mr. Fenoglio described as the rubber hitting the 25 pavement. The Judge clearly addressed directly 84 1 Mr. Fenoglio's concern that the Commission may choose to 2 go after organizations who hire an attorney or hire 3 bookkeeper, who hire a janitor to clean the bathrooms, 4 you know, in her PFD she discussions it is not the job 5 of a distributor to practice law. It is not the job of 6 a distributor to clean toilets. Their job is to 7 maintain, install and -- card-minding devices, and 8 that's what these -- this commercial lessor and these 9 bingo hall managers were getting paid to do. The sole 10 reason Texas Gaming exists is to maintain and install 11 card-minding devices. They were clearly active within 12 the business of Texas Gaming. Their sole business is 13 installing and maintaining card-minding devices, getting 14 paid handsomely. 15 In return, these three individuals, by 16 Texas Gaming's own admission, were the only people they 17 ever dealt with in terms of entering into contracts 18 worth tens of thousands of dollars on behalf of these 19 charities. 20 So some day, you know, these 21 hypotheticals, can the Commission pursue an action 22 against a distributor who hires an attorney who also 23 represents a charity is misplaced if you adopt the 24 proposal for decision of the ALJ. It addresses that 25 directly. 85 1 COMM. STAVINOHA: Mr. Fenoglio, help me 2 understand just a little bit. Why were these 3 individuals paid by TGI? 4 MR. FENOGLIO: Because if not, then TGI 5 had to have someone there to wipe down the face of the 6 card minders, change out batteries whenever a battery 7 fails, change out a handle. 8 COMM. STAVINOHA: And so they were 9 representing TGI's interests in performing these duties? 10 MR. FENOGLIO: I would -- I think you've 11 got a rule that suggests otherwise when you have 16 TAC 12 402.200 which says the clarity has the duty, has the 13 responsibility, to ensure that its bingo equipment is in 14 proper working condition. 15 COMM. STAVINOHA: So the charity was 16 supposed to do it, and they didn't. Right? Is that 17 what you're saying? Just help me understand. 18 MR. FENOGLIO: Well the -- wiping down the 19 screens and changing the batteries and changing the 20 handles was done, no question about it. And it was done 21 by the bingo employees, not by TGI. Is it in TGI's 22 interests to make sure its equipment is in a 23 presentable, working condition? Of course it is. 24 COMM. STAVINOHA: And that's the reason 25 they paid them to do that? 86 1 MR. FENOGLIO: Yes, as opposed to having 2 someone drive from New Braunfels or wherever to come do 3 that at these particular -- and there are only three 4 halls at issue. 5 COMM. STAVINOHA: And this is the only 6 place that they did that in the state? 7 MR. FENOGLIO: This is the only place they 8 did it in the state, yes, ma'am. 9 COMM. STAVINOHA: What city was that in 10 again? I'm sorry, I didn't -- 11 MR. FENOGLIO: Two of the halls were in 12 San Antonio -- by the way, one of the halls -- 13 COMM. STAVINOHA: Not in rural areas, 14 though? 15 MR. FENOGLIO: No. 16 COMM. STAVINOHA: Okay. 17 MR. FENOGLIO: I was going to say, one of 18 the halls is on a federal military reservation, which we 19 also argued Lottery Commission doesn't have jurisdiction 20 over, and you don't. You don't have jurisdiction over 21 a -- it was Fort Sam Houston in San Antonio. But, be 22 that as it may, it is a licensed distributor that was 23 providing the equipment. 24 COMM. STAVINOHA: Great. Thanks. 25 COMM. EDWARDS: I move that we adopt the 87 1 Judge's recommendation to deny the renewal application 2 of Texas Gaming unless it pays a $20,000 penalty or deny 3 the application outright. 4 CHAIRMAN KRAUSE: Second? 5 COMM. STAVINOHA: I'll second. 6 CHAIRMAN KRAUSE: All in favor say "aye." 7 (All those voting in favor so responded) 8 MR. FENOGLIO: Thank you. 9 MR. BIARD: I have a final order for you 10 to sign. 11 CHAIRMAN KRAUSE: I'm gratified that you 12 guys are all interested in what we're doing here today. 13 I was kind of hoping that we were accommodating folks by 14 going ahead and doing the witness testimony up front, 15 but we're here for your -- as an entertainment option 16 for you. 17 (Laughter) 18 AGENDA ITEM NOS. II, III & IV 19 CHAIRMAN KRAUSE: Let's now go back to our 20 normal agenda, and Item No. 2, Kathy Pyka. And if you 21 don't mind, just segueing straight into 3 and 4. 22 MS. PYKA: Yes, sir. 23 Good morning, Commissioners. For the 24 record, my name is Kathy Pyka. I'm the controller for 25 Commission. And with me to my right is Robert Tirloni 88 1 who is our products manager from the Lottery Operations 2 Division. 3 Commissioners, the first chart that we 4 have for you this morning reflects comparative sales 5 through the week ending December 7th, 2013. Total 6 fiscal year 2014 sales through this 14-week period are 7 $1,136,000,000, which is a decrease of $13.1 million 8 from the same period last fiscal year. It's about a 9 1.1 percent decline from last fiscal year. 10 Our fiscal year 2014 instant ticket sales, 11 which are depicted on the second orange bar, are at 839 12 million, which is a $24.6 million increase over the 13 sales figure for fiscal year 2013. And, Commissioners, 14 our instant ticket sales reflect 73.9 percent of our 15 total sales for this period. 16 Our fiscal year 2014 draw sales reflected 17 on the second blue bar are at $296.9 million, which is a 18 $37.7 million decline below the $334.7 million figure 19 reported for last fiscal year. Commissioners, this 20 deficit is attributed to the $550 million Powerball 21 jackpot that we had last fiscal year during the month of 22 November, which our weekly sales for the final week of 23 that jackpot roll were $43.3 million. 24 Our next slide reflects cumulative average 25 daily sales for fiscal years 2014, 2013 and 2012. The 89 1 average daily sales value for fiscal year 2004 -- 14 is 2 11.6 million, which is a $39,000 per day decrease from 3 fiscal year 2013, and it's a $1.32 million increase over 4 fiscal year 2012. 5 Moving to our jackpot games which are 6 highlighted in the white font, we have a daily average 7 total of $1.81 million for fiscal year 2014. That's 8 $197,000 decline from last fiscal year, and a $259,000 9 increase over fiscal year 2012. 10 Within this category, our Mega Millions 11 game reflects a healthy increase over the two previous 12 fiscal years. And with the current roll cycle now at 13 $400 million, we're certainly looking for some increased 14 sales this week with that increased role. 15 Powerball does reflect a $317,000 decrease 16 from the previous fiscal year, and again that's 17 attributed to the $550 million jackpot that we had last 18 fiscal year. 19 Daily games highlighted in blue reflect a 20 daily average of $1.22 million. This is $176,000 21 decrease from last fiscal year. And as we look at this 22 category, our Daily Four product continues to have a 23 strong year-over-year increase with a 19 percent 24 increase over last fiscal year's daily average; however, 25 our all or nothing product is at $128,000 per day, which 90 1 doesn't compare to the $291,000 figure that we had at 2 start-up last fiscal year. 3 Wrapping up this slide, our instant ticket 4 sales with a daily average of $8.6 million, which is an 5 increase of 334,000 over last fiscal year, and more than 6 $900,000 over fiscal year 2012 instant ticket sales. 7 So with that, Robert will now cover actual 8 sales by product. 9 MR. TIRLONI: Good afternoon. For the 10 record Robert Tirloni, products and drawings manager for 11 the Commission. This slide is our fiscal year-over-year 12 comparison. It's the same format as the previous slide 13 with our jackpot games at the top in white. 14 Again, as Kathy mentioned, Powerball in 15 November of last year had a very large jackpot of $550 16 million. Powerball has not generated a jackpot of that 17 level thus far this fiscal year, and that is the reason 18 for this $32 million decline that we're seeing for that 19 product. 20 The good news is that Mega Millions is 21 showing an increase, and we are advertising a $400 22 million jackpot for Friday and we're hoping we might be 23 able to increase that tomorrow if sales warrant. That 24 game had just changed last month. The jackpot odds were 25 made longer, with the hopes that we would generate large 91 1 jackpots and kind of reinvigorate that game. That game 2 did not see large jackpots last fiscal year. So it 3 looks like the game change that was just made is helping 4 contribute to the jackpot levels that we're seeing right 5 now, and that's definitely a positive. 6 Lotto is down slightly. That game had a 7 pretty large jackpot for Lotto of 32 million at this 8 point last year. Again that was in November. And we've 9 not seen levels for Lotto this fiscal year in that 10 range. So all-told, our jackpot games are down just 11 over $21 million. 12 The blue are the daily games. Again we 13 continue to see good growth from the Daily 4 product. 14 Pick 3 is experiencing decline. We believe that is Pick 15 3 players that are moving over to the Daily 4 game and 16 trying that game. We hear that that is a trend that is 17 being experienced in other jurisdictions around the 18 country. 19 All or Nothing is down. That is our 20 newest draw game. It started this time last year to 21 very, very large sales, far more than we expected when 22 that game first started. We did have to suspend sales 23 on that game over the summer. We brought it back and we 24 are engaging in efforts right now to prop that game up 25 and to continue to support it. 92 1 So our daily games are down just over $16 2 million. So the draw game subcategory is down just 3 under 38 million. Again the bulk of that is coming from 4 the Powerball -- from the Powerball decline. And we 5 hope we can make that up with this current Mega Millions 6 jackpot roll that we're in. 7 Our instant products category is doing 8 very well. It's is up $24 million. I know some of our 9 newer Commissioners received some ticket samples 10 yesterday, but I did provide all of you with a packet of 11 our holiday games. They started in October. They've 12 been out for almost two months now. They're doing very 13 well, and sales are up on this year's holiday games 14 compared to last year's holiday games. So all-told, if 15 you look at the entire portfolio, we're down just about 16 $13 million. 17 I've one other product update for you. 18 Besides our holiday suite of games, we launched, back in 19 September, our weekly grand suite of games. That suite 20 or that family is doing very well. We're hoping to 21 capitalize on that with our new multiplier suite. Three 22 of these games will start at the end of this month. The 23 following two will start next month in January. This is 24 another major product initiative for us. 25 This suite of games will have TV, radio, 93 1 outdoor support, plus full in-store point of sale, and a 2 variety of other promotional support. And we hope we 3 can make these games core games within our portfolio. 4 Last, but not least, I have some good news 5 to share with you-all. Back to our All or Nothing Game, 6 NAASPL, the North American Association of State and 7 provincial lotteries, which is basically the lottery 8 trade organization in North America, had their annual 9 conference in Rhode Island back in October. Every year 10 as part of that conference they have a competition where 11 lotteries from all over North America can enter new 12 games that have been launched on the draw game side and 13 on the instant or the scratch-off game side. 14 We entered All or Nothing in the draw game 15 competition, and at that conference in Rhode Island it 16 was announced that All or Nothing is the best new draw 17 game in all of North America for 2013. And we just got 18 our award, and Gary wanted me the share this with all of 19 you so you could see it. It will go into the -- as soon 20 as we get all my fingerprints off of it -- it will go 21 into the case right outside of the auditorium. 22 But staff worked hard on this. We had to 23 develop and submit a business case to substantiate why 24 we felt All or Nothing was the best new draw game, and 25 it's a pretty big accomplishment in the industry to be 94 1 able to compete against lotteries from all over North 2 America. So we're really happy that we were able to 3 receive this award. 4 And that is the conclusion of the sales 5 presentation for this month. Kathy and I are happy to 6 answer any questions you-all may have. 7 COMM. EDWARDS: Congratulations. 8 MR. TIRLONI: Thank you. 9 CHAIRMAN KRAUSE: Kathy. 10 MS. PYKA: Very good. We'll move on to 11 Tab 3, which is our agency transfers to the state, as 12 well as the agency's budget status. Commissioners, your 13 notebook includes a document with the accrued revenue 14 transfers and the allocations to the Foundation School 15 Fund and the Texas Veterans Commission for the period 16 ending October 31st, 2013. 17 Our total accrued transfers to the state 18 amounted to $169.4 million for the first two months of 19 fiscal year 2014. Of this $169.4 million transfer to 20 the state, $168.6 million was the amount transferred to 21 the Foundation School Fund, with $800,000 transferred to 22 the Texas Veterans Commission. Commissioners, this 23 represents a 10.2 percent increase or $15.6 million over 24 the amount transferred to the Foundation School Fund 25 through the same period last fiscal year. 95 1 And now our cumulative transfers following 2 this transfer to the Foundation School Fund are now at 3 $16.1 billion. 4 The final item under this tab is our 5 agency's fiscal year 2013 method of finance summary for 6 the fiscal year ending August 31, 2013. Our 7 Commission's lottery account budget was $202.3 million, 8 and of that amount we expended 91.9 percent. Our bingo 9 operations budget funded out of general revenue was just 10 over 15 million, and we expended 99.9 percent of the 11 total budget through fiscal year end. 12 Commissioners, this includes my 13 presentation and I'd be happy to answer any questions. 14 CHAIRMAN KRAUSE: Okay. 15 MS. PYKA: We'll move on to Tab 4, which 16 is the itemized operating budget. In accordance with 17 the General Appropriations Act, agencies are required to 18 file itemized operating budgets with the Governor's 19 Office, as well the Legislative Budget Board. Those 20 were due by November -- or December 1. 21 The budget document included in your 22 notebook behind Tab 4 reflects the Commission's 2014 23 operating budget previously adopted by the Board on 24 August 5th, 2013, as well as actual expenditures for 25 fiscal years '12 and '13. Under the requirements set 96 1 forth by the Legislative Budget Office, this document 2 was completed by the Office of the Controller on 3 November 20th, and certified with the Legislative 4 Offices on November 26th. 5 This concludes my presentation. I'll be 6 happy to answer any questions. Thank you, 7 Commissioners. 8 AGENDA ITEM NO. V 9 CHAIRMAN KRAUSE: Mike Fernandez. And, 10 Mr. Fernandez, if you would be so kind as to report on 11 this item and then also I believe it's Item 12 and 13 12 while we have you up here. 13 MR. FERNANDEZ: Thank you. Thank you very 14 much. 15 Good morning, Mr. Chairman, Commissioners. 16 My name is Mike Fernandez. I'm the director of 17 administration. 18 Item 5 in your agenda is regarding the 19 demographic study of lottery players. This study by 20 statute is required to be conducted every two years and 21 the results presented to the leadership prior to each 22 legislative session. As you know, the agency conducts 23 the study every year. 24 The 2013 demographic study was developed 25 by the University of Houston, and what we presented this 97 1 morning by Dr. Jim Granato, the Director of the Hobby 2 Center. 3 Jim? 4 MR. GRANATO: Thank you, Mr. Fernandez. 5 Chairman Krause, Commissioners. For the record, my name 6 is Jim Granato, and I direct the Hobby Center for Public 7 Policy at the University of Houston, and this is the 8 2013 demographic survey. 9 In keeping with past practice, we surveyed 10 1700 people. What's different about the survey is we're 11 starting to ramp up the proportion that's cell phone 12 only. This is a reflection of what's happening out 13 there in the real world. Cell phone users tend to be 14 younger, and we want to incorporate that demographic in 15 our surveys. If we were to do mostly landline, we would 16 lost that demographic. So for the sake of accuracy, 17 this cell phone proportion has gone up. I might add, 18 five years ago we were using 20 percent. So that's a 19 rapid, rapid increase in cell phone use. 20 Margin of error in our results is 2.4 21 percent, and is a standard random digit design of a 22 phone survey. The forecasts we have on our survey, we 23 forecasted 3.7 billion in revenue. This is past year 24 players from the year -- leading up to summer of 2013. 25 The margin of error in this is plus or 98 1 minus 2.4 percent. The upper bound is 3.79 billion. 2 Our lower bound is 3.61 billion. The order of 3 sensitivity here, the average -- part of the formula was 4 based on average expenditure per month. That 5 expenditure in this past survey was $44.38. That is 6 based on recollection. 7 Imagine if a person -- the recollection 8 wasn't 44.38 but $50. If it was $50 the forecast would 9 be 4.18 billion. In other words, almost exactly the 10 same as what the actual sales were for fiscal year 2012. 11 The general findings, participation rates 12 for all games, about 36 and a half percent. That's very 13 similar to last year, and we'll have some figures on 14 those participation rates for all games. 15 The monthly average is up. 2013 again, as 16 I said before, is 4438. We haven't seen a number that 17 high since 2009. 18 The demographic differences, our point of 19 comparison between -- too see the differences in 20 demography, our players versus nonplayers for all games, 21 this is all referenced in Table 2. Gender, employment 22 status and Hispanic origins were the three demographic 23 characteristics in which there were statistically 24 significant differences in the distribution between 25 players and nonplayers. For nonplayers, they tend to be 99 1 more female. The proportion is higher in terms of 2 female. For players employment status, you're looking 3 at things like people that are fully employed, they tend 4 to be players versus nonplayers. And finally for 5 Hispanic origin, players tend -- the proportions are 6 higher in terms of Hispanic origin. All other 7 demographic indicators were not statistically different 8 between players and nonplayers for all games. 9 Game results, changes from the 2012 10 survey, the big thing we saw in participation rates was 11 Powerball. We saw a 90 percent increase in 12 participation in Powerball. And we'll show again those 13 figures over these individual games. 14 Frequency of purchase, there's general 15 stability. Powerball was the exception, although with 16 some of the different metrics for purchase was weekly, 17 monthly, there was some mixed results, but Powerball 18 seemed the one where there was some changes, and when I 19 say "changes," up tick. 20 Average time played, stability for most 21 games, Powerball again showed some mixed but weak 22 results. They show the most fluctuation. 23 And in terms of average dollar spent per 24 play, we saw -- they're up for Pick 3 Day, Megaplier and 25 Powerball. They're lower for scratch offs and Mega 100 1 Millions. There's stability for all the games, Cash 2 Five, Lotto Texas and Texas Two Step, again basically 3 the same. 4 The game results, now what we do is we 5 took the individual games and we again checked the 6 nonplayer distribution between that and compared to the 7 distribution for these individual games. For Pick 3 day 8 we saw a difference in year. In other words, the 9 year -- this year compared to the prior year it's down 10 in terms of participation. Income level, we saw a 11 negative -- in other words, people that played the 12 distribution, as the income goes up, they tend to play 13 less. Race, we saw a big difference between black 14 players and white players, and very different from the 15 distribution of nonplayers. So black players I think it 16 was 41 percent played Pick 3 day, 9 percent for white 17 players. 18 The Asian category and the American 19 (inaudible) category and Hispanic category -- Hispanic 20 origin category, we say an increase. But the big 21 difference we looked at race was blacks versus whites. 22 That was the distributional difference that stood out. 23 For Cash 5, education and race were the 24 only two indicators that showed difference between the 25 two types of distributions. For people as they're -- 101 1 for people that are more educated, they tend to be less 2 likely to play Cash 5. For race we saw again white 3 participation was down, but black participation was up. 4 Lotto Texas, no difference between the 5 distributions. 6 Scratch off, we saw four different 7 demographic differences. Education we saw as education 8 level went up, people more likely to play scratch off. 9 Income level we saw in general as income level went up 10 we saw -- we saw less participation, which is 11 interesting comparing it's education. 12 Now, there were a few little minor 13 glitches as you looked at different income categories, 14 but in generally you saw a negative pattern between 15 income level and participation. 16 Hispanic origin. Hispanic origin shows 17 that category there was a higher proportion playing in 18 the -- in that for this particular game Scratch Off. 19 And for gender, female players are more -- the gender 20 category showed a greater distribution of female players 21 in that particular game Scratch Off. 22 For Two Step and Mega Millions, again no 23 difference. For Megaplier we saw age category seemed to 24 be driving the big difference there. It's 35 to 44. 25 People that are 65 an older are playing less in this 102 1 game. In addition, employment status we saw people that 2 are either full-time or part-time playing this game in a 3 greater proportion nonparticipation distribution, but we 4 also saw the retired folks playing less in this game. 5 And finally for Powerball, we saw again a 6 substantial increase from last year, so there's a big 7 increase income levels -- higher income more likely to 8 play Powerball, and employment status we saw that 9 unemployed people -- this is interesting -- unemployed 10 people tend to play this game more because the big games 11 you get out of Powerball, and that retired folks tend to 12 play this game less. 13 Here's some selected figures of the games. 14 It shows the friends over time. This is for any lottery 15 game. As you can see there's been a general downward 16 trend. The real break probably occurs in 2003. I mean, 17 we only have one time where it's over 50 percent, and 18 it's been hovering around about -- if you were to draw 19 an average between 2007 and 2013, you're looking at 20 about 37, 38 percent as participation between these last 21 five or six years. 22 For Pick 3 day there is a difference of 23 about 7 percent -- this is actually within the margin of 24 error, so that is -- even though there's a nominal 25 difference in the bar, it's not statistically 103 1 significant, so it's within random error. 2 For Cash 5, again even though it was a 3 nominal difference, a slight drop nominally, it's within 4 the margin of error. So basically you can say it's 5 statistically there's no difference between this year 6 and last year in terms of participation. 7 For Lotto Texas, a slight up tick. And 8 this is within the margin of error. Again, some 9 stability there looking at the lower seventies basically 10 in the last three years. 11 For Scratch Off, notice the increases 12 we've seen since 2007. There's an upward trend in 13 Scratch Off, although the last -- comparison between 14 last year and this year it's within the margin of error. 15 Texas Two Step, no basic difference within 16 the margin of error. 17 Mega Millions -- I'm sorry, Megaplier 18 basically within the margin of error. And the one game 19 that is not reported and I want to report to you is that 20 Powerball we saw 19 percent increase in participation. 21 That's out of the margin of error, so that's a 22 statistically significant change in participation for 23 Powerball. 24 CHAIRMAN KRAUSE: So even though we 25 haven't had a big jackpot in Powerball this year? 104 1 MR. GRANATO: But this certainly would 2 reflect the prior year. 3 CHAIRMAN KRAUSE: Oh, I gotcha. 4 MR. GRANATO: That's why. So I did see 5 the numbers present prior to that, but I think it was 6 the last year that you saw the -- this is reflecting 7 what I did last year. 8 And that concludes my presentation. If 9 you have any questions, I'll be glad to answer them. 10 CHAIRMAN KRAUSE: Seems like there's at 11 least one game player -- as people have more education, 12 they tended to play more. 13 MR. GRANATO: Correct. 14 CHAIRMAN KRAUSE: Smart people. 15 COMM. EDWARDS: A question for you, 16 because this survey period versus the prior survey 17 period, how big was the statistical difference between 18 the amount of people that utilized the mobile app and 19 then the demographics associated with the people that 20 would be respondents for the actual survey? 21 MR. GRANATO: We did not have it in the 22 instrument. 23 COMM. EDWARDS: So the prior year was not? 24 MR. GRANATO: Right. 25 COMM. EDWARDS: So is there a standard 105 1 deviation of some kind that's slightly skewed the data 2 towards the -- more of the millennial kind of answers? 3 MR. DESHIELDS: You're talking about the 4 people that use the cell phone? 5 COMM. EDWARDS: The demographics, the 6 demographics that we captured -- 7 (Simultaneous discussion) 8 MR. GRANATO: -- we do have data -- it's 9 not in the report. We do have separate data report the 10 difference between cell phone users and people who use 11 landlines. We're glad to present that -- give that to 12 you. 13 COMM. EDWARDS: I would love to see that. 14 MR. GRANATO: Yeah. It's a fascinating 15 what's happening. I mean, more and more folks are not 16 using landlines at all, and they tend to be younger. 17 COMM. EDWARDS: But the data that 18 you're -- where the variances are to me tended to skew 19 more to the respondent areas from the prior year. And I 20 don't remember it exactly for the -- you know, for all 21 the numbers because I haven't seen it for a few months. 22 But it seemed like the data's shifting for what we're 23 reporting to a -- to a different demographic subset that 24 we might have captured on the mobile. 25 MR. GRANATO: Right. Right. 106 1 CHAIRMAN KRAUSE: Well, one of the things 2 that I've got out of your work in the past is that it, 3 at least to me, legitimizes what we're doing, because 4 what I've gotten out of it in the past is that our 5 players are intelligent, they play when they can and 6 should, and they don't play when they shouldn't. That 7 indicates a lot of good judgment on our players' part. 8 And so anyway, we wouldn't know that if 9 you didn't do your work for us. Thank you. 10 MR. GRANATO: Thank you. 11 CHAIRMAN KRAUSE: Any other questions? 12 Mr. Fernandez, you've got two more items. 13 AGENDA ITEM NO. XII 14 MR. FERNANDEZ: Yes, sir, Mr. Chairman. 15 Agenda Item 12 is regarding the selection of a firm to 16 provide internal audit services for the Commission. At 17 the request of the board and direction of Mr. Grief, an 18 RFP drafting an evaluation committee was appointed. 19 The committee was comprised of Michael 20 Angrier, director of lottery operations, Kathy Pyka, 21 agency controller, and I served as the committee chair. 22 The committee was supported by Angela Zgabay-Zgarba, 23 contract specialist; Andy Marker, deputy general counsel 24 and Leah Burnett assistant general counsel. 25 A solicitation notice was mailed to 107 1 approximately 150 vendors. The RFP was issued 2 October 22nd, with a response due date of November 22nd. 3 24 vendors requested and received copies of the RFP. 4 Four proposals were received by the November 22nd 5 deadline. During the review, one proposer withdrew. 6 The three remaining proposals were 7 reviewed and scored by the committee. The committee's 8 report and recommendation, including a draft contract 9 has been provided to the Commission. If the Commission 10 adopts the staff report and recommendation, we will 11 proceed with executing a contract. 12 Mr. Biard? Have you got any comments to 13 provide. 14 MR. BIARD: This is an action item, and -- 15 excuse me. I'm sorry. 16 This is an action item for the Commission, 17 and I think the action would be that there's a motion to 18 approve the staff's recommendation and authorize the 19 executive director to execute a contract upon the 20 completion of negotiations. 21 CHAIRMAN KRAUSE: I have a question, and 22 that is we're saving money by doing this, going to an 23 outside contractor. Can you fell us a little bit about 24 that. 25 MR. FERNANDEZ: Yes, sir, that's my 108 1 understanding. If I may, I'd like to ask Ms. Pyka to 2 join us. She actually looked at the numbers in terms of 3 the current -- or the past operating budget for our IA 4 function and what we had put in the cost-benefit. 5 MS. PYKA: For the record, Kathy Pyka, 6 controller for the Commission. And to respond to that 7 question, historically we've had approximately $520,000 8 budgeted per year for the internal audit function. So 9 that function was when we had staffing in-house 10 performing the function. 11 Under this proposal that we're looking at, 12 we're looking at a budget of $300,000 for outsource 13 services, so a savings of just over $200,000 on an 14 annual basis. 15 CHAIRMAN KRAUSE: Wonderful. Thank you, 16 ma'am. 17 MS. PYKA: You're welcome. 18 CHAIRMAN KRAUSE: Is there a motion to 19 approve staff's recommendation to authorize the 20 executive director to execute a contract upon completion 21 of negotiation? 22 COMM. STAVINOHA: I will make that motion. 23 CHAIRMAN KRAUSE: All right. Second? 24 COMM. BAGGETT: I'll second. 25 CHAIRMAN KRAUSE: All right. Call for a 109 1 vote. All approving say "aye." 2 (All those voting in favor so responded) 3 CHAIRMAN KRAUSE: Any opposed? 4 (No response) 5 CHAIRMAN KRAUSE: Carries by acclamation. 6 Mr. Fernandez, Item 13. 7 AGENDA ITEM NO. XIII 8 MR. FERNANDEZ: Thank you, Mr. Chairman. 9 The first part of this agenda item is to advise the 10 Commission of staff's intent to extend two contracts, 11 each for a one-year period. The first is Knight 12 Security Systems for surveillance cameras and related 13 services, and the second is for Weaver & Tidwell for 14 financial audit services. 15 The last part of this agenda item -- and 16 the last contract I would like to address -- is the 17 drawing studios and production services, which is an 18 action item for the Commission. This contract will now 19 be classified as a major procurement based on the 20 estimated contract value. The current contract for 21 these services expires August 2014; therefore, staff is 22 requesting Commission approval to proceed with the 23 procurement process for the acquisition of a vendor to 24 provide the requested services. 25 Once the process is complete, the contract 110 1 will be provided to the board -- to the Commission -- 2 for your review and approval. So we're seeking your 3 permission to proceed with the acquisition of the 4 vendor. 5 COMM. EDWARDS: I move we adopt the 6 staff's recommendations for extending the contract for 7 surveillance cameras, products and related services and 8 the extension of the contract for audit purposes and the 9 procurement for drawing studio and production services. 10 CHAIRMAN KRAUSE: Second? 11 COMM. BAGGETT: Second. 12 CHAIRMAN KRAUSE: All in favor say "aye." 13 (All those voting in favor so responded) 14 CHAIRMAN KRAUSE: All opposed? 15 (No response) 16 CHAIRMAN KRAUSE: Hearing no opposition, 17 it passes. 18 Let's call on Mr. Biard to handle it looks 19 like Item 8. 20 AGENDA ITEM NO. VIII 21 MR. BIARD: Yes, thank you, Commissioners. 22 Item 8 is the proposed policy that's required by the 23 Sunset bill, which requires the Commission to adopt a 24 policy clearly delineating the policymaking 25 responsibilities of the Commission and the management 111 1 responsibilities of the executive director and 2 Commission staff. This is an across-the-board 3 recommendation, which means Sunset Commission recommends 4 this for all state agencies and our agency was not 5 singled out. I will summarize it briefly and recommend 6 that you approve the policy. This is intended to be 7 descriptive of existing practice and not new in that 8 respect. 9 It says, "The Commission shall establish 10 general policies governing the operation and 11 administration of the Lottery and the regulation of 12 charitable bingo and retains full authority to review 13 and modify any specific policies, procedures and 14 practices established by the Executive Director for the 15 Lottery and the Bingo Director for Charitable Bingo." 16 It recognizes that under the State Lottery Act, both the 17 Commission and the Executive Director share some 18 policymaking responsibilities. They both have broad 19 authority and are required to exercise strict control 20 and close supervision of all lottery games, to promote 21 and ensure, integrity, security, honesty and fairness in 22 the operation and administration of the Lottery, and 23 they have a shared responsibility for procurement 24 decisions as well. 25 So recognizing that, this policy says that 112 1 the Executive Director has broad authority to implement 2 the Commission's general policies by establishing 3 specific policies, procedures and practices governing 4 the day-to-day operations and administration of the 5 Lottery, and that would include the activities of all 6 Commission divisions other than the bingo division and 7 internal audit. And that is because the Executive 8 Director is the administrative head of the agency. 9 The Bingo Director, under the bingo act, 10 has -- is another direct report to the Commissioners and 11 is required to administer the bingo division under the 12 direction of the Commission and perform all duties 13 required by the Commission to administer the Act and 14 implement the Commission's general policies by 15 establishing specific policies, procedures and practices 16 governing the day-to-day management of that division. 17 So we recommend you approve this policy by 18 initialing a T bar memorandum. 19 CHAIRMAN KRAUSE: Is there a motion to 20 approve staff's recommendation? 21 COMM. EDWARDS: I make a motion we approve 22 staff's recommendation as outlined by Bob Biard. 23 CHAIRMAN KRAUSE: Second? 24 UNIDENTIFIED SPEAKER: I will second. 25 CHAIRMAN KRAUSE: All in favor say "aye." 113 1 (All those voting in favor so responded) 2 CHAIRMAN KRAUSE: Any opposed? 3 (No response) 4 CHAIRMAN KRAUSE: Carries by acclamation. 5 MR. BIARD: Thank you. I have a T bar. 6 CHAIRMAN KRAUSE: Just to let y'all know, 7 we're passing the item that Nelda Trevino was going to 8 be reporting on. The Legislature is not in session, so 9 they aren't taking any activity that we need to know 10 about, plus she's sick. 11 AGENDA ITEM NO. IX 12 CHAIRMAN KRAUSE: Now what we're going to 13 do is we're going to hear from Deanne Rienstra. Then 14 after that we're going to hear from James Person again. 15 MS. RIENSTRA: Good afternoon, Chairman, 16 Commissioners. I am Deann Rienstra, assistant general 17 counsel. 18 You have been provided in your notebooks 19 the draft rule 16 TAC 401-317 concerning the Powerball 20 On-Line Game Rule. This proposed new rule was published 21 in the Texas Register on October 4th, 2013. There were 22 no comments received during the public comment period. 23 This rule was proposed to make amendments 24 to the Power Play Add-on Game Feature and to make other 25 nonsubstantive changes. Staff recommends adoption of 114 1 this new rule, and I'm happy to answer any questions. 2 CHAIRMAN KRAUSE: Questions? 3 COMM. EDWARDS: I move to adopt -- make a 4 motion to adopt Amendment 16 TAC 401.317 Powerball 5 On-Line Game Rule. 6 CHAIRMAN KRAUSE: Second? 7 UNIDENTIFIED SPEAKER: Second. 8 CHAIRMAN KRAUSE: Let's vote. All in 9 favor say "aye." 10 (All those voting in favor so responded) 11 CHAIRMAN KRAUSE: Any opposed? 12 (No response) 13 CHAIRMAN KRAUSE: No one is opposed, it 14 carries. 15 AGENDA ITEM NO. X 16 CHAIRMAN KRAUSE: Let's go on to James 17 Persons, Item 10 -- Person -- sorry. 18 MR. PERSON: Thank you, Mr. Chairman. 19 James Person assistant general counsel. This is an easy 20 one, I promise. 21 CHAIRMAN KRAUSE: I know. Some of your 22 other ones were not. 23 (Laughter) 24 MR. PERSON: Staff is recommending that 25 you adopt new Rule 403.102 without changes as the rule 115 1 was originally proposed back in August. This rule would 2 allow the Commission to assign a mailed-on date to any 3 piece of mail we receive that lacks a legible postmark. 4 Apparently this has actually become a serious issue here 5 at the agency. We're receiving more and more mail that 6 lacks a postmark. 7 So under the rule, if we receive a piece 8 of mail that lacks a postmark, we're going to say that 9 it was sent seven calendar days prior to the date we 10 received it. There are various deadlines under the Act 11 and the rules that require various licensees and other 12 people to mail things by certain date, and without a 13 legible postmark we have a hard time making sure that 14 they're abiding by those rules. So this rule would fix 15 that. 16 COMM. EDWARDS: I move to adopt new 16 TAC 17 403.102 for items mailed to the Commission. 18 CHAIRMAN KRAUSE: Second? 19 UNIDENTIFIED SPEAKER: Second. 20 CHAIRMAN KRAUSE: All in favor say "aye." 21 (Those voting in favor so responded) 22 CHAIRMAN KRAUSE: All opposed? 23 (No response) 24 CHAIRMAN KRAUSE: Hearing no opposition it 25 carries. 116 1 Let's see. We are down to our Executive 2 Director, Mr. Gary Grief. He has got two items before 3 we hear from Sandy Joseph. 4 AGENDA ITEM NO. XV 5 MR. GRIEF: Thank you, Mr. Chairman. On 6 Item No. 15, the GTECH item, I do have one item I'd like 7 to bring to your attention. Alan Eland from GTECH 8 Corporation in Rhode Island is in attendance today. 9 Alan holds the position of senior vice president and 10 chief operating officer for GTECH Americas, and I would 11 like to ask Alan to come to the table, if he would. 12 As a reminder, Commissioners, GTECH is our 13 Lottery operator and our business partner in running the 14 Texas Lottery. And although Alan now lives and works in 15 Rhode Island, he has deep roots here in Texas. He 16 actually served as the GTECH Texas account manager in 17 the early days of the Texas Lottery going back all the 18 way to 1992. 19 And after leaving Texas to go back home to 20 Rhode Island several years ago, Alan began a climb 21 through the corporate ranks of GTECH. And in his 22 current position, he is responsible for all lines of 23 GTECH's business in North America, including the very 24 large and comprehensive Texas Lottery operator contract. 25 From my own personal experience, I'll tell 117 1 you that Alan is a sharp business man, and a very 2 skillful negotiator. He understands the importance of 3 the Texas Lottery operator contract to the funding of 4 Texas public schools, and he shares with me a laser 5 focus on the sensitivities of gaming in general in 6 Texas, and the Lottery specifically. 7 In short, Alan does his job very well, and 8 that talent and skill has not gone unnoticed by the 9 lottery industry. Earlier this year, Public Gaming 10 Research Institute, an organization that's dedicated to 11 the support and growth of lotteries around the world, 12 and also one of the most respected lottery research 13 organizations in the country announced six newly elected 14 members to be inducted into the Lottery Industry Hall of 15 Fame, including one Alan Eland from GTECH. 16 It was my pleasure to be in Providence, 17 Rhode Island in October for Alan's induction ceremony. 18 This is a well-deserved honor for Alan and for GTECH, 19 and we here in Texas take particular pride in Alan 20 achieving this honor due to his long history and deep 21 involvement with the Texas Lottery. 22 So with that, Commissioners, I would ask 23 that you join me in recognizing Alan for this 24 achievement with a round of applause. 25 (Applause) 118 1 MR. GRIEF: Thank you, Alan. 2 MR. ELAND: Let me just say really quickly 3 thank you very much, Gary, for those kind words. I 4 truly appreciate it. And on behalf of the company, I do 5 have a very soft spot for Texas because of the six years 6 I spent here, including the start-up of the Lottery. 7 And it's a wonderful account to work with, and one of 8 the most important customers that GTECH has and it's an 9 honor for us to serve all of you. 10 And I'll have to say that I think this is 11 the first time I've been called up to this table when 12 it's okay with me. 13 (Laughter) 14 MR. ELAND: Thank you very much. 15 AGENDA ITEM NO. XVI 16 MR. GRIEF: Very good, Mr. Chairman. I'll 17 move on to my report, if that's all right with you. 18 CHAIRMAN KRAUSE: Absolutely. 19 MR. GRIEF: I have several items I would 20 like to brief the Commission on this morning. The first 21 involves a new draw game slated for launch in the summer 22 of 2014. The capital budget funding that's necessary to 23 launch a new draw game was obtained during the last 24 legislative session, and we are now winding down the 25 research that's necessary to choose exactly what game 119 1 we'll be offering. 2 Due to timing issues, we will need to get 3 a game rule proposed in December in order to meet that 4 timeline. With no Commission meeting scheduled for 5 December, my intent is to use my authority to propose a 6 game rule sometime in December, brief each Commissioner 7 individually on the details of the game rule, and the 8 move forward with the regular comment period, including 9 a public hearing on the game rule. 10 This approach will in no way impede the 11 public's ability to comment on this game rule. And as 12 with all rules, this proposed rule will have no effect 13 until and if the Commission actually adopts the rule at 14 a public Commission meeting. 15 In addition, once the game rule is 16 proposed, we intend to issue an invitation for bid or 17 and IFB as it's known, for the draw machines and ball 18 sets necessary to operate a new draw game. Any funding 19 for the purchase of such equipment will be clearly and 20 explicitly contingent upon the Commission adopting that 21 new game rule. 22 If there are no questions on that item, 23 I'll move on. 24 CHAIRMAN KRAUSE: Questions? 25 (No response) 120 1 MR. GRIEF: The second item I wish to 2 brief the Commission on involves an invitation I've 3 received from the World Lottery Association, or WLA as 4 it's known, to present at its annual conference 5 scheduled for February in London. This will be a 6 three-day event, and all expenses will be paid for by 7 the WLA with no expenses incurred by either the Texas 8 Lottery Commission or the State of Texas. I'll be 9 presenting on issues related to Mega Millions and 10 Powerball, specifically the future of the 11 multijurisdictional games in the U.S. 12 And speaking of multijurisdictional games, 13 I also want to inform the Commission that momentum seems 14 to be gathering on a national premium draw game and a 15 possible associated national TV game show. This 16 initiative is being led by the Multistate Lottery 17 Association, or MUSL as it's known, which is composed of 18 33 U.S. lottery jurisdictions, of which Texas is 19 currently not a voting member. 20 MUSL has recently issued an RFP for this 21 particular game concept, and they are reviewing 22 proposals now. The likelihood is that this game would 23 be offered at a higher price point than we've ever 24 offered for draw games before, probably $5. And the 25 introduction of the game is tentatively being discussed 121 1 for early in calendar year 2015. I'll keep you apprised 2 as things develop. 3 And speaking of MUSL, Multistate Lottery 4 Association, I want to make the Commission aware of my 5 intent to have the Texas Lottery join MUSL and become a 6 voting member, with the target date being for this 7 February. 8 As the Mega Millions group has recently 9 enacted a new bylaw banning dual membership in both the 10 Mega Millions Consortium and the MUSL Group, this will 11 require Texas to withdraw from membership in the Mega 12 Millions Group. This change of membership, if you will, 13 will have no impact on our ability to continue to sell 14 both the Mega Millions game and the Powerball game. 15 Rather, it will better align our ability to vote on 16 important game changes. 17 With Powerball sales in Texas now almost 18 outselling Mega Millions by a three-to-one margin, it's 19 become more important than ever that Texas have a vote 20 in any future game changes for the Powerball Game, which 21 has become a very important revenue producer for this 22 state. 23 And, finally, my last item -- I know 24 you're glad to hear that, Mr. Chairman -- my last item 25 involves the National Council on Problem Gaming, and 122 1 I'll refer to that as the NCPG. The NCPG was founded in 2 1972, and this organization is an objective voice on 3 gambling and problem gambling issues in the U.S. with a 4 40-year history of impartiality an independence. 5 As an advocate for assistance to problem 6 gamblers, the NCPG does not fake a position for or 7 against legalized gambling. Rather, the NCPG works to 8 promote responsible gaming, provide critical links to 9 assistance and treatment programs, and fosters 10 opportunities for professional connections in the 11 industry. 12 The NCPG also concentrates on increasing 13 public awareness of pathological gambling, ensuring the 14 widespread availability of treatment for problem 15 gamblers and their families, and encouraging research 16 and programs for the prevention of gambling problems. 17 In the past, the Texas Lottery has joined with the NCPG 18 in focusing on certain initiatives, including our Play 19 Responsibly Campaign that we still have in place to this 20 day. 21 All that said, we can do better. I've 22 been in discussions with Keith White, the Executive 23 Director of the NCPG regarding the Texas Lottery 24 actually becoming a member of the NCPG. Other state 25 lotteries including Georgia, Minnesota, Kentucky, 123 1 Maryland, Vermont and Virginia, are already members of 2 the NCPG. Two of our biggest vendors, GTECH and 3 Scientific Games are also members. 4 Joining NCPG will give us access to the 5 NCPG staff and the Executive Director for assistance on 6 a wide range of gambling topics, and it should assist us 7 in our efforts to encourage our players to play 8 responsibly. The cost for membership is $1750 annually, 9 a portion of which will go towards funding for the 10 National Problem Gambling Help Line Network, which 11 already receives a number of calls from Texans every 12 month. I plan to move forward with membership for 13 Texas. 14 Mr. Chairman, that completes my report 15 this morning. I'd be happy to answer any questions. 16 CHAIRMAN KRAUSE: Well, I don't have a 17 question, but I would like to reiterate what you just 18 reported on, and that is that while I take a lot of 19 comfort from the fact that our University of Texas (sic) 20 report research tells us that our players are 21 intelligent, they're not mindless automatons that go out 22 and spend the rent money and spend the food money on 23 lottery tickets and bingo playing; that in the same 24 breath I do acknowledge the possibility that there are 25 people that need help out there. 124 1 So I wanted to be on the record as saying 2 that's what we're about. We're about, you know, being 3 responsible, and I'm glad, Gary, that you're doing this. 4 Thank you. 5 MR. GRIEF: Very good. Thank you. 6 AGENDA ITEM NO. XVII 7 CHAIRMAN KRAUSE: Sandy? 8 MS. JOSEPH: Yes, sir. In addition to 9 what's in your notebook, I'd like to just give you a few 10 highlights of what's been going on in bingo. 11 In November we received the approval that 12 we needed from the Comptroller to confirm that we are -- 13 our bingo fees are sufficient to cover the monies that 14 the Legislature appropriated for additional staff. So, 15 as a result, we were able to hire four new auditors who 16 began work on December 1st. They happen to be sitting 17 to your right back here. Guys, wave your hands so they 18 can see. 19 These are four of our new auditors who 20 just started. We have an additional auditor who is 21 committed to start in January. In addition, we are in 22 the process of evaluating more candidates who have 23 applied and hope to have all those positions filled in 24 January. 25 I also just wanted to update you on our 125 1 big -- our big project to replace the automated 2 charitable bingo system project. That's moving along 3 quite well. We're very pleased. The team has completed 4 a detailed review of our licensing process and will 5 begin reviewing the accounting process next week. 6 We're really very impressed with our 7 contractors who grasped what our work is about and what 8 we're doing very quickly, and are very proficient at 9 identifying ways to simplify our process. We're 10 grateful for that and very hopeful this is going to be a 11 fantastic system. 12 In fact, in October we had a contest to 13 name the new system among the bingo staff, and the 14 winning name was the Bingo Operations Services System, 15 the acronym being BOSS. We want to clarify that this 16 does not mean we expect this system to control our 17 lives, but rather that we think it's going to go really 18 fine. 19 And we really compliment RFD and 20 Associates on their help so far. 21 That's all I have today. 22 CHAIRMAN KRAUSE: Wonderful. 23 AGENDA ITEM NO. XVIII 24 CHAIRMAN KRAUSE: Mr. Biard, I know that 25 you're going to help us out by going through Item 18 -- 126 1 MR. BIARD: Yes, sir. 2 CHAIRMAN KRAUSE: -- expeditiously. 3 MR. BIARD: Quickly, yes. Tab 13 contains 4 22 lottery and bingo enforcement matters. The first 18 5 cases, Tabs A through R are NSF lottery retailer license 6 revocations. These all involve a lottery retailer 7 having insufficient funds in their bank account, and 8 they can be handled with a single order. 9 Tab S is a lottery license revocation case 10 based on criminal convictions, and Tabs T through V are 11 bingo and lottery agreed settlement orders. 12 So first Tabs A through R are lottery 13 license revocations. These cases were presented at SOAH 14 for revocation on the grounds the licensee failed to 15 have sufficient funds available to cover electronic fund 16 transfers to our account. The Administrative Law Judge 17 recommends revocation, and staff recommends that you 18 vote to approve the order in each case revoking the 19 license. And if you approve, I have one order that 20 covers all 18 of these cases. 21 COMM. EDWARDS: I make a motion we adopt 22 staff's recommendation for license revocations for A 23 through R -- and through V as well. Right? 24 MR. BIARD: Huh? 25 COMM. EDWARDS: Through V as well? 127 1 MR. BIARD: I can make -- I was going to 2 make a really quick -- I'll make a real quick 3 presentation on those. 4 COMM. EDWARDS: Okay. 5 MR. BIARD: I'll go ahead and do those if 6 you like. Tab S is a proposed revocation of a lottery 7 retailer's license. This is where a licensee failed to 8 notify the Commission that its owner had pled guilty in 9 2013 to theft and in and 2012 to fraudulent use and 10 possession of identifying information, so they're not 11 eligible to hold a lottery sales agent license. That 12 case went to SOAH and the licensee did not appear, so 13 the Judge recommends revocation. 14 Tab T is a lottery agreed order involving 15 a retailer who knowingly and intentionally sold a ticket 16 to a minor. Staff reached a settlement for the retailer 17 to suspend their license for a period of 10 days, and 18 the staff recommends that you approve the agreed order. 19 Tabs U and V are two related bingo orders. 20 Tab U is an agreement with the charity, and Tab V is 21 with a bingo worker and a bookkeeper. In this case 22 during a particular bingo occasion the charity's cash 23 report incorrectly stated that $584 in prizes were paid; 24 however, the primary prize of $500 was never claimed, 25 but the unclaimed money was not deposited into the 128 1 charity's bingo account for some period of time, and it 2 actually was only deposited after our staff contacted 3 them about the discrepancy. So we have two agreed 4 orders here. The agreed order with the charity is for 5 $50 administrative penalty. The agreed order with the 6 bingo worker would remove that individual from the 7 registry of approved bingo workers, and he will not be 8 allowed to apply for 10 years and is prohibited from 9 being involved in charitable bingo for 10 years. In 10 exchange, the Commission will not pursue monetary 11 penalties against that person. 12 So that is Tabs A through V. That is all 13 the enforcement orders. 14 CHAIRMAN KRAUSE: If there's no comment or 15 discussion then, let's entertain that motion. 16 MR. BIARD: I will tell you though -- 17 however, earlier Mr. Fenoglio indicated that he wanted 18 to make a comment on Tabs U and V, but -- 19 MR. FENOGLIO: For the record, my name is 20 Stephen Fenoglio. I don't have any comment to make 21 information the Commissioners have questions. 22 CHAIRMAN KRAUSE: That's really wise. 23 MR. FENOGLIO: Thank you. 24 (Laughter) 25 COMM. EDWARDS: In that case, I move that 129 1 we adopt staff's recommendations for lottery actions A 2 through V. 3 COMM. STAVINOHA: I'll second. 4 CHAIRMAN KRAUSE: I call for a vote. All 5 in favor say "aye." 6 (Those voting in favor so responded) 7 CHAIRMAN KRAUSE: All opposed say "nay." 8 (No response) 9 CHAIRMAN KRAUSE: No "nays," it caries. 10 MR. BIARD: Thank you. And I have orders 11 I will present you for signature. 12 AGENDA ITEM NO. XX 13 CHAIRMAN KRAUSE: I move that the Texas 14 Lottery Commission go into executive session. We have 15 many things to discuss, among those are to deliberate 16 personnel matters, including the appointment and 17 employment evaluation, reassignment, duties, discipline 18 or dismissal of the Executive Director, Charitable Bingo 19 Operations Director, and then we don't have an internal 20 auditor so we're going to hold on that, also the duties 21 of the General Counsel and/or the Human Resources 22 Director pursuant to Section 551.074 of the Texas 23 Government Code. We will also receive legal advice on 24 pending or contemplated litigation or settlement matters 25 and other matters pursuant to Section 551.072, 130 1 subparagraphs 1 and 2 of the Texas Government Code, 2 including but not limited to items posted on the Open 3 Meetings notice for the purposes of receiving legal 4 advice. 5 Is there a second? 6 COMM. STAVINOHA: I second. 7 CHAIRMAN KRAUSE: All in favor say "aye." 8 (All those voting in favor so responded) 9 CHAIRMAN KRAUSE: All right. It is 10 unanimous. We go into executive session in five minutes 11 after a bathroom break. 12 (Recess: 1:01 p.m. to 1:30 p.m) 13 AGENDA ITEM NO. XXI 14 AGENDA ITEM NO. VII TAB N 15 CHAIRMAN KRAUSE: The Lottery Commission 16 is out of executive session. It's 1:30. We do have one 17 action item, and I'm looking for a motion to adopt a 18 rule. 19 COMM. EDWARDS: I move we adopt Item 7, 20 Tab N as proposed by staff, except I move we add two 21 mitigating factors to subsections H: One, remoteness in 22 time. As an example, if more than 10 years have elapsed 23 since the last conviction; and, two, whether an arrest 24 resulted in deferred adjudication rather than a 25 conviction. 131 1 CHAIRMAN KRAUSE: Second? 2 COMM. BAGGETT: I second. 3 CHAIRMAN KRAUSE: All in favor say "aye." 4 (Those voting in favor so responded) 5 CHAIRMAN KRAUSE: Any "nays"? 6 (No response) 7 CHAIRMAN KRAUSE: No nays. It carries by 8 acclamation. 9 AGENDA ITEM NO. XXII 10 CHAIRMAN KRAUSE: The next order of 11 business is to adjourn this meeting, and I make a motion 12 that we adjourn this meeting. Anybody want to second 13 that? 14 COMM. BAGGETT: Second. 15 COMM. EDWARDS: Second. 16 CHAIRMAN KRAUSE: Let's call for a vote on 17 that. All in favor say "aye." 18 (All those voting in favor so responded) 19 CHAIRMAN KRAUSE: Hearing no dissent, we 20 are adjourned. 21 (Proceedings concluded at 1:35 p.m.) 22 23 24 25 132 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 5 in and for the State of Texas, do hereby certify 6 that the above-mentioned matter occurred as 7 hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings of 9 such were reported by me or under my supervision, 10 later reduced to typewritten form under my 11 supervision and control and that the foregoing pages 12 are a full, true, and correct transcription of the 13 original notes. 14 IN WITNESS WHEREOF, I have hereunto set my 15 hand and seal this 20th day of December, 2013. 16 17 _______________________________ 18 LOU RAY Certified Shorthand Reporter 19 CSR No. 1791 - Expires 12/31/13 20 Firm Registration No. 276 Kennedy Reporting Service, Inc. 21 1016 La Posada Drive, Suite 294 Austin, Texas 78752 22 512.474.2233 23 24 Job No. 114720 25