1 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 COMMISSION MEETING OF THE § 7 TEXAS LOTTERY COMMISSION § MONDAY, JUNE 23, 2014 § 8 9 10 COMMISSION MEETING 11 MONDAY, JUNE 23, 2014 12 13 14 BE IT REMEMBERED THAT on Monday, the 23rd day of 15 June 2014, the Texas Lottery Commission meeting was held 16 from 10:00 a.m. until 12:33 p.m., at the offices of the 17 Texas Lottery Commission, 611 East 6th Street, Austin, 18 Texas 78701, before CHAIRMAN J. WINSTON KRAUSE and 19 COMMISSIONERS MARY ANN WILLIAMSON and JODIE G. BAGGETT. 20 The following proceedings were reported via machine 21 shorthand by Lorrie A. Schnoor, Certified Shorthand 22 Reporter, Registered Merit Reporter, Certified Realtime 23 Reporter and Texas Certified Realtime Reporter. 24 25 2 1 APPEARANCES 2 CHAIRMAN: J. Winston Krause 3 COMMISSIONERS: 4 Ms. Mary Ann Williamson Ms. Jodie G. Baggett 5 GENERAL COUNSEL: 6 Mr. Robert F. Biard 7 EXECUTIVE DIRECTOR: 8 Mr. Gary Grief 9 ACTING CHARITABLE BINGO OPERATIONS DIRECTOR: 10 Ms. Debbie Parpounas 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 TABLE OF CONTENTS 2 PAGE 3 PROCEEDINGS - MONDAY, JUNE 23, 2014 ............ 7 4 I. The Texas Lottery Commission will call the meeting to order....................... 7 5 II. Consideration of and possible discussion 6 and/or action, including proposal, on new 16 TAC § 401.323 “MONOPOLY® Millionaires’ 7 Club” Game Rule............................ 7 8 III. Report, possible discussion and/or action on overview of the 2014 Survey of Employee 9 Engagement, presented by Dr. Noel Landuyt University of Texas Institute for 10 Organizational Excellence.................. 44 11 IV. Report by the Acting Charitable Bingo Operations Director and possible discussion 12 and/or action on the Charitable Bingo Operations Division’s activities, including 13 updates on the Business Process Restructuring Project, licensing, 14 accounting and audit activities, pull-tab review, and special projects............... 53 15 V. Report, possible discussion and/or 16 action on the Charitable Bingo Operations Division annual report for calendar 17 years 2012 and 2013........................ 55 18 VI. Consideration of and possible discussion and/or action on external and internal 19 audits and/or reviews relating to the Texas Lottery Commission, and/or on 20 Internal Audit activities, including the Charitable Bingo Operations Division 21 Business Process Restructuring Project and revisions to the FY 2014 Internal 22 Audit Plan................................. 57 23 VII. Consideration of and possible discussion and/or action, including proposal, on 24 amendments to 16 TAC §§ 401.158 Suspension or Revocation of License and 401.160 25 Standard Penalty Chart..................... 61 4 1 TABLE OF CONTENTS 2 PAGE 3 VIII. Report, possible discussion and/or action on lottery sales and revenue, game 4 performance, new game opportunities, advertising, market research, trends, 5 and game contracts, agreements, and procedures................................ 66 6 IX. Report, possible discussion and/or action 7 on transfers to the State and the agency’s budget status.................... 71 8 X. Report, possible discussion and/or action 9 on the FY 2015 Operating Budget........... 73 10 XI. Consideration of and possible discussion and/or action on the agency’s Strategic 11 Plan for FY 2015–2019..................... 74 12 XII. Report, possible discussion and/or action on the 83rd Legislature, including 13 implementation of legislation............. 75 14 XIII. Report, possible discussion and/or action on agency major contracts, including 15 extension and/or amendments on the contracts for internal audit services 16 and instant ticket manufacturing and services.................................. 77 17 XIV. Report, possible discussion and/or action 18 on agency prime contracts, including extension and/or amendments on the 19 contract for Lottery Products Testing..... 79 20 XV. Report, possible discussion and/or action on GTECH Corporation............... 80 21 XVI. Report by the Executive Director and/or 22 possible discussion and/or action on the agency’s operational status, agency 23 procedures, awards, and FTE status........ 80 24 25 5 1 TABLE OF CONTENTS 2 PAGE 3 XVII. Consideration of the status and possible entry of orders in: 4 Lottery NSF License Revocation Cases (Default Unless Otherwise Noted) 5 A. Docket No. 362-14-2396–Robert’s Grocery B. Docket No. 362-14-2397–Conroe Food Mart 6 C. Docket No. 362-14-2606–Lone Star Grocery D. Docket No. 362-14-2607–A&M Food Store 7 E. Docket No. 362-14-2608–Greenbriar Grocery F. Docket No. 362-14-2609–AK Food Mart 8 G. Docket No. 362-14-2820–OST Fuel 2 H. Docket No. 362-14-2821–Super Mercado 9 San Francisco I. Docket No. 362-14-2823–4 U Convenient 10 Store J. Docket No. 362-14-2825–Chiky’s 11 K. Docket No. 362-14-3104–61st Food Mart L. Docket No. 362-14-2395–Z Kwik Stop 12 (Not Default) Other Lottery Revocation 13 M. Docket No. 362-13-2121–Howard’s Drive-In Bingo Revocation 14 N. Docket No. 362-14-1294.B–Humane Society of Cedar Creek........................... 83 15 XVIII. Public comment.......................... 87 16 XIX. Commission may meet in Executive Session: 17 A. To deliberate personnel matters pursuant to Section 551.074 of the Texas Government Code 18 including (i) the appointment, employment evaluation reassignment, duties, discipline, 19 or dismissal of the Executive Director and Acting Charitable Bingo Operations Director; 20 and (ii) the appointment, employment, and duties of the Charitable Bingo Operations 21 Director, including consideration of Applications for the Director position. 22 B. To deliberate the duties of the General Counsel and/or the Human Resources 23 Director pursuant to Section 551.074 of the Texas Government Code. 24 25 6 1 TABLE OF CONTENTS 2 PAGE 3 C. To receive legal advice regarding 4 pending or contemplated litigation pursuant to Section 551.071(1)(A) and/or to 5 receive legal advice regarding settlement offers pursuant to Section 551.071(1)(B) 6 of the Texas Government Code and/or to receive legal advice pursuant to 7 Section 551.071(2) of the Texas Government Code, including but not limited to legal 8 advice regarding the following items: Department of Texas, Veterans of Foreign Wars 9 et al. v. Texas Lottery Commission et al. State of Texas v. Equal Employment 10 Opportunity Commission et al. Legal advice regarding the State Lottery 11 Act, Texas Government Code Chapter 467, the Bingo Enabling Act, the Open Meetings 12 Act, the Administrative Procedure Act, employment law, personnel law, procurement 13 and contract law evidentiary and procedural law, and general government law. Legal advice 14 regarding any item on this open meeting agenda..................................... 87 15 XX. Return to open session for further 16 deliberation and possible action on any matter discussed in Executive Session...... 88 17 XXI. Adjournment................................ 90 18 REPORTER'S CERTIFICATE ......................... 91 19 20 21 22 23 24 25 7 1 P R O C E E D I N G S 2 MONDAY, JUNE 23, 2014 3 (10:00 a.m.) 4 AGENDA ITEM I 5 CHAIRMAN KRAUSE: I hereby call this 6 meeting of the Texas Lottery Commission to order. It's 7 ten o'clock, 10:00 a.m. Commissioners Baggett and 8 Williamson are present. We have a quorum. 9 I've got a bit of news for you and that is 10 that Commissioner Stavinoha, while she is still a 11 commissioner, she has resigned effective as of June the 12 30th. And we appreciate the service that she's given to 13 us, and we're sorry to see her go. So that's going to 14 leave us with one vacancy. 15 AGENDA ITEM II 16 CHAIRMAN KRAUSE: Our first agenda item 17 has to do with 16 TAC Section 401.323 which is a 18 proposed rule dealing with a new game called MONOPOLY® 19 Millionaires' Club Game Rule. 20 Deanne, would you please introduce this to 21 us? 22 MS. RIENSTRA: Okay. Good morning, 23 Commissioners. I am Deanne Rienstra, assistant general 24 counsel. And we have in your notebook for your 25 consideration a proposed new rule, new game rule, for 16 8 1 TAC Section 401.323. It is MONOPOLY® Millionaires' Club 2 Game Rule. The purpose of the new proposed rule is to 3 establish and share with the public the details of the 4 game design, matrix, prize level structure and operation 5 of the new Multi-State Lottery Association national 6 premium lottery draw game. The Commission anticipates 7 sales for the new game will start on or about 8 October 19th, with the first drawing for the new game 9 will occur on or about October 24th. These dates, of 10 course, are subject to change by MUSL and/or the 11 commission's executive director. 12 With us this morning we have Mr. Steve 13 Saferin with SGI, and he is going to present a 14 PowerPoint to explain the new game. 15 MR. GRIEF: Mr. Chairman, if I could 16 interrupt and just make a couple of opening comments 17 before Steve takes over. 18 CHAIRMAN KRAUSE: Yes, sir. 19 MR. GRIEF: I think back to June of 2010, 20 and I met in Chicago in that month four years ago with 21 eight other lottery directors for the first discussion 22 of many that followed involving our desire for a new 23 national premium lottery game, one that could be 24 launched on a national scale at a price point that would 25 be greater than Mega Millions or Powerball. 9 1 At that time four years ago, we had some 2 very simple goals in mind. We wanted a game that 3 obviously would generate new incremental revenue for all 4 of the lotteries that would be involved, we wanted a 5 game that would help us acquire new players through true 6 national marketing efforts, and we wanted to design a 7 game that would be fun, one that would be exciting and 8 would be something a little different than anything we 9 had done before. 10 Since that first meeting several years 11 ago, several of those lottery directors that I met with 12 initially have left the industry, but our industry has 13 never lost its vision and its focus on creating a 14 national premium game. And I've mentioned this to you 15 in numerous past Commission meetings about all the 16 efforts that have gone into developing this game. 17 With Mega Millions filling the $1 price 18 point for our national draw game portfolio and Powerball 19 going strong at the $2 price point, we -- and I'm 20 referring, when I say "we," to lottery directors across 21 the country -- we've been focused these last four years 22 on developing a new draw game that would fill the niche 23 at the $5 draw game price point, similar to the 24 portfolio approach that we used for our scratch games 25 where we have price points that run the spectrum. 10 1 We've also had a desire to reach new 2 players, and we think we can do that with the 3 introduction of a national TV game show to go along with 4 the new base draw game that the MONOPOLY® game provides. 5 The challenges in getting where we are 6 today with the MONOPOLY® Millionaires' Club Game Rule in 7 front of you for your deliberation have been 8 substantial. Every lottery jurisdiction in the country 9 is very unique and each jurisdiction has their own set 10 of challenges and issues to overcome in bringing any new 11 lottery product to market but especially bringing one 12 that has to be delivered in a uniform manner across 13 every jurisdiction. 14 After spending literally years working 15 with our existing vendors to develop such a game, we 16 finally determined that the best way to go about this 17 and to keep us moving forward and to allow any and all 18 vendors to submit their best ideas and products in a way 19 that would be secure and confidential for their benefit 20 was to use a formal procurement process. And we 21 determined that MUSL, the Multi-State Lottery 22 Association, would be the best vehicle for delivering 23 that process to us. 24 So today we've come all the way to having 25 Steve Saferin here with us. Steve is the president of 11 1 Scientific Games Properties Group, and he's also their 2 chief creative officer. 3 Those titles are great, but they don't do 4 any justice to Steve's impact on the industry over the 5 last almost 30 years. He's been one of the great 6 leaders of our industry, and he's been a great partner, 7 specifically to the Texas Lottery, from the role that 8 he's played with MDI and subsequently with Scientific 9 Games for as long as I can remember. 10 Steve is going to share with you in detail 11 today all the nuances of this game. I've asked him to 12 cover it in a thorough and a comprehensive manner, as I 13 believe it's critically important that we be completely 14 transparent on any new game that we're going to ask our 15 players to be involved in. 16 I'll leave you with a couple of thoughts 17 as I turn the presentation over to Steve. 18 The MONOPOLY® -- this MONOPOLY® 19 Millionaires' game, if it's approved by every 20 jurisdiction and gets launched as we expect, it will be 21 the most entrepreneurial activity that the lottery 22 industry has participated in in the history of the 23 industry. I have no doubt about that. And that 24 approach fits very nicely with our mission statement 25 here and your policy as a commission that we try to 12 1 generate as much money for the Foundation School Fund as 2 possible. 3 And while the revenue that we anticipate 4 this game to generate is going to be significant and 5 very important, just as important, if not more so, will 6 be the market penetration to potentially new players 7 through the use of the national TV game show that Steve 8 is going to speak about. And not to be lost is the 9 opportunity for all participating lotteries in this game 10 to work together unshackled by either being a member of 11 the Mega Millions or the Powerball groups, all focused 12 on one mission, and that's bringing this national 13 premium game to the forefront and generating revenue for 14 all of our states. That I'm also excited about. 15 So with that, Steve, I'll turn the 16 presentation over to you. 17 MR. SAFERIN: Thank you, Gary. 18 Chairman, Commissioners, it's really, 19 really good to be in Texas. You'll see in a minute that 20 we have some Texas roots at MDI. 21 We've been part of Scientific Games since 22 2003 when they acquired a company that I started back in 23 1986. I had been the director of programming at ESPN in 24 the early days from '81 to '86, and before that I was a 25 recovering attorney having worked at the Federal 13 1 Communications Commission and then at Viacom and Warner 2 MX Cable. 3 So we started MDI sort of with a mission 4 to try to marry entertainment to the lottery industry, 5 and I think we've been pretty successful. But before we 6 even got involved in the lottery industry, we were in 7 Texas. And we were founded in '86 in Fort Worth in the 8 very -- 9 (Video playing) 10 MR. SAFERIN: So this is a project we did 11 for the Texas Sesquicentennial in 1986. We sold it to 12 Wrangler jeans and it got distributed in all of the 19 13 Texas television markets. We actually filmed it on a 14 stage we built right across 35 at what was then called 15 Third Coast Video on the other side of -- the east side 16 of 35. 17 Willie has a -- Willie had a wonderful 18 neighbor, and our next project was another Texas 19 project. 20 (Video playing) 21 MR. SAFERIN: So this is a project that we 22 sold to Budweiser, and it was quite successful. We 23 tried to replicate it in a couple other states around 24 the country. 25 So in 1987 -- in 1987, we had this idea of 14 1 doing sort of lottery -- vignettes about lottery 2 winners. Our first contract in Texas was in 1995. Our 3 first license game -- because we do a lot of third-party 4 license games for mostly scratch tickets -- was in 2001 5 in Texas; and as I indicated earlier, we were acquired 6 in 2003 by Scientific Games. 7 But even before there was a -- so got to 8 hit the right -- I got to hit the right button here. 9 I'm hitting the wrong button. 10 So even before there was a Texas Lottery 11 in 1987, we created a project for ten other lotteries 12 called The New Millionaires with Alex Trebek, but 13 because we were based in Texas and doing a lot of 14 production work here, we actually brought in 40 lottery 15 winners from around the country, and we filmed some of 16 these spots for other lotteries. 17 And, Pam, can you get this to play? And 18 this is just an example of one of these -- 19 (Video playing) 20 MR. SAFERIN: I thought that sort of tied 21 into the theme of today's presentation. 22 So the first project we ever did with the 23 Texas Lottery was back in 1995, and it was called -- 24 there was a game called Money, Movies, and Music. And 25 what it allowed lotteries to do, and what the Texas 15 1 Lottery did, is they took a portion of the prize money 2 they would pay out and they used it to buy a popular 3 selection of videotapes, audio cassettes -- it's back 4 that long ago -- and CDs to use as second chance prizes. 5 We also produced an exclusive video called 6 "Great Moments in Texas Sports" where we pulled Texas 7 sportswriters and sportscasters around the country and 8 picked the ten greatest moments in Texas sports. It was 9 hosted by Randy Galloway. It was taped at the Texas 10 Hall of Fame that was then in Waco. And we gave away 11 almost a half a million videotapes and CDs and audio 12 cassettes as second chance prizes. 13 And so we've continued to do business with 14 the Texas Lottery with many of our license games -- 15 NASCAR, Harley Davidson, MONOPOLY®, Corvette, the World 16 Poker Tour -- and then just a whole list of games that 17 we've done with the Texas Lottery over the years to help 18 grow the instant ticket product here, bring in new 19 players by using third-party branding that would attract 20 new players that might not ordinarily be interested in 21 playing the lottery. 22 One of the successful brands we're using 23 now is Loteria, which is sort of a Mexican bingo game 24 that does quite well not only in Texas but really all 25 over the country. 16 1 So let me give you a little bit of 2 background on the MONOPOLY® Millionaires' Club because 3 it's sort of -- so Gary gave you a little bit of it from 4 the MUSL side. 5 Back in 2006, MDI acquired the licensing 6 rights to the game show Deal or No Deal, which was 7 hosted by Howie Mandel, and one of the things I realized 8 when I watched Deal or No Deal that it really was the -- 9 it's really the only game show that I knew of where 10 there was no skill involved in playing the game. I 11 mean, it was really -- it's a nonskill-based game. So 12 it got me thinking that maybe we could create a one-hour 13 prime time national lottery game show with the same kind 14 of production values that Deal or No Deal had and use it 15 to help grow the lottery -- the lottery player base and 16 bring in new players. 17 We started down this road by we created a 18 category of games that we call Link Games where multiple 19 lotteries do the same instant ticket. Much like they do 20 with Powerball and Mega Millions, they'll do the same 21 instant ticket. 22 So in 2007 we did a Link Game with Deal or 23 No Deal. About 24 lotteries participated. We printed 24 about a half a billion dollars' worth of Deal or No Deal 25 tickets, and we flew out about 125 lottery winners and 17 1 their guests to Los Angeles, and about 20 of them got to 2 play a nonbroadcast version of Deal or No Deal with 3 Howie and the models, et cetera. 4 Just to point out, Deal or No Deal is 5 going back on the air in prime time sometime this fall, 6 most likely. 7 In 2008 we did a second version of this. 8 You may remember that in addition to the one-hour prime 9 time network version of Deal or No Deal, there's also a 10 daily half-hour version of it. And so we tied our next 11 version of our Link Game to the half-hour version, and 12 we actually had lottery week on Deal or No Deal where 13 all of the contestants had gotten there -- and this was 14 broadcast. All of the contestants had gotten there 15 because they had played the lottery Deal or No Deal game 16 and had -- and took part in a second chance promotion 17 and were selected and actually got to play. 18 So about this time now, the lottery 19 industry is starting to talk a little bit about a 20 national premium game and the potential of a game show. 21 And so we put together a project that we called 10 Steps 22 to a Billion, which was a nonskill-based lottery game, 23 and we made a presentation -- a nonskill-based lottery 24 game show -- I'm sorry -- and we made a presentation to 25 the new game -- National Game Committee in Baltimore in 18 1 2011. I think we piqued a lot of people's interest, but 2 we didn't get a whole lot of traction out of that 3 meeting. And I think one of the reasons we didn't get a 4 lot of traction is we were really concentrating on the 5 game show and not necessarily the lottery game, and they 6 really need to work in tandem with one another. 7 So then, as Gary said, MUSL came out with 8 an RFP. In the summer of 2013, the Multi-State Lottery 9 Association issued an RFP for a new national premium 10 game, and they included -- it wasn't required, but they 11 included the possibility of a television game show to go 12 along with it. 13 I think it's important to note that the 14 objective of this RFP, which has sort of guided what we 15 have done, is to grow the reach of U.S. lottery games by 16 developing products that are relevant to consumers who 17 may not currently be interested in lottery games while 18 meeting the changing desires of current players. That's 19 a very, very difficult task to try to accomplish. 20 So we proposed a concept that we call the 21 MONOPOLY® Millionaires' Club. It's our understanding 22 that there were ten bidders for this contract. The 23 evaluation committee selected four finalists, and oral 24 presentations were at a meeting in Miami in November of 25 2013. And in April of 2014, MDI and Scientific Games 19 1 were selected as the winner. But I want to point out 2 that this has been, since that period of time, an 3 immensely cooperative effort between all of the lottery 4 vendors, between Scientific Games and GTECH and 5 Intralot, we have all worked together because we're 6 trying to sort of raise the lottery industry and get -- 7 bring in new players and increase contributions to good 8 causes. 9 So let me talk a little bit now about the 10 Millionaires' Club, the lottery game itself. This is as 11 opposed to the game show. 12 So in 2005, Scientific Games game 13 developers patented a concept for a new lottery draw 14 game and they called it the Millionaires' Club. The 15 game was based on the premise that lottery players would 16 prefer to see all this million -- hundreds of millions 17 of dollars split up amongst many players rather than one 18 player getting the entire jackpot. MUSL asked for a 19 game changer in their RFP, and at the heart of our 20 offering is the Millionaires' Club lottery game, so it's 21 a new approach. 22 Traditional jackpot games are usually 23 about a single winner and the top prize. You know, 24 occasionally it's split; you get two, maybe even three 25 wining tickets. But you tend to get the most buzz about 20 1 a winning ticket when there's a group of 15 or 20 2 coworkers that have bought a ticket somewhere, and then 3 it becomes a much sort of better story. 4 So the MONOPOLY® Millionaires' Club gives 5 the industry really its first of a kind unique 6 opportunity to talk up tens, to scores, to hopefully 7 hundreds of millionaires that could be created in a 8 single draw. The hype will be generated by players to 9 see how much the number of millionaires can grow each 10 and every week. 11 So what is the game? Basically, as Gary 12 indicated, it's a premium game. We're raising the price 13 point to $5. Instead of drawing it twice a week like 14 Powerball and Mega Millions, it'll only be drawn once a 15 week. The drawing right now is scheduled to be Fridays 16 at ten o'clock Eastern. It's a dual-matrix game, much 17 like Powerball and Mega Millions, in that there's 5 of 18 52 of which you can either pick those numbers yourself 19 or have them quick picked. And then the second part of 20 the matrix is 1 of 28, but those 28 are not numbers. 21 They're actually the properties around the MONOPOLY® 22 board, and those will be quick picked for you; and 23 there's reasons for that that we'll explain in a minute. 24 There are more prize levels than Powerball 25 and Mega Millions 10. The overall odds of winning any 21 1 prize are significantly lower than Powerball and Mega 2 Millions at one in ten. The payout, including the 3 reserve fund, is 50.44 percent. The jackpot is going to 4 start at 15 million and it's going to roll to a maximum 5 of 25 million by Draw 4, so it would be 15, 18, 21, 25. 6 We'll start with ten guaranteed 7 1 million-dollar club prizes. The winning club prize 8 numbers won't be drawn unless the jackpot is won. So if 9 the jackpot is not won, then that number of 10 10 million-dollar club prizes will go -- will continue 11 to rise. 12 The jackpot caps at 25 million. So you 13 can see right there how different this is than Powerball 14 or Mega Millions. The jackpot will never be above 15 25 million. All of the additional monies that are 16 wagered around the country will then go to fund 17 additional 1 million-dollar -- 1 million-dollar prizes, 18 and it's probably going to be drawn with some type of 19 potentially animated drawing in some jurisdictions. 20 So what is the game exactly? 21 Well, the -- so the 1 million-dollar club 22 prizes, so when you buy a ticket and you buy your 5 of 23 52 and 1 of 28 for the base game with the jackpot, you 24 will also be assigned a Millionaires' Club number. That 25 number will be good only for the next draw. 22 1 There's ten 1 million-dollar cash prizes 2 available for the first draw, and that will -- those 3 will roll by a minimum of two each draw, and then all 4 that money, as I said earlier, will -- after we hit 5 25-million jackpot, will go into the million-dollar 6 prizes. 7 Club prizes are only awarded if a top 8 prize is won. And if the top prize is won, we will 9 immediately draw the club prize winners after that 10 drawing and then post them on the lotteries' Web sites. 11 This gives you an example. So on the left 12 here -- I'm going to go back and show you some more 13 about a ticket, but this shows you how the number of 14 millionaires grows, but the jackpot caps at 25 million 15 on the fourth draw, and then you see the number of 16 million-dollar prizes continuing to increase. So based 17 on sort of the math that we have now, we think that it 18 should get hit right around here, so you'd be creating 19 about 77 millionaires in a single draw. But if it rolls 20 longer than that, like happens in Powerball and Mega 21 Millions, we could get, you know, in the 20th draw, 160 22 or more, 180 or more -- 60 -- 80 -- 80 million-dollar 23 winners or perhaps more. 24 I mean, that is a different -- that's a 25 very different marketing message than the lottery 23 1 industry has ever employed before. It's more inclusive. 2 It's what we hear from players in focus groups all the 3 time, "Why does one person have to win all the money? 4 Why can't that money be split up?" And this is going to 5 be an opportunity to see that happen. 6 So this is what a ticket could look like. 7 So here is the -- your five of -- your five numbers that 8 you could have either selected or quick picked, and then 9 there's your property. This is your Millionaires' Club 10 club number, and this is then the code you have to enter 11 in the second chance promotion to be eligible to 12 potentially become a -- in the audience for the game 13 show and then a contestant. 14 This is the game matrix and the prize 15 table. As you can see, there's ten levels of prizes. 16 After the jackpot, there's a hundred-thousand-dollar 17 prize, there's a 20,000, and then it goes all the way 18 down to $5, basically, you get your money back. The 19 payout for the game itself is 50 percent, then there's 20 another .44 percent for a reserve fund. 21 So the rationale for this game is, first 22 of all, there's not currently a 5-dollar draw game for 23 sale anywhere in the United States. It is the most 24 popular price point for instant tickets. It doesn't 25 appear as if higher price points are a barrier to entry 24 1 either on the instant side or now that we've increased 2 the price of Powerball to $2. The premium price, we 3 think, reinforces the value that's embedded within the 4 game, the TV show, the chance for -- to win trips, et 5 cetera. The higher price point allows us to have an 6 impactful top prize plus the most million-dollar prizes 7 we could possibly award. 8 This is a further opportunity to brand 9 this game with MONOPOLY®, which I'll talk about in a 10 minute. And we find that it's more palatable usually 11 for players to accept a higher price point with a new 12 game rather than raise the price of an existing game. 13 And then there is precedence for success 14 for a 5-dollar draw game. There's a game in Canada 15 called Lotto Max that is a 5-dollar game drawing once a 16 week that is similar to this game, although it's not 17 identical. It went on sale in 2009. This game is doing 18 about a dollar a week per capita in the U.S. To put 19 that in perspective, something -- Powerball and Mega 20 Millions combined do about 50 cents a week per capita, 21 so this one game in Canada is doing a dollar a week. 22 It should be pointed out that in Canada, 23 draw games are a much more important part of their 24 portfolio than they are in the United States. Instants 25 are less important there. 25 1 It's a five-dollar game, drawing once a 2 week. It's designed to complement another one of their 3 mega jackpot games which is called Lotto 6/49, but their 4 jackpots don't get nearly as high as ours get here. 5 They also have million-dollar prizes, sort 6 of second chance million-dollar prices, but they're 7 not -- they don't become available until the jackpot 8 reaches its maximum, and they don't have a club number. 9 They just draw new winning number combinations so 10 they're not guaranteed that they're going to have any 11 winners or they may have some winners. So it really is 12 not as robust a value proposition to players as the 13 Millionaires' Club game is. 14 And this just goes to show you what -- 15 they replaced a game, a game called Super 7, in 2009, 16 and you can see the significant uptick in sales in 17 Canada for the Lotto Max game. 18 So why this game? Well, as I said 19 earlier, we're really trying to give players what they 20 ask for. Nobody is -- MUSL is not interested, the 21 member lotteries are not interested, we're not 22 interested in creating another national big jackpot 23 game. That's not what we need. We need something new. 24 And -- but we do know that, you know, the bigger the 25 jackpot, the more play we do get. So we're trying to 26 1 sort of thread the needle here and find a way to change 2 player behavior. 3 For years players had been musing, "Well, 4 why does one person win the jackpot? I wish the jackpot 5 could be split up so lots of people could win it." So 6 they've never had this opportunity. I mean, are they 7 just saying this in focus groups or do they really mean 8 this? Well, we're going to give them a chance now with 9 this game to find out. And we think with the marketing 10 plan that we're putting together and the overlay of the 11 TV game show, we're going to have a game that's really 12 going to change lottery buying habits and really 13 represent an evolution of lottery play in the United 14 States. 15 We've done some research. We did some 16 original research in September and then we did some 17 additional research just about a week and a half ago. 18 And the research was extremely positive. The 19 Millionaires' Club game concept, you know -- half the 20 participants, you know -- there's one to ten, how 21 interested you are, ten being the most, half the 22 participants were in the top three. How familiar are 23 you with the MONOPOLY® logo? 92 percent were familiar 24 with it. The MONOPOLY® branding in the game, more than 25 half really liked that. The TV game show, nearly half 27 1 really appreciated the opportunity for the TV game show. 2 And their purchase intent, just under half said they 3 would purchase it. 4 And interestingly, this game tested better 5 in a younger demographic than it did in an older 6 demographic, and that's something that everyone in the 7 lottery industry has been searching for ways to unlock, 8 you know, younger players to play our lottery games, so 9 this is not your father's lottery game. 10 Okay. So we have this Millionaires' Club 11 game that Scientific Games developed. Why have we 12 married it with MONOPOLY®? First of all, it's the best 13 known and most successful brand in all of gaming. It's 14 recall statistics are really virtually off this chart. 15 It's really a hundred percent almost everywhere in the 16 in the Western world. 17 Why? Well, the DNA of the MONOPOLY® brand 18 really speaks for itself. The physical elements, the 19 tokens, the hotels, the game board, currency, Chance and 20 Community Chest, the emotional elements of success and 21 accomplishment, excitement and the ups and downs, 22 anticipation, luck, disappointment, decision-making, and 23 then the experiential elements of, sort of, a journey 24 from rags to riches, collecting, building, all the 25 things that, you know, has made MONOPOLY® the most 28 1 successful board game of all time has translated very 2 well into the gaming industry. So the iconography is -- 3 you know, who doesn't recognize many of these icons from 4 a MONOPOLY® game? So much so that in 1998 -- this goes 5 to show you what's happened to the cost of postage 6 stamps. In 1998 the U.S. Postal Service actually put 7 out a MONOPOLY® stamp when the stamps were still 32 8 cents. 9 We have had -- MDI and Scientific Games 10 have had the license for MONOPOLY® scratch tickets since 11 about 2003. We've printed -- since 2006, we've printed 12 about 190 -- no, maybe 195 games with a retail value of 13 in excess of $5.5 billion now, and MONOPOLY® games 14 almost always perform at least 10 percent above the 15 average game at that same price point that the game was 16 offered. 17 It's been a remarkably successful and 18 resilient brand for the lottery industry. It has also 19 been the number one brand in sweepstakes with the 20 McDonald's annual MONOPOLY® promotion. They have a 21 significant rise in same-store sales when the promotion 22 is available. They've run it for 21 years. It's now in 23 19 countries. They do -- McDonald's does about 24 $40 million in advertising around it. They do a billion 25 pieces of promotional packaging and 600 million game 29 1 pieces. And I should point out that to participate in 2 the McDonald's MONOPOLY® promotion, you have to be 18 3 years old. 4 So in 2012, Hasbro, which owns the 5 MONOPOLY® brand, executed a brand extension that they 6 called MONOPOLY® Millionaire. And according to La 7 Fleur's magazine, it was, in 2013, one of the most 8 successful licensed brands in the lottery industry, and 9 that is distinct from MONOPOLY®, which was also one of 10 the most successful brands. So we printed about 11 $850 million worth of MONOPOLY® millionaire tickets in 12 2013. 13 In August 2013, we conducted a brand 14 study. We do this periodically to determine which of 15 the brands we currently own or which brands that we are 16 sort of looking at would be most popular as a lottery 17 game. And the number one strategic finding of this 18 research study -- and believe it or not, it was 19 independent -- was launch any MONOPOLY® game. So among 20 all those games tested, we tested two versions. We 21 tested just a regular sort of classic MONOPOLY® as well 22 as a MONOPOLY® Millionaire's game, and they were both 23 identified as very strong candidates for game launch. 24 So going back to the beginning now, 25 this -- from our perspective, a lot of this started with 30 1 the idea of a TV game show. And so what do you need to 2 do to produce a great game show? You need a great game, 3 you need a great host, and you need great tone. And we 4 think we've got it -- most of this -- most of this in 5 place. So now I'm going to show you a short -- we call 6 this -- it's an animated sizzle reel for what the game 7 show might look like. 8 (Video playing) 9 MR. SAFERIN: So that gives you a little 10 bit of idea of what the game show would look like. 11 Lotteries over the years, many lotteries, 12 have done half-hour game shows for some period of time, 13 but they've never been able to sort of aggregate a bunch 14 of lotteries to take advantage of a bigger base to sort 15 of cover the cost, so we're really excited about this 16 opportunity. 17 One of the challenges when trying to get 18 45 lotteries together on a project like this is every 19 lottery wants -- you know, they want to make sure that 20 one of their players is on TV every week. And that's a 21 difficult task given the limited time and the number of 22 lotteries that are participating. But we did come up 23 with what we think is a solution to this that most 24 lotteries really seem to appreciate. And what that is 25 is that there's going to be -- one of the mini games 31 1 built into the show is going to be what we call a local 2 mini game so that if there are 40 lotteries 3 participating, we will tape that particular mini game 40 4 different times and we'll feed the version with the 5 Texas winner to the Texas TV stations, the version of 6 the -- with the Ohio winner to the Ohio TV stations, the 7 version with the Arkansas winner to the Arkansas TV 8 stations. So this gets every lottery to have someone 9 that will be playing one of the games during the show on 10 television in their state. 11 So how do players get to be in the 12 audience? How do they get to become a contestant? 13 Well, first of all, this is -- it's a second chance 14 promotion and it's very consistent with other second 15 chance promotions we have done here in Texas and in 16 other places around the country. They register their 17 tickets online. They receive -- every time they buy a 18 Millionaire's Club ticket, they get that one property 19 that you saw on the ticket and then they get a bonus 20 property. They'll have a MONOPOLY® board. That 21 MONOPOLY® board will be populated with the properties 22 that they have collected. When they get a MONOPOLY®, 23 they'll automatically get entries into a second chance 24 drawing. Depending on the value of the MONOPOLY® 25 depends how many entries they get, so Mediterranean and 32 1 Baltic are worth less than Park Place and Boardwalk. 2 So then there will be drawings that will 3 be scheduled -- really before the game even starts going 4 on sale, we'll periodically have these drawings. And 5 depending on what's -- every state will get at least 6 three winners flown to where the production is going to 7 take place and be present in the audience for a day's 8 worth of shooting. We're going to shoot three shows a 9 day. We think Texas will probably get ten winners all 10 together. Some of it will depend on sales. 11 So each lottery is going to be represented 12 in the audience. There's a base allocation of two 13 audience members sort of like the House and the Senate. 14 There's a base allocation of two audience members for 15 participating in the game, and then the other allocation 16 is based on sales. So you automatically get one for 17 sales, and then depending on how much your sales are 18 compared to other lotteries, you'll get additional ones. 19 And, like I say, we estimate that Texas 20 will probably have about ten winners in the audience. 21 Each audience will have 250 lottery winners and one 22 guest, so there will be 500 people in the audience. And 23 we'll shoot three shows a day, so that audience will be 24 there for those -- the shooting of those three shows. 25 The show is divided into mini games. That 33 1 local game I talked about earlier is just one of those 2 mini games. It'll be played by one member of the 3 audience that will be selected at random after the 4 audience is divided into sections by the MONOPOLY® 5 token, so you can sit in the shoe section or the dog 6 section and we'll go around as different mini games are 7 played and we'll draw randomly one person from that 8 section to play the game. 9 You're only eligible to play once but that 10 does not include the mini games, so somebody who plays a 11 mini game could be selected to play one of the other 12 mini games. That member comes on stage and then they 13 get to play the game and win money. 14 One thing I should point out is that in 15 that final round-the-board game where there's a 16 potential million-dollar top prize, our mathematicians 17 estimate we'll probably give away a million dollars 18 between five and six times a year. That's almost as 19 many times as a million dollars has been given away on 20 television in the history of television game shows. So 21 this is really a game changer for the television game 22 show industry also. 23 So each audience has the ability to 24 participate in three shows. Once a player is on stage, 25 they won't get to go again. We talked about the local 34 1 game and the fact that that means that every lottery 2 will have a player that appears on television in their 3 jurisdiction. So in every Texas market, there will be a 4 Texas Lottery winner that will play at least one. 5 So distribution. This is a -- it's 6 complicated to try to get this on TV and make sure it's 7 not on at, you know, 3:00 in the morning or 2:00 in the 8 afternoon and get some reasonably good viewing times. 9 So, like I said, I've been involved in this project for 10 over five years, and it's very much outside a 11 traditional television deal. 12 Our goal was to get -- to do the best we 13 can to get this on in prime time in every market in the 14 country, and that sort of forced us into Saturday and 15 Sunday. And I'll go over that in a minute. But it 16 starts with four -- the four broadcast challenges. 17 First, the FCC has broadcast network 18 regulation that you cannot broadcast lottery information 19 or advertising on a television station whose transmitter 20 is in a state that does not have a lottery. So assuming 21 that you could say that this game show is lottery 22 information or advertising, and I think that's not an 23 unreasonable conclusion, for a network to carry this as 24 a network program, they would have to black out 25 affiliates in markets that don't have lotteries. 35 1 There's not that many of them. You know, it's Las Vegas 2 and Salt Lake City and Jackson, Mississippi, and 3 Birmingham, Alabama. 4 We had some conversations with NBC, the 5 most in-depth of all of the networks. They were 6 interested in it, and someday they might be interested 7 in putting this on the NBC network but not until it has 8 a track record. So a broadcast network was really not 9 possible. 10 We had no pilot. We had that sizzle reel 11 I just showed you, but usually for something like this, 12 you would have a pilot. 13 When we started this, we didn't know for 14 sure, well, what states are going to be in for sure. I 15 mean, we were hoping everybody was going to be in. 16 Everybody's not going to be in at the beginning. Most 17 people will join over a period of time, so that sort of 18 makes it a little bit more difficult. 19 And then most importantly, you know how 20 television shows go on the air and then they go off the 21 air if they're not successful. We needed a commitment 22 from the broadcast stations that they can't move it; 23 they can't take it off the air. This is a firm 24 commitment for however many weeks we're going to be on 25 the air. 36 1 So there's three windows that are part of 2 our plan. There's a syndication window, and syndication 3 is when you go out and you create a business 4 relationship with one station in each of the television 5 markets. They can be an NBC affiliate; they could be a 6 CW affiliate -- it doesn't matter -- but that's your 7 syndicated network, a national cable network and then 8 video streaming. 9 So we started by creating a deal with 10 Tribune Broadcasting, which is the largest station group 11 in the country in terms of number of television 12 households that their stations serve. So this is one 13 hour of prime time on Saturday or Sunday between 7:00 14 and 11:00. They have 40 stations in 31 lottery markets 15 representing about 44 percent of the TV households. 16 They do have the top five markets in the country and 14 17 of the top 20. 18 In Texas -- so the show will be on KDAF in 19 Dallas and KIAH in Houston. The rest of the -- we've 20 got some arrangements with the rest of the markets, but 21 we're still working on all of the Texas markets. 22 So our syndication is headed up by a 23 gentleman name Barry Wallach. Barry is the former 24 president of NBC Universal TV program distribution, and 25 he's working with the distributors. 37 1 We have another deal with the second 2 largest station group called Sinclair. They have more 3 stations than Tribune, but they don't cover as many 4 households. And there is some overlap. So in one of 5 these markets, either the Sinclair station will get it 6 or the Tribune station will get it. 7 Right now, we currently have, when these 8 are all signed and finalized, about 70 percent of all 9 the TV households in the country we have at least a 10 handshake agreement with stations to carry it, and we 11 continue to work to get the rest of them. We really 12 haven't been at this that long. 13 And so that's going to be Saturday and 14 Sunday. Monday and/or Tuesday night, this will be on 15 prime time on the Game Show Network, which is a second 16 window. They also have an actual active digital 17 presence, so they're in 80 million homes. So most 18 homes, most TV households in the US, have access to the 19 Game Show Network. And it'll -- the same show that was 20 on Saturday or Sunday will be on the Game Show Network 21 on Monday and/or Tuesday. They may carry it both days. 22 It will be a little bit different in that 23 it won't -- we'll pick the best of all those local games 24 and we'll put it in the generic national version, 25 because they won't be able to localize that because it's 38 1 a single feed to the entire country. 2 And then we'll be streaming it most likely 3 on Hulu, although we have had some conversations with 4 Amazon Prime and Netflix. But later in the week, the 5 show will be available for -- and it'll be streamed by 6 one or more of these entities. 7 So finally, I think there's a financial 8 discussion, is: How do we put this all together? Well, 9 first of all, we -- the cost for this that we bid to the 10 lottery industry was -- it started off at 4.75 percent 11 and that was -- and it started at that level because we 12 were told to base our proposal on a population of 13 300 million which is every lottery participating. 14 MUSL came back to us and asked us if the 15 population was less how would we handle the fee. And so 16 what we did is we took a population of 150 million, half 17 of that, and we said, well, then it would be 18 5.75 percent. It wouldn't be twice as much. It would 19 just be one point more. And so the fee is going to vary 20 over time because the population is going to start at 21 about 152 or 155 million, maybe more, because one of the 22 states, a larger state, may come in now in October, and 23 then the -- and then the fee will go down from the 24 starting point of 5.75 to hopefully finally resting at 25 4.75 when all of the lotteries are participating. 39 1 There is a variety of different ways -- we 2 have a lot of experience in providing lotteries with 3 games that include noncash prizing and license brands, 4 and this is -- so there's different ways that you could 5 allocate the costs of this. 6 There is -- you can allocate it towards -- 7 some of it towards prizes because we're going to be 8 paying all the prizes in the game show, you can allocate 9 some of it towards a royalty for Hasbro, and you can 10 allocate it towards administrative fees. This is just 11 two examples, or three examples, at two different 12 populations of how you could allocate the actual fees. 13 So here's what the package includes: All 14 prizes that are available to be won on the game show, 15 and I'll elaborate on that in a minute. All the trip 16 costs related to 250 winners and guests for every three 17 shows that are taped. These trips will include 18 transportation, accommodations, food and beverage, 19 allowance, spending money and, of course, taxes. 20 The annual production of 39 original 21 one-hour episodes of the MONOPOLY® Millionaires' Club 22 game show, the multichannel distribution of the game 23 show through the syndicated network, the national 24 cablecast and streaming, and the sale of all national 25 barter advertising and trade-outs; a sublicense for the 40 1 use of the MONOPOLY® mark in conjunction with all of the 2 marketing activities surrounding the game, the game 3 itself, et cetera; a royalty free license for Scientific 4 Games' patents for the Millionaires' Club lottery game, 5 a multimedia advertising campaign, which will include 6 television and radio and point of sale at all lottery 7 retailers; a robust social media marketing campaign for 8 those lotteries that want to take advantage of that; 9 play-at-home executions for lotteries that want to take 10 advantage of that; 60 seconds of in-show promotion 11 for -- either promote the lottery game itself or perhaps 12 good causes, what the lotteries are set up to do and who 13 they're funding; and then trips for up to five MUSL and 14 lottery staff to each of the taping sessions. 15 So here's a breakdown of this. So the 16 prizing in the games themselves are about -- the 17 potential prizing is about $2 million in each of the -- 18 in each of the games. There's six mini games at 19 $100,000 per game is $600,000. There's the local mini 20 game that -- with three players and 45 lotteries would 21 be $450,000, then in a final GO! Game with a million 22 dollar top prize. So it's about $80 million in prizing 23 that is available. 24 We all know that's not all going to be won 25 because there's players choice. Players are going to 41 1 lose all of their money in some of these games, so we're 2 probably going to self-insure half of that and then 3 we'll probably insure about half of those -- half of 4 that prizing. 5 The trips -- it's about 1,875,000 per 6 every three shows that we're taping. It's $7500 per 7 trip times 250 times the 13 taping sessions, so that's 8 about $25 million. The Hasbro royalty at 1 percent. 9 We're at 300 million population, and a 20-cent 10 per-capita sales, we anticipate $3.2 billion in sales, 11 so that would be 32 million. The production of 39 12 original one-hour episodes. We have a budget of about 13 $600,000 per episode. That's about $23 million for the 14 year. That's a little less than the budget for Deal or 15 No Deal, but Deal or No Deal's budget includes both 16 audience recruitment and show prizing, and our -- those 17 numbers for us are on different line items. 18 And then we're going to pass through -- 19 all the net advertising that we sell, we're going to 20 pass back to MUSL for their -- them to distribute to the 21 participating lotteries. We estimate that the 22 advertising revenue will be about $8 million per 23 cumulative rating point that the show generates. 24 And the current status, the game, as Gary 25 indicated earlier, is scheduled to go on sale 42 1 October 19th. The broadcast of the first game show will 2 be the weekend of February 7th and 8th, which is the 3 weekend after the Super Bowl. We're still working on a 4 host. We hope to have one within probably 30 days. 5 The lottery game rules are currently 6 available through MUSL, and I imagine they're sort of 7 embedded in this -- in what you-all have today. The 8 game show rules are also available through MUSL. 9 And then the second chance promotional 10 drawing schedule, which means when the drawings will be 11 held, when winners will be notified, when taping 12 sessions will occur, and when those shows will be 13 broadcast will be available shortly through MUSL. 14 And that's it. Thank you so much, and I'd 15 be happy to answer any questions. 16 CHAIRMAN KRAUSE: Commissioners? 17 COMM. WILLIAMSON: Okay. I'm going to put 18 y'all on the spot. What are your projections for how 19 much money the state of Texas would receive? 20 MR. SAFERIN: Well, I think Gary 21 probably -- 22 MR. GRIEF: I'd like to ask Kathy to come 23 up and speak to that, Commissioner. 24 MS. PYKA: Thank you. 25 In looking at a five-year revenue 43 1 estimate, we're looking at $109 million over the 2 five-year period. And as we look at revenue, that would 3 be about 22-and-a-half million per fiscal year for each 4 full year of sales. 5 COMM. WILLIAMSON: Okay. 6 CHAIRMAN KRAUSE: Thank you. Commissioner 7 Baggett? 8 (No response) 9 CHAIRMAN KRAUSE: Well, I think that we 10 ought to move this forward so we can get some public 11 comment on that. That's the only way we're going to 12 know what the public thinks about it. I do encourage 13 them to take advantage of the public comment period. 14 And so anyway, do I hear a motion that we begin this 15 rulemaking process? 16 COMM. WILLIAMSON: Yes, I make a motion 17 that we propose new 16 TAC 401.323 MONOPOLY® 18 Millionaires' Game rule. Did I say that right? Okay. 19 CHAIRMAN KRAUSE: You did just fine. 20 Do I have a second? 21 COMM. BAGGETT: I second that. 22 CHAIRMAN KRAUSE: I call for a vote. All 23 in favor, say "aye." 24 COMM. WILLIAMSON: Aye. 25 COMM. BAGGETT: Aye. 44 1 CHAIRMAN KRAUSE: Aye. There are no nays. 2 It carries. 3 And so we're going to take a ten-minute 4 break here. 5 MS. RIENSTRA: Commissioner -- Chairman? 6 CHAIRMAN KRAUSE: Yes. 7 MS. RIENSTRA: We -- I'd also like to get 8 on the record that we do plan on having a public comment 9 hearing on July 22nd here at the headquarters at 11 a.m. 10 CHAIRMAN KRAUSE: Outstanding. Did 11 everybody hear that? Good. Will y'all put that up on 12 the Web site? 13 MS. RIENSTRA: Yes. 14 CHAIRMAN KRAUSE: Thank you, ma'am. We 15 are adjourned for ten minutes. 16 (Recess: 10:57 a.m. to 11:07 a.m.) 17 CHAIRMAN KRAUSE: We're back on. We broke 18 at three till and it is seven after, so we are back in 19 session. 20 Agenda Item No. III. Mr. Shaw. 21 AGENDA ITEM III 22 MR. SHAW: Good morning. Good morning, 23 Commissioners. For the record, my name is John Shaw. 24 I'm the human resources director. 25 In March 2014, employees of the Texas 45 1 Lottery Commission participated in the Survey of 2 Employee Engagement conducted by the Institute of 3 Organizational Excellence at the University of Texas at 4 Austin. 5 Like many state agencies, the Lottery 6 Commission has participated in this or similar survey 7 every other year for many years. This survey, formerly 8 known as the Survey of Organizational Excellence, has 9 been revised in recent years and is now known as the 10 Survey of Employee Engagement, or SEE. We experienced a 11 high participation rate by our employees this year, and 12 our overall survey score is the highest our agency has 13 ever recorded. 14 It's my pleasure to introduce to you 15 Dr. Noel Landuyt from the University of Texas Institute 16 for Organizational Excellence. Dr. Landuyt will provide 17 an overview for you of our recent employee survey. 18 Dr. Landuyt. 19 DR. LANDUYT: Good morning, Commissioners. 20 It's wonderful to be here. I appreciate the opportunity 21 to come speak for a few moments on the results of the 22 Texas Lottery Commission and their employee engagement 23 survey. 24 Just as a quick context, this survey has 25 actually been around since '79. It started with 46 1 Governor Clements, it was integrated into the strategic 2 plan through Governor Richards, it was expanded through 3 Governor Bush, and it's continued through Governor 4 Perry. So it has a long history of being and working 5 with surveying the employees in the state of Texas. 6 It's used in the strategic planning 7 process. It's part of the LBB and governor's office 8 strategic plan instructions to be included in the 9 agency's strategic plan. It goes to the state auditor's 10 office and is included in the workforce summary sheets 11 that go in front of the Legislature. It's requested by 12 Sunset, and so it has a long sense of being integrated 13 within Texas government. 14 What we do is we attempt to measure the 15 engagement of employees and look at how well the 16 employees -- what they think, what they feel, what they 17 know about the agency, and providing that information 18 back to leadership. 19 And so we did last -- we did it in March. 20 It has 71 core items. It was available in English and 21 Spanish and online in accessible versions. We had some 22 additional items to it. We coded out multiple parts of 23 the agency. 24 As, again, what was said, you had a very 25 high response rate of about 78 percent. When we look at 47 1 the industry standard for job satisfaction, employee 2 moral surveys, the industry is pretty happy when it gets 3 40 percent. In the state of Texas, we've continued to 4 get a very high response rate -- and people ask me why, 5 and I guess I'm not quite sure except we've been there 6 for a long time -- of response rates up near 80 percent. 7 And the Commission has continued to have a 8 very high response rate. It's right at what -- the 9 benchmarks, if not a little higher than the benchmarks. 10 The benchmarks are similar size, similar 11 mission, and then statewide. The mission is the 12 article. The similar size is agencies of about this 13 size. We have agencies range from 300 to 500 in a lot 14 of cases, and then we have the statewide which is all 15 state agencies. 16 We also for the -- when we first do the 17 tabulation, we like to give the survey an overall score 18 and we call that the overall score, and it ranges from 19 100 to 500. 350 is the midpoint for perceptual surveys, 20 not 300. What we find is that when you look at the 21 research and the documentation that's out there is that 22 engaged organizations really start -- really score more 23 at 350 and better. So we like to see scores 350 and 24 higher. 25 Lottery far exceeds that, and it's near 48 1 400. We don't see many state agencies at all get above 2 400. Certainly nobody over 425. So the agency is 3 really high up on that scale. As you look at the 4 similar benchmarks, most of those sit around 375 as an 5 average. 6 So Lottery scored a little higher, which 7 means that -- it tells me a couple things. One, the 8 response rate in the high score says that your employees 9 are willing to communicate. They feel as though this is 10 a good vehicle for them to give their opinion, and they 11 like the conversation and the opportunity to do so. 12 As I mentioned, the survey has 71 items, 13 though we do break that into different construct areas. 14 We look at everything from supervision and how team 15 functions to training, which is employee development, 16 pay and benefits, information systems and internal 17 communication and what have you, so we look at a wide 18 range of things with the organization. 19 We then take those scores -- and, again, 20 these are scored from 100 being low and 500 being 21 high -- and we simply, for this graph, put the three 22 highest in blue and the three lowest in red. 23 The first one that sticks out is the pay 24 construct at 334, which is a -- which is not a bad 25 score. It's one of the lowest ones for the agency. 49 1 It -- just as a matter of comparison, the statewide 2 score on this is a 250, so the agency is about 80 points 3 higher than what the state -- the rest of the state 4 scored. 5 Diversity and internal communication also 6 were on the lower -- they're high scoring -- this is a 7 high -- this is a good presentation for me to give. 8 It's a high-scoring agency, but there still are areas of 9 concern. So diversity and internal communication were 10 on the lower; benefits, physical environment, that's 11 physical plant, and strategic were all high. 12 What I did is I pulled out those items so 13 you could kind of see how those kind of play out. These 14 are for the low scoring. You do see that there's some 15 concern amongst employees about giving the right 16 information at the right time, a little bit about open 17 and honest communication, although that's a high-scoring 18 one. The pay one -- the pay -- keeping pace with the 19 cost of living, that's a little bit on the low side. 20 Effort made to get the opinions throughout the 21 organization, that's a little bit on the low as well. 22 And so what this is meant to demonstrate is simply those 23 items that make up those constructs. 24 On the flip side, you have some really 25 very high scores. You have a very high score of people 50 1 understanding the mission of the organization. That's 2 excellent. Feel as though that they work well with 3 their customers, they have adequate resources, 4 equipment, safety procedures are in place, so those are 5 all very high scores. 6 The other thing that we look at within the 7 organization is we look at the climate, we look at the 8 atmosphere, the ethical behavior, upper management 9 fairness and feedback. The atmosphere is specifically 10 harassment. 11 When we look at those different -- five 12 different scores, atmosphere is on the high side, 13 climate and -- I mean, climate and management is on the 14 high side. Fairness and feedback are a little bit on 15 the lower side. You know, the one item that stands out 16 is, you know, I believe people are generally treated 17 fairly. That's a little bit lower, as well as satisfied 18 to give feedback on supervisor's performance, which is 19 on the lower side as well. 20 We don't as -- just, again, another 21 reference point, there are -- out of the 70 22 organizations we did in the state of Texas over the last 23 two years, there's only about three or four that have 24 climate management, which is how people think about 25 their upper management, as one of the high ones. And so 51 1 this agency -- that pops out for me as being one of the 2 higher ones. 3 When we looked at over time, we do compare 4 this over time. And it's really something to have all 5 of the chart over to the right. That means increases in 6 scores. And so everything, probably with the exception 7 of the ones that have five points or less -- physical 8 environment, external communication and the ethics 9 one -- those probably are all flat scores. 10 Statistically, those probably aren't different. 11 Everything else indicates a positive change. The scores 12 went -- in other words, the scores went up. And it -- 13 and some quite strong. Internal communication, the pay 14 score went up high. The management feedback, fairness, 15 all of them are moved in the right direction. 16 I would caution, though, that this agency 17 is getting up to the point at this 400 range where we 18 don't see too many agencies go above 400. We have a 19 couple that are around four -- maybe in the teens, but 20 not a lot than that. So when an organization starts to 21 score high like this, we see this gain, what are we 22 going to see next time? I'm not sure, but the agency 23 has really reached a high pinnacle. 24 The survey's a continuous cycle. The 25 agency -- it happens every two years. We compile and 52 1 make benchmarks available. We provide -- I forgot to 2 mention we do provide that information to Senate Finance 3 and House Appropriations as well. They're very 4 interested in the pay and benefits portion of the 5 survey. 6 The survey, we participate, we prepare, we 7 administer, and then it's back to the agency to 8 interpret and to work on that data. Even though, as I 9 mentioned, it's a high-scoring agency, there's always -- 10 it does -- you know, the high response rate does say 11 that -- indicate that employees are willing to help keep 12 improving the agency, and so that's a continuous process 13 that we work with them. 14 I'd be more than happy to -- if you have 15 any specific questions to address about the survey; or 16 if there's some other type of analysis you'd be 17 interested in, I'd be happy to entertain that as well. 18 CHAIRMAN KRAUSE: Mary? 19 COMM. WILLIAMSON: Thank you. 20 It's always enlightening and good for 21 those up here to know what all of our folks are saying. 22 Of course, for me it just demonstrates my whole point. 23 I always think the employees of this agency are about 24 the best out there, so this just affirms my personal 25 opinion. 53 1 COMM. BAGGETT: I agree. 2 DR. LANDUYT: It's a very positive report. 3 It's a good report. But, you know, again, I always 4 caution with that, that doesn't mean, you know, that 5 they don't want to talk about things, so yeah. 6 COMM. WILLIAMSON: Sure. And there's 7 always room -- you know, when you have more than two 8 human beings together, there's always room for 9 improvement on something. 10 DR. LANDUYT: That's correct. 11 CHAIRMAN KRAUSE: All right. Is this an 12 action item? 13 MR. BIARD: No, sir. 14 CHAIRMAN KRAUSE: All righty. Thank you 15 very much for coming and sharing with us. 16 DR. LANDUYT: Okay. Thank you. 17 Appreciate it. 18 CHAIRMAN KRAUSE: Acting Charitable Bingo 19 Division director. You're up. 20 AGENDA ITEM IV 21 MS. PARPOUNAS: Good morning, 22 Commissioners. For the record, I'm Debbie Parpounas, 23 acting director for the Charitable Bingo Division. 24 In addition to the information in your 25 notebook, I would like to provide an update on the 54 1 business process restructuring project. 2 Last week, we held an initial kickoff 3 meeting with some industry stakeholder representatives 4 to provide a project overview and begin discussions on 5 the business process compliance matrix that's in your 6 notebook. I believe the meeting went very well; and 7 based on the dialogue, several issues were highlighted 8 that I anticipate we, as a team, will discuss further in 9 detail and host workshops to collaborate and hopefully, 10 as a team, reach solutions with a common theme to 11 consider impact to the charities' bottom line and 12 proceed with effective and efficient business processes 13 to incorporate into our overall goal of developing the 14 new bingo operating system known as BOSS. 15 We requested initial feedback identified 16 at this time two weeks from the kickoff meeting which 17 was held on July 2nd. Based on the feedback, we plan to 18 schedule workshops and work towards consensus and 19 resolution. Some of the key issues that were identified 20 relate to bond administration, refunds, and licenses on 21 administrative hold. 22 On the project itself, the team continues 23 to document the business processes and the transaction 24 details, including review and redesign of business 25 forms, to provide better customer service, consistent 55 1 interaction with licensees, and overall have an 2 efficient business model and processes that are more 3 responsive to taxpayers and report financial information 4 consistently with Generally Accepted Accounting 5 Principles and, of course, our regulatory needs. 6 Before I open it up to questions that you 7 may have, I would like to thank the project team for all 8 their time and assistance in this major undertaking in 9 the bingo division and personally assisting me in coming 10 up to speed on this project. 11 I also want to thank the bingo staff for 12 their support and transition during the transition of 13 leadership in the division. We have a resilient team in 14 bingo whom are all hard, dedicated workers, and I 15 appreciate all their hard work. 16 And Commissioner, that concludes my 17 project update, and I'd be happy to answer any 18 questions. 19 CHAIRMAN KRAUSE: Questions? 20 COMM. WILLIAMSON: I don't have any. 21 CHAIRMAN KRAUSE: Okay. We're ready for 22 your next agenda item. 23 AGENDA ITEM V 24 MS. PARPOUNAS: Okay. Commissioners, in 25 your notebook is a copy of the letter that was provided 56 1 to the governor, lieutenant governor, speaker of the 2 house, and the chair of the standing committees on the 3 Senate and House which primarily have jurisdiction over 4 charitable bingo. 5 The data reported in this letter is due on 6 or before June 1st of each even number year. It covers 7 the two previous calendar years, which was 2012 and 8 2013. It reports information provided by the charities 9 on adjusted gross receipts, expenses, net proceeds, a 10 percentage of net proceeds compared to adjusted gross 11 receipts, and calculation of rental income by lessors 12 and conductors. We worked with the governmental affairs 13 division to deliver the letter by the reporting deadline 14 and the letter was submitted to the required offices on 15 May 30th. 16 Additionally provided in your commission 17 packets are the 2012 and 2013 Charitable Bingo 18 Operations annual reports for your approval for release. 19 Once approved, we plan to have these reports available 20 at our Web site. 21 The annual report provides financial 22 information on the condition of bingo in the state of 23 Texas as reported by the charities and lessors. 24 A few highlights from the reports. 25 In 2012 gross receipts were 723.5 million, 57 1 which is the highest receipts that have been since 2 charitable bingo was legalized in Texas. In 2013 gross 3 receipts decreased by almost 4 million from 2012, and 4 they were reported at 719.6 million. Total prizes paid 5 to players in 2013 were 549.4 million, the highest paid 6 on record. And charitable distributions saw a slight 7 increase in 2013 with organizations reporting 8 26.6 million for their charitable purposes. 9 I'd be happy to answer any questions 10 related to the letter in the annual reports for your 11 approval for release. 12 CHAIRMAN KRAUSE: Ladies? 13 COMM. WILLIAMSON: I have no questions. 14 COMM. BAGGETT: No questions. 15 CHAIRMAN KRAUSE: Thank you, ma'am. 16 Our next agenda item is going to take us 17 to Darlene Brown. 18 COMM. WILLIAMSON: Do we have an action 19 item on that? 20 CHAIRMAN KRAUSE: I don't think so. It 21 was just a report. 22 AGENDA ITEM VI 23 MS. BROWN: For the record, I'm Darlene 24 Brown, the Commission's internal auditor and I'm here 25 today to give you your status report on what we've been 58 1 up to these past couple of months. 2 Most of our efforts have been focused 3 towards the -- helping with the bingo project, and we 4 have identified 170 business processes that we'll be 5 looking at. And to date, since it started through last 6 week, we've looked at 20 percent of those, or 34 of 7 them. 8 The staff have been great in the bingo, 9 and also there's a really good project team in place. 10 So we're moving along. We're looking at different 11 processes every week, sometimes two and three processes 12 for each week in addition to getting their daily work 13 done. So they are under a huge amount of pressure, and 14 they're doing so great. 15 One of the things that is going to be 16 immediately noticeable to the licensees is one of the 17 processes we changed has to do with the license renewal 18 process and that staff are now going to be screening the 19 licensees' accounts before that renewal package goes out 20 so that if there's anything wrong with their account, 21 they know up front rather than waiting until they get 22 the application back and say, "Oh, by the way, you're 23 missing this or you're missing that." They're going to 24 get that information right away and be able to better 25 respond. 59 1 But the drawback from this project for 2 internal audit side is it's a great project and we're 3 more than happy to help you out, but we're also not able 4 to get to some of the other audits that we had 5 originally planned. So we're requesting that we -- 6 we're reallocating some of the audit hours that were in 7 the '14 plan towards the bingo project. And in total 8 we're requesting 770 hours be reallocated toward this 9 project. 10 The bulk of those hours are going to be 11 coming from the BOSS project, and we're able to do that 12 because we're working in conjunction with designing the 13 system in conjunction with developing the business 14 processes. 15 The other 250 hours are coming from where 16 we were going to do the very large sales to transfer to 17 state audit on the lottery side, so by adjusting those 18 hours down this year, we're going to have to include 19 more towards that next year. So the major impact is 20 that we're going to be reducing from the one audit to 21 put it towards next year's audit. 22 The other thing that we've been working on 23 is the risk assessment for next year. We will have that 24 ready to you for your next audit committee meeting. 25 We'll have the proposed 2015 audit plan for you. And we 60 1 also started the bingo allocation audit. And then the 2 next period, we are going to start that sales to 3 transfer audit, and we're also going to start the 4 information security audit. 5 So in total we will have completed the 6 audit plan by August 15 like anticipated. It's just the 7 hours will be reduced on some of those audits. 8 And so what we're asking for you today is 9 to authorize the approval of the adjustment of these 10 hours for this year's plan so that when we come to 11 developing the annual audit report, we will have an 12 approved revised plan to include in that report. 13 So I'd be happy to answer any questions 14 you might have. 15 CHAIRMAN KRAUSE: Well, we have a 16 recommend -- questions? 17 COMM. WILLIAMSON: No. So basically 18 you're going to be doing the same things. It's just the 19 timing of it will be different. 20 MS. BROWN: Correct. Correct. 21 CHAIRMAN KRAUSE: Is there a -- so there's 22 a recommendation that we take action on this. Is there 23 a motion to approve internal audit's recommendation. 24 COMM. BAGGETT: I make a motion that we 25 approve the internal audit's reallocated hours 61 1 recommendation. 2 CHAIRMAN KRAUSE: And a second? 3 COMM. WILLIAMSON: Second. 4 CHAIRMAN KRAUSE: I call for a vote. All 5 in favor, say "aye." 6 COMM. WILLIAMSON: Aye. 7 COMM. BAGGETT: Aye. 8 CHAIRMAN KRAUSE: There's no nays. It 9 carries. 10 Thank you, ma'am. 11 Lea Burnett. 12 MS. BURNETT: Burnett. 13 CHAIRMAN KRAUSE: Burnett. Lea Burnett. 14 MS. BURNETT: Good morning. 15 CHAIRMAN KRAUSE: Happy to have you. 16 AGENDA ITEM VII 17 MS. BURNETT: Thank you, sir. 18 Good morning, Chairman and Commissioners. 19 For the record, my name is Lea Burnett. I am an 20 assistant general counsel in legal services. 21 And I'm here to present for you -- they're 22 also in your packet -- some proposed rule amendments for 23 your consideration. 24 The proposed amendments concern existing 25 Lottery Commission rules 16 TAC 401.158 and 401.160. If 62 1 you approve of the proposals, we are seeking your 2 permission to post these in the Texas Register to seek 3 public comment. 4 Rule 401.158, which is entitled, 5 "Suspension or Revocation of License," describes types 6 of conducts for which the agency will cite and sanction 7 a lottery retailer in an enforcement case. 8 Specifically, the staff is proposing 9 amendments to clarify sections of the existing rule 10 regarding unauthorized purchases of lottery tickets from 11 customers by lottery retailers. The existing rule 12 prohibits lottery retailers from making offers to 13 purchase lottery tickets from those customers. The 14 amendments will clarify that lottery retailers are also 15 not authorized to accept offers to purchase lottery 16 tickets when the offer is made by the customer. The 17 staff believes that this clarification is well within 18 the Commission's authority under State Lottery Act 19 provisions that require a license to sell lottery 20 tickets in addition to sections that prohibit 21 individuals from conspiring to claim lottery prizes by 22 fraud, deceit, or misrepresentation. 23 In addition to this key clarification, the 24 staff suggests making several nonsubstantive grammatical 25 clarifications in other subsections under 401.158. 63 1 Now under 16 TAC 401.160(g)(10), Standard 2 Penalty Chart, the Commission promulgated a chart that 3 lays out the potential range of sanctions that are -- 4 that the Commission will seek for prohibitive conduct 5 listed in 401.58 -- 158. Any proposed changes that are 6 made to 16 TAC 401.158 therefore must also be made in 7 401.160 to maintain the consistency between the two 8 rules. Therefore all the proposed amendments to 401.158 9 have been proposed as amendments to the text in 401.160. 10 I'm glad to go into any more detail if you 11 like. Otherwise, we request permission to post proposed 12 amendments to these rules in the Texas Register for 13 public comment. 14 CHAIRMAN KRAUSE: Commissioners? 15 COMM. WILLIAMSON: I have no questions. 16 COMM. BAGGETT: I have none. 17 CHAIRMAN KRAUSE: So being clear means 18 that we don't want there to be any transactions between 19 the retailers and the customers. 20 MS. BURNETT: Yes, sir. 21 CHAIRMAN KRAUSE: Either way, who offers 22 doesn't matter. No business. 23 MS. BURNETT: Yes, sir. As you can well 24 imagine, there are some disputes oftentimes in the facts 25 between who actually made the offer. And so, therefore, 64 1 this will sort of eliminate that as a possibility for 2 the enforcement attorneys to have to explore. Either 3 way, it's not okay, and so therefore, that's why. 4 CHAIRMAN KRAUSE: So how much of this is 5 going on? Was this like a minute amount or was this a 6 vast amount? 7 MS. BURNETT: We've had -- we've had at 8 least two cases on it in this last year, and we've had 9 some -- would you like to go into that, Michael? 10 MR. ANGER: Good morning, Commissioners. 11 For the record, my name is Michael Anger and I'm the 12 Lottery Operations Director. 13 As Lea started to jump into, it's not a 14 frequent occurrence, but when we -- retailers pay prizes 15 every day, and we want to encourage retailers to pay 16 prizes. That's good and convenient for lottery players. 17 It's good for the retailer for their lottery business, 18 and it's something that we encourage them to do. 19 And the dividing line there is the IRS 20 rules. So we allow retailers to pay prizes at their 21 retail locations up to $599, and they can perform 22 validations on their terminals, validate tickets and pay 23 those prizes. So we want that to occur at retail 24 locations. 25 What this rule is really about is those 65 1 prizes of $600 or more that are supposed to come to the 2 Commission because we're supposed to collect tax 3 information from those individuals who claim those 4 prizes. And we then, in turn, provide that information 5 to the IRS for tax reporting purposes. 6 So periodically we have retailers who 7 engage in practices outside of what we set them up to do 8 as far as validation and payment of prizes, and they 9 enter into agreements outside of a proper validation of 10 a ticketed retail location in exchange for some type of 11 financial exchange in order to claim that prize on 12 behalf of a claimant. And so that's also against our 13 claiming rules as well. 14 And so this is to clarify those 15 transactions so that there's no, you know, 16 misunderstanding on the part of retailer. It's really 17 just to kind of strengthen or be more clear, if you 18 will, in what we believe is already pretty clear, that 19 retailers shouldn't be engaging in these transactions 20 with players. 21 CHAIRMAN KRAUSE: Thank you. 22 All right. I believe -- does that 23 generate any questions or comments? 24 (No response) 25 CHAIRMAN KRAUSE: All right. Well, then 66 1 I'm going to entertain a motion that we initiate the 2 rulemaking process on this rule change. 3 COMM. WILLIAMSON: I second. 4 COMM. BAGGETT: I second. 5 CHAIRMAN KRAUSE: Okay. Well, then let's 6 just call for -- 7 COMM. BAGGETT: You did it. 8 CHAIRMAN KRAUSE: I didn't mean to. It's 9 just -- try to -- but anyway, we're going to vote. And 10 so anyway, all in favor, say "aye." 11 COMM. WILLIAMSON: Aye. 12 COMM. BAGGETT: Aye. 13 CHAIRMAN KRAUSE: Aye. 14 All opposed? There being no nays, it 15 carries unanimously. 16 MR. BIARD: I have a T-bar memo for this 17 I'll get y'all to sign, along with the other rulemaking 18 matter. 19 AGENDA ITEMS VIII 20 CHAIRMAN KRAUSE: Ms. Pyka, the next three 21 are yours, and you may segue straight into them unless 22 we have questions. 23 MS. PYKA: Good morning, Commissioners. 24 For the record, my name is Kathy Pyka. I'm the 25 controller for the Commission. And with me to my right 67 1 is Robert Tirloni who is our products and drawings 2 manager. 3 Commissioners, the first chart that we 4 have for you this morning include sales through the week 5 ending June the 14th, 2014. This is our 41st week of 6 the fiscal year and sales are at $3,523,000,000, which 7 is an increase of $25.9 million over the previous fiscal 8 year. 9 As we look at our instant ticket sales 10 reflected on the second orange bar, we're at 11 $2,062,000,000, which is a 47-and-a-half million-dollar 12 increase over last fiscal year. 13 Commissioners, at this point our instant 14 ticket sales amount to 74.3 percent of total sales for 15 fiscal year '14. 16 Our fiscal year 2014 draw sales reflected 17 on the second blue bar are at $905.2 million, which is a 18 $21.6 million decline from last fiscal year. 19 Commissioners, as we noted last Commission 20 meeting, we recognize that we were faced with two 21 Powerball draws last fiscal year that exceeded 22 $550 million, and so that is much of that sales decline 23 that we're seeing this fiscal year. 24 We'll now move on to our next slide. It's 25 our cumulative daily average sales comparison which 68 1 includes fiscal years 2012, '13, and '14. The overall 2 daily average sales value for fiscal year 2014 is 3 $12.3 million. That's an $80,000 per day increase over 4 fiscal year 2013, and it's a $682,000 increase over 5 fiscal year 2012. 6 Looking at the details of this, our 7 jackpot games are highlighted in the white font, reflect 8 an average daily total of $1.9 million for fiscal year 9 2014. That's a $10,000 per day increase over last 10 fiscal year, and it's a $15,000 decline from fiscal year 11 2012. 12 Within this category, our Mega Millions 13 game reflects a healthy increase over last fiscal year 14 with a December jackpot roll that reached up to 636,000. 15 However, we do note that Powerball does have a decrease 16 of 235,000 as compared to last fiscal year. 17 Our daily games reflected with the blue 18 font reflect a daily average of $1.24 million for the 19 fiscal year. That's $127,000 per day decrease from last 20 fiscal year. Within this category, our Daily 4 game 21 continues to reflect a strong year-to-date sales with 22 13-point -- 13 percent increase over last fiscal year. 23 And then closing out this chart, we've got 24 our instant ticket sales with the daily average of 25 $9.12 million, which is an increase of $197,000 over the 69 1 previous fiscal year and just over $600,000 over fiscal 2 year 2012. 3 So, Commissioners, with that, Robert will 4 now cover actual sales by product. 5 MR. TIRLONI: Good morning, Commissioners. 6 For the record, Robert Tirloni, products and drawings 7 manager for the Commission. 8 This next slide follows the same layout 9 that we just looked at. It's through last Saturday, 10 June 14th. Our jackpot games are up at the top in 11 white. We are seeing a gain over last fiscal year in 12 our jackpot category of just under $12 million. You'll 13 notice healthy gains from the Mega Millions game due to 14 jackpots. You'll also see that the gains in Mega 15 Millions are kind of countered by the losses in 16 Powerball. And, again, that's just due to a lack of 17 large Powerball jackpots this fiscal. 18 The blue at the middle is our daily games. 19 As Kathy mentioned, Daily 4 continues to be a strong 20 performer for us. It's up 7-and-a-half million dollars 21 this fiscal compared to last. 22 Our biggest decrease in our daily games is 23 our All or Nothing game. We've talked about this in 24 past meetings. This game is struggling somewhat since 25 its comeback since -- from its sales suspension. We 70 1 continue to put efforts behind that game to increase 2 sales and awareness of the game. 3 So all told our draw games are down 4 $21 million, or just under 22, I should say; but we are 5 seeing very good sales results from our instant product 6 category. Our instants are up just under $48 million. 7 And combined as a whole for the entire product 8 portfolio, our sales are up for the year just under 9 $26 million at $3.52 billion. 10 We show you this slide about once a 11 quarter. This is our instant ticket sales for the 12 fiscal year, again, through last Saturday, June 14th. 13 So this pie chart represents just under $2.7 billion in 14 instant ticket sales. Not much difference from what 15 we've seen in the past. The biggest slice of the pie is 16 the 5-dollar price point. That continues to be our best 17 selling price point. It's followed by the 10, the 20, 18 and then by the 2; not much difference from what we've 19 experienced for quite some time now. 20 I have one last piece of information to 21 share with you today, and I've given you samples. You 22 have them up on your desk in front of you. This is our 23 $200 million Cash Blowout game. This is our new $10 24 spotlight game. I wanted to show it to you here before 25 you started to see advertising to support it. 71 1 This game will start in approximately a 2 month, on July 21st. This is a big product initiative 3 for us. It will receive full marketing support, 4 including TV advertising, radio advertising, outdoor 5 billboards, full suite of in-store point of sale. We've 6 seen very good sales success from our spotlight games at 7 both the 10- and the 20-dollar price point, so we're 8 hoping that this $10 spotlight game will give us a 9 strong close to the fiscal year '14 and a good start to 10 fiscal year '15. 11 And that's our presentation today, but 12 we'll be happy to answer any questions. 13 CHAIRMAN KRAUSE: Commissioners? 14 COMM. WILLIAMSON: I don't have any. 15 CHAIRMAN KRAUSE: Excellent report. 16 Next item. 17 AGENDA ITEM IX 18 MS. PYKA: Certainly. I'll move on to Tab 19 Item No. IX. This includes information on the agency's 20 transfers to the state and the agency's budget status. 21 Commissioners, the report in your notebook 22 includes accrued revenue transfers and allocations to 23 the Foundation School Fund and the Texas Veterans' 24 Commission as well as the allocation of unclaimed prizes 25 for the period ending May 31st, 2014. 72 1 Our total accrued revenue transfers to the 2 state amounted to $892.2 million for the first nine 3 months of the fiscal year. Of that $892.2 million 4 transfer to the state, $826.5 million was transferred to 5 the Foundation School Fund. $7.3 million has been 6 transferred to the Texas Veterans Commission with the 7 remaining balance of 58.4 million transferred from 8 unclaimed prizes. 9 Commissioners, this represents a 10 1.6 percent increase, or $13.1 million, over the total 11 amount transferred to the Foundation School Fund through 12 May of 2013, and this also brings our cumulative 13 transfers to the Foundation School Fund through May at 14 $16.76 billion. 15 The final item under this tab, 16 Commissioners, is the agency's fiscal year 2014 method 17 of finance summary for the period ending February 28th, 18 2014. The commission's lottery account budget for 19 fiscal year 2014 is 201.6 million. Of that amount, 20 81.3 percent was encumbered and expended through the end 21 of the second period. And our bingo operations budget, 22 funded out of general revenue, is $16.5 million, and we 23 have encumbered and expended 60 percent of that total 24 budget through the end of the second period. 25 I'd be happy to answer any questions. 73 1 CHAIRMAN KRAUSE: Questions? 2 COMM. WILLIAMSON: No, I don't have any. 3 COMM. BAGGETT: No. 4 CHAIRMAN KRAUSE: Next item. 5 AGENDA ITEM X 6 MS. PYKA: Certainly. Commissioners, Tab 7 X includes the fiscal year 2015 operating budget for 8 your consideration this morning. 9 The proposed budget that we have before 10 you is for $220,724,903 and includes 328.5 full-time 11 equivalent positions. The budget was developed in 12 accordance with the appropriation amounts outlined in 13 Senate Bill 1, adjusted for the rider in Article IX 14 appropriations. 15 The initial draft to the budget was 16 developed by the office of the controller and delivered 17 to division management for their direct input, and the 18 final draft was developed after receiving input from the 19 division directors and reviewed by executive management. 20 Commissioners, this concludes my 21 presentation. I'd be happy to answer any questions and 22 am seeking your approval on the fiscal year 2015 budget. 23 CHAIRMAN KRAUSE: Questions? Motion? 24 COMM. WILLIAMSON: I make a motion that we 25 approve the fiscal year 2015 operating budget. 74 1 COMM. BAGGETT: I second. 2 CHAIRMAN KRAUSE: All in favor, say "aye." 3 COMM. WILLIAMSON: Aye. 4 COMM. BAGGETT: Aye. 5 CHAIRMAN KRAUSE: Any opposed? No nays. 6 It carries. 7 MS. PYKA: Thank you, Commissioners. 8 CHAIRMAN KRAUSE: Thank you, ma'am. 9 Mr. Gary Grief, you're up. 10 AGENDA ITEM XI 11 MR. GRIEF: Commissioners, our agency's 12 strategic plan for fiscal years 2015 through 2019 is due 13 to the governor's Office of Budget Planning and Policy 14 as well as to the Legislative Budget Board on July the 15 7th. We've provided you a copy of the strategic plan 16 for your review, and I'm asking you this morning to 17 approve that document for submission. 18 CHAIRMAN KRAUSE: Questions? Comments? 19 Motions? 20 COMM. BAGGETT: I make a motion that we 21 approve the Executive Director's recommendation. 22 CHAIRMAN KRAUSE: Second? 23 COMM. WILLIAMSON: Second. 24 CHAIRMAN KRAUSE: All in favor, say "aye." 25 COMM. WILLIAMSON: Aye. 75 1 COMM. BAGGETT: Aye. 2 CHAIRMAN KRAUSE: Aye. Carries. 3 MR. BIARD: Chairman, I have a document 4 for you to sign I'll give you later. 5 CHAIRMAN KRAUSE: Excellent. 6 AGENDA ITEM XII 7 MS. TREVINO: Good morning, Commissioners. 8 For the record, I'm Nelda Trevino, Director of 9 Governmental Affairs. 10 At the last Commission meeting, I reported 11 as part of the Sunset Review Process, the Sunset Act 12 requires the Sunset Advisory Commission to review the 13 implementation of their recommendations and resulting 14 legislation. I also mentioned the state auditor's 15 office participates to specifically review the 16 implementation of management recommendations adopted by 17 the Sunset Advisory Commission. 18 The state auditor's office did contact the 19 agency in May and requested the agency provide 20 responsive information related to the recommendation -- 21 related to the bingo related management recommendation. 22 Debbie did provide responsive implementation status 23 information to the state auditor's office by the 24 required deadline. 25 Additionally, as part of the required 76 1 rulemaking the Commission undertook resulting from the 2 agency's Sunset legislation, you may recall one of the 3 bingo rule amendments relates to certain disqualifying 4 offenses for bingo licensees and that the Commission 5 requested an attorney general opinion for guidance on 6 the applicability to an officer, director, or 7 shareholder of a bingo entity. 8 The attorney general issued his opinion on 9 June the 9th and concluded the Commission may revoke or 10 deny a legal entity's license for the conviction of an 11 officer, director, or shareholder only for three 12 offenses listed in the Bingo Enabling Act, and that 13 includes gambling, a gambling related offense or 14 criminal fraud. Therefore, the rule adopted by the 15 Commission conforms to the attorney general's opinion 16 and no modifications are needed to the rule. 17 Lastly, there are no updates to provide 18 regarding the ten-member legislative review committee 19 that was a result of the Sunset legislation. We'll keep 20 you advised on any developments regarding any 21 appointments to this committee. 22 And this concludes my report, and I'll be 23 glad to answer any questions. 24 CHAIRMAN KRAUSE: Questions? 25 COMM. WILLIAMSON: I have none. 77 1 CHAIRMAN KRAUSE: On this committee, is 2 there a time frame within which appointments must be 3 made? 4 MS. TREVINO: There's nothing stipulated 5 in the Sunset bill that talks about the time frame as to 6 when appointments need to be made. There is a provision 7 that indicates that the committee issue its initial 8 report by December of this year. 9 CHAIRMAN KRAUSE: And that's the joint -- 10 MS. TREVINO: Yes. 11 CHAIRMAN KRAUSE: -- committee? 12 MS. TREVINO: Correct. Five members from 13 the House and five members from the Senate. 14 CHAIRMAN KRAUSE: Thank you, ma'am. 15 MS. TREVINO: You're welcome. 16 AGENDA ITEM XIII 17 CHAIRMAN KRAUSE: Mr. Fernandez. We 18 always love hearing from you. 19 MR. FERNANDEZ: I wouldn't miss it. 20 Good morning, Mr. Chairman, Commissioners. 21 For the record, my name is Mike Fernandez. I'm the 22 Director of Administration. 23 Item XIII in your notebook addresses 24 action items for two major contracts, which as you know 25 requires board approval. 78 1 The first is staff is seeking Commission 2 approval to extend the current contract for internal 3 audit services with McConnell Jones for a one-year 4 period. As you know, we need to seek delegated 5 authority from the state auditor's office in order to 6 move forward with that extension. And that is an action 7 item. 8 If you have any questions, I'd be happy to 9 answer it. 10 CHAIRMAN KRAUSE: Questions? Comments? 11 Motion? 12 COMM. WILLIAMSON: I make a motion that we 13 extend the contract with our internal auditors as you 14 stipulated. 15 CHAIRMAN KRAUSE: Second? 16 COMM. BAGGETT: I second. 17 CHAIRMAN KRAUSE: All in favor, say "aye." 18 COMM. WILLIAMSON: Aye. 19 COMM. BAGGETT: Aye. 20 CHAIRMAN KRAUSE: Aye. 21 Got you what you want. 22 MR. FERNANDEZ: Thank you very much. 23 The second action item for the Commission 24 is staff is also seeking approval to renegotiate instant 25 ticket pricing for print quantities affecting six 79 1 different instant ticket sizes. This request is in 2 response to increasing the quantity of tickets being 3 printed in those specific sizes. 4 I'd be happy to answer -- Michael or I 5 would be happy to answer any questions on that agenda 6 item. That is an action item for the board. 7 CHAIRMAN KRAUSE: All righty. Motion? 8 COMM. WILLIAMSON: I make a motion that we 9 renegotiate the contract on our -- what you described. 10 MR. FERNANDEZ: Instant ticket -- 11 CHAIRMAN KRAUSE: Second? 12 COMM. BAGGETT: I second. 13 CHAIRMAN KRAUSE: All in favor, say "aye." 14 COMM. WILLIAMSON: Aye. 15 COMM. BAGGETT: Aye. 16 CHAIRMAN KRAUSE: Aye. It carries. 17 AGENDA ITEM XIV 18 MR. FERNANDEZ: Thank you. 19 Again, Item No. XIV in your packet is a 20 briefing item. And it's to advise the Commission of 21 staff's intent to extend the current contract for 22 lottery product testing services with Barker & Herbert 23 Analytical Laboratories for a one-year period. These 24 are the people that test our instant tickets. 25 That is an action item -- 80 1 CHAIRMAN KRAUSE: All right. 2 MR. FERNANDEZ: -- or that is a briefing 3 item. I apologize, Commissioners. 4 CHAIRMAN KRAUSE: All right. 5 MR. FERNANDEZ: That's it. 6 CHAIRMAN KRAUSE: All right. Thank you so 7 much. 8 MR. FERNANDEZ: Thank you. 9 CHAIRMAN KRAUSE: Mr. Grief? 10 AGENDA ITEMS XV and XVI 11 MR. GRIEF: Commissioners, other than 12 what's in your notebook this morning under the GTECH 13 item, I did want to recognize two visitors to the Texas 14 Lottery Commission today from GTECH headquarters, both 15 of whom are certainly no stranger to Austin or to our 16 Texas Lottery team. 17 First, we have over on the right side 18 Connie Laverty O'Connor, who is the Senior Vice 19 President and Chief Customer Officer, and we also have 20 Alan Eland, Senior Vice President and Chief Operating 21 Officer of GTECH North America. 22 And I just want to say I really appreciate 23 Connie and Alan being here, and I appreciate their 24 interest in our ongoing success. 25 CHAIRMAN KRAUSE: We're happy to have 81 1 y'all. 2 MR. GRIEF: Moving on. 3 CHAIRMAN KRAUSE: Sure. 4 MR. GRIEF: In addition to what's in your 5 notebook today, Mr. Chairman, I have two additional 6 items to report on. 7 Commissioner Williamson had asked a 8 question at a previous Commission meeting about the 9 economic impact of a couple of lottery conferences that 10 we've managed to get scheduled in Texas over the next 11 year. The first one is the Dallas NASPL lottery 12 conference. That's scheduled for October of 2015, and 13 NASPL staff have indicated that the expected economic 14 impact in the Dallas area will be between 1.6 and 15 $2 million. 16 And for the La Fleur's conference coming 17 up in Austin this November, which I'm hopeful all 18 commissioners will be able to attend, that's a much 19 smaller conference. Economic impact figure on that 20 conference is estimated at right at half a million 21 dollars. 22 My second and final item for report has to 23 do with last week. Last week was the NASPL spring 24 directors conference that was held in New Hampshire. 25 And although I presided over NASPL executive committee 82 1 meetings several times in the past, this was my first 2 opportunity to preside over a full meeting of the NASPL 3 membership. 4 Forty-six lotteries were represented at 5 that meeting. The governor of New Hampshire, the 6 Honorable Maggie Hassan, also joined us during the week 7 at one event to show her support for the lottery 8 industry in general and the New Hampshire lottery in 9 particular. 10 And in summary, the week of meetings went 11 very well. Of course highlighted by the positive vote 12 that we obtained from all the participating lotteries in 13 the MONOPOLY® Millionaires' Club game, and something I 14 had been pushing for, we had the first ever joint 15 meeting between the executive committees of the World 16 Lottery Association and NASPL. 17 The World Lottery Association executive 18 members came from all parts of the globe to sit down 19 with us and talk about gaming issues that they're facing 20 in different parts of the world, and we found that to be 21 very enlightening and helpful as well. 22 Mr. Chairman, that concludes my report 23 this morning. I'd be happy to answer any questions. 24 CHAIRMAN KRAUSE: Outstanding. 25 Questions? 83 1 COMM. WILLIAMSON: No, I don't have any. 2 COMM. BAGGETT: No. 3 CHAIRMAN KRAUSE: All right. Very good, 4 Mr. Grief. Appreciate that. 5 Next, Mr. Biard. 6 AGENDA ITEM XVII 7 MR. BIARD: Good morning, Commissioners. 8 For the record, I'm Bob Biard, general counsel. 9 And today, Tab XVII contains 14 lottery 10 and bingo enforcement matters. These are cases where 11 Commission staff found a violation, and most of the time 12 either the lottery or bingo licensee failed to appear at 13 the hearing or the staff and the licensee have reached a 14 settlement. I'll briefly describe the cases and you can 15 take them all up in a single vote. 16 The first 12 cases, Tabs A through L, are 17 NSF lottery retailer license revocations and are handled 18 in a single order. These cases were presented at the 19 State Office of Administrative Hearings for revocation 20 of the retailer's license on the ground that the 21 licensee failed to have sufficient funds in their bank 22 account to cover electronic fund transfers to the 23 Lottery Commission's account. The administrative law 24 judge recommends revocation in each case, and Staff 25 recommends that you vote to approve the order in each 84 1 case revoking the license. 2 Tab M is a lottery license revocation case 3 that was protested at SOAH. In this case, the retailer 4 purchased winning lottery tickets from lottery players 5 for less than the full prize amount and cashed them for 6 profit. Specifically, in October 2013, the retailer 7 offered to and did purchase a winning instant 8 scratch-off ticket with a prize amount of $1,000 from a 9 Lottery Commission investigator for $600 in violation of 10 Commission rules and the Lottery Act. 11 The retailer subsequently admitted he had 12 purchased lottery tickets from other lottery players in 13 the past. The retailer said he was not aware of this 14 being a violation, but it is, and the SOAH judge 15 recommends revocation. 16 Tab N, the last tab under XVII, is a bingo 17 revocation case. In this case, the charity's bingo 18 chairperson failed to take the mandatory bingo operator 19 training, which is offered online. The charity did not 20 appear at the hearing, and the judge recommends 21 revocation in that matter as well. 22 I'll be happy to answer any questions, or 23 you can take all these up in a single vote, if you'd 24 like. 25 CHAIRMAN KRAUSE: Questions? 85 1 COMM. WILLIAMSON: I have none. 2 CHAIRMAN KRAUSE: My only question is, on 3 M, that was not an employee; that was actually our 4 licensee, right, that was engaging in these bad acts? 5 MR. BIARD: Correct. Correct. And we 6 occasionally have sting operations where we send 7 investigators out with tickets that appear to be winning 8 lottery -- large winning lottery tickets, and they 9 target retailers who there have been reports on in the 10 past, and that's what happened here. 11 CHAIRMAN KRAUSE: So we're hoping that the 12 new rule that we passed today is going to help us out 13 with that. 14 MR. BIARD: It will help us out because at 15 SOAH, there have been occasions where the judge has 16 agreed that if the retailer didn't initiate the offer 17 that he didn't violate the statute, and we don't agree 18 with that. 19 The rule you proposed today, if adopted, 20 will establish a written policy here that we think the 21 SOAH judges will follow. 22 CHAIRMAN KRAUSE: Good. 23 Do I hear a motion? 24 COMM. WILLIAMSON: I make a motion that we 25 approve the Staff's recommendation of revocation on 86 1 cases A through L. 2 COMM. BAGGETT: I second. 3 CHAIRMAN KRAUSE: All in favor, say "aye." 4 COMM. WILLIAMSON: Aye. 5 COMM. BAGGETT: Aye. 6 CHAIRMAN KRAUSE: Aye. Carries. 7 What about -- 8 MR. BIARD: And M and N as well. 9 COMM. WILLIAMSON: Oh, both of them? 10 Okay. Then I'll redo my motion and say, I make a motion 11 that we take the Staff's recommendation on the license 12 revocation for Items A through -- 13 CHAIRMAN KRAUSE: N. 14 COMM. WILLIAMSON: -- M. 15 MR. BIARD: N. 16 COMM. WILLIAMSON: N. 17 COMM. BAGGETT: N. 18 CHAIRMAN KRAUSE: Second? 19 COMM. BAGGETT: Second. 20 CHAIRMAN KRAUSE: All in favor, say "aye." 21 COMM. WILLIAMSON: Aye. 22 COMM. BAGGETT: Aye. 23 CHAIRMAN KRAUSE: Aye. Carries. 24 MR. BIARD: Thank you, Commissioners. 25 I'll have orders for you to sign. 87 1 AGENDA ITEM XVIII 2 CHAIRMAN KRAUSE: Do we have any public 3 comment? I don't have any affidavits. Might be a 4 little late. 5 (No response) 6 AGENDA ITEM XIX 7 CHAIRMAN KRAUSE: So now is when the 8 Lottery Commission goes into executive session, so I 9 move that the Lottery Commission -- Texas Lottery 10 Commission go into executive session to deliberate 11 personnel matters, including appointment, employment, 12 evaluation, reassignment, duties, discipline or 13 dismissal of the Executive Director, the acting 14 Charitable Bingo director, and to also consider the 15 appointment, employment, and duties of the Charitable 16 Bingo Operations director, including the consideration 17 of applications for that position, and the duties of the 18 General Counsel and Human Resources director, all 19 pursuant to the Government Code and to receive legal 20 advice, et cetera, et cetera. 21 So is there a second? 22 COMM. BAGGETT: Second. 23 COMM. WILLIAMSON: She said second. 24 CHAIRMAN KRAUSE: Oh, okay. So all in 25 favor, say "aye." 88 1 COMM. WILLIAMSON: Aye. 2 COMM. BAGGETT: Aye. 3 CHAIRMAN KRAUSE: Aye. Done. We're out 4 of session temporarily. It is four till noon. 5 (Executive Session: 11:56 a.m. to 12:30 6 p.m.) 7 AGENDA ITEM XX 8 CHAIRMAN KRAUSE: It's 12:30. We are out 9 of executive section. We're reconvening to wrap up 10 business for the day. And I believe that we have a 11 motion. 12 COMM. WILLIAMSON: Yes. The Commission 13 has considered the applications for the Charitable Bingo 14 Operations Division Director position, and I believe we 15 are prepared to make an offer. 16 I move that the Commission offer 17 employment to Alfonso Royal as the Charitable Bingo 18 Operations Division Director at a salary of 135,000 per 19 year effective as soon as possible in the (inaudible). 20 Debbie Parpounas will continue to serve as 21 acting director until such time he comes on full time. 22 COMM. BAGGETT: I second that motion. 23 CHAIRMAN KRAUSE: I call for a vote. 24 Everybody in favor, say "aye." 25 COMM. WILLIAMSON: Aye. 89 1 COMM. BAGGETT: Aye. 2 CHAIRMAN KRAUSE: Aye. It carries. 3 Make a motion that we adjourn. 4 COMM. WILLIAMSON: No, we're not through 5 yet. 6 CHAIRMAN KRAUSE: We're not? 7 COMM. BAGGETT: We have to have a separate 8 motion for Debbie. 9 CHAIRMAN KRAUSE: Oh, man. Okay. 10 COMM. WILLIAMSON: No, we have to let him 11 accept. 12 CHAIRMAN KRAUSE: Ah. Before we adjourn, 13 Mr. Royal, do you have an answer for us? "Yes" will do. 14 MR. ROYAL: Yes. 15 CHAIRMAN KRAUSE: Thank you. 16 Okay, go ahead. 17 COMM. WILLIAMSON: Now I move that the 18 Commission offer employment to Debbie Parpounas as 19 Charitable Bingo Operations Division Deputy Director at 20 a salary of $110,000 per year effective on the date 21 Mr. Royal starts as director and, if she accepts, that 22 we direct Mr. Royal to take action on his first day as 23 director to ensure that Debbie Parpounas is instated as 24 deputy director on that date. 25 COMM. BAGGETT: I second. 90 1 CHAIRMAN KRAUSE: Call for a vote. 2 Everybody in favor, say "aye." 3 COMM. WILLIAMSON: Aye. 4 COMM. BAGGETT: Aye. 5 CHAIRMAN KRAUSE: Aye. There's no nays. 6 It carries. 7 Yes, ma'am? 8 MS. PARPOUNAS: Yes. 9 CHAIRMAN KRAUSE: Outstanding. 10 Any other business to come before this 11 commission today? 12 (No response) 13 AGENDA ITEM XXI 14 CHAIRMAN KRAUSE: Good. Hearing none, I 15 move that we adjourn. Anybody want to second that? 16 COMM. WILLIAMSON: Second. 17 CHAIRMAN KRAUSE: All right. Call for a 18 vote. Say "aye." 19 COMM. WILLIAMSON: Aye. 20 COMM. BAGGETT: Aye. 21 CHAIRMAN KRAUSE: We're adjourned, 12:33. 22 (Proceedings concluded at 12:33 p.m.) 23 24 25 91 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Lorrie A. Schnoor, Certified Shorthand 5 Reporter in and for the State of Texas, Registered Merit 6 Reporter, Certified Realtime Reporter and Texas 7 Certified Realtime Reporter, do hereby certify that the 8 above-mentioned matter occurred as hereinbefore set out. 9 I FURTHER CERTIFY THAT the proceedings of such 10 were reported by me or under my supervision, later 11 reduced to typewritten form under my supervision and 12 control, and that the foregoing pages are a full, true, 13 and correct transcription of the original notes. 14 IN WITNESS WHEREOF, I have hereunto set my hand 15 and seal this 2nd day of July, 2014. 16 17 _________________________________ LORRIE A. SCHNOOR, RMR, CRR, TCRR 18 Certified Shorthand Reporter CSR No. 4642 - Expires 12/31/15 19 Firm Registration No. 276 20 Kennedy Reporting Service, Inc. 7800 North Mopac, Suite 120 21 Austin, Texas 78759 512.474.2233 22 23 24 25