1 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § 7 TEXAS LOTTERY COMMISSION § THURSDAY, FEBRUARY 13, 2014 § 8 9 10 11 COMMISSION MEETING 12 THURSDAY, FEBRUARY 13, 2014 13 14 BE IT REMEMBERED THAT on Thursday, the 13th 15 day of February 2014, the Texas Lottery Commission 16 meeting was held from 10:00 a.m. until 12:59 p.m., at 17 the offices of the Texas Lottery Commission, 611 East 18 6th Street, Austin, Texas 78701, before CHAIRMAN 19 J. WINSTON KRAUSE and COMMISSIONERS JOHN W. TOWNES, III, 20 JODIE G. BAGGETT, KATIE DICKIE STAVINOHA, and 21 VERONICA ANN EDWARDS. The following proceedings were 22 reported via machine shorthand by Lorrie A. Schnoor, 23 Certified Shorthand Reporter, Registered Merit Reporter, 24 and Texas Certified Realtime Reporter. 25 2 1 APPEARANCES 2 CHAIRMAN: Mr. J. Winston Krause 3 COMMISSIONERS: 4 Mr. John W. Townes, III Ms. Jodie G. Baggett 5 Ms. Katie Dickie Stavinoha Ms. Veronica Ann Edwards 6 GENERAL COUNSEL: 7 Mr. Robert F. Biard 8 EXECUTIVE DIRECTOR: Mr. Gary N. Grief 9 CHARITABLE BINGO OPERATIONS DIRECTOR: 10 Ms. Sandra K. Joseph 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 TABLE OF CONTENTS 2 PAGE 3 PROCEEDINGS - THURSDAY, FEBRUARY 13, 2014 ......... 7 4 I. The Texas Lottery Commission will call the meeting to order................................... 7 5 II. Report, possible discussion and/or action on 6 Commissioner training, including ethics, administrative procedure, and open government 7 laws pertaining to the Texas Lottery Commission.... 10 8 III. Consideration of and possible discussion and/or action, including adoption, on new 16 9 TAC § 401.322 “Texas Triple Chance” Lottery Game... 16 10 IV. Consideration of and possible discussion and/or action, including proposal, on new 16 11 TAC § 402.211 Other Games of Chance................ 31 12 V. Consideration of and possible discussion and/or action, including proposal, on Petitions 13 of K&B Sales Inc. and Dept. of Texas Veterans of Foreign Wars for Adoption of Rule 14 Changes to 16 TAC §§ 402.300 Pull-Tab Bingo, 402.321 Card-Minding Systems – 15 Definitions, 402.322 Card-Minding Systems – Site System Standards, 402.323 Card-Minding 16 Systems – Device Standards, and 402.325 Card-Minding Systems – Licensed Authorized 17 Organizations Requirements......................... 39 18 VI. Consideration of and possible discussion and/or action on external and internal audits 19 and/or reviews relating to the Texas Lottery Commission, and/or on Internal Audit activities, 20 including approval of the Fiscal Year 2013 Internal Audit Annual Audit Report, the Fiscal Year 21 2014 Internal Audit Annual Audit Plan, and the Commission’s Internal Audit Charter................ 47 22 VII. Report, possible discussion and/or action on 23 lottery sales and revenue, game performance, new game opportunities, advertising, market 24 research, trends, and game contracts, agreements, and procedures......................... 51 25 4 1 TABLE OF CONTENTS 2 PAGE 3 VIII. Report, possible discussion and/or action on transfers to the State and the agency’s 4 budget status...................................... 56 5 IX. Report, possible discussion and/or action on prime contracts, including issuing procurement 6 for the agency’s lottery security study services and amendments on the contracts for lottery 7 drawings CPA services, drawing studio and production services, and statistical consulting 8 services........................................... 58 9 X. Report, possible discussion and/or action on the 83rd Legislature, including implementation 10 of legislation..................................... 59 11 XI. Report, possible discussion and/or action on GTECH Corporation............................... 61 12 XII. Report by the Executive Director and/or 13 possible discussion and/or action on the agency’s operational status, agency procedures, 14 awards, and FTE status............................. 61 15 XIII. Report by the Charitable Bingo Operations Director and possible discussion and/or action 16 on the Charitable Bingo Operations Division’s activities, including updates on licensing, 17 accounting and audit activities, pull-tab review, and special projects............................... 73 18 XIV. Consideration of the status and possible 19 entry of orders in: ............................... 74 20 Lottery NSF License Revocation Cases (Default) A. Docket No. 362-14-0293–Dry Creek of Bridgeport 21 B. Docket No. 362-14-0294–Diamond W of Bridgeport C. Docket No. 362-14-0295–Radi Mart 22 D. Docket No. 362-14-0296–Shell Food Mart E. Docket No. 362-14-0299–Woody’s Market 23 F. Docket No. 362-14-0300–Quick Stop #2 G. Docket No. 362-14-0301–OB’s Mart 2 24 H. Docket No. 362-14-0302–New Way 2 I. Docket No. 362-14-0514–Gateway #4 25 5 1 TABLE OF CONTENTS 2 PAGE 3 J. Docket No. 362-14-0689–Easy Stop No. 1 K. Docket No. 362-14-0690–Pearsall Travel Center 4 L. Docket Nos. 362-14-0892 and 362-14-0893 – Fishermans Supply 5 M. Docket No. 362-14-0894–Guadalajara Meat Market 6 N. Docket No. 362-14-0895–Navigator Truck Stop Alvord 7 O. Docket No. 362-14-1084–Road Runner Superette #2 8 P. Docket No. 362-14-1085–Daghlas Mart Q. Docket No. 362-14-1086–Lake Country Food 9 Mart R. Docket No. 362-14-1087–Roger’s Food Mart 10 Bingo Agreed Orders Related to Golden Belle 11 Bingo Unit Trust 12 S. Docket No. 362-13-4468.B–Gun Barrel City Volunteer Fire Department 13 T. Docket No. 362-13-4469.B–Humane Society of Cedar Creek Lake, Inc. 14 U. Docket No. 362-13-4470.B–Payne Springs Volunteer Fire Department 15 V. Docket No. 362-13-4471.B–House of Isaiah Athletes for a Drug Free America, Inc. 16 W. Docket No. 362-13-4472.B–Mary Queen of Heaven Knights of Columbus, Inc. 17 Other Bingo Agreed Order 18 X. Case No. 2013-283–Coastal Bend Kidney 19 Foundation 20 XV. Public comment.............................NOT HEARD 21 XVI. Commission may meet in Executive Session: .... 78 22 A. To deliberate personnel matters, including the appointment, employment, evaluation, reassignment, 23 duties, discipline, or dismissal of the Executive Director and/or the Charitable Bingo Operations 24 Director pursuant to Section 551.074 of the Texas Government Code. 25 6 1 TABLE OF CONTENTS 2 PAGE 3 B. To deliberate the duties of the General Counsel 4 and/or the Human Resources Director pursuant to Section 551.074 of the Texas Government Code. 5 C. To receive legal advice regarding pending or 6 contemplated litigation pursuant to Section 551.071 (1) (A) and/or to receive legal advice 7 regarding settlement offers pursuant to Section 551.071 (1) (B) of the Texas Government 8 Code and/or to receive legal advice pursuant to Section 551.071 (2) of the Texas Government 9 Code, including but not limited to legal advice regarding the following items: 10 Department of Texas, Veterans of Foreign Wars et al. v. Texas Lottery Commission et al. 11 State of Texas v. Equal Employment Opportunity Commission et al. 12 Legal advice regarding the State Lottery Act, Texas Government Code Chapter 467, the Bingo 13 Enabling Act, the Open Meetings Act, the Administrative Procedure Act, employment law, 14 personnel law, procurement and contract law, evidentiary and procedural law, and general 15 government law. 16 Legal advice regarding any item on this open meeting agenda. 17 XVII. Return to open session for further 18 deliberation and possible action on any matter discussed in Executive Session..................... 78 19 XVIII. Adjournment................................. 78 20 REPORTER'S CERTIFICATE............................. 80 21 22 23 24 25 7 1 P R O C E E D I N G S 2 THURSDAY, FEBRUARY 13, 2014 3 (10:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN KRAUSE: The Texas Lottery 6 Commission meeting is gaveled into order. It's February 7 the 13th, ten o'clock. And we have Commissioners 8 Edwards, Baggett, Stavinoha and Townes present. Of 9 course, I'm here. So we have a full board for one 10 meeting. 11 And the reason why we have a full 12 Commission for this one meeting is because next time 13 we're not going to have Commissioner Edwards with us. 14 And so I'd like to let you know that this is her last 15 meeting. She has submitted her resignation to be 16 effective March the 31st. 17 In her time, she's done a great job. She 18 embraced the role as bingo commissioner and really 19 settled in to learn and understand the bingo division 20 and its issues. I really appreciate the valuable 21 leadership and the guidance that she has provided in the 22 mean time, as well as her work on the Lottery 23 Commission's Sunset Legislation. We will miss her. 24 As you know, one of our commissioners has 25 always been designated as the bingo commissioner. And 8 1 so in the wake of Commissioner Edwards departure, we 2 need a new bingo commissioner. I am very pleased to 3 introduce to you Commissioner Townes, who's agreed to 4 take on that role. He'll do a great job, and I know the 5 Staff will do everything to help him get up to speed, 6 and there is no doubt in any mind that he's going to do 7 a great job in that role. 8 So at this point I'd like to hear from 9 Commissioner Edwards. 10 COMM. EDWARDS: There you go. 11 Thank you very much. 12 Winston, it's been an honor serving with 13 you, and as a commissioner for the chairman, you've been 14 nothing but a great role model and an excellent leader 15 for the -- 16 CHAIRMAN KRAUSE: But the pleasure has 17 been mine. 18 COMM. EDWARDS: Absolutely. And thank you 19 for all the rest of the commissioners. 20 I want to preface my statement just a bit 21 by starting off with the following: I've been 22 recognized as one of the top women CEOs in the nation, 23 one of the top ten women CEOs in the nation by Inc. 24 magazine, and this year by Chief Executive magazine, as 25 one of the top hundred CEOs in the nation for middle 9 1 markets. 2 The reason why I say that is because I 3 want everybody to really understand the credibility, 4 hopefully, that it carries when I compliment the 5 Commission and the excellent work they're doing as far 6 as the oversight, the financial integrity of the agency, 7 and making sure that the decisions that are being made 8 are for -- in the best interest of Texas -- state of 9 Texas as well as all the participants and everybody 10 within the -- within the organization. 11 I'd particularly like to thank Sandy 12 Joseph for her oversight within Charitable Bingo, Bob 13 Biard who's been answering all my questions for the last 14 year, Nelda Trevino, Kathy Pyka, Mike Fernandez, Michael 15 Anger, and particularly Gary Grief. Gary has been an 16 excellent manager within the organization, and the 17 personnel that are here have been nothing but exemplary. 18 And I can honestly say that it's been a fairly easy -- 19 easy time because of the great oversight that the 20 Commission has. 21 I also like to say that I'm moving on 22 because I'm going to be finding a voice as a Hispanic 23 woman and an executive within the political arena and/or 24 the party that I'm affiliated with, and that's what's 25 basically putting me in a position where I can no longer 10 1 participate because of the regulations within the -- 2 within the -- for the commissioners. 3 So with that, I can't wait to just say 4 "second" and "aye" all day. So we'll start going from 5 there. Thank you. 6 (Applause) 7 CHAIRMAN KRAUSE: We have a lot of 8 important business today, but the first thing we're 9 going to do is hear from Bob Biard to give us a little 10 bit of training for our new commissioner, Commissioner 11 Townes. 12 AGENDA ITEM NO. II 13 MR. BIARD: Thank you, Chairman. 14 Good morning, Commissioners. For the 15 record, I'm Bob Biard, general counsel. Whenever 16 there's a new Lottery Commissioner, this agency has a 17 tradition of reviewing the laws that govern the Texas 18 Lottery Commission at that commissioner's first open 19 meeting. 20 In addition, the Commission Sunset 21 Legislation requires new appointees to complete a 22 training program before they may vote, deliberate, or be 23 counted as a member in attendance at a Commission 24 meeting. This program must provide the new appointee 25 with information about the legislation that created the 11 1 Commission, the program functions, rules, and budget, 2 the results of the most recent formal audit of the 3 Commission, the laws relating to open meetings, public 4 information administrative procedure and conflicts of 5 interest and applicable ethics policies. 6 I wanted to state for the record that 7 prior to this meeting, Commissioner Townes has had this 8 required training with our Executive Director, Gary 9 Grief; the bingo director, Sandy Joseph; our controller, 10 Kathy Pyka; and me. For purposes of today's meeting, I 11 wanted to provide just a brief overview and hit some 12 highlights regarding these laws governing the 13 Commission. 14 I have provided you all a document titled 15 "Guide to Ethics Laws for State Officers and Employees." 16 This is the publication from the Texas Ethics 17 Commission, but because the Lottery Commission has a 18 number of additional requirements, we have annotated it 19 using blue ink to highlight provisions that are specific 20 to the Lottery Commission, and these provisions are 21 generally more restrictive than the requirements that 22 apply to other state agencies. 23 For instance, with respect to gifts, other 24 agencies have a de minimis exception that allows members 25 to accept gifts under $50 in value, but this exception 12 1 does not apply to the Lottery Commission. 2 The Lottery Commission does have an 3 exception for commissioners to accept a gift that's 4 given on account of a relationship that's independent of 5 your commissioner status, such as kinship or a personal, 6 professional, or business relationship. 7 The restriction is against accepting 8 gifts, employment, or remuneration from any person that 9 has a significant financial interest in the lottery, 10 which is the defined term that includes vendors and 11 retailers licensed to sell lottery tickets; or on the 12 bingo side, bingo commercial lessor distributor 13 manufacturer. 14 There's also a restriction against 15 political fund-raising activities that is unique to this 16 agency. A Lottery Commissioner may not, quote, directly 17 or indirectly coerce, attempt to coerce, command, or 18 advise a person to pay, lend, or contribute anything of 19 value to another person for political purposes. 20 This is basically a restriction on 21 fund-raising. There are two attorney general opinions 22 that discuss this provision, which applies only to the 23 Lottery Commission. 24 That's just a quick overview of ethics. 25 On the procedural side, under the 13 1 Administrative Procedure Act, the Commission has two key 2 roles: First, to propose and adopt rules relating to 3 the lottery and Charitable Bingo; and second, to decide 4 contested cases. Rules are general statements of policy 5 or practice that are generally applicable to all 6 persons. When you propose rules, you're acting in a 7 legislative capacity, so to speak, and you may talk to 8 anyone you wish in connection with Agency rules or rule 9 proposals. 10 However, you also have a judicial 11 function, because you decide cases, contested cases, 12 where the legal rights of particular parties are 13 involved and determined after an opportunity for a 14 hearing. At this Commission, the contested cases 15 usually involve lottery or bingo licensees, and the 16 issues are whether to deny or revoke a license or assess 17 penalties for violations of the statutes or rules. 18 In contested cases, ex parte 19 communications are prohibited, which means you may not 20 communicate with a person or party to the case, either 21 on the outside or here on our Enforcement staff about an 22 issue of fact or law in the case unless all the parties 23 in the case have the opportunity to participate. 24 Contested cases are heard at an 25 independent agency, the State Office of Administrative 14 1 Hearings, by an impartial administrative law judge who 2 prepares a proposal for your consideration. Although 3 the proposal is only a recommendation, the law protects 4 the impartial role of the judge by limiting the reasons 5 why the Commission may change the judge's 6 recommendations, which there are basically three 7 reasons. 8 The first is to correct a technical error; 9 the second is if the judge fails to properly apply the 10 law, Agency rules, or policies; and the third is if the 11 Commission decides to overrule a prior Agency decision 12 or policy that the judge relied on. 13 The last item I'll touch on briefly is 14 Open Meetings Act and Public Information Act. A new 15 commissioner is required to complete the attorney 16 general's online training on both these laws within 90 17 days of taking the oath of office. 18 And Commissioner Townes, there are two 19 certificates on the attorney general's website that you 20 can print out when you complete the online training, and 21 the Agency is required to maintain those on file here. 22 So you can give those to me when you've completed that 23 training. 24 Commissioner Townes and I discussed Open 25 Meetings and Public Information Act in detail, and I 15 1 won't go into greater detail right now. I will note 2 that as of last September 1st, the Lottery Commission is 3 a five-member board, which means that three 4 commissioners are required for a quorum to conduct 5 business. 6 This also means that two commissioners may 7 meet and discuss public business without violating the 8 Act, but there is an important caveat to that. And that 9 is the attorney general and Texas courts have held that 10 it would be a violation of the Open Meetings Act to 11 deliberately have a series of two commissioner meetings 12 with different commissioners for the purpose of deciding 13 public business outside of a meeting. That's referred 14 to as a "walking quorum," and that's not allowed. 15 This is a very broad overview. There's a 16 lot of information in the laws that govern the 17 Commission, so please always feel free to contact me or 18 anyone in the legal services division if you have any 19 questions about any of these laws or how they apply. 20 Thank you. 21 COMM. TOWNES: Thank you. 22 CHAIRMAN KRAUSE: Any questions, 23 Commissioners? 24 (No response) 25 16 1 AGENDA ITEM NO. III 2 CHAIRMAN KRAUSE: All righty. Agenda Item 3 No. III is the consideration of and possible discussion 4 and/or action including adoption of the new 16 TAC 5 Section 401.322, which we call the Texas Triple Chance 6 lottery game. We have witnesses Bob and Diane -- 7 Deanne. 8 MS. RIENSTRA: Good morning, Chairman. 9 Good morning, Commissioners. I am Deanne Rienstra, 10 assistant general counsel for the Texas Lottery 11 Commission. In your notebook is a draft of a proposed 12 new lottery game, Game Rule 16, Texas Administrative 13 Code 401.322, called Texas Triple Chance. 14 At the last Commission open meeting on 15 December 11th, Mr. Grief publicly advised the Commission 16 of a new game proposal with an anticipated launch date 17 in the summer of 2014. Mr. Grief also advised of his 18 intent to use the Executive Director's authority to 19 propose the new game in the Texas Register and to 20 proceed with the public comment period. 21 The proposed new game rule and the dates 22 for the hearings were published in the Texas Register on 23 January 3rd as well as on the Commission's website. Two 24 public comment hearings were held, the first on 25 Wednesday, January 8th; and the second on Monday, 17 1 January 27th. No members of the public were present at 2 either meeting. The Commission received four written 3 comments in agreement for the proposed new game rule, 4 nine written comments opposing the new game rule, and 5 three written comments that -- let's see -- three or so 6 that did not address the rule at all but commented on 7 general lottery matters. 8 Mr. Tirloni here is going to explain this 9 new game, Texas Triple Chance. 10 MR. TIRLONI: Good morning, Mr. Chairman, 11 Commissioners. For the record, my name is Robert 12 Tirloni. I'm the products and drawings manager for the 13 Texas Lottery. 14 So I thought we'd start today by talking 15 about the Agency's mission statement and one of our core 16 values and how that impacts the Agency's product 17 portfolio and what we do. 18 So our mission, of course, is to generate 19 revenue for the state of Texas through the sale of our 20 lottery products. One of our core values is innovation. 21 And we strive to incorporate innovation into our product 22 portfolio, our draw games and our scratch-off games, so 23 that we can provide Texans with the best entertainment 24 experience available. 25 So what this means to us, the Staff, we 18 1 are constantly working with our vendors. And we're 2 looking for new game opportunities and game enhancements 3 in order to keep the games innovative and to keep them 4 fresh and exciting and new so that we can maintain or 5 increase our sales levels, and so we can also continue 6 to generate revenue for public education in the state of 7 Texas. 8 So Texas Triple Chance is a draw game, and 9 so I've put up a quick or a brief graphic showing all of 10 our draw game logos. So this is our portfolio of eight 11 draw games. And on the next slide, I'll go into greater 12 detail about them. But as you are aware, we participate 13 in two multistate games that are played across the 14 nation. We have in-state rolling jackpot games, and 15 then we have daily games that are drawn every day, 16 Monday through Saturday. 17 So this slide has a lot of information; 18 I'll walk through it from top to bottom. But as I 19 mentioned, we have our two multistate games, Powerball 20 and Mega Millions, again, played nationwide. These are 21 rolling jackpot games. Most people are familiar with 22 them because of the very large jackpots that are 23 generated by these games, hundreds of millions of 24 dollars on a pretty regular basis here lately. 25 These games have guaranteed and 19 1 pari-mutuel prices. So a guaranteed prize is basically 2 when we tell a player, "If you match a certain 3 combination of numbers in a game, we're going to pay you 4 a prize for matching those numbers or matching that 5 combination." 6 A pari-mutuel prize is when we basically 7 tell or communicate to players that, "If you match a 8 certain combination of numbers in a game, your prize is 9 going to be dependent on the sales for the drawing and 10 the number of winners at the prize tiers." So basically 11 there's a pool of prize money for each prize tier, and 12 the number of winners at that tier are going to split or 13 share in that prize pool. 14 And that's basically the difference 15 between the two. Guaranteed prizes are sometimes 16 referred to as set prizes, sometimes referred to as 17 fixed prizes. All three, guaranteed, set, and fixed, 18 are all basically the same thing. 19 So those games, obviously, because they're 20 played nationwide, have bigger jackpots offered. They 21 start at 40 million for Powerball, 15 million for Mega 22 Millions. Lotto, the very first draw game introduced in 23 Texas back in 1992, is our own in-state rolling jackpot 24 game. It starts at $5 million and increases when there 25 are no jackpot winners. Again, that game has both 20 1 guaranteed and pari-mutuel prize tiers. 2 Next game in our portfolio, All or 3 Nothing, has a top prize of $250,000. This is our 4 newest draw game. We -- it's an in-state game. This 5 game has all guaranteed prizes, so this game doesn't 6 have any pari-mutuel prizes. Now, it does have a top 7 prize liability cap. So if we have an extraordinarily 8 large number of top prize winners, that tier would go 9 pari-mutuel, and that's to protect the Agency 10 financially. 11 Texas Two Step, it's like Lotto. It's a 12 smaller in-state rolling jackpot game, but much smaller 13 scale. The jackpot starts at 200,000 and increases if 14 there are no jackpot winners. Again, guaranteed and 15 pari-mutuel prizes in that game as well. 16 Cash Five is a our five-digit cash game, 17 guaranteed and pari-mutuel prizes in that game. This 18 game is a little unique. You'll see for the top prize 19 I've listed, it's approximately 17 to $20,000. That's 20 if there's one winner in the drawing. The top prize in 21 Cash Five is totally pari-mutuel, so it varies from draw 22 to draw, like I explained a few minutes ago. 23 And then we have Pick 3 and Daily 4. 24 Those are our daily numbers games. Again, these games 25 are all guaranteed prizes. There's no pari-mutuel 21 1 prizes in these games. These games are a little bit 2 more complex, so you have a lot of choices as a player. 3 You can decide how much you want to wager. You can 4 decide how you want to choose your numbers, and that 5 impacts the amount that you're playing for. And so I've 6 put 1,000 and 5,000 up there on the slide, 1,000 for 7 Pick 3, 5,000 for Daily 4. That's based on a dollar 8 wager. 9 Let me go back here for one second. 10 So on Triple Chance, the game I'm about to 11 describe for you, Staff feels that this game, with its 12 hundred thousand-dollar top prize will fill a void here. 13 These games are listed by their top prize offered. We 14 feel that Triple Chance will kind of fill a void in the 15 product portfolio by offering a hundred thousand-dollar 16 top prize. 17 And lotteries typically look at their 18 portfolios in that manner in terms of what top prizes 19 are offered in the game. And we believe that we do kind 20 of have a gap here, and so we think Triple Chance will 21 be a good addition to the portfolio and kind of fill 22 that void. 23 So these are the attributes of Texas 24 Triple Chance. On the next slide, I'm going to show you 25 a graphic of a ticket that I think will bring all of 22 1 this together. A picture is worth a thousand words. 2 I'll run through this, and then I'll just kind of 3 summarize it on the next slide. 4 But Triple Chance is a 2-dollar game, and 5 it consists of three separate chances or sets of 6 numbers. And each chance or each set is an opportunity 7 to win a prize. So for Chance 1, players can either 8 pick their seven numbers out of 55, or they can have the 9 terminal select their numbers for them. It's their 10 choice. For Chance 2 and for Chance 3, the player's 11 sets of numbers are automatically selected by the 12 terminal. They don't have a choice on Chance 2 or 13 Chance 3. And when they make their purchase, those two 14 chances automatically print on their ticket. 15 We, the Lottery, will draw ten numbers 16 from out of 55, out of 1 to 55, for each drawing. We're 17 planning to draw this game once a day during our night 18 draw window, 10:12 p.m., every Monday through Saturday. 19 So this will be a once a day, daily draw game. So we're 20 drawing more numbers than the player is choosing. 21 So you can win up to three times in each 22 play, once per chance. 23 So if you match all seven numbers in any 24 single chance to any of the ten that we draw, you win 25 the top prize of a hundred thousand dollars. So if you 23 1 match seven, you win a hundred thousand dollars, the top 2 prize. 3 The projected prize payout for this game 4 is 54.42 percent. Now, I want to clarify, that 5 fluctuates, and it changes in very similar fashion to 6 what we experienced with Pick 3 and Daily 4. 7 So a good example is the Pick 3 game. 8 Triples are a popular wager for Pick 3. People like to 9 play 777, 999, so on and so forth. If we draw one of 10 those triples, what typically happens is we pay out in 11 prizes more than we even take in in sales for that 12 drawing, because so many people play that number 13 combination. 14 But there are also drawings where we don't 15 pay out 50 percent. There are drawings where we do pay 16 out 50 percent on Pick 3, but what happens over time is 17 the statistically designed payout percentage for the 18 game is achieved. 19 And that's what, for Texas Triple Chance, 20 that's what this 54.42 percent prize payout percentage 21 is. It's the statistically designed payout for the 22 game. Some drawings will pay out more than that; some 23 drawings will pay out less. Over time, you will 24 approach this statistically designed payout percentage. 25 And I already talked about the last 24 1 bullet. The one draw per day, every Monday through 2 Saturday, during our night drawing. 3 So here's just a sample ticket that we 4 mocked up to kind of try to take all of those attributes 5 and give you a clear picture. 6 So here is -- this is a 2-dollar wager. 7 You get all three chances for $2. This is your Chance 8 1, where you can choose your own numbers; or you can, if 9 you choose, have the terminal quick pick these numbers 10 for you. Here's Chance 2 and Chance 3 that are 11 automatically quick pick for you when you make your 12 purchase and print on your ticket. 13 So if you match all seven numbers, let's 14 say, in this chance, you win a hundred thousand dollars. 15 That's the top prize. But you can win prizes in all 16 three chances. And I'm going to show you all the prizes 17 that are available in the game on the next slide. 18 So, again, if you match seven, you win the 19 top prize of a hundred thousand dollars. But you win 20 prizes for three -- matching three numbers or more. So 21 if you match three numbers, you win $2; if you match 22 four numbers, you match (sic) $5. Again, this is in 23 each chance, all the way up to the top prize of a 24 hundred thousand dollars. 25 I have a little asterisk here. We do have 25 1 a liability cap on this game, just like we do for All or 2 Nothing. I'll talk about that on the next slide. But 3 the overall odds for this game, for each chance, is one 4 in 9.6. But since you get three chances to win in a 5 play, your overall odds of winning in a play are 1 in 6 3.6. 7 So these are the best overall odds of any 8 draw game that we offer. All or Nothing is currently 9 the best overall odds with 1 in 4.5. This would be one 10 in 3.6. 11 The liability cap is at the top prize. 12 Again, very similar to what we have for All or Nothing. 13 If we were to have more than ten top prize winning 14 chances in a drawing, that prize tier would end up being 15 a pari-mutuel tier. 16 So for example, if we had 20 top prize 17 winning chances, the one million-dollar liability cap 18 would be implemented. And so then the 20 winners would 19 split that one million dollars, so they would get 20 $50,000 each. We've never hit the liability cap on All 21 or Nothing. That's not happened yet. So we feel like 22 this is a good financial protection to have, but we 23 don't we don't foresee hitting this cap very often. 24 So I wanted to let you know that we've 25 actually researched this game. This is a little bit of 26 1 a unique situation. We've actually researched this game 2 twice. So the very first time we researched or tested 3 this game with players was when we were also testing the 4 All or Nothing game. And the All or Nothing game was 5 the more popular game in the player research, and that's 6 why we ended up launching that game. 7 But we like different aspects of Triple 8 Chance, because it was different and it was unique. And 9 so we kind of worked with GTECH and tweaked the concept 10 and modified it, and then we put it back into player 11 research this past fall, in October. And we tested it 12 with two other draw game concepts. 13 And so based on the previous research and 14 the research that we just completed, as I said, we do 15 believe that this game can fill a niche in the 16 portfolio. We feel that the hundred thousand-dollar top 17 prize is a good prize and will fill that void in terms 18 of the way the games rank by top prize. And we do think 19 it's unique, getting three different chances to win for 20 $2. The Lottery drawing ten numbers. We believe 21 there's some interesting aspects about this game that 22 will -- that it will appeal to players. 23 We also have worked with Kathy Pyka's 24 division, the Office of the Controller. Fiscal analysis 25 has been prepared, and the projection is that this game 27 1 will bring in an additional $22.9 million over -- in 2 revenue during its first five years. 3 So in closing, I'll just run through the 4 timeline. Deanne covered some of this. But in 5 December, Gary informed the Commission that he was going 6 to utilize his rulemaking authority, and he was going to 7 propose a new draw game rule because of the Commission 8 meeting schedule. January 3rd, that rule published in 9 the Register, and we also put a link on the home page of 10 our website talking about this rule proposal, talking 11 about this new game. So players could click through on 12 that link, get to the rule proposal, and find out about 13 how the game worked and provide public comment. 14 We had the two public comment hearings 15 right here in Austin, at the Lottery headquarters, on 16 the 8th and the 27th of January. The public comment 17 period ended on February 2nd, and we're here today to do 18 this presentation for you, explain how the game works, 19 and present the rule to you for your adoption. 20 The game's start date will be determined 21 pending the outcome of the attorney general opinion that 22 has just recently been requested. 23 And so that's the presentation on the game 24 and how it works, and we're available for questions. 25 CHAIRMAN KRAUSE: Questions, 28 1 Commissioners? 2 (No response) 3 CHAIRMAN KRAUSE: Well, before we act on 4 this rule adoption, I need to make the public aware 5 that -- and as Bob referred to -- that on Monday, 6 Senator Robert Deuell, chairman of the Senate Economic 7 Development Committee, submitted a request to the 8 attorney general for an opinion on this game. And the 9 question is whether the Texas Triple Chance, as proposed 10 by our Commission, qualifies as a lottery under the 11 guidelines set by the Texas Constitution. 12 In his request, Senator Deuell describes 13 the fact that the game has a preset amount and that the 14 prize level would stay constant no matter how many 15 tickets are purchased. We've heard from Bob, and he's 16 described all those features of it. He also notes that 17 if there's no winner in the drawing, that the money does 18 not carry forward to be paid to an eventual winner as it 19 would be in a traditional jackpot type of game, which 20 this is not. 21 Now, the Senator is correct when he 22 describes what we are proposing. And Texas Triple 23 Chance is not a jackpot game, but neither are many other 24 of our games, like Pick 3, Daily 4, All or Nothing, 25 which also have fixed prizes. 29 1 Texas Lottery has been offering Pick 3 2 since 1993 when the Lottery was not an independent 3 Commission, but was actually a division of the 4 controller's office. 5 That fixed prize amounts are part of the 6 game is not new in the state lottery industry, in Texas 7 or at other lotteries around -- that have been around 8 longer than we have. We're proud of the fact that we 9 are one of the biggest and one of the most innovative, 10 and we've received prizes for that. 11 However, based on advice from our legal 12 counsel, the Commission believes that we have the 13 authority to offer this game and other games with fixed 14 prize amounts. And we intend to have our legal staff 15 provide, at least our perspective, to the attorney 16 general when the attorney general is considering its 17 opinion. 18 We have great respect for Senator Deuell 19 and his committee and their interest in the game. And 20 if the senator believed that this is important enough to 21 warrant an attorney general opinion, then we think that 22 the Commission should show appropriate deference to 23 that. 24 The Executive Director has instructed the 25 Staff not to expend any Agency funds to implement the 30 1 game. If the Commission votes to adopt the rule today, 2 I propose that the vote be with the direction that the 3 Commission not start sales for the game or expend any 4 money to implement this specific game, pending the 5 outcome of the attorney general's opinion. 6 However, we do have a timeline that we've 7 committed to for starting the game, because this game 8 ultimately impacts the amount of money that our 9 Commission transfers to the Foundation School Fund. Any 10 delay impacts the sales revenues coming to the state for 11 the game. 12 And since there is more at stake riding on 13 this opinion than Texas Triple Chance, but also the fact 14 that we offer Pick 3, Daily 4, and All or Nothing, then 15 these three games alone, that we currently implement, 16 contribute $171 million to the Foundation School Fund 17 and pay commission to our lottery retailers of about 18 $21 million. So there's a lot at stake here. It is 19 important, and we're taking it seriously. 20 Do we have any other discussion among our 21 commissioners? 22 Commissioner Edwards, would you like to 23 make a motion on this? 24 COMM. EDWARDS: I make a motion we adopt 25 the 16 TAC 401.322 for Texas Triple Chance lottery game 31 1 in recognition of all the comments you just made prior. 2 CHAIRMAN KRAUSE: All right. 3 COMM. STAVINOHA: I will second. 4 CHAIRMAN KRAUSE: All right. I call for a 5 vote. Those in favor, say "aye." 6 (All those voting in favor so responded) 7 CHAIRMAN KRAUSE: Any opposed? Hearing no 8 opposition, we've adopted the rule, subject to waiting 9 implementation or expending funds on this game until we 10 hear from the attorney general. 11 MR. BIARD: Thank you, Commissioners. 12 I have an order for your signature. And 13 it does have that instruction not to start sales or 14 expand Agency funds to implement this game, pending the 15 outcome of the attorney general's opinion. 16 AGENDA ITEM NO. IV 17 CHAIRMAN KRAUSE: Thank you. 18 Our next item is consideration of and 19 possible discussion and/or action on the new Section 20 402.211 of 16 TAC, Other Games of Chance. 21 Mr. Person. 22 MR. PERSON: Thank you, Mr. Chairman. 23 For the record, James Person, assistant 24 general counsel. 25 The Bingo Enabling Act currently prohibits 32 1 all games of chance during a bingo occasion with the 2 exception of an authorized bingo game, an authorized 3 raffle, amusement machines that are not gambling 4 devices, and certain door prize games. 5 The Act also mandates that the Commission 6 adopt rules to implement this prohibition. And for that 7 reason, Staff is recommending that you propose for 8 public comment, New Rule 16 TAC 402.211, which will be 9 titled Other Games Of Chance. 10 The rule will specifically define what a 11 game of chance is, and that will be a game or contest 12 that awards a prize and whose outcome is determined, at 13 least in part, by the element of chance or luck. 14 The rule will also specify where the 15 prohibition on Other Games of Chance is applicable. The 16 statute states that Other Games of Chance may not be 17 conducted during a bingo occasion. It doesn't specify 18 where that prohibition is applicable. The rule would 19 specify that it is at the bingo premises. 20 And probably the biggest issue with the 21 proposed rule centers on the -- what types of amusement 22 machines are going to be allowable under this rule. The 23 Act specifies that the machines cannot be gambling 24 devices, but whether a particular machine is a gambling 25 device is not always an easy question to answer. 33 1 There's debate throughout this state on 2 that very issue with courts and government officials 3 coming to different conclusions. And because of this, 4 the rule, as drafted, would require Staff to rely on a 5 local prosecuting attorney to first determine whether a 6 machine is an illegal gambling device. 7 If we receive such a determination, then 8 we can proceed pursuing a bingo violation. We felt that 9 was the prudent route to go, noting that the 10 discrepancies throughout the state with certain D.A.s 11 believing these machines are illegal and other D.A.s 12 disagreeing. 13 Finally, the proposed rule would also 14 prohibit any game of chance, other than bingo, from 15 awarding bingo equipment or entry into a bingo game as a 16 prize. 17 And with that, I'd be happy to answer any 18 questions you may have. 19 CHAIRMAN KRAUSE: Well, we're going to 20 defer questions by the Commissioners to after we hear 21 from our witnesses. We've got three witnesses that 22 would like to testify. I'm going to take them in 23 alphabetical order. First is Mark Gottschalk, who is 24 going to testify in opposition. The next is going to be 25 Paul Melton, who supports this rule. And the third is 34 1 going to be Jane Thompson, who is opposed. And so if 2 y'all would make yourself available, and you're up now 3 if you're -- if you're Mark. 4 MR. GOTTSCHALK: I am. 5 CHAIRMAN KRAUSE: All right. 6 MR. GOTTSCHALK: Thank you, Commissioners. 7 I am Mark Gottschalk. I'm here 8 representing Austin Capital Group. I am a supplier here 9 in the state. And I have a very kind of specific 10 objection to this. It's not so much on the amusement 11 games but on the door prizes. 12 Currently what's happening, people will go 13 out and buy televisions or maybe some small appliance, 14 and they'll give that as a door prize. But they're also 15 giving away bingo product. And I guess my question is: 16 What is the value of restricting that from bingo 17 product, because that is the cheapest thing that a 18 charity can give away that has a value to the customer. 19 So for instance, let's say they were 20 giving away ten -- you know, they're going to draw ten 21 people who would be getting a ten-dollar pack, you know, 22 a piece of paper that's worth a ten-dollar value. 23 That's a hundred dollars in value to the customers, but 24 it may only cost them $2.50 to produce that. They're 25 buying it from a supplier; they're turning it around. 35 1 So it's a very -- it looks like it's giving away 2 something of value that's much cheaper to the charities. 3 They can do the same thing with electronics, and they're 4 currently doing this right now. 5 So I guess my question for you all is: 6 What is the value? What are we trying to protect here 7 by doing this door prize? Because I think it's going 8 the opposite direction. It's going to force them to 9 spend $300 for a television versus, you know, pennies on 10 the dollar for product that they're already giving away. 11 And they're not giving out any more prize 12 money. I mean, the prize is what it is. All they're 13 doing is allowing someone who's already spent some money 14 in the location -- maybe they came in and spent $25 -- 15 they're giving them an extra ten dollars' worth of 16 value, but the price remains the same. 17 So I think this needs to be reconsidered. 18 I will submit a more detailed comments on in writing, 19 but I just wanted to mention that today. 20 CHAIRMAN KRAUSE: All right. Thank you. 21 Mr. Melton. 22 MR. MELTON: Good morning, Chairman, 23 Commissioners. Thank you for your time. 24 My name is Paul Melton. I'm the president 25 of the Board of Directors of Texas VFW foundation. I'm 36 1 here today on behalf of the VFW and Department of Texas. 2 We, the VFW, are the oldest 3 Congressionally Chartered Veterans Service Organization 4 in the United States. Our mission is plain. It's to 5 support veterans and their families. 2.4 million 6 members of the VFW, and its auxiliaries, are located in 7 8500 VFW posts around the world. And while we are a 8 national organization, we express dedication through our 9 local post and programs to support veterans, veteran 10 services, and their families. 11 In Texas, we have 348 VFW posts to serve 12 that mission. Over 100 of our posts participate in 13 Charitable Bingo Operations. I'm here to put forth the 14 position of the VFW, that we support the Commission's 15 interest in promulgating a rule to prohibit illegal 16 gambling devices on bingo premises during a bingo 17 occasion. 18 We appreciate the Staff very much and 19 Counsel involving us in distributing the draft rule for 20 review. We appreciate the consideration we were given 21 with some input we thought was insightful. We 22 appreciate the consideration that they gave us in 23 changing some of the breadth of the initial language and 24 appreciate the Staff's consideration of some of our 25 revision language to the draft rule. 37 1 Our focus is to ensure that we do not 2 prohibit authorized legal activities, though, while 3 prohibiting illegal gambling operations. 4 Chairman and the Commissioners, we look 5 forward to participating in the rulemaking proceeding. 6 I'm available for questions after, if needed. Thank you 7 for your time. 8 CHAIRMAN KRAUSE: Jane Thompson. 9 MS. THOMPSON: Good morning. I'm Jane 10 Thompson with Thompson Allstate Bingo Supply. And I do 11 oppose only Subsection F of this proposed rule, 211. 12 And as a distributor, I just want to say 13 we've got a number of exclusive event tickets that are 14 very popular and they award merchandise, such as 15 electronic bingo devices, to the winners. And the 16 players enjoy this type of ticket immensely. It's very 17 profitable to the charities, and it would be a big loss 18 to the charities if they weren't able to offer the 19 device to the players. 20 It's also beneficial for those bingo 21 players that have never used an electronic bingo device 22 before when they -- so they have the opportunity to try 23 to play one free, if they've won it from the bingo event 24 ticket that they've played. So they get a chance to use 25 an electronic bingo device, and they may love it and 38 1 then come back and it -- it's just beneficial to the 2 charities to be able to have that event ticket to give 3 that merchandise away. 4 I also oppose the fact that they can't 5 award a prize as entry into a bingo game. This, too, is 6 encouragement for them to attend a bingo game that they 7 might not have otherwise gone to play. 8 So as I said, Subsection F is the part 9 that I oppose in this rule. Thank you. 10 CHAIRMAN KRAUSE: Well, since this is a -- 11 an action item to begin the rulemaking process, I'm 12 going to encourage our witnesses, and anybody else 13 that's interested, to participate in the rulemaking 14 process, which involves two things -- one, coming to the 15 public comment hearing and discuss in more detail with 16 our staff what it is; and then also provide written 17 comments. And so we use the -- our Staff uses the -- 18 this rulemaking authority to be able to hear from you. 19 And so testifying today is important, but 20 probably the more important is communicating your views 21 to the staff during the rulemaking process. And so I 22 encourage that to occur in abundance. 23 So other than that, since we are merely 24 starting the rulemaking process, do we have a motion to 25 approve this rule for beginning the rulemaking process? 39 1 COMM. EDWARDS: I make a motion that we 2 begin the rulemaking process for 16 TAC 402.211, Other 3 Games of Chance. 4 COMM. BAGGETT: Second. 5 CHAIRMAN KRAUSE: We have a second, so 6 we're going to vote on it. All those in favor, say 7 "aye." 8 (All those voting in favor so responded) 9 CHAIRMAN KRAUSE: All opposed, say "nay." 10 No nays. It carries. 11 MR. BIARD: Thank you, Commissioners. I 12 have a T-bar memorandum for your initials. Thank you. 13 AGENDA ITEM NO. V 14 CHAIRMAN KRAUSE: Agenda Item 5 is the 15 consideration and possible discussion or action, 16 including proposal on petitions of K&B Sales Inc. and 17 Department of Texas Veterans of Foreign Wars for 18 Adoption of Rule Changes to 16 TAC Sections 402.300, 19 Pull-Tab Bingo; 402.321, Card-Minding Systems, 20 Definitions; 402.325, another one on Card-Minding 21 Systems. 22 And so anyway, James. 23 MR. PERSON: Thank you, Commissioners. 24 James Person, assistant general counsel. 25 The Commission, back in January, received 40 1 two petitions requesting amendments to various bingo 2 rules. Both petitions were jointly submitted by K&B 3 Sales and the VFW. And pursuant to the Administrative 4 Procedures Act, you have the choice to either deny the 5 petitions or initiate the rulemaking process for the 6 requested amendments. 7 The first petition requests that the 8 Commission adopt amendments to Rule 402.300, which, as 9 you stated, governs Pull-Tab Bingo. The primary 10 purposes of the requested amendments are to allow 11 multi-play Pull-Tab Bingo tickets and to allow customers 12 to utilize video confirmation and/or bar codes to reveal 13 whether an Instant pull-tab ticket is a winning ticket. 14 Staff recommends that the Commission 15 initiate the rulemaking process, in this instance, with 16 some modifications to the language originally submitted 17 by the petitioners. 18 And just so you know, a multi-play ticket 19 is a ticket that has two or more chances to win a prize 20 and is similar to a lottery scratch-off ticket that has 21 multiple chances to win on a single ticket. 22 The proposed rule would also allow video 23 confirmation to be used for Instant pull-tab tickets. 24 Video confirmation is already authorized for event 25 pull-tab tickets; this would just expand that to include 41 1 Instant pull-tab tickets. 2 And just to be clear, when I say "video 3 confirmation," I'm not talking about playing these 4 pull-tabs on an electronic device. Video confirmation 5 would just be revealing whether the ticket is a winner 6 or loser in some fun fashion on a screen. But just to 7 avoid any confusion, Staff has added language that 8 indicates -- or that specifically prohibits any video 9 confirmation that utilizes anything resembling a casino 10 style game, including slot machines. 11 The proposed rule also includes some other 12 changes, some related to when winning pull-tab tickets 13 must be submitted for payment and where certain 14 information must be printed on a ticket. 15 The Staff has met with the petitioners to 16 discuss the amendments, and I believe most of the 17 modifications put forward by the Staff are acceptable to 18 the petitioners. There are some minor disagreement, 19 particularly about what information the rule requires to 20 remain on a pull-tab ticket once the pull-tab is 21 removed. 22 The proposed rule would require that, 23 among other things, the game name and ticket payout 24 structure remain on the ticket. The petitioners voiced 25 some concern stating that there wouldn't be enough space 42 1 on the ticket for all that information. Therefore, we 2 requested that they submit comments to that effect and 3 rationale for that during the public comment period. 4 CHAIRMAN KRAUSE: Perfect. 5 MR. PERSON: The second petition, as you 6 stated, requests amendments to various Card-Minding 7 System Rules 402.321, 322, 323, and 325. The primary 8 purpose of the requested amendments is to allow 9 charities to offer bingo patrons the opportunity to set 10 up individual customer accounts at the bingo premises. 11 Under the proposal, a customer could 12 establish his or her account during a bingo occasion and 13 deposit funds into that account for use during that 14 occasion. The customer could then use the funds in the 15 account to purchase various bingo products. Staff 16 recommends that the Commission initiate the rulemaking 17 process in this instance, again, with some modifications 18 to the language submitted by the petitioners. 19 A customer must generally claim -- a 20 customer who sets up a customer account must generally 21 claim any funds remaining in that account prior to the 22 end of a bingo occasion under the rule at which the 23 account was used. If any unclaimed funds remain in the 24 account, they would end up being retained by the charity 25 conducting the occasion. 43 1 The money would have to be deposited into 2 their bingo account, and there are some limited 3 exceptions to this requirement for charities within a 4 unit and charities that conduct back-to-back occasions. 5 The proposed rule would also permit mobile 6 point of sale stations. And as I understand this, this 7 could be four workers carrying around an iPad or similar 8 tablet that is linked up to the sale system, or the site 9 system, and from that they could initiate sales. 10 The Staff has met with the petitioners to 11 discuss these rule amendments, and I believe the 12 modifications put forward by Staff are acceptable to the 13 petitioners. 14 The petitioners have stated that they 15 believe the rule amendments will result in increased 16 proceeds for the charities that utilize this new 17 technology. While I don't doubt that claim, we can't 18 independently confirm that, mainly because we don't know 19 what the manufacturers and distributors are going to 20 charge for this new technology. But I will note that we 21 have received several signatures in support of these, 22 particularly from various charities. 23 And with that, I'd be happy to answer any 24 questions. 25 CHAIRMAN KRAUSE: Any questions? 44 1 (No response) 2 CHAIRMAN KRAUSE: We have one witness. 3 I'd like to introduce Kim Kiplin, who is the former 4 general counsel to the Lottery Commission, which, if -- 5 just to make sure everybody understands what we do here, 6 we operate the lottery, but we regulate Charitable 7 Bingo. And so those are two significantly different 8 things, and Ms. Kiplin was a very valued professional 9 here for many, many years, and we highly regard her 10 opinion. 11 So let's please hear from you. 12 MS. KIPLIN: Thank you. Good morning, 13 Chairman Krause and Commissioners. 14 My name is Kim Kiplin, and I'm an attorney 15 now with the law firm here in Austin, Dykema Gossett. I 16 am here today on behalf of the petitioners, K&B Sales, 17 and the VFW. And my comments will be brief. 18 We obviously support the Staff's 19 recommendations to grant the petitions in order to 20 propose amendments to the pull-tab and card-minding 21 rules. Over the course of drafting the rules, we've 22 tried to be inclusive of all interests, and we 23 appreciate the feedback we received, even before we 24 filed the petitions. We revised our draft rules in 25 response to that feedback. 45 1 And following the filing of the petitions, 2 we very much appreciated Staff's review, very careful 3 review, and the opening can of discussions that we had 4 with the Staff. 5 As the result of this process today are 6 these rules that are before you for your consideration. 7 They include the key changes the petition requested, and 8 they also include the provisions that Staff has 9 requested to enhance their ability to regulate bingo 10 transactions. 11 As Mr. Person has mentioned, there are 12 petitions with signatures, and we have over 170 13 signatures for many, many organizations in support of 14 the rule changes. I filed those petitions with the 15 Staff, but I do have copies here today if you'd like to 16 review those. 17 The rules are not intended, and they do 18 not expand gaming in Texas. And they do not go beyond 19 the Commission's statutory authority with regard to the 20 regulation of bingo. 21 Thank you for your time, your 22 consideration today. We're happy to answer any 23 questions that you may have. We look forward to the 24 Commission's consideration to vote to propose these 25 amendments for public comment. 46 1 CHAIRMAN KRAUSE: Any questions, 2 Commissioners? 3 (No response) 4 CHAIRMAN KRAUSE: I'd just like to point 5 out that this is an opportunity for the people that we 6 regulate to petition that we change rules that govern 7 their business, their behavior. And so this is what 8 we're here for is to hear from you. 9 And so anyway, do we have a motion to 10 begin the rulemaking process on these proposals? 11 COMM. EDWARDS: I make a motion we begin 12 rulemaking process on the proposals for Card-Minding 13 Systems, Site System Standards, for 402.323; as well as 14 Card-Minding Systems, Definitions, 402.322. However, 15 for Card-Minding Systems, Device Standards, and 16 Card-Minding Systems under 402.325, I move that we adopt 17 Staff's recommendations with one change, to add to the 18 end of the rule, 16 TA6 (sic) 402.325, on Page 10, the 19 following language: However, any unclaimed balances 20 deposited into the organization's bingo account are 21 restricted to the organization's charitable purposes as 22 provided by Texas Occ. Code 2001.453(2) and 2001.454. 23 CHAIRMAN KRAUSE: Second. 24 COMM. TOWNES: Second. 25 CHAIRMAN KRAUSE: Call for a vote. All in 47 1 favor, say "aye." 2 (All those voting in favor so responded) 3 CHAIRMAN KRAUSE: All opposed, say "nay." 4 No nays. It carries. 5 MR. BIARD: Thank you, Commissioners. 6 Just to clarify, those were two separate 7 rulemaking petitions that I have a memorandum, a T-bar 8 memorandum, for you to initial on both of those. 9 AGENDA ITEM NO. VI 10 CHAIRMAN KRAUSE: We now move to the 11 hiring of the internal auditors. And I believe we have 12 Mike Fernandez. 13 MR. FERNANDEZ: Good morning, 14 Mr. Chairman, Commissioners. 15 My name is Mike Fernandez, and for the 16 record, I'm the director of administration. And at the 17 direction of the Commission, the Staff issued an RFP, 18 received a number of bids. Subsequently after thorough 19 review, the recommendation to the Commission, the Staff 20 recommended McConnell Jones. And at your last meeting, 21 you supported that recommendation. And with me this 22 morning I have two principals from McConnell Jones that 23 have been carrying out the business of the Agency and 24 the Commission, and I will turn it over to them for 25 introductions and for their recommendations. Thank you. 48 1 MS. BROWN: Thank you. Good morning, 2 Commissioners. I'm Darlene Brown, and my colleague is 3 Doug Neaves. And we're here representing the internal 4 audit firm, McConnell & Jones, and we're a CPA firm 5 based out of Houston. 6 Today we're presenting three documents for 7 your approval. The first one is the internal audit 8 charter, and it's a revision of your current operating 9 internal audit charter. And the revisions are to 10 reflect the five-member board and also the fact that the 11 internal audit function is now outsourced. 12 The second document that we're presenting 13 for your authorization is the 2013 annual audit report 14 that goes to the state. And that report reflects all 15 the activities that occurred last year in 2013 for 16 internal and external audit. 17 And then the third document that we're 18 presenting to you is the proposed 2014 annual audit 19 plan. And that is put together based upon a risk 20 assessment that we conducted, which included interviews 21 with Staff, a survey that we sent out to Staff, 22 reviewing documents that were provided by Staff, and 23 also we reviewed the self-assessment that was conducted 24 at the end of the year. 25 From that we prioritized risks, and we 49 1 came up with eight different business cycles within your 2 operations. And we propose to do three major audits 3 this year in addition to reviewing the internal controls 4 associated with two new systems that you're bringing on 5 board, the lottery service portal and also the bingo 6 operating system. 7 And then also the audit plan includes 8 hours for administrative-type work and handling the 9 ethics lines. 10 So in total, we propose 1900 hours for 11 this year for those activities. And if you approve 12 these documents, they will be ready to be posted to your 13 website and sent to the state. 14 CHAIRMAN KRAUSE: Do you have any 15 testimony? 16 MR. NEAVES: I don't. 17 CHAIRMAN KRAUSE: All right. Well, I have 18 your witness affirmation, so I wanted to give you a 19 chance to speak. 20 All right. Well, we have been in need of 21 hiring an internal auditor, and I am really pleased that 22 the Staff has chosen this particular firm. I met with 23 representatives several weeks ago and was really 24 impressed with their qualification, and I'm happy to 25 have y'all on board. Subject to a vote by the 50 1 Commissioners, we have a motion to approve the internal 2 audit items. 3 MR. BIARD: Could I suggest that we add to 4 that motion an authorization for the chairman to sign 5 these documents on behalf of the Commission? 6 CHAIRMAN KRAUSE: Yes. 7 MR. BIARD: Okay, thanks. 8 COMM. EDWARDS: I make a motion we adopt 9 the audit reports as listed underneath Tab 6 of the 10 Lottery Commission meeting, as well as authorization for 11 Executive Director -- 12 MR. BIARD: Chairman. 13 COMM. EDWARDS: The chairman to sign and 14 execute the documents -- 15 MR. BIARD: Uh-huh. 16 COMM. EDWARDS: -- on behalf of Lottery. 17 COMM. STAVINOHA: I will second. 18 CHAIRMAN KRAUSE: Call for a vote. All in 19 favor, say "aye." 20 (All those voting in favor so responded) 21 CHAIRMAN KRAUSE: Any opposed? No nays. 22 It carries. 23 Let's go ahead and squeeze another couple 24 items in here before we break. Item VII. That is 25 discussion of lottery sales and revenue. Thank you. 51 1 Kathy Pyka. 2 AGENDA ITEM NO. VII 3 MS. PYKA: Good morning, Commissioners. 4 My name is Kathy Pyka. I'm the controller 5 for the Commission, and with me to my right is Robert 6 Tirloni. Robert is our products and drawings manager. 7 Commissioners, the first chart that we 8 have for you this morning reflects comparative sales 9 through the week ending February 8th, 2014. Our fiscal 10 year 2014 sales through this 23-week period are 11 $1,935,000,000, which is an increase of $55 million or 12 2.9 percent over fiscal year 2013 sales. 13 Our fiscal year 2014 Instant ticket sales 14 reflected on the second orange bar are $1,418,000,000. 15 This is a 48.9 -- 48.9 million-dollar increase over the 16 sales figure for last fiscal year. And Commissioners, I 17 want to note we continue to see exceptional 18 year-over-year Instant ticket sales as compared to 19 previous years. 20 In the month of January, we set another 21 all-time sales record for the highest January sales, 22 which were 279.8 million. That was a 23 20.7 million-dollar increase over fiscal year 2013 24 sales. So, again, our highest month of January sales in 25 the history of the Commission occurred last month. 52 1 Our fiscal year 2014 draw sales reflected 2 on the second blue bar are at $516.6 million, which is 3 $6.1 million above the fiscal year 2013 sales figure. 4 We'll move on to the next slide, 5 Commissioners, and this reflects our cumulative average 6 daily sales for fiscal years 2012, fiscal year 2013, and 7 fiscal year 2014. Moving to the bottom of the slide, we 8 see our overall daily sales average for fiscal year 2013 9 is just above $12 million. This is a 401,000-dollar 10 increase per day over last fiscal year, and it's over a 11 one million dollar per day increase over fiscal year 12 2012. 13 Moving to the top of the slide, we'll 14 focus on our jackpot games, which are highlighted in the 15 white font. We had a total daily average of fiscal year 16 2014 sales of $1.99 million. That's 189,000-dollar 17 increase over last fiscal year, and it's a 18 309,000-dollar increase over fiscal year 2012. 19 Within this category, we'd like to 20 highlight the Mega Millions daily average of $627,000. 21 This certainly reflects a healthy increase over the 22 prior fiscal years, and this is following the 23 636 million-dollar Mega jackpot that we had in the month 24 of December. 25 We do, however, see that our Powerball 53 1 average daily sales figure is $594,000, and that's a 2 179,000-dollar decline from last fiscal year; and, of 3 course, last fiscal year we were working with a 4 550 million-dollar jackpot during this time period. 5 We'll move on down to daily sales, and you 6 can see we've got a daily average of $1.22 million per 7 day on the daily side. We'd like to highlight in this 8 particular area our Daily 4 sales, which are at $227,000 9 per day, and that's a 17 percent increase over the 10 previous fiscal year. 11 Our All or Nothing sales for this fiscal 12 year are at $132,000 per day, and certainly they do not 13 compare to last fiscal year in which we had to suspend 14 sales, and we've seen a decline with the return of those 15 sales. I do want to note, though, that the last number 16 of weeks we've seen a return of well over a million 17 dollars in daily sales -- or weekly sales for All or 18 Nothing, following an advertising campaign. 19 So we'll move down to Instants, which 20 reflect an $8.8 million daily average. This is an 21 increase of $356,000 over last fiscal year and well over 22 $700,000 in increased sales over fiscal year 2012. 23 With that, Robert will now provide an 24 overview of actual sales by game. 25 MR. TIRLONI: Excuse me. So 54 1 Commissioners, this next slide is in the same format as 2 the slide Kathy just covered. It is the fiscal year 3 comparison, fiscal '14 compared to fiscal '13, through 4 last Saturday, February 8th. 5 Again, same format. If you look at our 6 jackpot games as a whole, they're up just under 7 $29 million through the week ending February 8. Again, 8 the bulk of that increase is being realized by the Mega 9 Millions sales increase that we've seen. Again, that's 10 thanks to the very large jackpot that we had in 11 December. 12 So we've kind of had a flip-flop here. 13 We're seeing good growth on Mega because of that 14 jackpot, but we are seeing a decline in Powerball just 15 because we've not had the jackpot rolls that we had in 16 the previous fiscal. 17 Good news is the Powerball jackpot did 18 roll last night. There were no jackpot winners, so we 19 are now advertising a Powerball jackpot of $330 million 20 for Saturday. So hopefully, that jackpot level and 21 increased play will start to chip away at that 22 29 million-dollar deficit we're seeing for the Powerball 23 product. 24 The blue is our daily games. Again, we 25 talk about this every meeting, but we do continue to see 55 1 very good growth on the Daily 4 product. We're pleased 2 with that. Something that seems to be happening 3 industrywide is a decrease in Pick 3 and an increase in 4 the Pick 4 or the Daily 4 product. So it seems like 5 players are migrating from one to the other, and we 6 believe that's what the reason is for the decline that 7 we're seeing in Pick 3. 8 Kathy talked a little bit about All or 9 Nothing. We are continuing to support that game, our 10 newest draw game after the sales have resumed, after we 11 had to suspend sales for about ten weeks. And as she 12 said, we've had a good -- I think it was about a 13 three-week ad flight, and we've seen good results from 14 that ad flight, bringing us back up over a million 15 dollars a week. So we hope to continue for that product 16 also to chip away at that decline. 17 If you look at our draw games as a whole, 18 they are up $6 million, or $6.2 million, for the fiscal 19 year. 20 We're seeing great deals from the Instant 21 product. We started our new suite of games, our 22 Multiplier suite. I showed you the artwork for those 23 tickets in the December meeting. We have advertising 24 out right now supporting those games. And there's full 25 point of sale. That's a major product initiative for us 56 1 this fiscal year, and it's doing very well. So our 2 Instant product is up just under 49 million for the 3 year. 4 So if you look at the whole portfolio 5 combined, sales are up $55 million this fiscal year 6 compared to last. 7 And that's it for our sales presentation 8 today. We're happy to answer any questions. 9 CHAIRMAN KRAUSE: Commissioners? 10 Well, since you and Ms. Pyka are at the 11 witness table, why don't y'all go ahead and take on the 12 next agenda item. 13 MS. PYKA: Certainly. 14 CHAIRMAN KRAUSE: Then we'll break after 15 that. 16 AGENDA ITEM NO. VIII 17 MS. PYKA: Again, for the record, my name 18 is Kathy Pyka, controller for the Commission. 19 Commissioners, Tab 8 includes information 20 on the Agency's transfers to the state and the Agency's 21 operating budget. The report in your notebook reflects 22 accrued revenue transfers and allocations to the 23 Foundation School Fund and Texas Veterans Commission, as 24 well as the allocation of unclaimed prizes for the 25 period ending December 31st, 2013. 57 1 Our total accrued transfers to the state 2 amounted to $382.3 million for the first four months of 3 fiscal year 2014. Of the $382.3 million transferred to 4 the state, $355.9 million was the amount of revenue 5 transferred to the Foundation School Fund. We 6 transferred $2.1 million to the Texas Veterans 7 Commission, with the remaining balance of 24.3 million 8 transferred from unclaimed lottery prizes. 9 Commissioners, this represents a 10 3.8 percent increase or $13.1 million over the amount 11 transferred to the Foundation School Fund through 12 December of 2012. Our total cumulative transfers to the 13 Foundation School Fund through December of this year are 14 now at $16.26 billion. 15 Commissioners, the final item under this 16 tab is our agency's fiscal year 2014 method of finance 17 summary for the first quarter ending November 30th of 18 2013. 19 The Commission's lottery account budget 20 for fiscal year 2014 is $201.6 million. Of this amount, 21 73 percent of the total budget was expended and 22 encumbered through the end of the first quarter, and our 23 bingo operations budget funded by general revenue is at 24 16.5 million, and we expended and encumbered 41 and a 25 half percent of that budget through the end of the first 58 1 quarter. 2 I'd be happy to answer any questions. 3 CHAIRMAN KRAUSE: Commissioners? 4 (No response) 5 MS. PYKA: Thank you, Commissioners. 6 CHAIRMAN KRAUSE: Good news. Let's take a 7 ten-minute break, and we will reconvene. 8 (Recess: 11:07 a.m. to 11:23 a.m.) 9 CHAIRMAN KRAUSE: We adjourned at 11:10, 10 and it is now 11:23. So we are now moving on to the 11 next agenda item, No. IX. 12 Mr. Fernandez. 13 AGENDA ITEM NO. IX 14 MR. FERNANDEZ: Again, good morning, 15 Mr. Chairman, Commissioners. 16 For the record, my name is Mike Fernandez. 17 I'm the director of administration. Agenda Item IX is a 18 briefing item, and it's to advise the Commission of 19 Staff's intent to issue an RFP for the biannual lottery 20 security study. 21 I also wanted to advise the Commission of 22 three potential amendments to three current contracts. 23 Those being the lottery drawings and CPA services, 24 drawing studio and production services, and statistical 25 consulting services. And these contracts would be 59 1 amended with the implementation of Triple Chance. 2 I'd be happy to answer any questions. 3 CHAIRMAN KRAUSE: Commissioners? 4 (No response) 5 CHAIRMAN KRAUSE: Let's go on to Item No. 6 X. 7 Ms. Trevino. 8 AGENDA ITEM NO. X 9 MS. TREVINO: Good morning, Commissioners. 10 For the record, I'm Nelda Trevino. I'm 11 the director of governmental affairs, and I have a brief 12 report to provide today. 13 During the legislative interim, the 14 speaker of the house and the lieutenant governor 15 assigned charges to every house and senate standing 16 committee to study particular issues and possibly 17 conduct committee hearings for the purpose of making 18 recommendations to the next legislature. 19 In your meeting notebook, we have provided 20 you copies of interim committee charges issued by 21 Speaker Straus and Lieutenant Governor Dewhurst for 22 certain house and senate committees. 23 While no specific charges were issued 24 related to the administration of the lottery or the 25 regulation of Charitable Bingo, there are committees 60 1 that were assigned to study issues and review matters 2 related to all State agencies. We will keep you advised 3 on developments related to these interim committee 4 charges, specifically as it relates to any committee 5 request that might be made of the Agency. 6 As I just mentioned, there are no specific 7 interim committee charges related to the administration 8 of the lottery or the regulation of Charitable Bingo. 9 However, as you know, a provision included in the agency 10 Sunset Legislation, House Bill 2197, establishes a 11 ten-member legislative committee to study both the 12 impact of eliminating the state lottery and aspects 13 related to the distribution of revenue for Charitable 14 Bingo. 15 In your meeting notebook, we also provided 16 the excerpt from House Bill 2197 related to this 17 legislative review committee, which outlines what this 18 committee is charged with studying. 19 As stated in the legislation, (as read) 20 The committee shall make its initial report of its 21 findings and recommendations to the legislature not 22 later than December the 1st, 2014. 23 The speaker and the lieutenant governor 24 have yet to make appointments to this committee, but we 25 anticipate this occurring in the very near future. 61 1 And, again, we'll keep you advised of any 2 developments related to this specific committee. 3 This concludes my report, and I'll be glad 4 to answer any questions. 5 CHAIRMAN KRAUSE: Commissioners? 6 (No response) 7 CHAIRMAN KRAUSE: Agenda Item No. XI and 8 XII. Mr. Grief, just take them both. 9 AGENDA ITEM NOS. XI and XII 10 MR. GRIEF: Very good. Thank you, 11 Mr. Chairman. 12 Under Item No. XI, the GTECH item, in your 13 notebooks this morning you have several documents 14 relating to a significant corporate restructuring of the 15 organization of GTECH, our lottery operator and our 16 business partner in running the Texas Lottery. That 17 reorganization is detailed in the documents that I have 18 provided to you, and as described in the letter from 19 Jaymin Patel, who is the president and CEO of GTECH 20 Americas. 21 The reorganization puts a new focus and 22 additional resources on those anticipated by GTECH 23 growth areas in the U.S. gaming market, in particular 24 the interactive market described by some as "Internet 25 gaming," in future opportunities for GTECH to provide 62 1 further outsourcing lottery services, such as are 2 currently occurring in Illinois, New Jersey, and 3 Indiana. 4 With that said, the most significant 5 change, as far as Texas is concerned, is the 6 announcement of the retirement of Alan Eland, senior 7 vice president and chief operating officer for GTECH 8 North America. 9 With the exception of new Commissioner 10 Townes, all of our sitting commissioners have had an 11 opportunity to meet Alan during his attendance at past 12 Commission meetings. He's testified before this 13 Commission many times over the last 20 years. He has 14 deep roots in the Texas Lottery, having served as our 15 actual account general manager here in Texas at the 16 beginning of the lottery back in 1992. He's maintained 17 direct oversight of the Texas Lottery GTECH function 18 since he's moved into his corporate position. 19 Alan traveled to Texas the week before 20 last to meet with me personally and announce that he was 21 stepping down from the company at the end of this 22 calendar year, about ten and a half months from now. He 23 provided me assurances that there will be a smooth 24 transition as he leaves the company, but most 25 importantly to me, he assured me that there would be no 63 1 changes to GTECH Texas and to our team that's led by Joe 2 Lapinski here in Austin. 3 Subsequently, I received a phone call from 4 Jaymin Patel, the CEO and president of GTECH North 5 America, and he reinforced those same commitments that 6 Alan had already made to me personally. And those 7 commitments from Mr. Patel are also in the letter that's 8 in your notebook today. 9 Certainly don't anticipate any problems or 10 issues to arise as this -- these changes are implemented 11 by GTECH, but I do want to assure the Commission that if 12 we do see any issues -- and we will be watching this 13 organizationally wide -- we will report those to Joe 14 Lapinski here in Texas and I'll follow up with GTECH 15 corporate and I'll keep you apprised of any issues as 16 well. 17 That concludes my report on that item, 18 Mr. Chairman. I'd be happy to answer any questions. 19 CHAIRMAN KRAUSE: Commissioners? 20 (No response) 21 MR. GRIEF: We're good. 22 Under Item XII, I have several items to 23 report to the Commission on this morning. 24 First, as I mentioned in our last 25 Commission meeting in December, I was invited and 64 1 recently attended the World Lottery Association 2 conference in London last week. World Lottery 3 Association is also known as WLA, and they held their 4 annual marketing conference. I provided you with 5 detailed information in your notebooks about the WLA. 6 It's composed of 148 different lotteries 7 from around the world. It encompasses over 80 countries 8 in six different continents, with annual revenue by 9 members of the association in excess of 200 billion in 10 U.S. dollars. Fifteen U.S. lotteries are currently 11 members of the WLA. Texas is currently not a member. 12 This was a three-day event that I 13 participated in, and all my expenses were covered by the 14 WLA. No money was expended by either the Texas Lottery 15 Commission or the State of Texas. I participated in two 16 separate panels and presentations in this particular 17 conference. 18 The first was a very spirited debate led 19 by Ray Bates, who is the longtime director of the Irish 20 Lottery. And Ray, good naturedly, took me to task, and 21 my U.S. colleagues, for our large jackpots and our 22 higher price scratch-off games that we utilize over here 23 in the states, neither one of which are very popular 24 over in Europe. 25 We had a very interesting and what I 65 1 thought was a very entertaining exchange during that 2 session. And both the audience and I learned, I think 3 quite a bit, about the different types of games that are 4 attractive to our playing populations on different sides 5 of the globe. 6 In the second agenda item I participated 7 in, my colleague and fellow lottery director from North 8 Carolina, Alice Garland, and I made a presentation to 9 the international audience on the recent changes that 10 we've made to Mega Millions and to Powerball, all in the 11 interest of generating higher jackpots. 12 And I also made the point -- and I gave 13 the case study, if you will -- of the need for the two 14 multi-jurisdictional game groups here in the U.S., MUSL, 15 or the Multi-State Lottery Association, and Mega 16 Millions, to set aside their differences and merge in a 17 way that we can effectively gain strength from the 18 synergy that such a merger like that would take on. 19 In summary, this conference put on by the 20 WLA, I thought it was extraordinarily a great 21 opportunity for Texas. Following the conference, as you 22 would suspect, I was approached by representatives from 23 WLA as to membership in that organization. And while I 24 believe that membership would indeed be a wonderful 25 opportunity for our lottery, the European countries, I 66 1 will tell you, are much more advanced than the U.S. when 2 it comes to interactive and Internet gaming. 3 Both of those are spreading rapidly across 4 state lotteries here in the U.S., but the challenges and 5 the limitations of traveling to WLA events really makes 6 a membership in WLA for Texas less than practical. 7 With that said, and after a lengthy 8 discussion with WLA, I believe they are going to put 9 forth some type of proposal to us for membership that 10 would include some type of reimbursable travel from WLA. 11 I'll be working closely with Kathy Pyka and our budget 12 staff in Texas state government and see if that might 13 pass muster under our standards. If it does, I'll 14 obviously bring that back before the Commission for a 15 discussion. 16 And regarding the Multi-State Lottery 17 Association, or MUSL as it's better known, I've provided 18 you with copies of my letter to Paula Otto, the Mega 19 Millions' lead director, regarding Texas transition out 20 of the Mega Millions organization and into the MUSL 21 organization as of March 1st. 22 As I've reported at previous meetings, 23 this change of affiliation will not impact our ability 24 to sell both Powerball and Mega Millions and reap the 25 benefits of that revenue, but it will better align our 67 1 ability to vote on Powerball game changes. That is 2 outselling Mega Millions by almost 3 to 1. It's much 3 more important that we have a voice and a vote on any 4 changes that are coming up for that game. 5 To help ensure a smooth transition from 6 Mega Millions to MUSL, the executive staff from MUSL, 7 who are based in Iowa, are going to travel down to Texas 8 on February 19th. They're going to spend the day with 9 us, in particular, with Kathy Pyka's staff and Mike 10 Fernandez's staff, to make sure that our financial and 11 our information resources, systems, and guidelines are 12 all ready for that March 1st transition day. 13 I would also like to report that Nelda 14 Trevino, our governmental affairs director, and I 15 attended a conference in Fort Lauderdale, Florida, on 16 January 9th and 10th. This was hosted by the National 17 Council of Legislators from Gaming States, or NCLGS, as 18 it's known. 19 That's the only organization of state 20 lawmakers from around the country that get together on a 21 regular basis to discuss gaming issues. Members of 22 NCLGS typically chair or serve on legislative committees 23 in their respective states that focus on gaming 24 regulation in their particular jurisdiction. 25 NCLGS doesn't take a position as to 68 1 whether they're for or against gaming; rather their 2 focus is on how to properly regulate it. Our agency has 3 participated in this conference in years past, but this 4 was my first opportunity to attend. 5 In my capacity as president of NASPL, I 6 presented to the legislators who were in attendance a 7 history of lotteries in the U.S. and then a recap of 8 sales in the U.S. on a national scale for the past 9 fiscal year. My sense was the focus of NCLGS, at this 10 particular conference, was really on two issues. 11 One was on responsible gaming, which plays 12 very well into the fact that Texas recently joined the 13 National Council on Problem Gambling as a full-fledged 14 member. 15 And the second issue that they focused 16 on -- and you, as a commissioner, and as a Commission, 17 will be hearing more about this in the months and years 18 to come -- is the proliferation of Internet and 19 interactive lottery wagering that is taking place in 20 many states throughout the U.S. My sense is the 21 legislative members that were there are trying to get 22 their arms around how to effectively monitor that and 23 regulate it in a proactive fashion rather than reactive. 24 And although representatives from Texas, 25 from our House and Senate, have attended this conference 69 1 in the past, there were no attendees from Texas at this 2 particular conference. 3 Next item I want to inform you about is 4 the Public Gaming Research Institute SMART-TECH 5 conference, and public gaming is also known as PGRI. 6 That's going to occur March 31st through April the 7 2nd in New York. 8 This conference will bring together 9 lottery and vendor staff and directors from around the 10 country to discuss issues of importance within our 11 industry. I've been asked to give the opening key note 12 address at this particular conference, as well as serve 13 on a panel or two. 14 I said this to you all individually, but 15 I'll say it to you as a body: Commissioners, you are 16 always invited and welcome to attend these industry 17 conferences. And I'll be sure to follow up with each of 18 you individually to make sure you have all the details. 19 My next item is a brief update on my 20 ongoing duties as president of NASPL. The work of the 21 association continues, and we will be having our next 22 executive committee meeting in Baltimore on 23 February 24th and 25th. 24 Geoff Freeman is the president of the 25 American Gaming Association or the AGA. For the last 20 70 1 years, the president has been a gentleman named Frank 2 Fahrenkopf, who you may have heard of. He's been in the 3 news for years on gaming issues. And Mr. Freeman has 4 recently taken over for Mr. Fahrenkopf. 5 AGA represents the commercial casino 6 industry, and they focus on federal regulatory and 7 legislative issues, anything that might affect the 8 members of their association and their employees and 9 customers, things like federal taxation, tourism, 10 Internet gambling, et cetera. 11 Mr. Freeman is going to join us for our 12 NASPL executive committee meeting, and he's going to 13 discuss the AGA's stated position on the future of 14 Internet gaming. And you all should know that NASPL's 15 official position is that Internet gaming is a state's 16 rights issue. 17 Our association believes it shouldn't be 18 up to the federal government to determine if Texas is 19 going to implement Internet gaming. That should be 20 something that our legislature decides, and that is 21 uniform across the country at every state lottery that 22 I'm aware of. 23 Also speaking of NASPL activities, our 24 annual NASPL Lottery Leadership Institute conference is 25 coming up in St. Louis April 6th through the 9th, just 71 1 prior to our April 10th Commission meeting. This is a 2 management development conference, and it provides an 3 opportunity for lottery Staff from around the country to 4 meet and hear from leaders of our industry on their 5 strategies and their management techniques and grow 6 professionally with the hope that many of these 7 attendees someday end up in management positions within 8 their lotteries. 9 I'll be addressing this year's attendees, 10 and we also plan to send two of our management team to 11 the conference to take advantage of this opportunity as 12 well. 13 Commissioners, my next item is just some 14 additional comments on sales and revenue. You heard the 15 information that Kathy and Robert presented to you 16 today. Sales of our scratch-off products, which account 17 for about 75 percent of our overall sales, are up about 18 3 and a half percent over last year's record pace. And 19 overall draw sales are up about 1 percent. 20 And while we're very pleased with that 21 performance, particularly on the draw sales side, keep 22 in mind that jackpot draw sales are primarily driven by 23 high jackpots. And we are going to be competing against 24 three different time periods between now and 25 August 31st, where we had very large jackpots occur last 72 1 year. And I'm counting on those occurring this year as 2 well. 3 We're now at 330, as you know, on 4 Powerball; but our success or failure on those jackpot 5 draw games is driven, in large part, by how high those 6 jackpots roll. So I remain cautiously optimistic as we 7 start to look at down the road towards the end of the 8 fiscal year at the end of August. 9 And I would like to formally welcome 10 Commissioner Townes to the board. 11 Commissioner Townes, I hope and I 12 anticipate that your experience as a board member on 13 this Commission will be very rewarding for you. I look 14 forward to working with you, sharing information with 15 you; and conversely, I hope to gain the benefit of your 16 experience to keep this agency moving forward. 17 And Mr. Chairman, my final item is to 18 thank Commissioner Edwards for her service to this 19 Commission. I'd like to add to what you said, 20 Mr. Chairman. Her business acumen and her enthusiasm 21 for serving on this board will be sorely missed. 22 And Commissioner Edwards, I know I speak 23 for every employee at the Agency in wishing you the very 24 best in your next adventure, whatever that may be. So 25 thank you for your time. 73 1 Mr. Chairman, that concludes my comments. 2 I'd be happy to answer any questions. 3 CHAIRMAN KRAUSE: Commissioners? 4 (No response) 5 CHAIRMAN KRAUSE: Thank you, Gary. 6 Ms. Joseph. 7 AGENDA ITEM NO. XIII 8 MS. JOSEPH: Yes, just like to add a 9 couple of things to the information that's contained in 10 the notebook under my report. 11 First of all, I'm pleased to report that 12 we are making steady, intense, and rapid progress on the 13 development of our new bingo operating services system. 14 Many hours are being put into that, and we're so far 15 very pleased with how it's moving along. 16 Secondly, I'd like to let you know that we 17 have hired five more auditors with that additional 18 funding that we received. I'd like to ask them to 19 stand, if they're in here, for just a moment and let 20 them -- let you take a look at them. There's four here, 21 and we're very pleased to have them. We know they're 22 going to be a great addition to our team. 23 We still need to go through another round 24 of hiring, and hopefully by the next Commission meeting, 25 we'll be fully staffed. 74 1 And finally, I, too, would like to echo 2 what Gary said in appreciation for Veronica. She has 3 been unbelievable as the bingo commissioner and very 4 inspiring and huge resource, and I really appreciate it. 5 And Commissioner Townes, talking with you 6 this morning over some bingo matters, it was clear to me 7 that you are going to catch on just as quickly as 8 Commissioner Edwards, and I look forward to working with 9 you. 10 COMM. TOWNES: Thank you. 11 MS. JOSEPH: Thank you. 12 CHAIRMAN KRAUSE: Outstanding. 13 Now, we come to the most fun part of the 14 meeting, all the enforcement actions that Bob is going 15 to walk us through. 16 AGENDA ITEM NO. XIV 17 MR. BIARD: Thank you, Commissioners. 18 Tab 14 in your notebook contains 24 19 lottery and bingo enforcement matters, Tabs A through X. 20 These are cases where the Commission Staff has found a 21 violation, and most of the time, either the lottery or 22 bingo licensee failed to appear at the hearing or the 23 Staff and the licensee have reached a settlement. 24 I'll briefly describe what we have in our 25 notebooks, and if you'd like, you can take them all up 75 1 in a single vote unless there's any one you'd like to 2 pull out. 3 The first 18 cases are Tabs A through R. 4 These are what we call NSF lottery retailer license 5 revocations, and they're handled in a single order. 6 These are cases presented at the State Office of 7 Administrative Hearings for revocation of the retailer's 8 license on the ground the licensee failed to have 9 sufficient funds in their bank account to cover 10 electronic fund transfers to the Lottery Commission's 11 account. 12 The administrative law judge recommends 13 revocation in each of these cases, and Staff recommends 14 that you vote to approve the order in each case revoking 15 the license. 16 Tabs S through X are all settlement 17 orders, and they're all bingo-related. Each of these 18 six items has its own order for you to sign. The first 19 five of these, S through W, are agreements with 20 charities that are members of the Golden Belle Bingo 21 accounting unit in Henderson County. 22 Last year, another case on the -- 23 involving Golden Belle came up. That was -- they were 24 settled, and that was the case that involved the use of 25 8-liners in these -- in the Golden Belle Bingo hall, and 76 1 these were the five charities involved. This is not 2 related to the 8-liner issue. It is just an audit that 3 went on with the charities roughly at the same time that 4 the other investigation was going on. 5 The bingo act allows two or more charities 6 to form a bingo accounting unit and share revenues, 7 expenses, and inventory. So a Commission audit of this 8 unit found a number of violations. 9 After initiation of a contested case, the 10 parties reached a settlement. The unit has agreed to 11 pay an administrative penalty of $2,000, reimburse the 12 bingo division, the $8,000 for the cost of the audit, 13 redeposit $6,000 into the unit's bingo account, and pay 14 additional prize fees, penalties, and interest. Staff 15 recommends you adopt the agreed orders in these five 16 cases. 17 And the final tab, X in your notebook, is 18 another bingo-agreed settlement order with Coastal Bend 19 Kidney Foundation. In this instance, the charity have 20 asked the Commission for a temporary license to conduct 21 bingo. They hadn't received it by the time they 22 conducted their bingo event, so they actually conducted 23 bingo without a license. They admitted to the violation 24 and have agreed to pay a 125-dollar penalty. 25 So that is all the items under this tab, 77 1 and there are a total of seven orders for you to sign, 2 if there's a motion to approve. 3 COMM. EDWARDS: I make a motion we approve 4 Staff's recommendations for lottery NSF license 5 revocation cases A through R and bingo-agreed orders 6 related to Golden Belle Bingo unit trust S through V as 7 well -- I'm sorry -- S through W, and then other 8 bingo-agreed orders X. 9 COMM. STAVINOHA: I will second. 10 CHAIRMAN KRAUSE: Calling for a vote. All 11 in favor, say "aye." 12 (All those voting in favor so responded) 13 CHAIRMAN KRAUSE: Nays? No nays. So 14 they're all approved. 15 MR. BIARD: Thank you, Commissioners. 16 I have seven orders for your signature. 17 CHAIRMAN KRAUSE: At this point, I move 18 that the Texas Lottery Commission go into executive 19 session, deliberate personnel matters, including the 20 appointment, employment, evaluation, reassignment, 21 duties, discipline, or dismissal of the Executive 22 Director and of the Charitable Bingo Operations Director 23 and to discuss the duties of the general counsel and/or 24 Human Resources Director, all pursuant to Section 25 551.703 Texas Government Code and to receive legal 78 1 advice on pending matters of litigation. 2 Is there a second? 3 COMM. STAVINOHA: I second. 4 CHAIRMAN KRAUSE: All in favor, say "aye." 5 (All those voting in favor so responded) 6 CHAIRMAN KRAUSE: Any opposed? No 7 opposition, it carries. 8 AGENDA ITEM NO. XVI 9 CHAIRMAN KRAUSE: It is 11:49, and we will 10 temporarily adjourn for executive session. 11 (Recess: 11:49 a.m. to 12:58 p.m.) 12 AGENDA ITEM NO. XVII 13 CHAIRMAN KRAUSE: The Texas Lottery 14 Commission is out of executive session at 12:58 a.m. 15 COMM. STAVINOHA: P.m. 16 CHAIRMAN KRAUSE: P.m. Oh, I'm sorry. 17 Yeah, it is p.m. It's a long session. 18 Is there any action to be taken as a 19 result of the executive session that is official action? 20 COMM. STAVINOHA: Not to my knowledge. 21 AGENDA ITEM NO. XVIII 22 CHAIRMAN KRAUSE: Okay. Next item is to 23 adjourn this meeting. 24 COMM. EDWARDS: I make a motion we adjourn 25 the meeting. 79 1 COMM. BAGGETT: I second. 2 COMM. TOWNES: I second. 3 CHAIRMAN KRAUSE: Let's call for a vote. 4 All in favor, say "aye." 5 (All those voting in favor so responded) 6 CHAIRMAN KRAUSE: Any opposed? 7 (No response) 8 CHAIRMAN KRAUSE: Then it carries. We are 9 out of session. 10 (Proceedings concluded at 12:59 p.m.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 80 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 24th day of February, 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. 1016 La Posada Drive, Suite 294 21 Austin, Texas 78752 512.474.2233 22 23 24 Job No. 115413 25