1 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 COMMISSION MEETING OF THE § 7 TEXAS LOTTERY COMMISSION § THURSDAY, DECEMBER 11, 2014 § 8 9 10 COMMISSION MEETING 11 THURSDAY, DECEMBER 11, 2014 12 13 14 BE IT REMEMBERED THAT on Thursday, the 11th day of 15 December 2014, the Texas Lottery Commission meeting was 16 held from 10:01 a.m. until 1:14 p.m., at the offices of 17 the Texas Lottery Commission, 611 East 6th Street, 18 Austin, Texas 78701, before CHAIRMAN J. WINSTON KRAUSE 19 and COMMISSIONERS JEFF MEADOR, MARY ANN WILLIAMSON, 20 JODIE G. BAGGETT, and JOHN W. TOWNES, III, and the 21 following proceedings were reported via machine 22 shorthand by Lorrie A. Schnoor, Certified Shorthand 23 Reporter, Registered Merit Reporter, Certified Realtime 24 Reporter and Texas Certified Realtime Reporter. 25 2 1 APPEARANCES 2 CHAIRMAN: J. Winston Krause 3 COMMISSIONERS: 4 Mr. Jeff Meador 5 Ms. Mary Ann Williamson Ms. Jodie G. Baggett 6 Mr. John W. Townes, III 7 GENERAL COUNSEL: 8 Mr. Robert F. Biard 9 EXECUTIVE DIRECTOR: 10 Mr. Gary Grief 11 CHARITABLE BINGO OPERATIONS DIRECTOR: 12 Mr. Alfonso D. Royal, III 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 TABLE OF CONTENTS 2 PAGE 3 PROCEEDINGS - THURSDAY, DECEMBER 11, 2014 ...... 7 4 I. The Texas Lottery Commission will call the meeting to order....................... 7 5 II. Report, possible discussion and/or action 6 on 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 9 and/or action on external audits and/or reviews relating to the Texas Lottery 10 Commission, including the FY 2014 annual financial audit and agreed upon procedures 11 engagements................................ 16 12 IV. Report, possible discussion and/or action on the 2014 demographic report on lottery 13 Players.................................... 20 14 V. Report, possible discussion and/or action on the biennial security study of the 15 lottery.................................... 42 16 VI. Consideration of and possible discussion and/or action, including proposal, on 17 amendments to 16 TAC §§ 402.400 General licensing Provisions, 402.401 Temporary 18 license, 402.404 License and Registry fees, 402.410 Amendment of a License – 19 General Provisions, 402.411 License Renewal, and 402.412 Signature Requirements; 20 and on new 16 TAC § 402.104 Delinquent Obligations................................ 45 21 VII. Consideration of and possible discussion 22 and/or action, including proposal, on amendments to 16 TAC § 401.317 “Powerball®” 23 On-Line Game Rule.......................... 51 24 25 4 1 TABLE OF CONTENTS 2 PAGE 3 VIII. Consideration of and possible discussion and/or action, including proposal, on 4 amendments to 16 TAC § 401.323 "MONOPOLY MILLIONAIRES' CLUB™" Game Rule............ 57 5 IX. Consideration of and possible discussion 6 and/or action, including proposal, on Amendments to 16 TAC § 401.101 Lottery 7 Procurement Procedures..................... 67 8 X. Report, possible discussion and/or action on lottery sales and revenue, game 9 performance, new game opportunities, advertising, market research, trends, and 10 game contracts, agreements, and procedures................................. 70 11 XI. Report, possible discussion and/or action 12 on transfers to the State.................. 74 13 XII. Report, possible discussion and/or action on the 83rd and/or 84th Legislature........ 75 14 XIII. Consideration of and possible discussion 15 and/or action on external and internal audits and/or reviews relating to the Texas 16 Lottery Commission, and/or on Internal audit activities, including approval of 17 Charitable Bingo Operations Division Prize Fee Allocation Audit Report......... 80 18 XIV. Consideration of and possible discussion 19 and/or action, including but not limited to suspension of sales, on the Texas Lottery 20 Commission’s participation in the MONOPOLY MILLIONAIRES’ CLUB™ game.......... 57 21 XV. Report by the Charitable Bingo Operations 22 Director and possible discussion and/or action on the Charitable Bingo Operations 23 Division’s activities, including updates on the Business Process Restructuring Project 24 licensing, accounting and audit activities, pulltab review, and special projects....... 85 25 5 1 TABLE OF CONTENTS 2 PAGE 3 XVI. Report, possible discussion and/or action on GTECH Corporation....................... 88 4 XVII. Report by the Executive Director and/or 5 possible discussion and/or action on the agency’s operational status, agency 6 procedures, awards, and FTE status........ 88 7 XVIII. Consideration of the status and possible entry of orders in: Lottery NSF License 8 Revocation Cases (Default Unless Otherwise Noted) 9 A. Docket No. 362-14-4831 – DI One Stop Other Lottery Revocation Cases 10 B. Docket No. 362-14-1856 – Hamshire Quick Mart (Motion for Rehearing) 11 Lottery Agreed Orders C. Case No. 2014-872 – Food Fast 12 #1007 D. Docket No. 362-14-2491 – 13 Pool’s Quick Stop........................ 100 14 XIX. Public comment............................. 8 15 XX. Commission may meet in Executive Session... 104 A. To deliberate personnel matters, 16 including the appointment, employment, evaluation, reassignment, duties, discipline, 17 or dismissal of the Executive Director and/or the Charitable Bingo Operations 18 Director pursuant to Section 551.074 of the Texas Government Code. 19 B. To deliberate the duties of the General Counsel and/or the Human Resources 20 Director pursuant to Section 551.074 of the Texas Government Code. 21 22 23 24 25 6 1 TABLE OF CONTENTS 2 PAGE C. To receive legal advice regarding 3 pending or contemplated litigation or settlement offers, or other legal advice, 4 pursuant to Sections 551.071(1) and (2) of the Texas Government Code, including 5 but not limited to legal advice regarding the following items: 6 Department of Texas, Veterans of Foreign Wars et al. v. Texas Lottery Commission et al. 7 State of Texas v. Equal Employment Opportunity Commission et al. 8 American Legion Department of Texas, Temple Post 133 et al. v. Texas Racing Commission. 9 Fun 5’s Instant Game #1592, including Travis Co. District Court Cause No. D-1- 10 GN-14-004345 and potential litigation. Legal advice regarding the State Lottery 11 Act, Texas Government Code Chapter 467, the Bingo Enabling Act, the Open Meetings 12 Act, the Administrative Procedure Act, employment law, personnel law, procurement 13 and contract law evidentiary and procedural law, and general government law. 14 Legal advice regarding any item on this open meeting agenda. 15 XXI. Return to open session for further 16 deliberation and possible action on any matter posted for discussion in Executive 17 Session. Any matter posted for Executive Session also may be the subject of 18 discussion and/or action in open session prior to Executive Session................. 105 19 XXII. Adjournment............................... 105 20 REPORTER'S CERTIFICATE.......................... 106 21 22 23 24 25 7 1 P R O C E E D I N G S 2 THURSDAY, DECEMBER 11, 2014 3 (10:01 a.m.) 4 AGENDA ITEM I 5 CHAIRMAN KRAUSE: Good morning. I'm 6 Winston Krause. I'm the chairman of the Lottery 7 Commission, and I'm calling this meeting of the Texas 8 Lottery Commission to order. It is 10:02 on December 9 the 11th, 2014, and we have a full house. When I say 10 that, I mean we have all five commissioners here, which 11 is the first time in a really long time we've had that. 12 We are welcoming Admiral Townes back, 13 after a bit of a hiatus; and we have a new commissioner, 14 Commissioner Meador. And so welcome to both of them. 15 And we normally start off a meeting with a 16 new commissioner with a little bit of microtraining that 17 we have to kind of put up with, but we're going to delay 18 that, because we do have one submission for public 19 comment. And so in order to accommodate that person and 20 go ahead and give them a chance to speak to us, they 21 were going to go ahead and have public comment now. 22 So I have a witness affirmation form for 23 Dawn Nettles, and so if Dawn Nettles would come up and 24 speak, we'd be happy to have her. 25 MR. GRIEF: Dawn, you may just want to sit 8 1 at the table. 2 COMMISSIONER WILLIAMSON: You can sit 3 there. See if that one works. 4 CHAIRMAN KRAUSE: Yeah, so anyway we do 5 have a full agenda, so if you could address us for three 6 to five minutes, we'd be pleased to hear from you. 7 AGENDA ITEM XIX 8 MS. NETTLES: Okay, Commissioners, you 9 caught me off guard. I didn't really expect to comment 10 until after hearing what was on the agenda, because I 11 came to comment on basically the MONOPOLY game, but I 12 see that you all have posted an emergency notice on it, 13 and I don't know what you're going to say. So, 14 therefore, I don't know what I want to say at this point 15 in time on the MONOPOLY game. 16 I hope you close it down, because it is a 17 huge liability to the state, and it's not a popular 18 game. The five-dollar price tag is -- 19 CHAIRMAN KRAUSE: You may get your wish. 20 MS. NETTLES: Well, be nice. It would be 21 good for the state, not me. I haven't played it. So -- 22 and with regard to the Powerball, I don't know exactly 23 what the plan is on it either, and that was the other 24 reason I was coming to speak on Powerball. So if I 25 could either come back later or -- 9 1 CHAIRMAN KRAUSE: But you have thoughts on 2 Powerball. Right? 3 MS. NETTLES: I'm sorry? 4 CHAIRMAN KRAUSE: You already have some 5 thoughts on Powerball? 6 MS. NETTLES: Well, Powerball took its 7 dump when you went to the two-dollar price. Players 8 aren't going to play that. Your ticket sales are not 9 strong enough -- I mean the people aren't going to spend 10 $2 on a Powerball ticket. I mean, everybody is known 11 for humteen jillion years that you can -- the lottery is 12 the only thing where you can spend a dollar and perhaps 13 get millions. So that is the viewpoint on it, and 14 that's what's hurt Powerball. Powerball is otherwise a 15 good game. 16 I see there's other changes on it, but I 17 don't know exactly what they are, because I haven't 18 really read the rule. So that's the two things that I 19 was going to comment on today. But I don't know what to 20 say, because I don't know what y'all are going to say. 21 CHAIRMAN KRAUSE: Uh-huh. 22 MS. NETTLES: I'm surprised you've taken 23 me first. 24 CHAIRMAN KRAUSE: Well, if you'd come to 25 the meetings, then you would know that we frequently try 10 1 to accommodate the public when they want to speak, and 2 it gives them a chance for us to hear from them before 3 they have to, you know, hear us drone through all the 4 reports and that kind of thing, so... 5 MS. NETTLES: I see. Well, I do 6 appreciate that. I have been to meetings, not lately a 7 lot, but I am, and it's, you know, listed on the agenda 8 for last. So at any rate, I do appreciate it, and I do 9 hope you do take serious action on MONOPOLY, because it 10 is a huge liability. I was surprised to find out you 11 bought insurance to cover your losses. I can't believe 12 the state would continue to run a game but go buy 13 insurance to pay its losses if they had losses. 14 CHAIRMAN KRAUSE: Uh-huh. 15 MS. NETTLES: So I was surprised at that. 16 But at any rate, I do appreciate it. It's nice to see 17 you all. I haven't met most of you. I only know two of 18 you, actually. So anyway, you all have a good day, and 19 I'll see if I have anything to say afterwards. 20 CHAIRMAN KRAUSE: Thank you, ma'am. 21 Mr. Biard, training time. 22 AGENDA ITEM II 23 MR. BIARD: Yes. Good morning, 24 Commissioners. This is Tab 2 in your notebooks. For 25 the record, I'm Bob Biard, general counsel. Whenever 11 1 there's a new Lottery Commissioner, this Agency has a 2 tradition of briefly reviewing the laws that govern the 3 Texas Lottery Commission, if that commissioner's first 4 meeting, and today is Commissioner Meador's first 5 meeting. 6 In addition, the Commission Sunset 7 legislation requires new appointees to complete a 8 training program before they may vote, deliberate, or be 9 counted as a member in attendance at a Commission 10 meeting. The training program must provide the new 11 appointee with information regarding the legislation 12 that created the Commission, the programs, functions, 13 rules, and budget of the Commission, the results of the 14 most recent formal audit of the Commission, the 15 requirements of the open meetings, public information, 16 administrative procedure, and conflict of interest laws 17 and applicable ethics policies adopted by the Commission 18 or the Ethics Commission. 19 I wanted to state for the record that 20 prior to this meeting, Commissioner Meador has had the 21 required training session. He's met with Gary Grief, 22 Kathy Pyka, Alfonso Royal, and me, and, in fact, has met 23 with all of the division directors prior to this meeting 24 for the required training and briefing. 25 So for purposes of today's meeting, I just 12 1 want to provide a brief overview of the highlights 2 regarding ethics, procedures, and open government laws 3 governing the Commission. 4 I have provided you a document titled 5 "Guide to Ethics Laws for State Officers and Employees." 6 This is a publication from the Texas Ethics Commission, 7 but because the Texas Lottery Commission has a number of 8 additional requirements, we have annotated it using blue 9 ink to highlight provisions specific to the Lottery 10 Commission, and these provisions are generally more 11 restrictive than the requirements that apply to other 12 state agencies. 13 For instance, there's a restriction 14 against accepting gifts, employment, or remuneration 15 from a person that has a significant financial interest 16 in the lottery, which is the defined term that includes 17 vendors and retailers licensed to sell lottery tickets. 18 And on the bingo side, it would include a bingo 19 commercial lessor, distributor, or manufacturer. 20 With respect to gifts, other state 21 agencies have a de minimus exception that allows members 22 to accept gifts under $50 in value, but this exception 23 does not apply to the Lottery Commission. The Lottery 24 Commission does have an exception for commissioners to 25 accept a gift that is given on account of a relationship 13 1 that's independent of your commissioner status, such as 2 kinship or a personal, professional, or business 3 relationship. 4 There's also a restriction against 5 political fund-raising activities that is unique to this 6 Agency. A Lottery Commissioner may not, quote, directly 7 or indirectly coerce, attempt to coerce, command, or 8 advise a person to pay, lend, or contribute anything of 9 value to another person for political purposes, end 10 quote. 11 This is basically a restriction on 12 fund-raising. There are two attorney general opinions 13 that discuss this provision, which applies only to the 14 Lottery Commission. 15 These are just a couple of points I wanted 16 to highlight. The annotated guide to ethics laws is a 17 useful document, and it's a handy reference if you have 18 ethics questions. 19 With respect to the procedural laws under 20 the Administrative Procedure Act, the Commission has two 21 key roles: First, to propose and adopt rules relating 22 to the lottery and Charitable Bingo; and, second, to 23 decide contested cases involving specific licensees. 24 Rules are general statements of policy or 25 practice that are generally applicable to all persons. 14 1 When you propose rules, you are acting in a legislative 2 capacity, and you may talk to anyone you wish in 3 connection with Agency rules or rule proposals. 4 However, you also have a judicial function, because you 5 decide contested cases where the legal rights of 6 licensees are determined after an opportunity for a 7 hearing. 8 At the Lottery Commission, contested cases 9 usually involve whether to deny or revoke a license or 10 assess penalties for violations of the statutes or 11 Commission rules. In contested cases, ex parte 12 communications are prohibited, and this means you may 13 not communicate with any person or party to the case 14 about an issue or fact of law in the case unless all the 15 parties have an opportunity to participate. 16 There is an exception to this prohibition 17 that allows you to communicate with Agency staff that 18 has not participated in the case to use the Agency 19 special skills or knowledge in evaluating the evidence. 20 Contested cases are heard at the State 21 Office of Administrative Hearings, which is another 22 state agency, by an impartial administrative law judge, 23 who prepares a proposal for your consideration. 24 Although proposal -- the proposal is only a 25 recommendation, the law protects the impartial role of 15 1 the judge by limiting the reasons why the Commission may 2 change the judge's recommendations. And there are three 3 reasons. These are to correct a technical error, if the 4 judge fails to properly apply the law, Agency rules, or 5 policies; or if the Commission decides to overrule a 6 prior Agency decision or policy relied on by the judge. 7 The last item I'll touch on briefly is the 8 Open Meetings Act and Public Information Act. A new 9 commissioner is required to complete the attorney 10 general's online training on both of these statutes 11 within 90 days of taking the oath of office. In this 12 case, the 90th day for Commissioner Meador is 13 February 11th. 14 Commissioner, there are two certificates 15 you'll need to print from the attorney general's website 16 when you complete the online training, and the Agency is 17 required to maintain those on file. So you can give 18 those to me when you've completed the training. 19 Commissioner Meador and I have also 20 discussed these laws, and I won't go into detail on 21 them. I'll just note that because the Lottery 22 Commission is a five-member board, three commissioners 23 are required for a quorum, and there must be at least 24 three commissioners present to conduct business at an 25 open meeting. This also means two commissioners are 16 1 allowed to meet and discuss public business without 2 violating the act, but there is an important caveat to 3 that. 4 The attorney general in Texas courts have 5 held that it would be a violation of the Open Meetings 6 Act to deliberately have a series of two commissioner 7 meetings with different commissioners to decide a matter 8 of public business outside of a public meeting. This is 9 referred to as a walking quorum, and it is not allowed. 10 But whether you are circumventing the act 11 is a question of intent which is always a fact question. 12 So this is a very broad overview. There's 13 a lot of information in these laws, so please always 14 feel free to contact me or anyone else in the legal 15 services division if you ever have a question about 16 these laws or how they apply. Thank you. 17 CHAIRMAN KRAUSE: Thank you, Bob. 18 Kathy Pyka. Kathy is our esteemed 19 controller. 20 AGENDA ITEM III 21 MS. PYKA: Thank you, Mr. Chairman. Good 22 morning, Commissioners. My name is Kathy Pyka. I'm the 23 controller for the Commission. 24 With me this morning is Kevin Sanford. 25 He's our engagement partner from the firm Weaver and 17 1 Tidwell, who performed our required annual financial 2 audit, as well as the agreed-upon procedure review for 3 our multistate games. 4 With that, Kevin, I'll allow you to 5 provide an overview. 6 MR. SANFORD: Thank you very much. Good 7 morning, Chairman Krause and Commissioners. My pleasure 8 to be here today. 9 As Kathy mentioned, I'm the engagement 10 partner on the audit of the Commission, and I'm here to 11 present the results of our audit for the year and did 12 August 31, 2014. I've got a brief presentation going 13 through this document, and then I'll be happy to go into 14 any more detail or answer any questions that you have. 15 Feel free to jump in at any time but also at the end. 16 I will highlight first our opinion on the 17 Commission's financial statements, which is Page 4 of 18 the document. And our opinion, actually, is on the top 19 of Page No. 5. And that opinion, once again this year, 20 is an unqualified opinion, which is the highest level of 21 assurance that independent auditors can give a set of 22 financial statements. And it states that in all 23 material respects, the Commission's financials are 24 accurately presented. 25 CHAIRMAN KRAUSE: So it would be fair to 18 1 characterize that as a gold standard? 2 MR. SANFORD: That is correct. 3 CHAIRMAN KRAUSE: Thank you. 4 MR. SANFORD: And I will walk through, 5 briefly, the financial statement for the lottery fund, 6 the enterprise fund of the Commission, which the 7 statement for that is on Page No. 28. Give you just a 8 second to turn if you want to follow along with me on 9 that. 10 And the lottery fund is in the far 11 left-hand column of that page, and ticket sales this 12 year were 4 billion 300 and -- just under 13 $4,385,000,000, which, of course, is a record that was 14 slightly better than the 4.35 billion from the prior 15 year. The operating expenses totaled 4 billion 16 380.8 million, which, of course, is largely the 17 2.7 billion of prizes, as well as 1.22 billion in 18 transfers to other governmental agencies, which all but 19 about 20 million of that goes to the available school 20 fund. So that number was just over 1.2 billion 21 contributed to the ASF this year. 22 So the operating income of the lottery 23 fund was just over $1 million, and there were some 24 nonoperating revenues that totaled approximately 1.56 -- 25 1.57 million. So the change in the net position of the 19 1 lottery fund this year was an increase in the net 2 assets, or net position, of two million, 3 six-hundred-and-ten million dollars (sic), leaving an 4 ending net position number, or the amount that assets 5 exceed liabilities in the lottery fund, of $61,062,000. 6 And the only other item in the report I 7 wanted to highlight is our last report, which is on Page 8 No. 67 in the document, which is our report on the 9 testing on compliance and other matters that we have to 10 do in the Lottery Commission's audit, because our audit 11 is performed in accordance with government auditing 12 standards. 13 And pleased to report -- in this report 14 you'll note that we had no findings either in internal 15 control over financial reporting or on compliance in 16 other matters that we tested in conjunction with our 17 audit. So that, of course, as well is a very good 18 thing. 19 And with that, the only other thing I 20 wanted to say was just a thank you and hardy "job well 21 done" to Commission financial management. In the 22 performance of our audit, it was very smooth, very 23 efficient. We received very rapid response to any of 24 our inquires and questions and requests for information. 25 So everybody and anybody that we had dealings with in 20 1 our audit was very professional and very forthcoming to 2 help. 3 CHAIRMAN KRAUSE: Commissioners, do we 4 have any questions or comments? 5 COMMISSIONER WILLIAMSON: Thank you. 6 CHAIRMAN KRAUSE: We do have great staff 7 here. We're proud of them. 8 I want to make a note that it looks like 9 we paid out 2.7. billion in prizes to the public, and 10 that's off of ticket sales of 4.4. That is 61 percent 11 of the money we take in goes right back to the public. 12 And so the most of the money goes right straight back 13 out. So I think that's a good percentage. 14 MR. SANFORD: Absolutely. Between that 15 and the payments to the Available School Fund is over 16 90 percent of the money taken in from ticket sales. 17 CHAIRMAN KRAUSE: Well, nobody would play 18 if they weren't going to be able to win, and they get 19 61 percent of the money back, so... 20 Thank you so much. 21 MS. PYKA: Thank you, Commissioners. 22 CHAIRMAN KRAUSE: Mr. Fernandez. 23 AGENDA ITEM IV 24 MR. FERNANDEZ: Good morning, 25 Mr. Chairman, Commissioners. For the record, my name's 21 1 Mike Fernandez. I'm the director of administration. 2 As you are aware, by statute, the 3 Executive Director of the Commission is required to have 4 conducted every two years a demographic study of lottery 5 players and that the findings of that study be presented 6 to the Commission, also to the governor and the Texas 7 legislature, prior to each legislative session. 8 The study was recently completed by the 9 University of Houston Hobby Center for Public Policy. 10 With me this morning I have Dr. Jim Granado, who is 11 going to present the findings. Thank you. 12 Jim. 13 DR. GRANADO: Thank you, Mr. Fernandez. 14 Good morning, Commissioners. 15 In keeping with past practice, this survey 16 required about 1700 people. Part of the sample includes 17 cellphones, and the obvious reason for that is cellphone 18 users tend to be younger and also minority in profile. 19 So we have, for the last few years, 20 ratcheted up the amount of cellphone respondents in our 21 samples. And, again, it's done to improve 22 representatives of the sample itself. 23 With 1700 respondents, you have a margin 24 of error of 2.4 percent. The methodology is, again, 25 cellphones and landlines -- it's the phone. It's RDD, 22 1 random digit dialing. And we draw our sample from 2 Survey Sampling International, which is a venerable and 3 well-known firm that provides phone listings. 4 Based on our survey data, we forecasted 5 that the year you would receive $2.87 billion in 6 revenue. That is under what you have actually done, and 7 there's a reason for that. We believe one of the 8 problems with this type of forecast is the -- is part of 9 the calculation is based on people's recollection of 10 what they spent. 11 Instead of having receipts and things of 12 that sort, it's hard data. They're using their memory. 13 So there's going to be some noises from sensitivity to 14 this estimate. 15 If the recollection would say -- the 16 sensitivity is quite stark. If the recollection is $10 17 less than it otherwise would be, we would be in the 18 4 billion-dollar ballpark. So that's -- when we talk 19 about forecast, we do it as a matter of courtesy. But I 20 would say our forecasts are probably -- they've 21 typically been under. And, again, the warning is the 22 sensitivity of people's recollection of how much they 23 spent. 24 The general findings. In terms of overall 25 participation, those are decreased at 25 percent. 23 1 That's statistically different than last year, and I'd 2 like to talk about that maybe a little bit in the Q and 3 A. 4 The monthly average spent is $49 now, so 5 that's gone up. It's gone up the last -- since 2011, 6 it's gone up every year. So right now, based on 7 people's recollection, the average, the average, is $49. 8 Now, let me break this down a little bit 9 more. 10 If you look at the report itself, in Table 11 3, we also have a discussion breaking down by 12 demographic groups, and there we used the median spent 13 per month. And you'll see when you look at the various 14 demographic indicators, we find that people that spent 15 the most tend to be in high school, but the bulge is 16 between 40,000 and 75,000. Those are the folks that 17 spent the most. 18 In terms of racial status, blacks and 19 Hispanics spend a little bit more than whites do. Okay? 20 But the important thing is, in terms of the expenditures 21 by income, there's a bulge. That's why you see the 22 most -- the highest median expenditures are done between 23 the income levels of 40 and 75,000. 24 Now, in terms of the demographic 25 indicators we look at -- I think one of the strengths of 24 1 this instrument that's been going out since the early 2 '90s, we look at several demographics. One, of course, 3 as I just mentioned, is income. Another is employment 4 status. Are you employed? Are you unemployed? Are you 5 retired? 6 In addition to that, we looked at whether 7 or not you own or rent a home. We look at your age. We 8 ask what's your marital status. We ask if you have 9 children under the age of 18 living; if so, how many? 10 We ask about your gender. We ask your races. We ask 11 what your education level is. We ask what your 12 occupation is. We ask whether or not you are of 13 Hispanic origin. 14 Some folks -- the census has found some 15 folks who are quote, unquote, Hispanic consider 16 themselves American and actually whites. We actually -- 17 besides asking you to identify yourself as a Hispanic, 18 some folks won't. They'll say they're whites. We ask 19 Hispanic origin questions to try and capture that issue. 20 Now, in Table 2 in the report, the 21 demographic differences that we found -- the comparison 22 we used is people that played and people that didn't 23 play in the sample. There were differences based on 24 employment status. People that were full time were more 25 likely to play than not play. People that were retired 25 1 were less likely to play. 2 In terms of race, blacks and Hispanics 3 played at a higher proportion than whites did versus the 4 people that didn't play at all. 5 Hispanic origin was up. When you -- the 6 proportion of people that played -- the proportion that 7 played versus not played in Hispanic origin indicator 8 was up higher. 9 For education level, we found a difference 10 between the high school category and none others. So 11 high school -- if you were in high school, finish your 12 high school degree, you're more likely to play than not 13 as opposed to not playing at all. 14 Now, one thing I'd like to point out about 15 the high school respondents, 97 percent of the entire 16 sample of people that played have a high school degree 17 or more. 67 percent of the entire set of respondents 18 had some college or more. So there was -- there is a -- 19 the number of people that had no high school degree was 20 3 percent. So it's skewed towards people with some 21 education. 22 And if you look at this, I would say with 23 67 percent of the people that played having some 24 college, the sample is skewed towards people that have 25 some -- they have actually a good deal of education. 26 1 Now, for the game results, we want to look 2 at the change between this survey and the survey last 3 year. For the participation rates for all the games, we 4 looked at everyone. They're down in every one except 5 Pick 3 Day, Cash Five, and the Texas Two Step. 6 Powerball, though, had a very, very substantial drop. I 7 don't know if that was in your other data that you have, 8 but we saw Powerball taking a very big drop in overall 9 participation. 10 In terms of average time played, we look 11 at weekly, monthly, and annually. It's up for Pick 3 12 Day, Cash Five, and Powerball. Means for every one of 13 those indicators, those three games, it's up weekly, 14 monthly, and annually. For being stable or up, that 15 means at least it's weekly, monthly, or annual, one of 16 the two is either the same, and the rest are going up. 17 You have Lotto Texas, scratch-off, and Mega Millions, 18 people playing at least the same they did the prior 19 survey or more. 20 Now, in terms of some games that -- where 21 it's stable or down, where you actually have weekly, 22 monthly, or annually playing either the same as last 23 year or down, Texas Two Step. And, finally, Megaplier 24 was mixed. It was up in some places, down in others. 25 There was no stability. We had just contradictory 27 1 results. 2 In terms of average dollars spent per 3 play, it's stable up for Cash Five, scratch-off, Texas 4 Two Step, or Powerball. It's stable or down for Lotto 5 Texas. It's mixed for Pick 3 Day and Mega Millions. 6 In terms of the demographic differences 7 for the individual game results now, we're looking every 8 demographic again. We're trying to see, for these 9 games, is there a specific demographic that's different 10 than the people that didn't play. 11 For Pick 3 Day, we find only one. It's 12 education. And that education category is if you have 13 less education, you're less likely to play. So this was 14 a game that people with more education tended to play. 15 That's Pick 3 Day. 16 For Cash Five, the indicator, the only 17 different one was gender. There, females played more 18 than males. 19 For Lotto Texas, even though this is not a 20 demographic indicator, we put year changes in to see 21 what the difference was, if there's a significant 22 difference in playing for that particular game. Lotto 23 Texas, you see a change based just on year. No other 24 demographic indicator. For Lotto Texas, it was down 25 significantly, statistically significantly. 28 1 For scratch-off, education was, again, an 2 indicator where it stands out that it's different than 3 people that didn't play. It tends to be -- people who 4 have higher education tend to play scratch-off as 5 opposed to less education. For gender, it's female, 6 again, playing more than male, again, for scratch-off. 7 For Texas Two Step, no differences in any 8 indicator. 9 For Mega Millions, again, there's a 10 difference in years. I believe it was down. Hispanic 11 origin was up. Employment status, it's, again, people 12 who are full-time play more than people that don't play 13 any game at all, so that's a full-timer's game is Mega 14 Millions For Megaplier year, again, I believe it was 15 down. Race, the big drop there is that whites played 16 far less than in the sample at large, than people that 17 don't play at large. 18 And, finally, for Powerball, as I said 19 before, there's no demographic difference there, but we 20 see a big drop based on year. 21 Now, in terms of selected figures of these 22 games, we're looking at just participation rates. As 23 you can see, there's a substantial drop in participation 24 for any game. Notice since the survey was started in 25 '93, it was hovering the 60s, it starts to drop off 29 1 early 2003, continues to drop off, stabilize around 2 2007, and then between 2007 and 2013 looking at high 3 30s, very low 40s, right, except for 2011. But if you 4 look at 2014, that's a substantial drop in 5 participation. And I'd like to talk about in the Q and 6 A, if you like, about what some of the reasons are I 7 believe this is happening, possible reasons. 8 In terms of Pick 3 Day, you have -- it's 9 stable. Just went up a little bit. Not as high as 2012 10 and certainly not as high as 2005-2006, but it went up 11 just a tiny bit. But statistically, there's probably no 12 difference at all. It's just stable. 13 For Cash Five, uptick; but, again, 14 basically stability, and you see stability since 2011. 15 For Lotto Texas, there's a drop from 16 73 percent to 67.8 percent. 17 For scratch-off, dropped from 61 to 57.6. 18 For Two Step, almost identical: 12.7 19 versus 12.1 the prior year. 20 Mega Millions saw a significant drop, from 21 about 59 to 52. 22 And the Megaplier saw a substantial drop, 23 from about 16 to about 9, in terms of people that are 24 playing. 25 And with that, I'll be glad to answer any 30 1 of your questions. 2 CHAIRMAN KRAUSE: Commissioners? 3 COMMISSIONER TOWNES: Yes, I'd like to ask 4 one. 5 What do you attribute the precipitous 6 drop, or statistically significant drop, in 7 participation from previous surveys? 8 DR. GRANADO: We think it's the response 9 rates are falling. 30, 40 years ago you get response 10 rates of 70 percent. The sample you drew, the initial 11 sample you drew, you were getting 70 percent of the 12 folks answering the phone and answering your questions. 13 It's below 20 now. 14 And starting the mid to late 90s, a lot of 15 academics started looking at this issue, and they were 16 concerned that with the drop in rates from 70 to 50 to 17 40, 30, at some point you know you're getting -- you 18 start to suspect you're getting a sample that's not 19 representative of the population you're looking at. 20 The initial research said it wasn't that 21 big of a deal, but there has to be a point where this 22 becomes a critical issue. I mean, I -- look at the 23 election in November. How many of those surveys got the 24 election in Virginia wrong? How many of those surveys 25 got the governor's race in Maryland wrong? I mean, you 31 1 had people that would then calibrate all those surveys 2 and say there's a 95 percent chance, then, that the 3 democratic nominee for governorship was going to win. 4 Well, he lost by, what, five points? I mean, that's 5 quite a shift. 6 So the response rates is an issue here. 7 The problem is we don't know how low we can go where it 8 really becomes a problem, but to me, that's a flag to us 9 when we saw such a far -- such a sharp drop. 10 Our response rates, typically, were in the 11 30s. For this one, I think they were in the high teens. 12 We've had some response rates in the 10 -- about 9, 13 10 percent. So it's a concern and it's happening across 14 the board. There's just -- there's a survey fatigue. I 15 think that's what's going on here. 16 COMMISSIONER TOWNES: Thank you. 17 CHAIRMAN KRAUSE: Can we have the lights, 18 please? Thanks. 19 COMMISSIONER WILLIAMSON: I have a 20 question. 21 Do you do other surveys besides for the 22 lottery? 23 DR. GRANADO: Oh, yes, many. 24 COMMISSIONER WILLIAMSON: Is this 25 something that you see -- do you use the same 32 1 methodology for the other surveys, and do you see a 2 similar trend there or -- you know, just kind of talk -- 3 I mean, you've sort of addressed it in terms of relating 4 it back to the election surveys, but from your own 5 personal experience and what you guys do. 6 DR. GRANADO: Okay. We do mail survey, 7 which the response rate's about 2 percent. It's cheap 8 and people just don't do it. So there's mail survey. 9 There's Internet survey. We do those, 10 which response rate's better, much better. 11 We've done -- we've also done Internet 12 panel surveys, which I think is a new and potentially 13 very exciting way to get around this issue, the problem 14 we're having with the phone where you actually -- you 15 have panels of people that you track that have Internet 16 connection. You have to compensate them, but the issue 17 is you get them to participate over a long period of 18 time. We've done those as well. 19 We've also done longitudinal surveys that 20 the panels actually track the same folks where we 21 actually interview them face-to-face. Those are very 22 pricey, but the bang for the buck for those is fabulous. 23 I mean, some of the best government 24 surveys, like the Panel Study of Income Dynamics which 25 started in 1968, that is the gold standard in terms of 33 1 understanding income dynamics and poverty. It is one of 2 the most important surveys, not only in the United 3 States, but in the world, in terms of understanding that 4 issue. 5 So we do mail, Internet survey, Internet 6 panel -- panel as well as RDD. And we've done a couple, 7 I believe -- I'd have to check with people at SRI -- but 8 I think we do some mixed mode. We mix things. And that 9 may be what we may want to do next with this is we mix 10 Internet panel with the RDD and see if we're seeing 11 similar patterns. 12 COMMISSIONER WILLIAMSON: Right. Well, it 13 just struck me -- we have automated services at every 14 location where we sell tickets. And, you know, I don't 15 know if this is even remotely feasible, but somehow 16 connecting some sort of data gathering at that point, 17 rather than after the fact -- because I agree with you. 18 I think phone surveys are way out of date, and I think 19 becoming quickly ineffective for all the reasons you've 20 cited and probably more. 21 DR. GRANADO: I would love to get the kind 22 of realtime data. The issue would be privacy concerns 23 maybe. 24 COMMISSIONER WILLIAMSON: Right. And, 25 there again, I don't even know if we could remotely do 34 1 that, but maybe they're a way to incentivize people that 2 are willing to provide more information. 3 DR. GRANADO: Right. Right. 4 COMMISSIONER WILLIAMSON: That was just -- 5 it's just one of these things, ideas, so... 6 DR. GRANADO: The thing we're looking at 7 now is -- the Internet panel is where we're moving 8 towards. I mean, I think that's because more and more 9 folks, the digital divide is shrinking. We know that, 10 and that's going to continue as we move forward. And so 11 we're -- then that panel is a very important avenue. 12 The other thing people are starting to 13 think about is this, that we started doing everything 14 based on our cell phones, too. 15 And so those are two possibilities, but we 16 do -- the phone itself, I think, is in trouble. I 17 just -- we still do them. They're cheap. They are 18 effective. I'm just wondering if we're reaching a point 19 where the quality is not as good as it should be, as it 20 used to be. 21 COMMISSIONER WILLIAMSON: Right. And I 22 have a hard time buying that much of a drop. 23 DR. GRANADO: Yeah. 24 COMMISSIONER WILLIAMSON: So -- 25 DR. GRANADO: Yeah. I should add when we 35 1 saw the numbers initially, I said -- I went to them. I 2 said -- the manager's there -- I said, "What did we do 3 different?" 4 And they said, "Nothing." 5 Same questions. Same -- everything was 6 the same, you know, same house. Everything was the 7 same, so it just -- they're trained the same, 8 everything. So we think may have been the draw. 9 Again, the response rate, I think, was 10 17 percent, I believe was my recollection. So you're 11 looking at -- when you get a response rate of that, you 12 are looking at -- you have to talk -- try and call -- we 13 do -- when you call somebody, we do about between five 14 and seven callbacks to get that person and then we give 15 up and then you got to go to a new person and extend the 16 sheet you're looking at. 17 COMMISSIONER WILLIAMSON: Right. 18 DR. GRANADO: With a 25 percent response 19 rate -- response rate of, say, 20 percent, you're 20 looking at calling about 11,000 people to get the 1700. 21 COMMISSIONER WILLIAMSON: Yeah. And 22 probably most folks do like I do, so... 23 (Laughter) 24 COMMISSIONER WILLIAMSON: When I see a 25 number I don't recognize. That's all. 36 1 CHAIRMAN KRAUSE: All righty. Anybody 2 else before I jump in here? 3 (No response) 4 CHAIRMAN KRAUSE: Did I hear you say 5 something about the percentage of Texans that actually 6 play from time to time -- 7 DR. GRANADO: 25 percent. 8 CHAIRMAN KRAUSE: So a quarter of our 9 citizens -- of course, you got to knock out those that 10 aren't old enough to play. So it's actually higher than 11 that, people that live here in Texas. 12 DR. GRANADO: Right. 13 CHAIRMAN KRAUSE: Okay. And the reason 14 why I'm asking these questions is that there, you know, 15 is some criticism, you know, up at the legislature and 16 other places that what we do here is something that is 17 harmful. And so that's hard for me to believe, 18 considering that nobody is making anybody participate in 19 this. It's not a tax. It's a voluntary thing that 20 people like to do. 21 And so when I turn to Page 15, Table 3, 22 and look at the demographic factors, the first one is 23 education. And so it looks like that people who have 24 some education play. Those with the high school degree, 25 you know, they play. They play quite a bit, actually. 37 1 And those with less than a high school degree apparently 2 play the same amount as those who have college degrees. 3 And so, to me, the criticism that people 4 who are not as well off are mindless automatrons 5 (phonetic), well, that must apply to the people that 6 have college degrees as well. And so I reject that kind 7 of thinking. 8 In addition, when we look at the income 9 statistics, it looks like that the people who actually 10 play the most are middle class, from 40,000 to $50,000. 11 They spend 42.50 a month. 12 The people who play the least are the 13 people who can afford it the least. And so it looks to 14 me like it is, you know, in healthy proportions. Any 15 comments about that? 16 DR. GRANADO: The data itself, it's -- the 17 patterns that I -- that we see, people that say the poor 18 pay more, play more, by definition, if you're poor and 19 you buy something, it's going to take a higher 20 proportion of your income than if you're rich, so 21 that -- let's set that aside. 22 The issue is going to be do you spend more 23 for these games? And the data here suggests it's not 24 clear. I mean, you have -- for example, people have a 25 high school degree -- in this survey this time, they're 38 1 spending $19 median income per month. But then if you 2 go to other indicators that would suggest a high school 3 education or above, as you said, if you look at the 4 income level between 40 and 50, you have 42.50 a month 5 they're spending, 40, 50,000. They're spending $42.50 a 6 month. And you go to 50,000 to 60,000, they're down to 7 23. But then you go to 60,000, 75,000, they're up to 8 $40 again. So those aren't poor people, as far as I'm 9 concerned. 10 Median income for a family of four is 11 what? It's 50K, I believe, roughly. I mean, I'm -- 12 memory is gone these days. 13 CHAIRMAN KRAUSE: So what I'm getting out 14 of this conversation is that those who focus on the 15 percentage, you know, they are focusing on something 16 that isn't a useful metric. I mean, if I don't have a 17 lot of money, and I spend it on anything -- food, 18 gasoline, housing -- by definition, it's going to be a 19 higher percentage than someone who's got more money. 20 DR. GRANADO: Correct. So the issue is 21 what's the median expenditure for you or the average 22 expenditure? My preference is median, because of the 23 potential for outliers. 24 But in addition, one other thing I 25 mentioned at the outset, if you look at the people -- 39 1 let's focus on education. If you look at the people 2 that play, the proportion that played, 97 percent had a 3 high school degree or more. I believe education is an 4 important factor in a person's income level, income 5 capability, skill level. 6 So it seems to me that if you look at 7 that, there's -- it's not -- the fact that we're 8 comparing to people that don't play, that's our 9 comparison, and there's very little difference in a lot 10 of these things that tells us the reflection of the 11 people that don't play as well. 12 So that means that if people don't play 13 have this certain profile, and people that do play have 14 this certain profile, and they're the same, that means 15 that it's reflecting people that are just -- it's just 16 the general society itself at large that's playing. 17 It's not skewed towards one group or another. Although 18 a given survey in a given year may show some 19 differences. 20 CHAIRMAN KRAUSE: Well -- and then when I 21 look at race, I've always heard that, you know, Asian 22 folks are pretty smart, because they're the ones that 23 are making all the good grades in school. They play 24 more than -- they play the same -- they play in about 25 the same range as the -- as the blacks and Hispanics. 40 1 And if they're that smart, they're playing more than 2 whites, according to this. 3 DR. GRANADO: Right. The only issue with 4 the Asian category is that the sample there is small, so 5 you have to be careful about that. But if you look, 6 you've got -- it's -- I believe in this indicator, for 7 median dollar spent per month, you've got whites at $11, 8 blacks at 16, Hispanics at 14. The Asians are 14.50. 9 But the thing -- if you look at the cell, there's only 10 six that we were able to get in that survey, so that 11 makes it pretty small. So I'd caution you on that. 12 The median indicator helps eliminate the 13 threat of the outlier, but I wish there was 25 or 30 14 there to see what the actual number would be. Now, if I 15 go back to the survey last year, probably may see that 16 it was similar. 17 CHAIRMAN KRAUSE: Uh-huh. Well, and I 18 have had children, and I know that from age 14 to about 19 age 24, they think I'm the dumbest man on the planet. 20 (Laughter) 21 CHAIRMAN KRAUSE: And so when I look at 22 the age of 18 to 24, they're playing more than anybody. 23 And so they must be really smart. 24 DR. GRANADO: One thing about that is the 25 sample is small, though. Look at -- I've got nieces and 41 1 nephews that think the same way. But the sample is at 7 2 there, so we report it; but, again, watch out for the 3 outliers there. The thing that's interesting about that 4 is it looks like people between the age of 25 and -- 25 5 and 34 are the ones that spent the most, and that's -- 6 you've got a fairly -- you got a robust sample. You got 7 32 folks there. They spent $31 a month, median. 8 CHAIRMAN KRAUSE: Well, so this is really 9 good information about who our players are and how 10 intelligent they are. And I appreciate you bringing 11 this to us. I guess it's our job to take this and 12 communicate it to our bosses, the legislature, and, you 13 know, to those who don't seem to understand this kind of 14 thing. 15 So keep up the good work. Thanks for 16 coming up and talking today. 17 DR. GRANADO: Thank you. 18 COMMISSIONER TOWNES: Can I make one other 19 comment before you step down, please? And that goes 20 back to your Figure 1, the percentage of respondents 21 playing any lottery game. Just to piggyback on your 22 comment about survey fatigue, I think if you look at 23 that, while it can't be necessarily an overriding 24 factor, there is a precipitous drop, I would say, in all 25 of the years where there is an election, with exception 42 1 2000 -- the change between 2007 and 2008 up there. 2 And as a individual Texas resident who was 3 inundated with phone calls this past year on -- 4 particularly as we got into the election cycle, I 5 would -- I would echo your comment that maybe we need to 6 look at other methods to attack this to ensure that we 7 do, in fact, have the right results; because, again, I'm 8 not saying when, you know, a drop from 36.5 to 9 25 percent participation rate is necessarily what we're 10 really actually seeing across the state. Thank you. 11 CHAIRMAN KRAUSE: Next item is yours, 12 Michael. 13 AGENDA ITEM V 14 MR. FERNANDEZ: Thank you. 15 Again, for the record, my name's Mike 16 Fernandez. I'm the director of administration. The 17 Agency, or the Executive Director of the Agency, is also 18 required by statute to have conducted every two years a 19 security study of all operations of the Texas Lottery 20 Commission. And the -- and then it would be presented 21 to the Commission, to the governor, and to the Texas 22 Legislature prior to the session. 23 The items to be surveyed are delineated in 24 that law, as well as any other requests that the Agency 25 might would like to include. That study has recently 43 1 been conducted by Grant Thornton, and with me this 2 morning to present that effort is Tony Hernandez, a 3 partner with Grant Thornton, and had project management 4 responsibilities and civil right, a principal on the 5 project. 6 Tony. 7 MR. HERNANDEZ: Thank you very much, Mike. 8 Good morning, Mr. Chairman and 9 Commissioners. I'm Tony Hernandez. I'm a partner with 10 Grant Thornton. I lead our security practice nationally 11 and have been the partner in charge for the security 12 study for the Texas Lottery Commission. 13 So as Mr. Fernandez had said, the state 14 is -- the Lottery Commission is obligated to do a 15 biannual security study. They clearly delineate the 12 16 areas upon which the security study is the focus, and 17 Grant Thornton started that study in June of this past 18 year. 19 The process started with a risk assessment 20 of lottery operations across all 12 of those areas, then 21 based upon the results of that risk assessment, we built 22 very detailed testing plans to evaluate those areas 23 where we felt there was the highest risk. 24 Based on the results of that study, we 25 concluded that the Lottery Commission, and their service 44 1 providers, they consistently maintain and adhere to 2 their security policies, procedures, and standards, and 3 we -- and ensure that the operation of the Texas Lottery 4 business is well protected and conducted in a manner 5 that's compliant with state law. 6 Additionally, we reviewed various 7 technology supporting the Texas Lottery gaming system 8 and observed both the logical and physical controls to 9 secure those technologies and verified that the lottery 10 gaming systems are well protected, and the overall risk 11 of a security issue is very, very low. 12 I further want to comment that the testing 13 procedures that we deploy often required multiple 14 iterations of tests with follow-up observations, 15 follow-up conversations with both Texas Lottery 16 Commission personnel, as well as your service providers. 17 And I wanted to state that as a group, they were very, 18 very responsive and cooperative, and, in my opinion, 19 most importantly, they were very transparent with us. 20 So when we asked questions, or we felt 21 like, you know, we needed to dig somewhere a little 22 deeper, they were very willing to allow us to get as 23 deep as we needed to get. So with that, any questions? 24 CHAIRMAN KRAUSE: Commissioners? 25 (No response) 45 1 CHAIRMAN KRAUSE: Thank you for your good 2 work. Appreciate it. 3 MR. HERNANDEZ: Thank you very much. 4 CHAIRMAN KRAUSE: James Person. 5 AGENDA ITEM VI 6 MR. PERSON: Thank you, Mr. Chairman, 7 Commissioners. For the record, my is James Person, and 8 I'm an assistant general counsel here at the Agency. 9 Staff is recommending that the Commission 10 vote to propose amendments to six rules, bingo rules, 11 and those are 402.400, 402.401, 402.404, 402.410, 12 402.411, and 402.412. And we're also asking that you 13 propose a new rule, 402.104. 14 As you know, the Agency is in the process 15 of developing and implementing the new bingo operating 16 service system, which the bingo division will use to 17 help administer and regulate bingo throughout the state. 18 During that process, various Commission 19 staff conducted a review of the bingo division's 20 business processes and procedures to ensure that they're 21 in line with applicable statutes, rules, and generally 22 accepted accounting principles. 23 Based on that review, we discovered 24 several processes and procedures that needed to be 25 altered. The proposed amendments and new rule before 46 1 you today are designed to accomplish the needed changes. 2 And prior to bringing this rulemaking action before you, 3 we met with several bingo industry stakeholders to 4 discuss the proposed action and to solicit their input. 5 We had healthy discussions, and I don't want to speak 6 for them, but it is my understanding that while they 7 probably don't agree with all the changes, they 8 understand why we're moving forward with them at this 9 point. 10 And if I may, I'd like to go over the 11 major issues covered by this rulemaking. The first 12 proposed change centers on the process by which refunds 13 will be given for license and amendment fees. State 14 agencies are generally only permitted to give refunds 15 when authorized to do so in statute. The Bingo Enabling 16 Act does not include such a provision however. 17 There is a provision in the Government 18 Code that provides for refunds of money collected or 19 received by a state agency through a mistake of law or 20 fact. We believe that overpayments of license and 21 amendment fees fall within this statute. However, under 22 that statute, the Comptroller of Public Accounts is 23 actually the office that will award the refunds. 24 The Commission cannot reward a refund on 25 its own. We would merely forward qualifying refund 47 1 requests to the comptroller for payment. Some of the 2 rule amendments would articulate the process by which 3 refund requests will be handled. The rules would also 4 clarify when refunds will not be made. 5 Another change centers on how the 6 Commission will credit certain license fee payments to 7 licensees. The Bingo Enabling Act includes provisions 8 that require the Commission to give credit to licensees 9 for any excess license fees paid. The Act also includes 10 a provision that allows bingo conductors to set up and 11 fund an escrow account with the Commission from which 12 funds can be withdrawn to pay for temporary licenses and 13 amendment fees. Escrow funds and credits are clearly 14 distinct from each other, so the proposed rules will 15 need to clarify that fact. There's been some confusion 16 on that. 17 Generally under the proposed amendments, 18 license fee overpayments will be credited the licensee 19 that paid the fees. They would have four years from the 20 latest date on which those fees were due to either use 21 the credits or request a refund under the process I 22 mentioned. However, with escrow accounts, funds in the 23 escrow account will not be eligible for refund and must 24 be used by the end of the licensee's subsequent license 25 period. 48 1 These changes will help solve some of the 2 accounting problems we discovered due to credits and 3 escrow funds remaining on the books for many, many 4 years. 5 The third major change centers on the 6 placement of bingo conductors and commercial lessors on 7 administrative hold. Under our rules, while they're on 8 administrative hold, bingo conductors and commercial 9 lessors must cease all their bingo activity. The bingo 10 division created the administrative hold status for 11 those licensees that needed a short period of time to 12 get their affairs in order before they could resume 13 conducting bingo. It was essentially supposed to serve 14 as kind of a holding pattern for these licensees. 15 However, during our review, we discovered 16 that the administrative hold status had become 17 essentially a semipermanent status for some licensees, 18 and that was not the original intent when the 19 administrative hold status was created. 20 We also discovered that despite the 21 prohibitory language in the current rules, some bingo 22 conductors on administrative hold were conducting bingo 23 using temporary licenses. 24 To correct these issues, some of the 25 proposed rule changes will prohibit nongrandfathered 49 1 licensees from being on administrative hold for more 2 than twelve consecutive quarters. The rule changes will 3 also clarify that while on administrative hold, a 4 licensee may not conduct any bingo, including under a 5 temporary license. 6 And we've also proposed to restrict when a 7 licensee may go on administrative hold. Currently, a 8 licensee can go on administrative hold at any time 9 during their license period, but we have discovered this 10 is also resulted in some accounting discrepancies for 11 the Agency. So the proposed rule amendments would only 12 allow a licensee to go on administrative hold at the 13 time of license renewal. 14 And the final change I want to discuss is 15 the proposed new rule, 402.104. The Government Code 16 requires state agencies to adopt rules -- to adopt rules 17 establishing procedures for the collection of delinquent 18 obligations owed to the Agency. Pursuant to that 19 mandate, this new rule would outline the process the 20 Agency will follow when delinquent bingo obligations are 21 owed. This includes how the Agency will utilize the 22 Comptroller of Public Accounts' warrant hold procedures 23 and the referral of delinquent obligations through the 24 attorney general's office for collection. 25 And, finally, that proposed new rule would 50 1 clarify that the Commission will not issue a license to, 2 renew a -- renew a license for, or place on the bingo 3 worker registry anyone with a delinquent bingo 4 obligation. 5 And that is my presentation, but I'd be 6 happy to answer any questions you may have. 7 CHAIRMAN KRAUSE: Commissioners? 8 COMMISSIONER WILLIAMSON: I know we've 9 had -- been a while bringing these rules forward, and 10 it's -- I've been intimately familiar with the problems, 11 particularly on the accounting side. And as I've said 12 many times, bingo doesn't need to be in the business of 13 banking, and that's kind of what we've been doing. 14 We're still doing a little bit of that. If I had my 15 way, we wouldn't do it at all. But I understand the 16 reasons why we have to do a little bit of that. 17 So I know this will certainly move forward 18 our implementation, and so I'm glad we're finally 19 getting around to getting this done. And thank you for 20 all the hard work everybody's done and industry input as 21 well. 22 CHAIRMAN KRAUSE: Other comments? Is 23 there a motion to approve the recommendation to begin 24 the rulemaking process in publishing these proposed 25 rulemaking -- rule changes in the Texas Register? 51 1 COMMISSIONER TOWNES: Mr. Chairman, I so 2 move that we accept the recommendation of the staff and 3 move forward on the rulemaking initiative. 4 CHAIRMAN KRAUSE: Outstanding. All in 5 favor, say aye. 6 (All those in favor of the motion so 7 responded) 8 CHAIRMAN KRAUSE: None opposed. It 9 carries. Thank you so much. 10 MR. BIARD: I have a T bar memo I'll 11 provide for your signatures later. 12 CHAIRMAN KRAUSE: Excellent. 13 Ms. Rienstra. 14 COMMISSIONER WILLIAMSON: We're laughing 15 with you, not at you. 16 MS. RIENSTRA: I know. I know. It's a 17 good thing. We practiced this. 18 (Laughter) 19 AGENDA ITEM VII 20 MS. RIENSTRA: Thank you. Good morning 21 Chairman, Commissioners. I am Deanne Rienstra, 22 assistant general counsel. In your notebook is a draft 23 of proposed amendments to the Texas Lottery Powerball 24 lottery game, game rule, at 16 TAC 401.317. 25 The Multi-State Lottery Association is 52 1 making significant changes to the Powerball game. 2 Therefore, these amendments will address those changes, 3 and Mr. Tirloni is going to explain the changes. 4 MR. TIRLONI: Thank you, Deanne. 5 Good morning, Commissioners. For the 6 record, Robert Tirloni, products and drawings manager 7 for the Commission. 8 So I'll walk you through what is pending 9 and what MUSL is working on related to the Powerball 10 game. 11 So we have to go back to September of this 12 year. The Multi-State Lottery Association, otherwise 13 known as MUSL, decided to implement changes to 14 Powerball. How did this come about? The game 15 development committee made a recommendation to change 16 the game, presented that to the Powerball group 17 committee, and that was accepted. Actually yesterday a 18 full vote was taken, and these changes were approved by 19 MUSL across all of the participating jurisdictions. 20 They have targeted a launch date for this 21 new game in the spring, in April of 2015, tentatively 22 looking for the first draw under this new game matrix to 23 be on Wednesday, April 15. That would mean we start 24 sales a few days before that, Sunday April 12. 25 So why is MUSL looking to change the 53 1 Powerball game? Since '92, Powerball, or MUSL, has made 2 significant matrix and add-on changes. They've made 3 about seven. We first joined Powerball in January of 4 2010. It was about two years later, in January of 2012, 5 that they changed the game matrix, and they also changed 6 the price point. They made it a two-dollar game at that 7 time. 8 So they've been refreshing or modifying 9 the game about every three to five years, and that's 10 happened a little bit more frequently here in recent 11 years due to consumer attitudes and consumer desires to 12 see game changes. This wasn't done in a vacuum. GTECH 13 was involved in performing retailer and player research 14 on this game concept and other game concepts in 15 coordination with MUSL. 16 So I'm going to walk you through the 17 things that are changing. I have a ticket sample for 18 you on the next slide which will help clarify all these 19 changes. 20 So there is going to be a matrix change in 21 April. The game is changing from a 5 of 59 plus 1 of 35 22 to a 5 of 66 plus 1 of 32 game matrix. So this will 23 make the jackpot odds longer on the game. The Power 24 Play feature, which is currently an add-on game, will be 25 built in to the base game. So when you make your 54 1 two-dollar purchase, a player will automatically be 2 getting Power Play with their purchase. 3 Power Play is changing in how it operates 4 from the current game to this new version. So there 5 will be five weighted multipliers -- two times, three 6 times, four times, five times, or ten times -- 7 multiplier. That's going to randomly print below 8 letters that will appear on every ticket, P-O-W-E-R. 9 Again, I'll show you this in one second. When they do 10 the Powerball drawing, and they select winning Powerball 11 numbers, they're going to also select a letter -- either 12 the P, the O, the W, the E, or the R -- and that will 13 determine the player's multiplier number. 14 Now, the multiplier never appear -- never 15 applies to the jackpot, and it does not apply to the 16 second tier, which is a million dollars. It applies to 17 all of the other tiers in the game. 18 They are implementing a new draw feature. 19 It's kind of -- I'd summarize it by saying it's a second 20 bonus-type draw. This will cost the player an extra one 21 dollar per play, and it's called Power Plus. So they're 22 going to draw the Powerball winning numbers; they're 23 going to draw a letter to determine the Power Play 24 multiplier; and then they're going to draw a second set 25 of winning numbers. So if the player opts to purchase 55 1 that add-on feature, they'll get a second set of winning 2 numbers that they can match their play numbers against. 3 The Power Plus jackpot prize is planned to 4 be a set 10 million-dollar prize. And it's pari-mutuel 5 and it doesn't roll. So if ten people win that prize, 6 they would each get a million dollars. And for that 7 Power Plus game, that jackpot is not rolling like it 8 does in the base game. Let me show you the ticket. So 9 this is just a sample. This is really not even what our 10 Texas tickets look like, but it provides a good visual. 11 So these would be your numbers up here at 12 the top, if you were playing. So on this ticket, 13 there's three separate plays. Again, each ticket -- 14 every single ticket will print with the P, the O, the W, 15 the E, and the R. So in this example, let's just say 16 after they drew the winning Powerball numbers, they drew 17 the letter R. So if the player won any prize, in any of 18 these plays, it would be multiplied by three. So this 19 is how they've just built the multiplier into the base 20 game. 21 Again, on this ticket example, it's saying 22 that the player chose the add-on game feature, and so, 23 again, they'd have a second set of winning numbers that 24 they could match their numbers against. 25 This is an I chart. The reason I'm 56 1 showing it to you is just to illustrate that basically 2 that Power Plus game is a separate game with different 3 prizes from the base game. 4 So the timeline, to summarize, we're here 5 today, obviously, asking you to consider proposing this 6 rule and publishing it in the Texas Register for public 7 comment. If you approve that, it will actually publish 8 on December 26. We always provide a link on the home 9 page of our website so people can see that rule and 10 learn about the game change. 11 We're going to have a public comment here 12 at the lottery headquarters in mid-January, on the 14th. 13 The comment period will end on Monday, January 26, and 14 we hope to bring this rule back to you on February 5 for 15 you to consider this rule for adoption. Again, MUSL has 16 targeted an April start for this new game. It's 17 tentative. It may slide a little, so it may actually be 18 a little bit later than that, but as of right now, that 19 is the goal for the launch. 20 Last thing I'll just mention is because of 21 the new Power Plus feature, or that add-on draw, there 22 is discussions amongst some of the MUSL committees and 23 MUSL groups, the logo, which is the current logo that 24 you see there, may be modified to incorporate that Power 25 Plus name into it. There's ongoing discussions about 57 1 that, and that will probably be decided over the next 2 couple of months. 3 That's the presentation on the game 4 changes. Happy to answer questions. 5 CHAIRMAN KRAUSE: Commissioners, comments? 6 Questions? 7 (No response) 8 CHAIRMAN KRAUSE: Hearing none, is there a 9 motion to approve the Staff's recommendation to begin 10 the rulemaking process by publishing this rulemaking 11 proposal in the Texas Register? 12 COMMISSIONER WILLIAMSON: I make a motion 13 that we post the proposed amendments as presented by the 14 Staff recommendation. 15 CHAIRMAN KRAUSE: Call for a vote. All in 16 favor, say aye. 17 (All those in favor of the motion so 18 responded) 19 CHAIRMAN KRAUSE: All opposed? 20 Hearing none opposed, it carries. 21 It is five minutes after 11:00, so we're 22 going to take a five-minute break. 23 (Recess: 11:05 a.m. to 11:17 a.m.) 24 AGENDA ITEMS VIII AND XIV 25 CHAIRMAN KRAUSE: The Lottery Commission 58 1 is back in session. 2 We are going to pass on the next item, 3 which has to do with the MONOPOLY game; but before we 4 do, we're going to hear from our Executive Director, 5 Mr. Gary Grief. 6 MR. GRIEF: And Bob, if you would, I'd ask 7 you to clarify exactly what item I'm going to speak on 8 this morning, please. 9 MR. BIARD: Sure. Item VIII was posted 10 for a rule proposal on the MONOPOLY Millionaires' Club 11 game. We're not going to make that proposal today, but 12 we did post a new Item XIV yesterday with The Texas 13 Register which is to discuss the Commission's 14 participation in the MONOPOLY Millionaires' Club game; 15 and that's what Gary is going to speak to. 16 MR. GRIEF: Thank you, Bob. 17 Commissioners, I've had the opportunity to 18 meet with you each individually on the challenges that 19 the Multistate Lottery Association, or MUSL, as it's 20 known, has encountered with the launch of the MONOPOLY 21 Millionaires' Club game; but I want to have this 22 discussion publicly and make sure you're fully advised 23 of my next intent. 24 As you know, 23 states launched the 25 MONOPOLY Millionaires' Club game on October 19. The 59 1 per capita sales projections for this game were 2 projected by some in the industry as high as 20 cents 3 per cap. Our own vendor, GTECH, their estimate came in 4 at around 13. 5 Here in Texas, internally, our own per cap 6 projections were much more conservative. Part of the 7 reason for that is we know from experience that draw 8 game sales, in particular, per cap sales as you move 9 further west and south in the country tend to be lower, 10 and we know that from experience. So our estimate was 11 around 5 cents per cap. 12 Well, the reality is that the sales from 13 the MONOPOLY Millionaires' Club game have been very 14 disappointing. They've actually come in around 2 cents 15 per cap nationally and around 1 cent per cap here in the 16 state of Texas. 17 So to exacerbate that whole situation, the 18 jackpot prize was actually won on the third -- during 19 the third week of sales in the third draw. That was 20 much sooner than the percentages and the projections and 21 the probabilities led everyone in the game group to 22 believe that would occur. 23 That -- because of the guaranteed nature 24 of the prize structure, that created a nationwide 25 shortfall between the prizes that were due and the 60 1 amount of sales that were allocated to fund those 2 prizes, and that shortfall was right at $23 million 3 nationwide. Our own share, Texas' own share of that 4 shortfall, was $1.9 million. 5 Although every state is different in how 6 they handled prizes won that are not fully funded by 7 sales -- and that does occur from time to time on draw 8 games where you have fixed prizes in the mix. I'll use 9 the Pick 3 game as an example. 10 777 is a wildly popular combination for 11 people to play. When that combination is drawn, and it 12 has been drawn from time to time around the country, the 13 prize payout percentage instead of being at 14 approximately 50 percent can jump all the way up to 2, 15 3, 400 percent for that particular drawing. 16 So for that third drawing in the MONOPOLY 17 Millionaires' Club, our liability in excess of what the 18 sales were contributing to those prize tiers was 19 $1.9 million here in Texas. 20 So all that said, the unexpected initial 21 low sales combined with that jackpot being hit so early 22 on in the game was a wake-up call nationally for the 23 Multistate Lottery Association. 24 Several of the states that participate in 25 that game, including us here in Texas, chose to, through 61 1 the MUSL organization, purchase liability protection, a 2 form of insurance but not truly insurance, but it was 3 liability protection. And what that allowed us to do, 4 and it -- based on about 10 percent of our sales, we 5 could purchase that protection; and if indeed the top 6 prize were hit again, we would be protected from that 7 $1.9 million shortfall situation that we had to deal 8 with on the third drawing. 9 Since that third draw was won, sales have 10 not grown for the MONOPOLY game and they have continued 11 to decline. Nationwide sales were down last week an 12 additional 12 percent even over the Thanksgiving Day 13 holiday week, which really puts that into perspective. 14 The financial risk, the liability risk, to 15 the participating states continues to climb with every 16 passing drawing as the jackpot has now reached its cap 17 of $25 million, but there are two additional 18 1 million-dollar prizes being added each week to that 19 game, guaranteed prizes. And the cost for the liability 20 protection that Texas and several other states are 21 purchasing each week continues to rise as a result of 22 that increased exposure for us. 23 As you can imagine, there have been 24 numerous discussions about the health and the viability 25 of this game, both here at the Texas Lottery and as the 62 1 full game group within the MUSL organization. 2 Unfortunately, our options to try to 3 change this game or tweak it while the game is in motion 4 are very limited and extremely difficult to try to make 5 while a game is going. 6 We're also disadvantaged because the fact 7 is, the hook for the MONOPOLY Millionaires' Club game is 8 the TV game show, the national TV game show that is 9 scheduled to launch in February. That hasn't begun yet, 10 so there's no front-of-mind consciousness of that game 11 show for our players to play for and to look forward to. 12 In Texas we're at a tipping point for a 13 variety of reasons. We are at the go or no-go point for 14 a $3.2 million advertising campaign that we were 15 planning to run to support the MONOPOLY Millionaires' 16 Club game. We've also set aside $2 million for our 17 retailer incentive program directly scheduled to reward 18 retailers for selling the MONOPOLY Millionaires' Club 19 game. And we have other miscellaneous dollars in play 20 for items such as drawing audit services, printing, and 21 required staff travel. 22 So to date, not including all the many 23 hours that our staff and our staff at GTECH have put in 24 preparing to launch this game and working to develop the 25 game, we have expended approximately $1.4 million on 63 1 advertising, fees to the MUSL organization, and 2 miscellaneous printing and draw expenses. 3 The states currently selling the MONOPOLY 4 game met via telephone on Tuesday this week, December 9, 5 for the purpose of voting on a recommendation that did a 6 couple of things. One, it would have suspended sales 7 nationally for the game on December 26, and it would 8 also have included developing a bridge game, if you 9 will, that would get us to the launch of the TV game 10 show and allow players to continue to be able to enter 11 tickets for the opportunity to be in that TV game show. 12 Unfortunately, that vote and that plan on 13 Tuesday did not come to fruition. There was no vote 14 taken and no consensus reached among the 23 states 15 participating. 16 So I not seeing any viable option in the 17 near future, I want the Commission to know that I can't 18 continue to have the Agency accept the ongoing financial 19 liability risk that the game in its current structure, 20 due to those lower than anticipated sales, puts us in. 21 And I certainly can't see fit to approve any additional 22 expenditures related to the game in its current state. 23 So my plan is to immediately suspend sales 24 in Texas of the MONOPOLY game following the weekly 25 drawing this Friday night, December 12. My 64 1 understanding, but this is just my -- my understanding 2 is that some of my colleagues around the country who are 3 selling MONOPOLY are considering this option as well, 4 but I have no confirmation of any other state taking 5 this type of action yet. 6 Our team in Texas worked last week through 7 the issues related to doing such a suspension of sales, 8 and we believe we've got our arms wrapped around all 9 those issues. But that said, I am absolutely certain 10 that this is going to be a very fluid situation, and the 11 dynamics will continue evolving over the next several 12 weeks. 13 I want the Commission to know that we are 14 going to continue to purchase the liability protection 15 even after we end sales this Friday because we are still 16 in this game insofar as we have a contribution of sales 17 to the top prize and to the 1 million-dollar prizes as 18 well that will continue to be there until either the 19 game is won or sales nationally have ceased. 20 It's important in my opinion, 21 Commissioners, for the Texas Lottery to take a step 22 back, to reduce our financial exposure as best we can, 23 to be an active participant in the national discussions 24 and carefully monitor what the next steps are for the 25 national premium game concept. 65 1 This item, as Bob might have mentioned, 2 does not require any Commission action, but obviously 3 this is not a decision that I would make lightly. And 4 we were fortuitous in having a Commission meeting this 5 week where I could brief you not only individually but 6 publicly as well and make sure you are all well aware of 7 what our plans are. 8 Mr. Chairman, that concludes my comments 9 on that. I would be glad to answer any questions the 10 Commission might have. 11 CHAIRMAN KRAUSE: Questions? Comments? 12 COMMISSIONER WILLIAMSON: You know, in our 13 ongoing quest in this industry to be innovative and try 14 to find new ways of generating interest amongst our 15 players, you know, I commend the collaboration that it 16 took to get to this point. This is an innovative game, 17 brand new, from what I understand, of anything that's 18 ever been out there. You know, generally in business, 19 ideas are brought forth all the time and not all of them 20 are home runs. 21 So from that perspective, I do not want 22 to -- I want to encourage us and the other states to 23 still look at innovative ways within our legal framework 24 that we deal with right now of creating games that 25 create excitement with our players. 66 1 Now having said that, you know, I know 2 there's this fixed prize aspect of this game, and I know 3 there's a place for that. You know, I suppose it would 4 be easy for us up here to be critical of how the 5 projections were done and the approximations were done 6 of the amounts. I would say maybe this needs to be done 7 a little bit more intently and with maybe a bigger 8 group. You know, there again, I'm not privy to how that 9 was all done. 10 I mean, obviously the boat was missed big 11 time on this one. And, you know, next time we'll 12 probably need to -- all of us, not just this state but 13 everybody -- spend a little bit more time and effort in 14 really looking at the numbers because we all know what a 15 slight mistake in anything on estimates, particularly in 16 what we all do in the lottery, can mean. 17 And so that's all my comments I have. 18 CHAIRMAN KRAUSE: Well, it's well said. 19 That basically summarizes my comments about the fact 20 that we might be regulating bingo, but we run a business 21 here to raise money for education. 22 And so we want to try new things. We 23 cannot stop innovation; otherwise, you know, we 24 stagnate. And so there is no guarantee that everything 25 that we try new is going to work out. So -- but we do 67 1 learn from it every single time, and it makes us 2 sharper. We learn more from something like this than we 3 do probably from our successes. And we enjoy many, many 4 successes. 5 So anyway I can't fault our staff for 6 doing a good job of trying to peer into the future, 7 which is one of the hardest things to do accurately. 8 And so anyway, do whatever you need to do, 9 Gary. 10 MR. GRIEF: Thank you, Mr. Chairman and 11 Commissioners. 12 And I appreciate your comments also, 13 Commissioner Williamson. 14 Just FYI, we'll be issuing a press release 15 to that effect later today, and I have informed my 16 colleagues around the country that are participating in 17 the game of our intent. Thank you. 18 CHAIRMAN KRAUSE: Next item, Lea 19 Burnett -- Burnett. 20 AGENDA ITEM IX 21 MS. BURNETT: Good morning, Chairman and 22 Commissioners. As you stated, my name is Lea Burnett. 23 I'm an assistant general counsel, and I'm here to 24 present a proposed rule amendment for your 25 consideration. 68 1 The proposed amendment concerns existing 2 Lottery Commission rule, 16 TAC 401.101. We are seeking 3 your approval for permission to post this in the Texas 4 Register seeking public comment. 5 This rule, entitled Lottery Procurement 6 Procedures, describes the manners and method the Agency 7 uses to procure certain goods and services. 8 Specifically, the Staff proposes to amend Subsection 9 401.101 C 6, involving purchases of proprietary 10 services. 11 While reviewing the rule, the purchasing 12 and contract Staff noticed this subsection included a 13 reference to the dollar amount triggering a requirement 14 to post a solicitation on the Electric (sic) State 15 Business Daily for proprietary purchase of service. 16 That dollar amount was different and higher than the 17 minimum threshold required for purposes of proprietary 18 goods. 19 Upon researching the differences between 20 the two, we discovered this was not correct under 21 governing laws and did not match our internal policy or 22 procedures regarding the posting of such solicitations. 23 Therefore, we propose the amendment to correct this 24 oversight, as it's strictly a housekeeping matter, since 25 our posting policies and procedures already match the 69 1 laws governing the posting of documents on the ESBD and 2 also the applicable laws and statutes for procurement. 3 Therefore, we request permission to post 4 the proposed amendment to 16 TAC 401.101 in the Texas 5 Register for public comment. Thank you. 6 CHAIRMAN KRAUSE: Commissioners, question? 7 Comments? 8 (No response) 9 CHAIRMAN KRAUSE: All righty. Well, I'm 10 looking for a motion to approve the recommendation to 11 publish this rulemaking in Texas Register. 12 COMMISSIONER BAGGETT: I would like to 13 make a motion to approve the recommendation to publish 14 the proposal for public comment. 15 CHAIRMAN KRAUSE: Got a second? 16 COMMISSIONER WILLIAMSON: Second. 17 CHAIRMAN KRAUSE: All in favor, say aye. 18 (All those in favor of the motion so 19 responded) 20 CHAIRMAN KRAUSE: All opposed, say nay. 21 No nays. It carries. 22 MR. BIARD: Thank you, Commissioners. I 23 have a T bar memo I will provide you for signature. 24 CHAIRMAN KRAUSE: Ms. Kathy Pyka. 25 70 1 AGENDA ITEM X 2 MS. PYKA: Good morning, Commissioners. 3 My name is Kathy Pyka, controller for the Commission. 4 With me this morning is the Commission's products and 5 drawings manager, Robert Tirloni. 6 Commissioners, the first chart that we 7 have for you this morning reflects comparative sales 8 through the week ending December 6, 2014. Our Fiscal 9 Year 2015 sales through this 14-week period are 10 $1,141,000,000, which is an increase of $4.4 million, or 11 four-tenths of a percent compared to last fiscal year. 12 Our Fiscal Year 2015 instant ticket sales, 13 reflected on the second orange bar, are at 14 $867.1 million. This is an increase of $27.7 million 15 over last fiscal year. And as noted on the chart, our 16 instance ticket sales represent 76 percent of our total 17 sales through this period. 18 Our Fiscal Year 2015 draw sales reflected 19 on the second blue bar are at $273.6 million, which is a 20 23.3 million-dollar decline from last fiscal year. 21 Commissioners, this decline is attributed to a lack of 22 large jackpot rolls. Specifically, the Powerball 23 jackpot has only seen an increase up to 225 million this 24 fiscal year, and last fiscal year we had already had a 25 400 million-dollar jackpot at this point in time. 71 1 Our next slide that we have for you this 2 morning reflects cumulative average daily sales 3 comparison for Fiscal Years 2013, '14, and '15. The 4 overall daily average sales value for Fiscal Year 2015 5 is $11.8 million. This is up $188,000 a day per 6 increase over last fiscal year and $149,000 per day 7 increase over Fiscal Year 2013. 8 We'll focus first on our jackpot games 9 highlighted in the white font. Our average daily total 10 for Fiscal Year 2015 is $1.66 million with declines of 11 $150,000 from Fiscal Year 2014 and a decline of $348,000 12 from Fiscal Year 2013. 13 As we drill down on this decline, you'll 14 notice that Powerball has an average daily sales value 15 of $477,000 per day, and last fiscal year we were 16 looking at $644,000 per day. 17 The other item I'd like to highlight 18 within the jackpot games category is this is our first 19 time to present to you since the inception of the 20 MONOPOLY game, and so we're looking at daily sales 21 average there, $49,000 per day. 22 Our daily games are highlighted in the 23 blue font, and you'll note that our average daily value 24 is 1 million or 1.18 -- $1,180,000 per day, with a 25 34,000-dollar decrease from last fiscal year. Within 72 1 this category, we have minor differences with Pick 3 and 2 a slight increase in Daily 4. 3 We'll close out this slide with our 4 average daily sales value for instant tickets of 5 $8.9 million per day, which is a 373,000-dollar increase 6 over last fiscal year and a 708,000-dollar increase over 7 Fiscal Year 2013. 8 With that, Robert will now provide an 9 overview of actual sales by game. 10 MR. TIRLONI: Good morning again, 11 Commissioners. This is a comparison through the week 12 ending Saturday, December 6, comparing Fiscal Year 13 '15 sales to Fiscal Year '14 sales by product. It's the 14 same layout as the previous slide, with our jackpot 15 games up at the top, and our daily games here in the 16 middle. 17 As a whole, our draw games are down year 18 over year, slightly over $23 million. Again, the 19 biggest bulk of that decline is coming from the jackpot 20 game category. We're seeing just under $19 million 21 worth of decline; and, again, most of that can be 22 attributed to the lack of Powerball jackpots thus far 23 this fiscal year. 24 I will make a note that Kathy mentioned 25 the Powerball jackpot a year ago. This time last year, 73 1 we were in the midst of a roll cycle on Mega Millions. 2 And at the end of December 2013, we rolled up to a Mega 3 Millions jackpot of $636 million. We are nowhere near 4 that jackpot level right now, so the chances are great 5 that when we're back here together in February looking 6 at this chart, the decline on Mega Millions will -- the 7 decline will be bigger due to the sales from a year ago 8 that will be reflected in this presentation in February. 9 The instant games are experiencing very 10 strong sales. We have a very strong suite of holiday 11 games. We have our new 20-dollar Holiday Game Book 12 right now. That's a new product for us. It's doing 13 very well. Overall, our holiday games this fiscal 14 compared to last fiscal are up over 20 percent. 15 So you see that we are seeing a 16 27 million-dollar increase in our instant sales. And 17 all told for the entire portfolio, we're up $4.4 million 18 this year compared to last. 19 This is just a quick snapshot of our 20 instant ticket sales. We bring this to you once a 21 quarter, so this pie chart represents $867 million in 22 instant ticket sales through Saturday, December 6. It's 23 broken down by price point. The 5-dollar continues to 24 be the best selling price point, followed by the 10, the 25 20, and then the 2. Very little change from what we 74 1 have seen in the past. 2 I just wanted to close on one note. I've 3 given you ticket samples of our newest multiplier suite. 4 We first launched this multiplier suite, or sometimes 5 called family, a year ago. We've -- it had such great 6 sales success that we have completely redesigned it, and 7 we will be releasing this later this month and into 8 January. And we hope that it will deliver the same 9 sales results that it did last year. 10 And that includes our report. We're happy 11 to answer questions. 12 CHAIRMAN KRAUSE: Commissioners? 13 (No response) 14 CHAIRMAN KRAUSE: Moving on. 15 AGENDA ITEM XI 16 MS. PYKA: Thank you, Commissioners. 17 Commissioners, Tab No. 11 includes 18 information on the Agency's transfers to the state. The 19 first report in your notebook reflects the accrued 20 revenue transfers and the allocations to the Foundation 21 School Fund and the Texas Veterans Commission for the 22 period ending October 31, 2014. Our total revenue 23 transfers to the state amounted to $166.7 million for 24 the first two months of Fiscal Year 2015. Of the 25 166.7 million-dollar transfer to the state, 75 1 $165.5 million was transferred to the Foundation School 2 Fund, with an additional 1.2 million transferred to the 3 Texas Veterans Commission. 4 This represents a 1.8 percent decrease, or 5 $3.1 million, from the amount transferred to the 6 Foundation School Fund through October of 2013. 7 Commissioners, our total cumulative 8 transfers to the Foundation School Fund through October 9 of this year are now at $17.26 billion. I'd be happy to 10 answer any questions. 11 CHAIRMAN KRAUSE: Commissioners? 12 (No response) 13 CHAIRMAN KRAUSE: Thank you -- all right. 14 Thank you for your good report. 15 MS. PYKA: Thank you, Commissioners. 16 CHAIRMAN KRAUSE: Ms. Trevino -- Trevino. 17 MS. TREVINO: That's good. 18 CHAIRMAN KRAUSE: Getting better. 19 AGENDA ITEM XII 20 MS. TREVINO: Good morning, Commissioners. 21 For the record, I'm Nelda Trevino. I'm the director of 22 governmental affairs. As you are aware, the legislative 23 review committee established as a result of the Agency's 24 sunset legislation issued its report on its findings and 25 recommendations to the legislature on December the 1st. 76 1 For the record, I'd like to briefly highlight the 2 committee's nine recommendations. 3 They include the following: The 4 legislature should continue the Texas Lottery and the 5 Texas Lottery Commission. 6 The legislature should instruct the Texas 7 Lottery Commission to include a study of geographical 8 lottery sales and retailer penetration by ZIP code as 9 part of its contracted demographic study to gain better 10 insight into the demographics of lottery players. 11 The legislature should instruct the Texas 12 Lottery Commission to conduct an external study of its 13 advertising media expenditures every other year to 14 ensure lottery advertising is not targeted towards any 15 specific demographic. 16 The legislature should instruct the 17 Lottery Commission to discontinue the promotion of 18 lottery games via print advertising. The legislature 19 should impose a statutory required minimum charitable 20 distribution based on a bingo's location's gross gaming 21 revenue. 22 The legislature should grant the Lottery 23 Commission the authority to address excessive prize 24 payout percentages. 25 That's in relation to Charitable Bingo. 77 1 The legislature should convert the state's 2 portion of the bingo prize fee into a mandatory player 3 contribution, which would be deposited directly into the 4 participating charity's general funds and used solely 5 for charitable purposes. 6 The legislature should encourage local law 7 enforcement to eliminate illegal gaming. 8 And lastly, the legislature should 9 continue to evaluate the proper regulatory home for 10 Charitable Bingo. 11 I understand Gary has some additional 12 comments regarding the review committee that he will 13 make during his report at a -- under Agenda Item No. 17. 14 With regard to the upcoming legislative 15 session, as reported at the last Commission meeting, 16 prefiling of legislation for the 84th legislature began 17 on November the 10th, and the legislature will convene 18 its regular session on January the 13th, 2015. We will 19 begin our practice of providing you legislative bill 20 tracking reports of bills filed that impact the Agency, 21 and we provided you this morning with a copy of the 22 current bill tracking report. 23 There have been more than 685 legislative 24 measures filed so far, and we are currently tracking 53 25 bills. 78 1 There are two bills specifically related 2 to the lottery that I would like to note for you today. 3 These include the following: House Bill 108 by 4 Representative Ryan Guillen, and this is a bill that 5 relates to a lottery prize winner's choice to remain 6 anonymous. The primary intent of Representative 7 Guillen's bill is to allow a person or legal entity who 8 wins $1 million or more to remain anonymous by 9 prohibiting all personally identifiable information from 10 being released to the public, with the exception of 11 their city and county of residence. 12 The second bill is House Bill 410 by 13 Representative Chris Turner, and this bill relates to 14 the amount of unclaimed lottery prize money to be 15 deposited into the Fund for Veterans' Assistance. This 16 legislation would mandate that $5 million in unclaimed 17 prize money be deposited to the Fund for Veterans' 18 Assistance each fiscal year. 19 We will continue to provide you bill 20 tracking reports on a regular basis throughout the 21 legislative session, and we may also provide you 22 separate notifications of bills filed that are of 23 specific interest to the Agency. 24 Additionally, once the session begins and 25 bills are scheduled to be considered by a committee, the 79 1 Legislative Budget Board will request fiscal note 2 responses from the Agency on legislation that may impact 3 the Agency. And this is a document that provides the 4 estimated fiscal impact of the bill, including the 5 administrative agency's cost estimates. 6 This concludes my report, and I'll be glad 7 to answer any questions. 8 CHAIRMAN KRAUSE: Commissioners? 9 (No response) 10 CHAIRMAN KRAUSE: On the bill to allow 11 one-million-dollar prize winners to remain anonymous, 12 that doesn't present any kind of administrative problems 13 for us, does it? 14 MS. TREVINO: I wouldn't say that it 15 would -- I don't believe it would. 16 CHAIRMAN KRAUSE: Is there a requirement 17 that they be publicized? Is that why that's necessary? 18 MS. TREVINO: Yes. 19 CHAIRMAN KRAUSE: Okay. 20 MS. TREVINO: I don't think there would be 21 any administrative burden. I think there is some 22 concern that it could impact the public's perception of 23 the lottery -- informing the public of winners and that 24 real people are winning goes to the integrity of the 25 lottery. 80 1 CHAIRMAN KRAUSE: Okay. And then on the 2 other -- the unclaimed prizes go to the general revenue. 3 Is that right? 4 MS. TREVINO: No, because as a result of 5 the provision in our sunset bill from last legislation, 6 the money that was going to the general revenue from 7 unclaimed prize money is now going to the Foundation 8 School Fund. 9 CHAIRMAN KRAUSE: Okay. And so this 10 second bill that you reported on is a diversion of that 11 to the veterans from the foundation? 12 MS. TREVINO: Yes, it would be. 13 CHAIRMAN KRAUSE: Okay. Thank you, ma'am. 14 MS. TREVINO: Welcome. 15 CHAIRMAN KRAUSE: Darlene Brown. 16 AGENDA ITEM XIII 17 MS. BROWN: Good morning, Commissioners. 18 I have two items to present to you today. One is our 19 traditional status report, and the other one is a audit 20 report that I will be asking your approval for. 21 First off, the status report. Activities 22 that we finished this time, we completed the instant 23 ticket sales audit report, and we were in the final 24 stages of the draft going over with management. There 25 were no observations to report, so on top of all the 81 1 other good audit results you've heard today, that's 2 another one that will be coming to you for the next 3 meeting. 4 We also finalized the Charitable Bingo 5 prize fee allocation audit and report, and we're 6 presenting that to you today for approval. We've 7 continued to work on the bingo restructuring project. 8 On that restructuring project, that is 50 percent 9 complete now, and we have reviewed 71 percent of the 10 business processes. And the majority of those are being 11 redesigned to make them either more efficient or in 12 compliance with the regulations. And the posting of the 13 proposal rules today are going to help that process 14 along. 15 The -- we have also adjusted our approved 16 internal audit hours for 2015 to accommodate what we are 17 actually spending on the various audits versus what we 18 thought we were going to spend and what we project to 19 continue to spend. Overall, we are still staying within 20 the approved hours and budget, financial budget, for the 21 year, so we have no request to change our budget. But 22 overall, we are still at 69 percent of remaining hours 23 available and 70 percent of our budget is available. 24 For the next period, we plan to begin the 25 procure to pay audit, which is the purchasing cycle. We 82 1 will also begin the ledger reconciliation project for 2 the bingo, and we will finalize the instant sales ticket 3 report. 4 Okay. So that's the end of my first 5 presentation. Are there any questions on the status 6 report? 7 CHAIRMAN KRAUSE: Commissioners? 8 COMMISSIONER WILLIAMSON: I commend you 9 and bingo as well on the progress that you're making on 10 BOS. 11 MS. BROWN: Thank you. 12 The next item is for your approval. It is 13 the audit report for the prize fee allocation. It -- 14 overall, the controls for the collection, calculating, 15 and reporting of prize fees out to the municipalities 16 and jurisdictions are effective and now working. 17 We do have three observations to report to 18 you. And two of those are related to the current system 19 limitations, and the third one is related to 20 jurisdictions required to submit information to 21 Charitable Bingo when they change boundaries through 22 annexations to make sure that if they opted in to 23 receive a portion of the prize fees is that they're 24 actually getting those prize fees awarded to them. 25 Since 1993, when the rule took effect, 83 1 there have been no updates provided to bingo. So as a 2 result, some of the records are not accurate, and some 3 of these municipalities may not be receiving the money 4 that they were -- are entitled to. It's still going to 5 the counties. 6 So to resolve that, we've worked with the 7 BOS and with bingo, and they're actually going to issue 8 an annual notice to each jurisdiction that is eligible 9 for prize fees to inform them that -- of their 10 responsibilities to notify bingo that there have been 11 changes. 12 The other two issues have to do with one 13 reporting -- not having the ability to report to 14 jurisdictions about the amount of money selected for 15 prize fees versus what is still due to be collected. So 16 that has also been modified into the new information 17 system where we are going to be able to provide a 18 quarterly report to them on activity within their 19 jurisdiction by bingo hall. 20 And then the third one has to do with 21 there are a few instances to deal with nonregular 22 temporary licenses, the timing of when those are issued 23 versus the timing of when the prize fee is collected. 24 Sometimes all of that money went to the county instead 25 of being split between the county and the municipality. 84 1 That is also being corrected in the BOS, so that will 2 not occur going forward. 3 That's the conclusion of this audit 4 report. Overall, it's a very good audit. Prize fees, 5 for the most part, are being allocated according to how 6 they're supposed to be allocated. In the few instances 7 that we saw that they weren't, it was due to system 8 limitations. So we are asking for your approval on this 9 report. 10 CHAIRMAN KRAUSE: Commissioners, 11 questions? Comments? 12 (No response) 13 CHAIRMAN KRAUSE: Looking for a motion to 14 approve the report. 15 COMMISSIONER MEADOR: I move we approve 16 the bingo report. 17 CHAIRMAN KRAUSE: Second? 18 COMMISSIONER WILLIAMSON: Second. 19 CHAIRMAN KRAUSE: Anybody want to second? 20 Move for a vote. Everybody who wants to 21 approve the report, say aye. 22 (All those in favor of the motion so 23 responded) 24 CHAIRMAN KRAUSE: All opposed, say nay. 25 No nays. It carries. Thank you. 85 1 MS. BROWN: Thank you. 2 CHAIRMAN KRAUSE: It's approved. 3 Mr. Royal. 4 AGENDA ITEM XV 5 MR. ROYAL: Good morning, Commissioners. 6 It's still good morning. Day 162 today. 7 In addition to the bingo output metrics 8 that are included in your briefing books, I'd like to 9 update you all on the process of resolving backlogs that 10 were identified during my assessment of the division and 11 reported to the Commission in October. 12 The backlog of pending licensees yet to be 13 issued has decreased by 46 percent. As of December 8, 14 there are some 400 pending applications. That is down 15 from a high of 739 that were reported in October. Those 16 numbers include 249 renewals that are down from a high 17 of 412. Renewals over 100 days have decreased to 104. 18 Audit activities have decreased from 153 19 to 139, with a number of scheduled audit exit 20 conferences and final reports due this month. 21 The compliance activity monitoring process 22 cases have decreased from 239 to 120. 23 Pull-tab testing has increased due to 24 recent submissions for review; however, we are currently 25 working through the month of September. Previously 86 1 reported at 68, we're at 81. This number will continue 2 to fluctuate depending on the number of submissions, but 3 we are working through in a more timely basis. 4 The bingo account ledger issue from prior 5 data conversions that was discussed by the internal 6 auditor in August, and Darlene provided an update 7 briefly, is underway. We're actually performing a 8 review on active accounts that have renewals pending. 9 So we are looking at those. The team is formulating a 10 process to apply to all accounts, and we'd anticipate 11 this would begin sometime in January. 12 I am extremely proud of the progress the 13 Staff has made and rising to the challenges and 14 deadlines imposed through -- to work through the 15 backlog. I appreciate all of their efforts as well as a 16 continued support from other divisions within the Agency 17 as we work together toward final disposition. 18 Finally, you've heard update on BOS from 19 Darlene. We are still on track with key deliverables on 20 schedule. Staff are actively testing and providing 21 feedback to a development team. 22 That concludes my report. I'm happy to 23 answer any questions. 24 CHAIRMAN KRAUSE: Commissioners? 25 COMMISSIONER TOWNES: No questions. I'd 87 1 just like to echo what Commissioner Williamson said 2 about the bingo operations and how well you're moving 3 forward on resolving many of the inconsistencies and 4 business processes. Thank you. 5 MR. ROYAL: Thank you. 6 COMMISSIONER WILLIAMSON: Just one 7 question. About the cases that you're resolving, 8 generally how old are some of those -- or maybe what 9 year. You know, I'm not going to pin you down to what 10 day and month but... 11 MR. ROYAL: Some of them go back to as -- 12 2012, so they're pretty old. 13 COMMISSIONER WILLIAMSON: Well, once 14 again, I know you're going to be -- you won't get tired 15 of hearing this. I commend everyone internally on your 16 staff, because I know you can't do it by yourself, and 17 you're only as good as the people that work with you. 18 So those directly involved in bingo and 19 lottery folks, thank you, thank you, thank you for 20 uplifting this project and helping bingo get out of its 21 quandary, as it were, and to move forward with our BOS 22 implementation as well. 23 MR. ROYAL: Thank you, Commissioners. 24 CHAIRMAN KRAUSE: Thank you, Mr. Royal. 25 Mr. Grief. 88 1 AGENDA ITEMS XVI & XVII 2 MR. GRIEF: Commissioners, the first item 3 I have for you is Item No. 15 -- is that correct -- 16 4 now, I'm sorry, the item for GTECH. And other than 5 what's in your notebook, I have nothing further on that 6 item. 7 So Mr. Chairman, if I could, I'll move to 8 my report, Item No. 17, and in addition to what is in 9 your notebooks this morning, Commissioners, I do have 10 several items to report on this morning. 11 The first thing I'd like to comment on is 12 the La Fleur's conference that was held recently here in 13 Austin. That was the last industry lottery conference 14 of the year, and that occurred November 16th through the 15 19th. That was called the La Fleur's Lottery Conclave & 16 Interactive Summit, and it occurred at the Stephen F. 17 Austin Intercontinental hotel. 18 Terry Marco and Bruce La Fleur were the 19 hosts for that conference, and I'm delighted to report 20 to you that the conference was a huge success. We had 21 more than 200 attendees, including four out of our five 22 commissioners. We had lottery directors from several 23 other states, and we had leaders from the lottery vendor 24 community from all over the country. 25 I was especially pleased that Chairman 89 1 Krause and Representative John Kuempel from Seguin, who 2 has cochaired the legislative review committee that has 3 just recently issued its report on the lottery and 4 bingo, that Chairman Krause and Representative Kuempel 5 were able to jointly open the conference and get it 6 kicked off on the first day. 7 All the reports that I've heard back from 8 the conference have just been glowing. The sessions 9 were well run. They were informative. And I was 10 particularly pleased that our staff, our Texas Lottery 11 Commission staff, played such a significant role on many 12 of the presentations and focus groups that were in 13 place. 14 So based on the success of that 15 conference, my understanding is that planning is already 16 underway for a future La Fleur's conference here in 17 Austin again in 2016, as they've already booked the 2015 18 conference for Seattle. That may become an annual event 19 here in Austin based on the success that they had here. 20 I also want to recognize the companies 21 that helped sponsor that conference. In particular, 22 GTECH, Pollard Banknote, who is one of our instance 23 ticket printers, and Shoutz, which is a lottery industry 24 marketing company. 25 Special thanks go to you, Chairman Krause, 90 1 and to your fellow Commissioners Townes, Williamson, and 2 Baggett for your attendance at the conference. Having 3 you present at those events reinforces to me and to our 4 staff the importance of continuing to collaborate around 5 the country with our colleagues and continually 6 educating ourselves on the latest and greatest 7 innovations out there that we can take advantage of to 8 generate revenue for our good causes. Your attendance 9 makes a difference at those events, and I greatly 10 appreciate it. 11 On the Thursday immediately following the 12 La Fleur's conference, we had the pleasure of hosting 13 staff from the Kansas and from the Georgia lotteries to 14 provide them with an overview of how we conduct our 15 business and also take them over to GTECH, which I know 16 our Commissioners Townes and Commissioner Meador have 17 just recently seen those facilities. Those lotteries 18 got to see that as well. I know our staff and Joe 19 Lapinski's GTECH staff were quite proud to show off to 20 our colleagues from Kansas and Georgia. 21 Moving on, you heard Nelda mention the 22 legislative review committee, and I wanted to share some 23 thought with you about that. 24 First, I wanted to publicly thank the 25 members of that review committee for their service and 91 1 their attention and the time that they put into studying 2 our agency and the time that their staffs put into 3 working the cause as well. In particular, I do want to 4 recognize the cochairs of that committee. Senator 5 Schwertner and Representative Kuempel for the time they 6 spent meeting with us, visiting our facilities, and 7 really gaining an understanding of how the Texas Lottery 8 operates. 9 With just one exception on the committee, 10 Alfonso and Nelda and I were able to meet personally 11 with each one of the committee members prior to the 12 issuance of that report, and those meetings were 13 definitely time very well spent. Just having a chance 14 to share data with them and answer their questions one 15 on one that they had, and they did have significant 16 questions. 17 So besides the obvious good result that 18 came out of the report, and that is the continuation of 19 the Texas Lottery, I was also gratified that there was 20 clear recognition of several other of our major 21 accomplishments. One is, of course, the significant 22 dollars that we generate for education and for the 23 veterans' fund. 24 The second is the very positive overall 25 economic impact that the Texas Lottery has on the Texas 92 1 economy, also, the success of the Lottery Commission in 2 doing business with historically underutilized 3 businesses, with our agency ranking right now No. 1 in 4 HUB percentage spending of the 18 largest spending 5 agencies in the state of Texas. 6 The report also acknowledged our active 7 participation in the amber, the silver, and the blue 8 alert programs as well. 9 And it also mentioned the success we've 10 had in collecting what were otherwise uncollectible 11 debts owed to the state of Texas via our debt set-off 12 program. When someone claims a prize at a lottery claim 13 center, if they owe a debt to the state of Texas, for a 14 variety of issues, from child support to back taxes, 15 we're able to capture that money and withhold that money 16 via our debt set-off program. So those were all 17 mentioned in the report. 18 I was very pleased with the thoroughness 19 and the fairness and the balance of the report, and, 20 again, I want to express my thanks and gratitude to the 21 members of the committee and to their staffs as well. 22 I also want to let the Commission know 23 what a solid group of individuals you have as your staff 24 here at the Lottery Commission. Many times this type of 25 important critical review could upset an organization 93 1 and cause people to feel uneasy about their jobs. If 2 you've got a legislative committee who's looking at 3 their mission is to consider the abolishment of your 4 agency, that would be normal for Staff to feel that way. 5 I want to let you know that rather than 6 having that type of reaction, our staff were quite the 7 contrary. They went about doing their jobs in the 8 normal, usual, professional manner that they always do, 9 and they continued to excel throughout this lengthy 10 process. 11 I'd like to think that at the Lottery 12 Commission, we're battle-tested here. And we understand 13 that we are, and we will always be, under intense 14 scrutiny because of the nature of the business that 15 we're in. We're in the gaming business. And there will 16 be people watching everything that we do very closely. 17 And rightly so. 18 I think that helps us -- that type of 19 experience helps us as we go through experiences like 20 the legislative review committee. I appreciate the work 21 of the Staff through all that, and I just wanted the 22 Commission to know about that. 23 And I have one final item on marketing 24 efforts. I'm going to ask Phillip in just a moment to 25 roll a couple of videos for me, but I want to say some 94 1 things before he gets those started. 2 I want to make the Commission aware of an 3 interesting opportunity that I'm exploring with one of 4 our most valuable, iconic branding partners. And that's 5 the Dallas Cowboys. For the past six years, the Dallas 6 Cowboys organization has partnered with the Texas 7 Lottery to develop scratch-off games that both 8 organizations have been extremely proud of and which 9 have generated significant revenue for public education. 10 And that also helped keep the Texas Lottery brand front 11 and center for those millions of Dallas Cowboy fans here 12 in the state of Texas. 13 The expectations -- when we first launched 14 the Dallas Cowboys scratch-off game, the expectations 15 were high, and the results have been nothing short of 16 spectacular. Fans of the Dallas Cowboys and the Texas 17 Lottery have purchased those scratch-off games to the 18 tune of more than $250 million in Cowboy scratch-off 19 games. But more importantly, more than $50 million from 20 the sale of those scratch-off games has gone directly to 21 public education. 22 In addition to the $50 million that has 23 gone to education, more than $12 million has gone 24 directly back into the economy in the form of 25 commissions to our more than 17,000 retailers who sell 95 1 the Dallas Cowboys scratch-off game. 2 Our players who have participated in the 3 Cowboy scratch-off game have won more than $160 million 4 in prizes, including some second-chance prizes, like 5 being in the war room on draft day and getting season 6 tickets to the Cowboys that have become legendary among 7 Cowboys fans and Texas Lottery fans. 8 The Cowboys organization, in general, and 9 the Jones family, in particular, have been tremendous 10 supporters of the Texas Lottery over time. For the 11 launch of this season's Cowboys scratch-off game -- and 12 Chairman Krause was in attendance at this -- Jerry Jones 13 came to Austin and participated in a press conference at 14 the state capitol. That was extremely well received, 15 and it garnered a lot of great publicity for the Texas 16 Lottery. 17 As I said, our partnership with the 18 Cowboys organization began six years ago. That was 19 right before the construction of AT&T Stadium was 20 complete. And as you probably know, AT&T Stadium has 21 become the premier sports and entertainment venue in the 22 country, and the Texas Lottery was fortunate to get in 23 on the ground floor and have a seat at the table when 24 cobranding opportunities were available for the new 25 stadium. 96 1 So I'm going to ask Phillip to start this 2 video, and I'll talk to you a little bit about what you 3 are seeing on the screen. 4 (Video playing) 5 Now the cowboys and the Jones family are 6 embarking on an all-new venture, and that's the subject 7 of this video. It's going to be a high-end retail and 8 entertainment district in Frisco, Texas, near Dallas, 9 that is going to serve as the gateway to the Dallas 10 Cowboys new World Headquarters. 11 Commissioners, this development will 12 involve more than 178,000 square feet of shopping and 13 restaurant space. It's going to be wrapped around two, 14 five-story parking garages on either side of the road 15 that ultimately leads to a multiuse indoor event center. 16 This center, which will include a 12,000-seat indoor 17 stadium that's being built by the City of Frisco, would 18 serve jointly as a training ground for the Dallas 19 Cowboys and as the home field for high school football 20 teams in the area. 21 The development is scheduled to be open 22 for business in mid-2016. It's a 91-acre development 23 located at the corner of Warren and Dallas Parkways, and 24 it's going to be called The Star at Frisco. It's a 25 joint venture among the Dallas Cowboys, the City of 97 1 Frisco, and the Frisco school district. And I say that 2 with emphasis. The school district. 3 The public portion will be on 20-acres and 4 will include the event center, an underground parking 5 garage, and two outdoor practice fields that will be 6 solely for the use of the Dallas Cowboys. The team's 7 new World Headquarters, which are right now located in 8 Valley Ranch, near Irving, will sit on about five acres 9 of this development. And the remaining 66 acres will be 10 developed by Blue Star Land, which is a Jones family 11 company. 12 Knowing firsthand what kind of business 13 acumen the Jones family has and how they conduct their 14 business, I fully expect that this development, and all 15 the attractions that go with it, are going to be nothing 16 short of spectacular. And I'm already in discussions 17 with the Cowboys on potential branding opportunities. 18 The tie-in that this development has 19 with -- and will have with public education, which is 20 our mission, is extremely appealing to me. 21 I have one other news video that I want to 22 share with you on this project. These are a couple of 23 local Dallas stories that ran about the project itself. 24 So Phillip, if you would run those, 25 please. 98 1 (Video playing) 2 MR. GRIEF: So if we could get the lights 3 back on, please, Fritz. Thank you. 4 I think you can see the obvious tie-in 5 with public education and the opportunity that exists 6 there. We have an in, if you will, because of our 7 long-standing relationship with the Cowboys 8 organization. We have an opportunity to be able to pick 9 and choose what, if any, cobranding opportunities we 10 might want to have at this facility. So I just wanted 11 to kind of whet the Commission's appetite and let you 12 know about this opportunity, and I'll keep you apprised 13 as we make progress on this. 14 And the last thing I have for you, 15 Mr. Chairman, has to do with a tagline, and it has to do 16 with getting the message out more about the positive 17 aspects of the Texas Lottery and the beneficiaries that 18 receive the revenue that we generate. 19 As you know, our money goes primarily to 20 public education, also to the veterans' fund, and to 21 some other good causes as well in Texas. So I wanted to 22 let the Commission know that we're going to be launching 23 a new flight of advertising in Calendar Year 2015 that 24 will have a focus on Pick 3. It's a game that needs 25 support now. It's been a while since we've ran a Pick 3 99 1 campaign. 2 And the Pick 3 game will not be the only 3 point of emphasis for this flight of commercials; we 4 will also be relaunching an emphasis on the overall 5 positive message and aspects of the Texas Lottery and 6 the beneficiaries as well. 7 We've done this in the past, but it's been 8 a while. And especially with the focus that the lottery 9 has received from the legislative review committee and 10 from the media as a result of that legislative study, we 11 feel like the time is right to do that again. And 12 Chairman Krause has been keenly interested in this. 13 I'd like to ask you, Chairman, if you 14 might have any comments you wanted to offer or thoughts 15 you wanted to share with us. 16 CHAIRMAN KRAUSE: Well, it astounds me 17 that this urban legend continues to exist that the money 18 that we raise, then goes to the Foundation School Fund, 19 somehow goes into the general revenue. I mean, that 20 has -- the law is our money must go to the Foundation 21 School Fund. And so it is unfair for the citizens to be 22 under this misapprehension about where the money goes. 23 They need to know, you know. And it opens the door to 24 our critics to unfairly, you know, publicize their 25 views, their inaccurate views, of where they think the 100 1 money goes. 2 Because we're bound by law. They're not. 3 We do what we're supposed to do. Legislature tells us 4 to. We do it. And so for us to not remind the citizens 5 of what we do and the benefit of what it is that they 6 asked us to do back in 1991 when we had a constitutional 7 amendment that they approved to start the lottery for 8 education. And, you know, it's just time for us to do 9 our civic duty and remind the public what it is that we 10 do. We do many great things. 11 MR. GRIEF: Thank you, Mr. Chairman. That 12 concludes my report this morning. 13 CHAIRMAN KRAUSE: Excellent. 14 Bob Biard, we've got our last agenda item. 15 AGENDA ITEM XVIII 16 MR. BIARD: Thank you, Commissioners. 17 CHAIRMAN KRAUSE: Go ahead. 18 MR. BIARD: In your notebooks, this is Tab 19 17. It's Tab 18 on the revised agenda. But in your 20 notebooks, Tab 17 contains four lottery enforcement 21 matters. These are cases where the Commission staff 22 found a violation, and most of time either the licensee 23 failed to appear at the hearing or the Staff and the 24 licensee have reached a settlement. I'll briefly 25 describe the cases, and you can take them up in a single 101 1 vote. 2 The first case, Tab A, is an NSF lottery 3 retailer license revocation. There's only one in your 4 notebook this week. We usually have more than one, and 5 they're handled always in a single order. This case was 6 presented at the State Office of Administrative 7 Hearings, because the licensee failed to have sufficient 8 funds in their bank account to cover electronic fund 9 transfers to the Lottery Commission's account. The 10 administrative law judge recommends revocation, and 11 Staff recommends that you vote to approve the order 12 revoking the license. 13 Tab B is a lottery license revocation case 14 as well. This is a case you decided at the October 15 meeting, actually, and the licensee has filed a motion 16 for rehearing, basically asking the Commission to 17 reconsider its decision. 18 This was a case where the Commission staff 19 discovered that in 2013, the president of the retailer 20 had pled no contest to assault on a family member. 21 Because this is a crime of moral turpitude, and ten 22 years has now elapsed since the sentence was terminated, 23 the retailer is ineligible for a lottery sales agent 24 license. The judge recommended revocation, and the 25 Commission voted to revoke the license in October. 102 1 The retailer now asserts that it was 2 entitled to and not provided 20 days notice of the 3 October 16th Commission meeting. As explained in the 4 Staff's response, the 20-day notice requirement applies 5 to the administrative hearing at SOAH, not the 6 Commission meeting. And importantly, the retailer 7 provided no reason why its license should not be 8 revoked. 9 Late yesterday afternoon the retailer 10 filed a notice that it wants to withdraw the motion for 11 rehearing, because the retailer has been sold, and this 12 individual is no longer part of the organization. 13 However, the Staff recommends you go ahead and deny the 14 motion for rehearing. 15 The request on the withdrawal was that the 16 Commission dismiss the motion. I'm not sure what it 17 means to dismiss as opposed to deny a motion for 18 rehearing, so Staff recommends you deny the motion for 19 rehearing. 20 Tab C and D are agreed orders. These are 21 settlements with a licensee. In Tab C, a player noticed 22 two scratch-off tickets she purchased had the "void if 23 removed" number, bar code, already scratched off. This 24 is a number that allows you to scan the ticket to tell 25 if it's a winner. 103 1 It was determined that an employee of the 2 retailer was scratching these numbers off the tickets, 3 collecting the prizes for the winners and selling the 4 nonwinning tickets to its customers, which, of course, 5 is a violation of the State Lottery Act and the 6 Commission's rules. So the retailer has fired the 7 employee, when it found out about this activity, and has 8 agreed to a ten-day suspension of its license. 9 In Tab D, on two occasions a customer 10 tried to collect on a 1,000-dollar scratch-off ticket 11 and was turned down because the retailers do not pay 12 prizes that are $600 or higher. The manager of the 13 retailer location, however, offered to buy the ticket 14 for $650, then mail the ticket to the Commission after 15 whiting out the customer's name and signing his own 16 name. 17 Offering to buy a winning ticket from a 18 player to claim a prize is a violation of the State 19 Lottery Act and the Commission's rules. The agreed 20 penalty is cancellation of the retailer's license; 21 however, they will be allowed to reapply after a 22 four-month period has passed. 23 And those are the four cases, and I'll -- 24 and they require an action on your part to approve. 25 CHAIRMAN KRAUSE: Question? Comments? 104 1 (No response) 2 CHAIRMAN KRAUSE: Looking for a motion to 3 approve Staff's recommendations on these orders. 4 COMMISSIONER WILLIAMSON: I make a motion 5 that we approve Staff's recommendations on the orders as 6 listed under Item 18 A through D. 7 CHAIRMAN KRAUSE: Do we have a second? 8 COMMISSIONER TOWNES: Second. 9 CHAIRMAN KRAUSE: All in favor, say aye. 10 (All those in favor of the motion so 11 responded) 12 CHAIRMAN KRAUSE: All opposed, say nay. 13 It carries. 14 MR. BIARD: Thank you, Commissioners. I 15 have orders for you to sign later. 16 AGENDA ITEM XX 17 CHAIRMAN KRAUSE: We will now be going in 18 executive session. And where is that -- so I got to say 19 my little speech here. 20 I move we go into executive session to 21 deliberate personnel matters, including the appointment, 22 et cetera, of the Executive Director and the Charitable 23 Bingo Operations director, as well as the duties of the 24 general counsel, human resources directors, and to 25 receive legal advice concerning all the things we have 105 1 legal matters on. So is there a second? 2 COMMISSIONER BAGGETT: Second. 3 CHAIRMAN KRAUSE: All in favor, say aye. 4 (All those in favor of the motion so 5 responded) 6 CHAIRMAN KRAUSE: Motion carries. 7 It is 12:23, and we are temporarily 8 adjourned while we go into executive session. 9 (Recess: 12:23 p.m. to 1:14 p.m.) 10 AGENDA ITEMS XXI & XXII 11 CHAIRMAN KRAUSE: Lottery Commission is 12 out of executive session. It is 1:14 p.m. There is no 13 action to be taken as a result of executive session. So 14 I make a motion that we end this session. Is there a 15 second? 16 COMMISSIONER WILLIAMSON: Second. 17 CHAIRMAN KRAUSE: All in favor, say aye. 18 (All those in favor of the motion so 19 responded) 20 CHAIRMAN KRAUSE: Any opposed, say nay. 21 Hearing none. Carries. This session is ended. 22 COMMISSIONER WILLIAMSON: Put the time. 23 CHAIRMAN KRAUSE: Oh, and it's still 1:14. 24 (Proceedings concluded at 1:14 p.m.) 25 106 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 22nd day of December, 2014. 16 17 _________________________________ LORRIE A. SCHNOOR, RMR, CRR, TCRR 18 Certified Shorthand Reporter CSR No. 4642 - Expires 12/31/15 19 Firm Registration No. 276 20 Kennedy Reporting Service, Inc. 7800 North Mopac, Suite 120 21 Austin, Texas 78759 512.474.2233 22 23 24 25