1 1 2 3 4 5 6 7 8 9 10 TEXAS LOTTERY COMMISSION MEETING 11 October 5, 2015 12 10:00 a.m. 13 AT 14 TEXAS LOTTERY COMMISSION 15 611 East 6th Street 16 Austin, Texas 78701 17 18 19 20 21 22 23 24 25 2 1 A P P E A R A N C E S 2 3 CHAIRMAN: 4 J. Winston Krause, Chairman 5 6 COMMISSIONERS: 7 Doug Lowe 8 Carmen Arrieta-Candelaria 9 Robert Rivera 10 Peggy A. Heeg 11 12 GENERAL COUNSEL: 13 Bob Biard 14 EXECUTIVE DIRECTOR: 15 Gary Grief 16 17 CHARITABLE BINGO OPERATIONS DIRECTOR: 18 Alfonso D. Royal, III 19 20 21 22 23 24 25 3 1 INDEX 2 PAGE 3 Appearances...................................... 2 4 Proceedings...................................... 4 5 Court Reporter's Certificate................... 77 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 4 1 CHAIRMAN KRAUSE: Good morning. Lottery 2 Commission is now in session. We've got Commissioners 3 Candelaria, Heeg, Lowe, and Rivera are all present. We 4 not only have a quorum. We have a full house. It is 5 October the 5th. And from here, it looks like it's 6 exactly 10:00. 7 And so anyway, we're going to change the 8 way that we do things here at the Lottery Commission, 9 and we are going to be a little bit more patriotic. And 10 so anyway, one of our commissioners is going to lead us 11 in the pledge of the United States flag and the Texas 12 flag. 13 (American pledge and Texas pledge) 14 CHAIRMAN KRAUSE: I'm aware that we have 15 an official agenda that was published in the register, 16 but it is also my privilege and honor to be able to vary 17 from that. So we're going to recognize Mr. Grief who's 18 going to visit with us for a moment about a recent 19 event. 20 MR. GRIEF: Good morning, Commissioners. 21 Today, your Texas Lottery team is celebrating 22 record-breaking revenue, the Foundation School Fund and 23 the Fund for Veterans' Assistance in fiscal year 2015. 24 Although I still haven't quite recovered from the Dallas 25 Cowboys' heartbreaking loss in overtime last night, I 5 1 thought it would be fitting to start off today's meeting 2 by showing you the press event that we held last week at 3 Valley Ranch at the Dallas Cowboys headquarters, where 4 we officially kicked off the start of the Dallas Cowboys 5 scratch ticket game. 6 Stephen Jones, who's the chief operating 7 officer for the Cowboys, was on hand to help us with 8 that event. And I also recruited Commissioner Rivera 9 who has a very long history with the Cowboys 10 organization to attend and participate. 11 Our media relations department did their 12 usual outstanding job in planning and organizing this 13 event. And they're also responsible for putting 14 together the video that we're going to show you today. 15 Our relationship with the Cowboys 16 organization along with the significant amount of 17 revenue that's been generated for the Foundation School 18 Fund, I believe that really speaks to the mission and 19 the heart and soul of the Texas Lottery. So with that, 20 Phillip, if you would please run the video. 21 (Video played) 22 MR. GRIEF: Chairman, I have one other 23 item -- unless there's any questions or comments about 24 that, I have one other item I'd like to cover this 25 morning if you'd allow me. 6 1 CHAIRMAN KRAUSE: Please. 2 MR. GRIEF: We have Mr. Mike Chambrello 3 who is joining us today from IGT in Providence, Rhode 4 Island. Mike is the CEO of IGT North America. And as 5 you know, IGT is the lottery operator for the Texas 6 Lottery. In his role as CEO, Mike oversees the 7 development and delivery of all lottery solutions for 8 IGT as well as the overall strategic management of their 9 entire lottery business. 10 In addition to those responsibilities, 11 Mike is also responsible for the IGT global instant 12 ticket printing business as well. You're going to hear 13 that Mike has a very rich history of the lottery 14 industry in general and also in Texas in particular, 15 which I'll let him share this morning. 16 He's certainly no stranger to addressing 17 the Commission, but I felt that with us having four new 18 members to the board, that this would be a good time for 19 Mike to come down, let you put a name with the face, 20 have him share with you some developments in the IGT 21 company. And with that, I'll ask Mike to come forward 22 and address the board. And with Mike is Jay Gendron. 23 You've heard from Jay in the past. 24 MR. CHAMBRELLO: Thank you very much. 25 Mr. Chairman, Commission, it's a little bit of a tough 7 1 act to follow, so we'll maybe divert to a -- quickly to 2 a different subject. 3 What I thought we would do this morning 4 is just spend a couple of minutes at a very high level 5 and give you an overview of IGT, the company, and then 6 we'll break it down a little bit further into our 7 lottery group and our role -- personally our role as 8 well as the company's role with the great Texas Lottery. 9 Some of you may be aware, we were 10 formally known as GTECH Corporation, and in April, we 11 merged with a company called IGT, which is the leading 12 gaming -- game machine company in the world. 13 Bringing the two companies together, we 14 now have approximately $6 billion in revenue, about 15 13,000 employees worldwide based in over 100 countries. 16 Here in Texas, we have approximately just over 600 17 employees, about 50 percent of those specifically 18 dedicated to executing the strategy and tactics of the 19 Texas Lottery Commission, so we're very proud of that 20 very large -- that very large footprint. 21 As the company has come together, we find 22 ourselves in a very enviable position, that we are the 23 number one global lottery company in the world by pretty 24 much any method that you would use with the number one 25 game machine company in the world, again, by pretty much 8 1 any metric that we would use. 2 We, however, are the number three instant 3 ticket printing company in the world by whatever metric 4 you might use. And I would say that's a case that we're 5 smaller, we're going to try harder. And we do print 6 approximately one-third of your tickets here in Texas, 7 and we're very proud of the opportunity to do that. 8 As a company, we view ourselves very much 9 as -- as the R&D branch of not only Texas Lottery but 10 lotteries worldwide. Overall, we invest about 11 $300 million a year strictly to research and 12 development. On top of that, we invest tens or, in some 13 cases, hundreds of millions of dollars in capital to 14 support the lottery and the good causes that they serve. 15 We've had -- on a personal note, I've had 16 the pleasure of being involved with the Texas Lottery 17 going all the way back to 1991. I met your executive 18 director at that time just after he had a leadership 19 role, and I've been helping to form that initial 20 eight-committee member that came up with a lottery motto 21 that is somewhat unique certainly in the United States 22 and somewhere around the world. 23 Traditionally, we provide -- we, as 24 vendors, provide services such as, you know, computer 25 operations, software, terminals, terminal maintenance, 9 1 sort of the nuts and bolts of keeping things up and 2 running. 3 In Texas, all those years ago, the 4 commission and Gary -- his role at that time developed a 5 new model that incorporated not only those basic 6 infrastructure tools, but also warehousing distribution, 7 inventory optimization, sales and marketing. And in 8 doing so, it really provided the market and the team an 9 opportunity to incent sales reps and customer service 10 reps and others in a way that a private company or a 11 publicly traded company could do that an arm of the 12 government couldn't do. 13 And as I look at just the last five years 14 and watching the screens, to have five consecutive years 15 of record sales and more importantly three consecutive 16 years of record distribution to your good causes, in 17 this environment, is something that is not consistent 18 across the country. 19 So we view that this model is really the 20 optimal model. There have been other models that are 21 more conservative. There have been models recently 22 tried that provide even more outsourcing that I would 23 suggest have not worked nearly as well. And I think 24 it's the perfect combination of oversight, which I will 25 say, having been on this side of the table for almost 25 10 1 years now, is as strong and stringent as anywhere in the 2 world, certainly in North America, the United States. 3 And I say that as a great compliment to Gary and his 4 team because it makes for -- it makes for a better, 5 stronger long-term lottery experience for our people and 6 our players. 7 Personally, I -- as I mentioned, I had 8 responsibility with GTECH at the time in 1991 and 1992 9 for the actual implementation of the lottery and for -- 10 from a vendor's side. And then ongoing operations -- I 11 will say at that time I served in a role very similar to 12 what Jay Gendron serves in today for the company. And 13 it was -- Texas was then the only jurisdiction that 14 reported directly to me. 15 So in terms of hierarchy or priorities 16 within GTECH then and IGT now, GTECH -- Texas was the 17 only lottery that reported directly to me then. And 18 fast-forward 22 or 23 or 24 years' worth of record sales 19 later, the Texas Lottery operation reports directly to 20 Jay Gendron as well. 21 So in terms of our commitment and our 22 success as a company, very, very closely tied to Texas 23 Lottery over the last 20 years, and we hope for many, 24 many more years to come. 25 The -- one of the things that we have 11 1 experienced as an industry over the last two or three 2 years is a significant shortfall in certain games like 3 our draw games that are cross boarder, Powerball and 4 Mega Millions. 5 I'm happy to report that as of yesterday, 6 across the country, 44 states were installed a revised 7 version of the Powerball game, which, again, was cheered 8 and led the changes by -- by Gary Grief and his team. 9 Gary is head of the -- is head of the Powerball 10 committee. And we expect that to position us to drive 11 greater sales, larger jackpots, and, again, a better 12 experience for our player. 13 In addition to that, under the Powerball 14 committee, we're looking and hoping that we'll implement 15 and install a jackpot management process that will, 16 again, allow us to have more consistent and consecutive 17 larger jackpots over an extended period of time so we're 18 able to sustain these -- these excellent sales. And, 19 again, Gary is the -- Gary is the chairman of that 20 committee. 21 So as we sit here before you as -- as the 22 new IGT, I can tell you that our commitment is as strong 23 today as it was 25 years ago. We are privileged to be a 24 partner. I use that term with great caution. We are 25 the "little P," and the lottery is the "big P" in the 12 1 partnership. And I will say, without hesitation, that 2 the leadership that you have and have had over the last 3 20 years and the team that Gary leads today is as -- is 4 as effective and as responsible as any that we've had 5 the privilege to work with in our history. And we look 6 forward to hopefully 20 more years of videos that you've 7 just witnessed in being a small part of the continuing 8 success of the Texas Lottery. 9 And at any point, whether it's R&D 10 operations, sales and marketing, or other, you have our 11 100 percent commitment, and we work hard every day for 12 every ticket that's printed and every ticket that's 13 transacted to do the right thing by the commission, the 14 lottery retailers, and most of our all -- most of all, 15 your players, consumers. 16 So that's sort of a brief overview of 17 where we are. We love Texas, and we are privileged to 18 work with you. So with that, I'll end. And if you have 19 any questions, Jay or I would be certainly very happy to 20 attempt to address them. 21 CHAIRMAN KRAUSE: Commissioners? 22 MR. LOWE: I have one question. 23 CHAIRMAN KRAUSE: Yes, sir. 24 MR. LOWE: I'm sort of the broken record 25 on this group here. And I want to get your thoughts on 13 1 the impact of illegal -- of legal lotteries in this 2 country, and specifically Texas, when we have, in my 3 opinion, organized crime that's doing illegal lotteries, 4 illegal sweepstakes, 8-liner, casinos, those things like 5 that. Do you have a sense that it's making a big 6 difference in our sales of legal lottery tickets and 7 scratch-offs and draw games? 8 MR. CHAMBRELLO: I'll take first shot at 9 that, and then I'll give Jay the opportunity. Again, 10 I'm dating myself here, but I actually started in the 11 lottery business in 1981. And there were very few 12 lotteries that were -- that were regulated at that time. 13 And if you look at the first lotteries 14 that are converted to an online or automated system 15 under the regulatory branch of Texas or New Jersey or 16 Michigan, whatever the state might have been, that it 17 was actually the numbers games that were the sort of 18 highest selling. The Lotto was not as big a deal then, 19 and certainly instant tickets was not as big a deal. 20 And so I can certainly tell you that 21 the -- from an East Coast perspective and then migrating 22 to the Midwest that there was a very direct and material 23 impact, positive impact in terms of growing lotteries in 24 the regulated environment and decreasing lotteries in 25 the typical runner format for the illegal or organized 14 1 crime mode. Very difficult statistically, obviously, to 2 demonstrate that. And, you know, just anecdotally, as 3 the lotteries grew, the numbers -- the illegal games 4 actually started using our numbers because those had so 5 much more credibility than anything they had done in the 6 past. 7 And I think over time, it is certainly 8 not eradicated, but I think it is materially diminished 9 and continues to be so just because of the good work 10 done by the regulatory agencies. 11 CHAIRMAN KRAUSE: What that sounds like, 12 to me, is a little bit like at the end of prohibition 13 when selling alcohol was illegal and then suddenly it 14 became legal. So here in Texas, we have our Texas 15 Alcoholic Beverage Commission. They took over, you 16 know, what had been illegal. 17 And so now it was legal, and so the 18 illegal sales of alcohol don't exist, but I agree it's, 19 you know, significantly diminished. And so what that 20 leads me to believe is that what we're doing here by 21 having a regulated game that is run well and honestly is 22 in the best interest of Texas as well as our children. 23 MR. CHAMBRELLO: Mr. Chairman, I couldn't 24 agree more. Integrity and credibility have been the 25 watch word of this lottery and all the lotteries in -- 15 1 that can't be -- that can't be under -- or overstated at 2 all. 3 CHAIRMAN KRAUSE: Thank you for coming 4 down and being with us. 5 MR. CHAMBRELLO: Great. Thank you very 6 much. 7 MR. LOWE: Thank you. 8 MR. GRIEF: Mr. Chairman, if I could just 9 interject one final thing. We strive to be the best, 10 but we also like to do business with the best. And to 11 that, I want to let the Commission know that Mr. Jay 12 Gendron just last week was elected to the Public Gaming 13 Lottery Industry Hall of Fame. 14 So we're very pleased that the gentleman 15 that has direct oversight of the Texas Lottery account 16 has been recognized by his peers all over the world as 17 one of the very best in the entire industry. 18 CHAIRMAN KRAUSE: Congratulations. 19 (Applause) 20 CHAIRMAN KRAUSE: Now that we've had our 21 excitement for the day, let's move on to mundane matters 22 and regulating bingo and running the lottery. 23 So anyway, we got Agenda Item No. 2. 24 Andy Marker, deputy general counsel's going to address 25 us. 16 1 MR. MARKER: Good morning, Commissioners. 2 I am happy to be the first of the mundane items. 3 Hopefully we can get through this item quickly. 4 Again, my name is Andy Marker. I'm 5 deputy general counsel. Today, staff is proposing the 6 amendments to the lottery procurement rules. The 7 purpose of the proposed amendments to Rule 401.101 is to 8 specify the agency will attempt to solicit at least two 9 Historically Underutilized Business vendors for 10 purchases and leases of goods and services over $5,000, 11 and for formal competitive solicitations where an 12 Invitation for Bids is used, the agency will award a 13 contract to the qualified bidder submitting the lowest 14 cost responsible bid meeting all specification and 15 providing best value for the agency. 16 Further, if only one response is received 17 to an Invitation for Bids, negotiations are allowed, 18 provided negotiations may not result in a material 19 change to the advertised specifications. These changes 20 are consistent with the Texas Comptroller of Public 21 Accounts procurement rules and the State of Texas 22 Contract Management Guide. 23 The purpose of the proposed amendments to 24 Rules 401.102 and 401.103 is to update the agency's 25 protest procedures to allow electronic filing of bid 17 1 protests. 2 The proposed amendments to Rule 401.101 3 would permit contract monitoring roles and 4 responsibilities to be performed by either agency 5 internal staff or pursuant to a delegation of authority 6 from the State Auditor's Office, an authorized agency 7 representative (including a contracted audit firm 8 selected following a formal competitive solicitation). 9 And finally, the staff is proposing 10 amendments to Rule 401.105. The proposed amendments 11 would revise the definition of "major procurement" to 12 include any formal procurement for goods or services 13 that directly supports the agency's core gaming business 14 function and has a cumulative contract value equal to or 15 greater than $10 million. 16 The amendments also add definitions for 17 "major contract" and "prime contract." Clarify the 18 approval process for amendments, renewals, and 19 extensions to major contracts and prime contracts; and 20 consistent with changes made by Senate Bill 20, provide 21 an enhanced contract monitoring of major contracts. 22 So the staff is recommending that the 23 commission initiate the rule-making process by 24 publishing the proposed amendments in the Texas Register 25 in order to receive public comments for a period of 30 18 1 days. I'd be happy to answer any questions. 2 CHAIRMAN KRAUSE: Commissioners? 3 MS. ARRIETA-CANDELARIA: I have one 4 question. 5 Thank you for your presentation. I have 6 just a quick thought. With regards to where only one 7 response is received to attend an invitation for bid 8 where negotiations are allowed and so forth, do we have 9 any kind of procedure where we reach out to other 10 providers or other vendors that we've done outreach to 11 as to why we didn't get enough other participants? 12 MR. MARKER: Yes. I believe the 13 administration division and person in the contracts 14 section does have a procedure so that in those instances 15 where we've conducted a formal competitive solicitation, 16 we've received only a single bid or no bids, that after 17 procurement's closed, they will reach out to prospective 18 vendors and find out what we could have done differently 19 to enhance -- or to receive more bids. 20 MS. ARRIETA-CANDELARIA: Great. Because, 21 you know, it could be timing, could be specifications 22 are restrictive, or there's just not enough competition. 23 So, great. Thank you so much. I'm glad to hear that. 24 CHAIRMAN KRAUSE: Other commissioners? 25 Mr. Marker, how long have you worked for 19 1 us? 2 MR. MARKER: I have been here since 3 January of 2003, so that would be 12 and a half years. 4 CHAIRMAN KRAUSE: Okay. So it's my 5 mistake to think that you were part of the Attorney 6 General's Office until recently. 7 MR. MARKER: No, sir. 8 CHAIRMAN KRAUSE: Okay. All right. Very 9 good. 10 Okay. I'm looking for a motion on 11 initiating rule-making process on these rule changes. 12 MS. ARRIETA-CANDELARIA: Move to approve. 13 MR. RIVERA: Second. 14 CHAIRMAN KRAUSE: All in favor, say 15 "aye." 16 COMMISSIONERS BOARD: Aye. 17 CHAIRMAN KRAUSE: Carries by acclimation. 18 No. 3. We do have a public comment on 19 that, and so at the end of our presentation, I'll 20 determine whether or not to do that, or it looks like 21 this person's willing to comment during the regular 22 public comments section. 23 So let's go ahead and start with 24 Ms. Rienstra. 25 MS. RIENSTRA: Yes, sir. Good morning, 20 1 Chairman, Commissioners. I'm Deanne Rienstra, assistant 2 general counsel. I am here again on -- let's see -- on 3 Powerball. The Multi-State Lottery Association has 4 adopted additional changes to the Powerball game rule. 5 However, these changes do not affect how the game is 6 played, but do require conforming changes to the 7 Powerball -- to the Texas Powerball game rule. 8 MUSL has implemented a Grand Prize Carry 9 Forward Pool with the intention to optimize MUSL's 10 ability to create new record Powerball jackpots, to 11 fully fund the prize reserve accounts, and to offer 12 players faster growing starting Powerball jackpots. The 13 anticipated implementation date is January 31, 2016. 14 Therefore, in your notebook is a draft of 15 those proposed amendments to 16 TAC, 401.317, Powerball 16 On-Line Game Rule to be published in the Texas Register. 17 The submission to the Texas Register will include a 18 notice of public hearing for November 4, 2015, at 19 11:00 a.m. Staff recommends initiating the rule-making 20 process with the publication in the Texas Register and 21 authorizing the executive director to make 22 nonsubstantive clarifying changes to the text prior to 23 submitting it to the Texas Register in order to conform 24 to the anticipated changes that MUSL may make before 25 publication. 21 1 Any questions? 2 MR. LOWE: Could I ask -- Mr. Grief, can 3 you just kind of comment on what we're doing here with 4 more explanation? 5 MR. GRIEF: Yes. Thank you, Commissioner 6 Lowe. 7 Yes. I would like to highlight a couple 8 of things that Deanne has mentioned to you all. The 9 goals of this program, this rule that we're putting 10 forth is to better fund our prize reserve accounts in 11 the MUSL organization, fully fund the starting jackpots 12 amount of $40 million as well, and also generate and 13 responsibly manage the inevitable roll to record 14 jackpots, including the $1 billion amount. 15 What we're asking you for today is out of 16 the ordinary. It is not typical of how we do 17 rule-making here. And in a perfect world, we would be 18 bringing you a finished and final product for you to 19 consider today. You would publish that for public 20 comment. You would come back and you would have the 21 opportunity to consider whether or not to adopt it. 22 This is the world of the Multi-State 23 Lottery Association. And although the Powerball game 24 group of which I'm the chair has voted on this matter 25 and has concluded it, there are still other committees 22 1 who are, for lack of a better description, wordsmithing 2 this rule. 3 There are nonsubstantive changes taking 4 place that either the finance or audit committees are 5 looking at. Those will probably continue to be made 6 this week as well. 7 So what my problem is, is to implement 8 that January 31st as the rest of the country has been so 9 inclined to do, I've got to somehow shoehorn that into 10 our rule-making process. So Deanne touched on it. I'd 11 like Bob to speak a little bit more about the special 12 permission that we're asking of the commission. 13 MR. BIARD: Thank you, Gary. For the 14 record, I'm Bob Biard, general counsel. Commissioners, 15 because this is a multijurisdictional game, the 16 Commission's rule has to mirror MUSL's rule for the 17 game. And as Gary explained, MUSL's still fine-tuning 18 the language as this meeting is occurring. 19 So in this particular situation, we'd 20 like to recommend and ask the Commission's permission to 21 not only start the rule-making process, but to authorize 22 the executive director to make nonsubstantive clarifying 23 changes to the text of the proposal that's in your 24 notebooks prior to submitting it to the Texas Register 25 in order to conform to the published proposal more 23 1 closely with MUSL's rule. 2 We don't anticipate MUSL changing any of 3 the basic concepts in the rule version that's in your 4 notebook. These changes, we anticipate, are primarily 5 for clarification or stylistic purposes. They don't 6 affect how the game is played. They have to do with the 7 details of how this newly created pool is going to be 8 managed. 9 And I'll also note that the lottery 10 act -- just as a side note, the lottery act actually 11 grants the executive director authority to propose 12 rules. Although, this has not been done, and that's not 13 what we're asking the Commission to authorize today. 14 In this instance, we'd still consider the 15 proposal to be made by the commissioners, but I think 16 the fact that the executive director has this authority, 17 you know, provides some additional support for this 18 recommendation, especially since the changes are only 19 going to be nonsubstantive. And of course we'd bring 20 the proposal back to the full Commission for adoption at 21 the December meeting. 22 MR. LOWE: So you're confident that we 23 have the authority to make this rule, this change? 24 MR. BIARD: Yes. 25 MR. LOWE: All right. And, Gary, could 24 1 you just expound a little bit more on the changes to the 2 pool, what's happening to the pool? 3 MR. GRIEF: In layman's terms, 4 Commissioner Lowe, as the jackpot reaches new and record 5 heights, the Powerball game group has voted to continue 6 a process that we already have in place of percentages 7 of sales rather than going to the jackpot prize, moving 8 to the reserve fund. As the jackpot grows ever larger, 9 a slightly larger percentage goes to the reserve fund. 10 Ultimately, what that does is slows down 11 the jackpot rolls. It also moves more money to our 12 currently underfunded reserve funds. For the player, 13 this is 100 percent transparent. The jackpot will be 14 paid at whatever the jackpot amount is advertised at. 15 So there is no player deception, player fraud, anything 16 of that nature in what we're proposing. In fact, as I 17 said, it's just a continuation on the extended basis of 18 what's already currently in place. 19 MR. LOWE: So as far as the reserve 20 pool -- I asked you this on the phone the other day. 21 Say, for instance, Illinois doesn't -- I don't know if 22 they've got their business together or not, but say they 23 don't pass a bill that allows the funding of the lottery 24 that goes in our pool. Do we have enough money there to 25 cover the winnings -- do we -- are we in good shape with 25 1 the pool? 2 MR. GRIEF: That would depend on what the 3 jackpot is at the time. Currently, now, if the jackpot 4 were, let's say, $250 million, throwing out a number, 5 no, we would not be able to cover that in a state as 6 large as Illinois where you go bad on that investment, 7 per se. Now, to that, I will say that Illinois, 8 although they are currently not paying prizes -- I 9 believe it's $25,000 or more -- they are making good on 10 any multistate game prizes, Powerball and Mega Millions. 11 MR. LOWE: Okay. Thank you. 12 MR. BIARD: And I'll just mention that we 13 have revised the approval memorandum in your notebooks 14 to incorporate approval for the executive director to 15 make these additional changes that I discussed. And 16 because we'll have to move -- we'll have about a 17 one-week delay in getting this proposal to the Texas 18 Register, we have moved the date of the public hearing 19 forward one week from November 4th. 20 MS. HEEG: Just to be clear, that if 21 there was a disagreement between the executive director 22 and the commission as to what is a nonsubstantive 23 change, this is going to be coming back to us in the 24 final rule so that -- 25 MR. BIARD: That's correct. 26 1 MS. HEEG: -- we can address it then. 2 MR. GRIEF: Let me just put on the 3 record, the executive director has no authority to adopt 4 rules. 5 MR. LOWE: Okay. 6 MR. GRIEF: No authority to adopt rules. 7 MR. LOWE: Chair, I'll move to -- 8 CHAIRMAN KRAUSE: Well, we do have a 9 public comment. Is there a public comment -- public 10 comment at this point in time? 11 MS. NETTLES: Thank you. For the record, 12 I'm Dawn Nettles. I'm Dawn Nettles with the Lotto 13 Report out of Dallas, and I do have some comments that I 14 want to make on this Powerball rule. 15 The multistate games -- Powerball and 16 Mega Millions -- their purpose is to build big jackpots 17 with all these states participating, and the larger the 18 jackpot, the greater the sales. Lotteries are supposed 19 to give 50 percent of sales back to the players. That's 20 what they base everything on, generally speaking. 21 In Powerball and multi -- and Mega 22 Millions, they do not do this. In fact, the greater the 23 sales, the less percentage that the players will 24 actually get. And with what Gary's talking about on 25 building reserve funds, this is reserve moneys that -- I 27 1 mean, a player is playing for $700 million. And he's 2 not really going to get everything that came in from 3 sales on those draws in that role. 4 I don't know if you-all understand that 5 or not or if I've made it real clear, but it doesn't 6 seem fair to the players. The players ought to see 7 their share. This rule says it's the parimutuel game. 8 "Parimutuel" means you take the percentage of sales, you 9 divide it by the winners. 10 I don't know for sure what this rule 11 says, but I know that the one you all just adopted had 12 conflicting language in it where it said it was a 13 parimutuel -- all prizes were parimutuel prizes with the 14 exception of some that were set prizes, the low-tier 15 prizes. 16 And then you rock along there, and then 17 finally it comes up and it says the jackpot prize is not 18 a parimutuel prize. It's a guaranteed prize. And Gary 19 just said it was a guaranteed prize. 20 So I just saw in here where it says it's 21 parimutuel, but he just said it was guaranteed. And I 22 don't know which it is. And I think the rule should be 23 very specific. Either the jackpot is a parimutuel prize 24 or it's a guarantee. 25 And I do oppose guaranteed prizes because 28 1 it hurts either the state or the players. The only fair 2 way to distribute the money is like the Cash Five game 3 that's run, where it's all parimutuel. You know, a set 4 percentage of sales. 5 Also, the rule doesn't say what it starts 6 at and how it rolls. And I think that information ought 7 to be in there. And on the reserve money, it says 8 "whatever the committee sets." I think the rule should 9 be specific on how much money is to be in reserve, how 10 much money Texas has to put in. And it does not do 11 that. It's very vague in that area. 12 So those are my comments. Maybe there's 13 an answer to the 40 million. Maybe it's roll in 14 10 million every time. I don't know. But I think it 15 ought to be in the rule, and it's not. 16 CHAIRMAN KRAUSE: Well, Ms. Nettles, 17 since this is going to public comment, then I'm assuming 18 that you're going to put these down in writing and 19 submit them during the period so that the staff can 20 understand precisely what your concern is. 21 MS. NETTLES: Yes, sir. I generally -- 22 yes, sir. I'll put it in writing. 23 CHAIRMAN KRAUSE: Thank you. 24 MS. NETTLES: Okay. Do you-all 25 understand, though, what I'm saying? 29 1 CHAIRMAN KRAUSE: Ma'am, we're going to 2 go ahead and just initiate the public process here of 3 rule-making. You're going to give your comments, and 4 then staff's going to be able to help us understand what 5 you're saying as a result of that. 6 MS. NETTLES: Okay. 7 CHAIRMAN KRAUSE: Yes, Commissioner? 8 MR. RIVERA: Thank you. Yeah. I'm 9 confident that we all fully comprehend everything 10 specifically that you're saying. I know that I do. 11 The question is really to Gary. So she 12 brings up a couple of points regarding, in the spirit of 13 transparency, the difference between parimutuel and 14 guaranteed. I'm confident that there's an answer for 15 that and that we can communicate that out to everyone in 16 the spirit of transparency and that there is, you know, 17 I'm sure, direction that you will be able to help with 18 on that. 19 MR. GRIEF: Yes, sir. 20 MR. RIVERA: So we'll look forward to 21 that in the future. 22 MR. GRIEF: Absolutely. 23 MR. RIVERA: So it will be addressed, and 24 we appreciate your coming to us. 25 MS. NETTLES: Thank you. 30 1 CHAIRMAN KRAUSE: Before I call for a 2 vote, let me just point out that our very touchstone is 3 an honest and fair -- running an honest and fair game. 4 So transparency is of the utmost importance to us. And 5 we wouldn't have the public comments if we didn't have 6 that. 7 And so anyway, I'm looking for a motion 8 to begin the -- to initiate the rule-making process on 9 this rule. 10 MR. LOWE: Move to approve. 11 CHAIRMAN KRAUSE: All right. Second? 12 MS. ARRIETA-CANDELARIA: Second. 13 CHAIRMAN KRAUSE: All right. All in 14 favor, say "aye." 15 COMMISSIONERS BOARD: Aye. 16 CHAIRMAN KRAUSE: Passed by acclamation. 17 MR. BIARD: Thank you, Commissioners. I 18 have two more memos for all these rule-making items. 19 CHAIRMAN KRAUSE: Reason why you're not 20 getting up is because you have the next item as well. 21 MS. RIENSTRA: Yes, sir. Okay. Let's 22 see. No. 4. Texas law currently allows a state agency 23 to make tuition reimbursement payments to agency 24 employees under certain circumstances. The 84th 25 Legislature made some revisions to the requirements 31 1 including mandatory rule-making by state agencies. 2 Each state agency is required to adopt 3 rules that, before tuition reimbursement payment may be 4 made, the employee must have satisfactorily completed 5 the course taken from an accredited institution of 6 higher learning and that the payment is approved by the 7 executive head of the state agency. 8 This commission has had a procedure in 9 place for the executive director to approve tuition 10 reimbursement payments already for a while. The 11 proposed draft of new Rule 16 TAC 403.700 will adopt the 12 substance of the agency's current procedure into rule 13 form. 14 The agency staff recommends that the 15 commission initiated the rule-making process by 16 publishing the proposed new rule in the Texas Register 17 in order to receive public comments for a period of 30 18 days. 19 Any questions? 20 MR. LOWE: What's the source of the 21 funding for the tuition reimbursement? 22 MS. RIENSTRA: The source of the funding? 23 MR. LOWE: Yes. 24 MS. RIENSTRA: The lottery-dedicated 25 account. 32 1 MR. LOWE: Do we have enough money to pay 2 tuition to anybody who wants to exercise this benefit? 3 MS. RIENSTRA: There are certain 4 eligibility requirements. 5 MR. LOWE: So if you're eligible, we have 6 enough money to pay for reimbursement? 7 MS. RIENSTRA: Yes. And it's a 8 first-come, first-serve basis. 9 MS. PYKA: Thank you, Commission. For 10 the record, my name is Kathy Pyka, controller at the 11 agency. We do have a budget that's included in human 12 resources' budget of $16,000 per fiscal year that we 13 have for this type of a reimbursement. 14 So as Deanne noted, it is on a 15 first-come, first-serve basis, and they have to have 16 their applications in for reimbursement by the end of 17 June. 18 MR. LOWE: Do we turn people down, then? 19 Do we usually have enough money? 20 MS. PYKA: We really haven't been in the 21 position to have to turn people down. 22 MR. LOWE: Okay. 23 MS. PYKA: So far, so good. 24 MR. LOWE: Well, I think it's a 25 fabulous -- and I applaud you for doing it. 33 1 MS. ARRIETA-CANDELARIA: I agree. I have 2 a question for you, Katheryn. 3 MS. PYKA: Yes. 4 MS. ARRIETA-CANDELARIA: Is there a cap 5 on how much you can get reimbursed? 6 MS. PYKA: $750 per employee. And that's 7 for the fiscal year. 8 MR. GRIEF: Right. Per year. $750 two 9 times, two semesters. 10 MS. PYKA: Right. 11 MR. GRIEF: 1,500. 12 MS. ARRIETA-CANDELARIA: Doesn't seem -- 13 and how many employees do we have? 14 MS. PYKA: We have just over 320 15 employees. And on average, I would say probably about 16 10 to 15 have participated in the program in years past. 17 MS. ARRIETA-CANDELARIA: Okay. Thank 18 you. 19 MS. PYKA: You're welcome. 20 CHAIRMAN KRAUSE: Other Commissioners, 21 questions? 22 All righty. We're going to begin 23 rule-making process on this as well. Do I hear a motion 24 to do so? 25 MS. HEEG: So move. 34 1 MS. ARRIETA-CANDELARIA: Second. 2 CHAIRMAN KRAUSE: All right. I'll call 3 for a vote. All in favor, say "aye." 4 COMMISSIONERS BOARD: Aye. 5 CHAIRMAN KRAUSE: All opposed? Hearing 6 none, it passes. 7 MS. RIENSTRA: Thank you. 8 CHAIRMAN KRAUSE: We now have 9 Mr. Fernandez for the next one, two, three, four. Don't 10 get stiff sitting there that long. 11 MR. FERNANDEZ: Thank you, Mr. Chairman. 12 Good morning, Commissioners. For the record, my name's 13 Mike Fernandez. I'm the director of administration. 14 I'll try to be brief on these items listed. 15 Item 5 in your packet is a briefing item 16 regarding two major contracts. However, we would like 17 to pass the first contract having to do with instant 18 ticket manufacturing and services. 19 The second item is to advise the 20 commission of staff's intent to amend our drawing studio 21 and production services contract for the installation 22 and ongoing support of broadcast equipment in our backup 23 and recovery site. 24 If you have any questions about that, I 25 will be happy to answer them. 35 1 CHAIRMAN KRAUSE: Questions, 2 Commissioners? 3 MR. LOWE: I'm good. 4 CHAIRMAN KRAUSE: All right. Next item, 5 please. 6 MR. FERNANDEZ: Item No. 6 is an action 7 item regarding internal audit services. Staff is 8 seeking commission guidance and/or approval to extend 9 the current audit services contract for a one-year 10 period. 11 If you have any questions, I'd be happy 12 to answer those. 13 CHAIRMAN KRAUSE: Do we have any 14 questions about that? 15 MS. HEEG: When we enter the audit 16 contract, is it a three-year contract? 17 MR. FERNANDEZ: No, ma'am. It was a 18 one-year contract with three one-year options. 19 MS. HEEG: Three one-year. 20 MR. FERNANDEZ: And really, the reason we 21 do that, Commissioner, is because we're required by 22 statute to seek delegated authority from the state 23 auditor's office. And we do that before bringing any -- 24 and certainly this particular contract before the 25 commission. 36 1 MS. HEEG: And are we on the third -- 2 MR. FERNANDEZ: This would be the 3 third -- yes, ma'am. So there would be one more 4 extension after this for 2017. 5 CHAIRMAN KRAUSE: Doesn't sound like we 6 have any interest at the moment of interfering with 7 that. So let's go to the next action. 8 MR. FERNANDEZ: So that will require a 9 vote of approval. 10 CHAIRMAN KRAUSE: To what -- to extend 11 this? 12 MR. FERNANDEZ: Yes, sir. 13 CHAIRMAN KRAUSE: All right. 14 MR. RIVERA: Move for approval. 15 MS. ARRIETA-CANDELARIA: Second. 16 CHAIRMAN KRAUSE: All in favor, say 17 "aye." 18 COMMISSIONERS BOARD: Aye. 19 CHAIRMAN KRAUSE: All oppose, "nay." 20 Carries. 21 MR. BIARD: Just to clarify, that's to 22 extend the contract for another one year. 23 MR. FERNANDEZ: One-year period. Yes, 24 sir. 25 Item No. 7 in your briefing book is also 37 1 a briefing item. And this is to advise the commission 2 of staff's intent to issue a solicitation and execute a 3 contract for lottery security study services. 4 If you have any questions regarding that, 5 I would be happy to answer those. 6 CHAIRMAN KRAUSE: Start on this side. 7 Commissioners? Commissioners? 8 All right. We have no questions. 9 MR. FERNANDEZ: And then lastly, Item 10 No. 8 is a briefing item. And this is for major, prime, 11 and operational contracts. By rule, we were required to 12 bring to the commission for information purposes all 13 agency contracts. And so you have attached in your 14 briefing book a listing of all our contracts. I have 15 with me this morning Toni Erickson who is our support 16 services manager. And all contracts run under her and 17 her team. 18 And I wanted you to put this name with a 19 face because Ms. Erickson and her team is really the 20 group that led the review of SP 20, which you heard 21 Mr. Marker address this morning, and has done a lot of 22 work on that in terms of identifying the appropriate 23 steps that we need to take over and above, which we have 24 in most -- thankfully most of those we have. But I 25 wanted you to see Ms. Erickson. 38 1 And if you have any questions about any 2 of this contract, she'd be happy to answer them, so... 3 CHAIRMAN KRAUSE: Commissioners? 4 MR. LOWE: So do we have performance 5 measures that you guys monitor periodically as far as 6 the contracts? 7 MS. ERICKSON: We don't have any 8 performance measures specific to contracts, no. 9 MR. LOWE: The other question I had with 10 regard to the case, which -- I don't have my glasses on, 11 but I think that's -- we're good here till how long? 12 MS. ERICKSON: 2020. May of 2020. 13 MR. LOWE: And it's a great location. So 14 is our landlord happy with us? 15 MS. ERICKSON: Yes. They are very happy 16 with us. They would like to see us stay even longer. 17 MR. LOWE: That's great. I think that's 18 the questions I have. 19 CHAIRMAN KRAUSE: All right. I think we 20 have no other questions. So thank you both very much 21 for keeping us in the know. 22 MR. FERNANDEZ: Thank you. 23 CHAIRMAN KRAUSE: Ms. Pyka. 24 MS. PYKA: Good morning, Commissioners. 25 My name is Kathy Pyka. I'm the controller for the 39 1 commission. With me to my right is admissions products 2 and drawings manager, Robert Tirloni. 3 Commissioners, this morning we'll be 4 presenting a year-end final fiscal year 2015 revenue and 5 sales data for you. And we'll begin the presentation 6 this morning with our revenue highlights. 7 Commission completed fiscal year 2015 8 with $1,242,000,000 in accrued revenue transfers to the 9 state. This is our highest revenue transfer in the 10 Texas Lottery Commission history. Breaking the previous 11 records set in 2014 -- and, Commissioners, it's our 12th 12 consecutive year we've exceeded the $1 billion mark in 13 revenue transfers. 14 This represents a 21 percent growth in 15 total revenue transfers since fiscal year 2011. And as 16 we look at that overall transfer amount, $1,225,000,000 17 went to the Foundation School Fund, which is an increase 18 of 20 -- $21 million or 1.8 percent in lottery 19 contributions to public education as we compare that to 20 the previous fiscal year. And that is also the largest 21 annual transfer to the foundation school fund in the 22 commission's history. 23 Additionally, of the total revenue 24 transfer, $13.1 million went directly to the Texas 25 Veterans Commission from the sale of scratch-off tickets 40 1 dedicated to the Fund for Veterans' Assistance. And 2 this is the largest annual transfer of the veterans fund 3 since we began selling scratch-off tickets dedicated to 4 that fund. 5 A few more records that we'd like to 6 highlight. We had also a record in the value of prizes 7 paid to our players with more than $2.9 billion won by 8 players. And this broke the previous record set in 9 2013. 10 Our retailers were paid more than 11 $248 million in commissions, bonus payments, and retail 12 or incentive payments. And this too was another record 13 for the commission. 14 Commissioners, we also conclude the 15 fiscal year with an administrative expenditure rate as a 16 percentage of lottery sales of 4.45 percent. And this 17 is one of the lowest administrative rates as compared to 18 other lotteries within the country. So that's a nice 19 summary over our revenue highlights. With that, we'll 20 move on to sales. 21 We ended the fiscal year with 22 $3.48 billion in scratch-off sales as noted in the -- on 23 the second orange column. This too is a new sales 24 record marking the best year of instant sales since we 25 began selling these tickets. This is a sales increase 41 1 of more than $200 million compared to last fiscal year. 2 And draw sales, as noted on the blue bar, 3 wrapped up with $1.05 billion. And this was $56 million 4 less than last fiscal year, as we've discussed in 5 previous commission meetings. The decline is due to the 6 lack of large jackpots as compared to fiscal year 2014. 7 As we look at both products combined, we 8 wrapped up the year with $4.53 billion in total sales. 9 That's an increase of $145 million over the last fiscal 10 year. And, again, that is an all-time sales record in 11 the history of the commission. 12 Moving to the next slide, this provides 13 an overview of the 23-year history scratch and draw 14 sales for the commission. Scratch sales are noted at 15 the orange bar, and our draw sales are noted at the blue 16 bar. We began with scratch sales in fiscal year 1992 17 with 591,000 in the first year of operations growing to 18 the 4.53 billion mark that we just discussed for fiscal 19 year 2015. 20 So with that, Robert, we'll now provide 21 an overview of detail sales from fiscal year 2015. 22 CHAIRMAN KRAUSE: Can we go back to that 23 last slide? 24 MS. PYKA: Certainly. 25 CHAIRMAN KRAUSE: Just to help our new 42 1 commissioners understand why there's a big dip there, 2 what occurred in 1998 that caused that? 3 MS. PYKA: Certainly. So in 1999, there 4 was a cap on -- well, actually for the '98/'99 biennium, 5 there was a cap of 52 percent placed on prize payout. 6 That was a legislative-mandated cap. The belief there, 7 as you look at the legislative history, was that if 8 there were a cap placed on the prizes, that would 9 provide for additional revenue to the State of Texas. 10 If we were to place the revenue chart 11 with this sales chart, you would see that there was a 12 tremendous decline in revenue to the State of Texas as 13 well. And so the cap was renewed to the next biennium. 14 And then there was a link placed on our advertising 15 budget to prize payout. That cap too was removed in 16 latter years. But, again, that is where we see that 17 decline in sales in those early years. 18 CHAIRMAN KRAUSE: So the way I heard it 19 is, is that when the legislature tries to fine-tune it, 20 then the players don't like it. 21 MS. PYKA: The players obviously did not 22 care for that prize payout cap, yes, sir. 23 CHAIRMAN KRAUSE: Thank you, ma'am. 24 MS. PYKA: You're welcome. 25 Yes, Commissioner. 43 1 MR. RIVERA: Can you expand what you 2 mentioned about advertising in the relationship? 3 MS. PYKA: Certainly. And so when they 4 lifted the cap on prize payout, at that point in time, 5 there was a belief that the advertising budget of the 6 commission should be tied to the commission's prize 7 payout. 8 So as our prize payout went up every -- 9 each percentage point, there was a corresponding decline 10 of $1 million tied to each percentage point of prize 11 payout. Thus, that's how we got to that base 12 $32 million appropriation for advertising in that time 13 period. 14 MR. RIVERA: Okay. And then what is it 15 now by comparison? 16 MS. PYKA: We're still in that 17 $32 million range. 18 MR. RIVERA: So in your -- what do you 19 think it would be if it were to increase? 20 MS. PYKA: If we were to apply the factor 21 of inflation to it -- I don't have that exact number off 22 the top of my head. I'm hoping that Michael Anger is 23 going to pop up any second, but -- 24 MR. GRIEF: Kathy, could I supplement 25 that -- 44 1 MS. PYKA: Sure. 2 MR. GRIEF: -- the commissioner's 3 question? 4 We had a study done by the Mays School of 5 Business at Texas A&M. And what they found was for 6 every dollar of advertising that we increased our 7 advertising budget by, that would yield approximately $7 8 in additional revenue to the Foundation School Fund. 9 CHAIRMAN KRAUSE: Okay. Not gross 10 revenue. We're talking net to the school fund? 11 MR. GRIEF: Bottom line net revenue. And 12 I'll just kind of supplement what Kathy said. When you 13 look back at what occurred in the day, that was a 14 compromise between members of the legislature who were 15 pro-lottery -- 16 CHAIRMAN KRAUSE: Right. 17 MR. GRIEF: -- and who were anti-lottery. 18 There are and were many members of the legislature who 19 don't feel like the lottery's an appropriate way for 20 state government to be funding itself. They feel like 21 any advertising for the lottery is a bad thing. 22 And then there are those who feel just 23 the opposite. And so when you hear some of the 24 restrictions that were put in place back in the '90s, 25 it's very counterintuitive. 45 1 If you really wanted the lottery to 2 receive and sell more product and gather more revenue 3 for good causes, you would increase the advertising 4 budget, you would have an unfettered cap on the amount 5 of prizes we would be able to pay as a percentage of 6 sales and let us optimize that rather than restrict it. 7 But that is the environment that we were in, and that's 8 the environment that we are in as well. 9 MR. RIVERA: Thank you. 10 MS. PYKA: And Michael is here to talk 11 about what that value would be. 12 MR. ANGER: Commissioners, for the 13 record, my name is Michael Anger. I'm the lottery 14 operations director. And just to add to what Kathy and 15 Gary explained about -- so our base appropriation for 16 advertising in the agency began back in 1992 was 17 $40 million a year. 18 And as Kathy referred to, we had the cap 19 put on price payout percentage, and then when the agency 20 was freed to increase the payout percentage again, by 21 the legislature, that $1 million cap was put in place. 22 And so that's looking out into the subsequent years. 23 So our price payout overall increased to 24 60 percent, which meant that we went from 52 to 25 60 percent overall. So we paid, if you will, an 46 1 $8 million penalty against the advertising budget. So 2 the advertising budget declined to $32 million. And 3 it's essentially stayed there since that time as far as 4 the base level of appropriation from the legislature. 5 In real dollars, inflation adjusted, you 6 know, our budget would be approximately based on that 7 $40 million budget we started with back in '93, I think 8 the last analysis we did for inflation adjustment. The 9 equivalent in today's dollars would be a little over 10 $56 million, to put that in perspective. But we stand 11 at 32 million today. 12 MR. RIVERA: Thank you. 13 CHAIRMAN KRAUSE: Thank you. 14 MS. PYKA: Actually, we have a little bit 15 more information on sales. Robert will now proceed. 16 MR. TIRLONI: For the record, Robert 17 Tirloni, products and drawings manager. 18 Commissioners, this next slide is the 19 fiscal year '15 totals compared to fiscal year '14 20 totals. As you can see and as we've looked at in the 21 past, the jackpot games are at the top in white. The 22 jackpot games had a deficit of almost $46 million in 23 fiscal '15. 24 As we've spoken about the last time we 25 met, the bulk of that decline is a result of a lack of 47 1 high jackpots, I should say, from the Mega Millions 2 game. That is causing almost $40 million decline in the 3 jackpot category. 4 Powerball was up in fiscal '15. We did 5 have some jackpots that contributed to that growth, but 6 as you've heard, as of yesterday, we are selling a new 7 version of that game with the hopes that we will 8 generate some large jackpots this fiscal year. 9 The blue in the center of the slide are 10 our daily games. All told, those are down just over 10 11 million. We -- you can see decline with the Pick 3 12 product. As we've also talked about, we believe Pick 3 13 players are moving to the Daily 4 product category. And 14 you can see the growth that we're experiencing there. 15 So the jackpot portion of the portfolio 16 is down just over $56 million. The instant game portion 17 or the scratch portion of the portfolio is up over 18 $200 million in fiscal '15. So we had an extremely 19 strong year for our scratch sales. And so all told, the 20 portfolio is up $145 million in fiscal '15 compared to 21 '14. 22 This just gives you a quick snapshot of 23 the $4.5 billion in sales broken down between the two 24 product categories. Scratch continues to be the 25 dominant category, bringing in almost 77 percent of our 48 1 total sales. 2 Draw continues to come in at just over a 3 billion at about 23 percent of the total. This is -- 4 scratch is a little higher in '15, but this is not 5 really a big departure from what we've seen from year to 6 year. 7 This next pie chart are our draw games. 8 This represents just over $1 billion in draw game sales 9 for the year. The add-on games or the add-on features 10 are included with the base game. So, for example, when 11 you see Powerball sales of 227 million, that includes 12 the add-on feature of Power Play. 13 Many people are surprised to learn about 14 this, but Pick 3, a non-jackpot game, is our best 15 selling game for fiscal '15, followed by Powerball and 16 then followed by Mega millions. 17 Lotto Texas, the very first draw game 18 ever introduced in Texas, comes in fourth at about 19 $143 million for the year. And then the rest of the 20 products are niche products, round out the rest of that 21 $1 billion in sales. 22 This is our instant or scratch sales 23 broken down by price point for the fiscal year. So this 24 represents almost $3 and a half billion in scratch 25 sales. 49 1 I believe we showed you this last time 2 you were here, but this is the summary now for the 3 entire year. The 5 continues to be our best selling 4 price point, followed by the 10, and then the 20. The 2 5 and the 3 are pretty much neck and neck. And then the 6 50 and the $1 price points round out this portion of the 7 portfolio. 8 The last slide we have for you today is 9 just the top 15 selling scratch games for the fiscal 10 year. The -- probably the big notes or the big 11 takeaways from this slide are some of our new 12 initiatives. 13 Our super ticket was a brand-new 14 initiative for us, as was our holiday game book. We 15 will be repeating those this year with some tweaks. You 16 see a lot of 10s and 20s. These are growing price 17 points for us here in Texas. Almost every price point 18 is represented by these top 15 best selling games except 19 our 1s and our 2s, which are introductory starting price 20 points for the scratch category. 21 That's the end of the revenue and sales 22 presentation. We're happy to answer any questions. 23 CHAIRMAN KRAUSE: Commissioners? 24 MR. LOWE: The new game we have that's 25 going now is -- help me out. 50 1 MR. TIRLONI: Yes, sir. Texas Triple 2 Chance? 3 MR. LOWE: Triple Chance. Because that, 4 I noticed, we really are advertising a lot. 5 MR. TIRLONI: Yes, sir. 6 MR. LOWE: Not as much as FanDuel and -- 7 what's the other one? 8 MR. TIRLONI: Our budget's not big enough 9 to do that. 10 MR. LOWE: So are you seeing an impact 11 with advertising -- I think it's only been a couple of 12 weeks, right? 13 MR. TIRLONI: It's been exactly one week. 14 So we started sales on September 27th. So it's been 15 exactly -- yesterday was exactly a week. We're seeing 16 about $100,000 a day in Texas Triple Chance sales. 17 MR. LOWE: Is that what you expected 18 based on the advertising? 19 MR. TIRLONI: I believe we're happy with 20 the sales that we're seeing for such a brand-new game, 21 yes. Yes. 22 So that advertising will continue for the 23 next few weeks. We also have a refresh plan for the 24 spring. We have a lot of other initiatives coming to 25 support Triple Chance. We've got retail incentive 51 1 programs going on right now. We have clerk incentives. 2 We're going to be running a player promotion. So 3 there's a kind of full court press for that game as it's 4 the first Texas -- the first new Texas-based draw game 5 we've introduced in about three or four years. 6 MR. LOWE: Okay. Thank you. 7 MR. TIRLONI: But yes, we're very happy 8 with the way the game has started. 9 CHAIRMAN KRAUSE: Questions, 10 Commissioners? 11 Thank you. 12 MS. PYKA: So the next item. 13 CHAIRMAN KRAUSE: Yes, ma'am. 14 MS. PYKA: We'll make it quick because 15 we've already provided an overview of the fiscal year 16 '15 result. The only other thing that I wanted to share 17 is that following those results, we have now provided 18 the Foundation School Fund cumulative transfers of 19 $18.3 billion. 20 I'd be happy to answer any other 21 questions that you might have. 22 CHAIRMAN KRAUSE: Commissioners? 23 Thank you. We're going to take up one 24 more item before I call a break. And so we're going to 25 hear from Darlene Brown. 52 1 MS. BROWN: Good morning, Commissioners. 2 I'm Darlene Brown, internal auditor. I have two items 3 for you today. One is our regular status report. 4 So since we met last time, we are now 5 winding down the activities that we have going on in the 6 bingo division. And then we also observed the annual 7 end-of-year inventory process for your scratch tickets 8 at the warehouse. I'm going to say that was very 9 interesting and very good to see. 10 Most times when, as auditors, we observe 11 an inventory taking and the client will just make 12 adjustments for if they can't locate inventory. In this 13 instance, this is not the case. We observed if the 14 staff taking the inventory were not able to locate a 15 pack of tickets, they were made to go back through that 16 whole warehouse and open boxes to locate those tickets 17 until they were found. So that was very positive 18 control that you have there. 19 The other thing we did is we started -- 20 we also resumed the procure-to-pay audit, and we intend 21 to finish that one next period. 22 So that's the status report. If you have 23 any questions, I'll be happy to answer them. 24 CHAIRMAN KRAUSE: Commissioners? Hearing 25 none, please continue. 53 1 MS. BROWN: Okay. The next item is an 2 action item. And it's the annual internal audit report. 3 This report is required by the Texas Internal Auditing 4 Act to be completed once a year. All the items in this 5 report are standard in requirement sections. What 6 happens is we recapture everything that we completed for 7 the 2015 year. And in this instance, we completed one 8 audit and worked with the bingo activities. It also 9 summarizes what we plan on doing for next year in the 10 external audit services that were provided and obtained. 11 In doing the -- preparing this report, I 12 noted that two items that we presented in your annual 13 internal audit report that you approved last commission 14 meeting had incorrect dates due to clerical errors. 15 These are minor. 16 One was to update the risk assessment, 17 what you approved said for 2014, but it's really for 18 2016; and then the annual audit report said for 2014, 19 it's really for 2016. So I'm asking for your permission 20 to correct those dates on the document that we published 21 on the Web, and then also ask you for approval for the 22 internal audit report. 23 CHAIRMAN KRAUSE: Commissioners, 24 questions? 25 MS. HEEG: How do you go about 54 1 determining the priorities for the commissioners audit? 2 MS. BROWN: We completed the risk 3 assessment, and we met with management, and we updated 4 the -- the balance sheet based on things that had 5 changed. The prior year, we had did a comprehensive 6 risk assessment where we completed a survey, and so -- 7 to -- a three-year audit plan. Because we were not able 8 to complete all the audits that were on last year's 9 audit plan, we rolled those into -- as priority for this 10 year's audit. 11 CHAIRMAN KRAUSE: Do I hear a motion to 12 allow the correction of the report that's going to be 13 posted on the Web and then acceptance of the annual 14 internal audit report? 15 MR. LOWE: So move. 16 CHAIRMAN KRAUSE: Okay. Do I have a 17 second? 18 MS. HEEG: Second. 19 CHAIRMAN KRAUSE: All right. I'll call 20 for a vote. All in favor, say "aye." 21 COMMISSIONERS BOARD: Aye. 22 CHAIRMAN KRAUSE: All opposed? Hearing 23 no opposition, noting that I've got one commissioner 24 absent, it passes. 25 We're going to take a 55 1 seven-and-a-half-minute break so it will last for ten 2 minutes. So we are temporarily adjourned. 3 (Recess taken) 4 CHAIRMAN KRAUSE: Commission's back in 5 session. And we are now down to directer reports. 6 Mr. Royal. 7 MR. ROYAL: Morning, Commissioners. I'd 8 like to highlight the annual audit plan for this 9 assessment which were prepared in consideration of House 10 Bill 2197, the agency's Sunset legislation. Our goal is 11 to audit the highest risk licensees within a five-year 12 timeframe and conduct game inspections every three 13 years. 14 The following risk factors were used: 15 gross receipts, expenses, net proceeds, and charitable 16 distributions as a percentage of gross receipts, gross 17 receipts reported for playing location, and time lapsed 18 since the last audit -- game inspection as well as 19 compliance history. 20 The results of the risk assessment and 21 resource allocation revealed a projection of 120 audits 22 and 188 game inspections which translates into 6 percent 23 coverage of all active licensees, 21 percent coverage of 24 licensees audited within the last five years, and a 25 50 percent coverage of all game locations. This plan is 56 1 as of September 1st, we will be revising it -- 2 revisiting it in about six months. 3 Any questions on the audit plan? 4 Moving forward to my assessment of the 5 division that I reported almost a year ago, we worked 6 tremendously hard to resolve backlogs. And we're just 7 about done. I'm truly pleased with the progress we've 8 made. Originally reported as 739 pending applications 9 including 181 that were over 100 days old, a far distant 10 from our targeted turnaround time of 40 days on renewal 11 applications and 60 days on original applications, both, 12 again, which I believe is too long. 13 We are currently processing applications 14 received in June and have 80 applications that are over 15 30 days old. I believe we will have those resolved in 16 the next two to three weeks and we will no longer have 17 backlogs. 18 Audit activities have decreased from 153 19 to six, with all six in various stages of completion and 20 expected to be finalized in the next few weeks. We 21 continue to remain current with compliance activity and 22 bingo pull tab testing. The bingo account ledger 23 project is in its final stages with account statements 24 and invoices being mailed to licensees once the 25 reconciling items have been entered into the bingo 57 1 operating services system. 2 Thus far, 17 licensees have been notified 3 of their -- of completion of their account review. We 4 anticipate completing all 1,400 active accounts by 5 April 2016. 6 At the August meeting, you-all authorized 7 a 60-day comment period for the comprehensive rule 8 review. That clock began September 11th and ends 9 November 10th. Our stakeholder rule-making work group 10 will convene shortly thereafter once we sort through all 11 the comments. 12 Again, the stakeholder work group will be 13 for the purpose of getting industry input into drafts of 14 rule revisions, additions, deletions, or any new rule 15 drafts that may arise from submitting comments. 16 Finally, we began our statewide bingo 17 training initiative last month. That training covers 18 material from audit, accounting, and reporting bingo 19 operations, and licensing including the bingo services 20 portal. We had 87 bingo operators in attendance. 21 Feedback was all positive and very receptive to us doing 22 that. The next training will occur October 20th in 23 Arlington. 24 Commissioners, that concludes my report. 25 CHAIRMAN KRAUSE: Question: The bingo 58 1 work group, is that distinguished from the bingo 2 advisory group? 3 MR. ROYAL: Yes, sir, it is. That is -- 4 CHAIRMAN KRAUSE: Thank you. That's all 5 I wanted to know. 6 Other Commissioners? I apologize for 7 jumping in there. Questions or comments? 8 MS. ARRIETA-CANDELARIA: I had a comment 9 with regards to the training. Do we also offer online 10 training? 11 MR. ROYAL: Right now there is a 12 required -- statutory required bingo chairperson 13 training that occurs every two years. That training is 14 online. 15 MS. ARRIETA-CANDELARIA: Okay. Because I 16 think one of the things that I would like to see is 17 particularly with -- we look at violations, and one of 18 the things that could be cited was the lack of 19 knowledge. And I think that we need to offer more 20 training and give people an opportunity to be trained. 21 And one of the ways that, you know, it's 22 going is online. And so these trainings that we have 23 rather than having people absorb the cost of having to 24 come to a training, particularly like coming from 25 El Paso, is -- is not only the time, but the cost 59 1 associated with being here or having to go to Arlington 2 for training. I think we should offer a Webinar online. 3 MR. ROYAL: Commissioner, I think that's 4 an excellent idea. These trainings that we're presently 5 doing, they're regionalized. So for those folks in El 6 Paso, there will be an Odessa training that will be 7 occurring in November. And then we'll travel also in 8 November to San Antonio and Houston in December. But I 9 couldn't agree with you more. The emphasis on 10 education, having voluntary compliance come through 11 education, I think it's the perfect scenario for us. 12 MS. ARRIETA-CANDELARIA: So maybe what we 13 need to do is also ask for that in the budget for next 14 year. I mean the actual development of a online program 15 so that we can have that access through our portal, and 16 then you would get a certificate. 17 Right now we have -- we're required to 18 have training through our open records request training. 19 And so we get a certificate at the very end of the 20 training. They can -- they can utilize that and submit 21 it. And then we have some documentation to identify 22 those people that have been training so that they can -- 23 so that we could also have additional support when we go 24 to these hearings and pose certain penalties and/or 25 other sanctions. 60 1 I really think that that's important to 2 do that. So if we could look to next year for maybe 3 putting it in the budget -- I don't know how much it 4 would cost. I can't imagine it would cost that much. 5 MR. ROYAL: We'll definitely look into 6 that. Thank you. 7 MR. LOWE: Do you have a list of dates 8 that you published on our website as far as where -- 9 when you go to different places? You have a list of 10 dates? 11 MR. ROYAL: We have the months that the 12 training will occur, but not the dates, because we're 13 still having -- identifying locations. 14 MR. LOWE: Okay. 15 MR. ROYAL: Typically, the licensees, 16 they have about three to four weeks lead time in to make 17 travel arrangements when we provide them with those 18 dates. 19 MR. LOWE: And so did you feel 20 comfortable with the turnout that you had -- how many 21 people did you say? 22 MR. ROYAL: We had 87 people that 23 actually came out. And this was actually a phenomenal 24 turnout for us. 25 MR. LOWE: Well, is there any thought to 61 1 making some sort of CLE mandatory for bingo operators? 2 MR. ROYAL: The bingo chairperson 3 training is the only required course that they have to 4 take by statute. That's every two years. And that -- 5 again, that is online. 6 This training for us provides us an 7 opportunity for -- to, so to speak, mend fences over the 8 years, create a presence of showing that we are there in 9 support to showcase our bingo services portal that's 10 available, since this is actually new for our licensees. 11 They've never had the opportunity to have a true online 12 submission system for them. 13 MR. LOWE: Okay. Thanks. 14 CHAIRMAN KRAUSE: Commissioners down this 15 way? 16 Mr. Royal, thank you for all you do for 17 us. 18 MR. LOWE: Absolutely. 19 MR. ROYAL: Great team effort. Thank 20 you, Commissioners. 21 CHAIRMAN KRAUSE: Mr. Grief. 22 MR. GRIEF: Commissioners, other than 23 what's in your notebook, I have just a couple of items 24 to comment on this morning. 25 First, I wanted to highlight again the 62 1 annual conference of the North American Association of 2 State and Potential Lotteries that's going to be taking 3 place next week in Dallas. Texas Lottery is the proud 4 host of that event. This is one of the largest gaming 5 conferences in the world. And we're very proud to be 6 hosting it this year. 7 As I've said before, we expect more than 8 1,000 attendees to be there in Dallas for the 9 conference. The economic impact on Dallas will be in 10 excess of $2 million. Our staff has been incredibly 11 busy working side by side with staff from NASPL to cover 12 every detail that's required for this size of the 13 conference. 14 In particular, Rene McCoy, who is in our 15 lottery operations division, and Casey Austin, who is in 16 our office of the controller, those are the two ladies 17 who I appointed as cochairs of this event, and they have 18 done yeoman's work in getting us ready for this very, 19 very large conference. 20 We've got a great lineup of keynote 21 speakers. We have a number of breakout sessions in the 22 educational track. And we anticipate having the largest 23 vendor trade show in the history of NASPL conference. 24 Some of our commissioners I know are 25 going to be in attendance. And I know that this is 63 1 going to be an event that you will be very proud of. 2 Next item I want to let the commission 3 know about is that John Shaw, our human resources 4 director and a state employee for 40 years, has retired. 5 And we wish John the very best in his retirement. And 6 Eliza Ortega -- I'll ask Eliza to stand. She is a 7 longtime member of our human resources department. She 8 has graciously stepped up and accepted my appointment as 9 the acting human resources director. 10 We now have a job posting out for that 11 position, and I anticipate a very strong candidate who 12 will -- to emerge once I start beginning to see the 13 applications. 14 Commissioners, the last item I want to 15 share with you involves what you've heard about already 16 today, the new sales and revenue records lottery. As 17 the commission knows, here in Texas, we have a very 18 small universe of lottery products that we offer for 19 sale. Unlike many other states that have keynote, 20 Internet lottery, or video lottery as well, we operate 21 within the strict parameters of our statute, which calls 22 for just scratch tickets and draw games. 23 So understanding that, my expectations 24 are very high for innovation within those two product 25 groups. And you saw today in Kathy and Robert's 64 1 presentation some of the positive results of that 2 innovation within those product groups. Those same high 3 expectations are in place for IGT, our lottery operator. 4 They're also in place for the three 5 companies that print our scratch products: IGT 6 Printing, Pollard, and Scientific Games. And those 7 expectations extend also to our advertising vendor, 8 which is LatinWorks. 9 To achieve the outstanding results that 10 you heard about today, it requires all of those teams to 11 come together and work as a cohesive unit in order to 12 make sure that we have the right products in the right 13 quantities, the right place at the right time out in the 14 retail environment. 15 You've heard me say in past, either 16 commission meetings or presentations, that the Texas 17 Lottery is truly a for-profit business operated by state 18 government for the benefit of public education, fund for 19 veterans assistance, and other good causes. That 20 statement is illustrated perfectly in the way these 21 multiple business components come together and generate 22 the results that you heard about today. 23 I'm extremely proud of the entire team, 24 both our staff and all of our vendors working together. 25 But all that said, fiscal year '16 has already kicked 65 1 off, and the expectations for even greater results are 2 already in play. And we're striving to meet that as 3 well. That concludes my comments for you today, 4 Commissioners. 5 Mr. Chairman, I'd be happy to answer any 6 questions. 7 CHAIRMAN KRAUSE: Commissioners, we have 8 questions for Mr. Grief? 9 All righty. We now move to Bob Biard. 10 MR. BIARD: Thank you, Commissioners. 11 Item 14 are the enforcement orders. Item 14 contains 12 four lottery and bingo cases, tabs A through D. These 13 are cases where commission staff found a violation of 14 the statute or rule, and either the licensee failed to 15 appear at the hearing so it proceeds by default, or the 16 staff and the licensee reached a settlement. 17 I'll briefly describe the cases, and you 18 can take them up in single vote if you'd like, and if 19 you approve of the proposed resolution. Tabs A and B 20 are nonsufficient fund lottery retailer license 21 revocations. And these are handled in a single order. 22 Each case was presented at the State 23 Office of Administrative Hearings for revocation of the 24 retailer's license on the grounds that the licensee 25 failed to have sufficient funds in a bank account to 66 1 cover electronic fund transfers to the lottery 2 commission's account. 3 In each case, the judge recommends 4 revocation, and staff recommends that you vote to 5 approve the order, in each case revoking the license. 6 Tabs C and D are bingo agreed orders. 7 These are settlements. These are cases where commercial 8 lessors who lease space to conduct bingo allowed gaming 9 machines to be played during a bingo occasion. The 10 Bingo Act and the commission's rules prohibit any game 11 of chance other than bingo, charitable bingo, or 12 charitable raffle to be conducted or allowed during a 13 bingo occasion. A bingo occasion generally has a set 14 start time and end time. The extent of the 15 commissioner's jurisdiction is enforcing the prohibition 16 against other games of chance occurring during a bingo 17 occasion. 18 In these cases, the gaming machines 19 awarded tickets or coupons that can be exchanged at the 20 bingo hall during a bingo occasion for entry into a game 21 or for bingo products such as card money devices. This 22 exchange is where the player receives their prize in the 23 unauthorized game. 24 Tab C is for P&W Enterprise in Fort 25 Worth, in this case, the lessor allowed the operation 67 1 for 38 gaming machines. Town & Country Bingo Hall that 2 awarded tickets that could be exchanged for bingo 3 products during a bingo occasion. The lessors 4 represented that the machines had been removed from the 5 hall. Staff has assessed an administrative penalty of 6 $22,800. 7 Tab D is for Polytechnic Mainstreet 8 Project, Incorporated of Everman, which is in Tarrant 9 County. In this case, the lessor allowed the operation 10 of 23 gaming machines at the Everman Bingo Hall and has 11 represented that the machines have now been removed from 12 the hall. Staff assessed an administrative penalty of 13 $13,800. 14 In both of these cases, the bingo 15 director has agreed to suspend the penalty if the 16 licensee complies with all the terms of the agreed order 17 for a period of three years. Those terms include not 18 allowing other games of chance to be played during a 19 bingo occasion, and taking action to evict and terminate 20 the leases of bingo conductors who cannot comply with 21 this restriction. 22 That concludes my presentation. And if 23 you approve the proposed resolution of these cases, you 24 may take them up in a single motion and vote. 25 MR. LOWE: I guess it's -- go ahead. 68 1 CHAIRMAN KRAUSE: Well, we have one 2 person who has indicated that they'd like to testify. 3 Mr. Fenoglio, if he still wants to. 4 MR. FENOGLIO: Mr. Chairman and 5 Commissioners, my name is Stephen Fenoglio. I filled 6 that out in case there were questions. I was informed 7 by your staff that I can't even get up to speak unless I 8 fill out the form. So I don't intend to make a 9 presentation unless there are questions. I represent 10 the respondent. 11 CHAIRMAN KRAUSE: Do we have questions? 12 MS. ARRIETA-CANDELARIA: I have one 13 question. 14 CHAIRMAN KRAUSE: For Mr. Fenoglio? 15 MS. ARRIETA-CANDELARIA: No, no. I have 16 one question for staff. 17 CHAIRMAN KRAUSE: Why don't you just stay 18 there and then... 19 MS. ARRIETA-CANDELARIA: With regards to 20 Item No. D -- and this is going back. Did I read 21 correctly, then, on the Polytechnic Mainstreet 22 Project -- on that one, it goes back to 2012. Does it 23 normally take that long? Because then 2012 and then we 24 have three years to -- we have then three years to then 25 impose sanctions. So the other one is more immediate. 69 1 Was there a particular issue in this one that goes back 2 three years? 3 MR. ROYAL: Commissioner, those are -- 4 that's an excellent question. And those are part of the 5 backlog of items that I spoke about. 6 MS. ARRIETA-CANDELARIA: Okay. 7 MR. ROYAL: That would be one on the 8 compliance activity where when I walked through the door 9 here a little over a year ago, I was faced with a stack 10 of these that would just -- no action had been taken 11 upon. 12 MS. ARRIETA-CANDELARIA: Okay. So in the 13 interim, the company's not allowed to do any business? 14 MR. ROYAL: They were allowed to -- their 15 license was still active. They were allowed to continue 16 operation, but they had the knowledge that the practices 17 which they were performing in their bingo hall were 18 contrary to the division -- commissioners division. 19 MS. ARRIETA-CANDELARIA: Okay. 20 Understood. Thank you so much. I just wonder -- I 21 thought that was a typo or something, but okay. Thank 22 you so much. 23 MR. LOWE: So, Alfonso, were these 38 24 machines -- were they -- what were they doing? Were 25 they paying out cash or paying the prizes in bingo? 70 1 MR. ROYAL: They were not paying out 2 cash. What they were doing is they were allowing the 3 winners -- part of the prizes was an exchange of a bingo 4 product as part of the win. So in other words, they can 5 allow -- you know, patron would win, and then they could 6 gain entry into a bingo game rather than paying for 7 entry into a bingo game with cash, with currency. 8 MR. LOWE: How many times did our 9 investigators go in? 10 MR. ROYAL: This was discovered during a 11 audit by one of our game inspectors, so this was during 12 a random game audit. 13 MR. LOWE: So did we actually lay eyes on 14 the machines? 15 MR. ROYAL: We have eyes on the machines. 16 We took photos of the machines. 17 MR. LOWE: Well, because I'm willing to 18 bet you, since this is a gambling arena, that they were 19 paying cash too. And these machines can generate about 20 $2,000 each per week in the right spots. And so, you 21 know -- and I'm -- I'm going to -- as far as the fine, I 22 think that if we're going to assess a fine, I have 23 issues with probating or suspended a fine, especially 24 when I know that they're making that kind of money on 25 these machines. 71 1 I know that they are customers, but they 2 need to play -- they need to play by the rules. And the 3 message that I want to send to them is that -- I mean, I 4 know you've negotiated these things, and I'm going to 5 vote no in the future if somebody says, "I want my fine 6 suspended." 7 So that -- I'm going to vote no from this 8 day forward if you suspend any more fines. I don't -- 9 they're just making too much money off these machines 10 for us to say, "Oh, yeah. You promise you're going to 11 be good tomorrow." So that's -- that's kind of my 12 thought. I'm sorry to be the broken record again, but 13 that's where I am. 14 CHAIRMAN KRAUSE: We don't have to 15 approve their recommendation. 16 MR. LOWE: Well, Alfonso's negotiated 17 this, and their counsel is here. It's hard. I want our 18 folks to know that I have confidence in their 19 decision-making. I don't want to second-guess them. I 20 really don't want to at this point in time. 21 I'm just saying in the future -- I know 22 these things -- that they're making a pile of money 23 using these machine, not just in the bingo halls, but in 24 our retailers that have -- have sweepstakes and 25 8-liners, and they're paying lottery tickets for the 72 1 winning. 2 So if we -- if we're catching them, we're 3 not going to probate any more fines. That's the way I'm 4 voting. I don't want to presuppose anybody else. 5 MS. ARRIETA-CANDELARIA: And I think that 6 that's why it's so important that the issue that I 7 raised earlier -- and that's the training component. 8 That if you train them, you put out that information, 9 they go through the training process, they acknowledge 10 that they received a training, they understand that 11 they're going to have a penalty that's associated 12 with -- and I understand the backlog and everything 13 else, how it's -- how that has led us to where we are 14 today, but I think that we need to communicate what are 15 the -- what are the sanctions that occur if you violate 16 these penalty? 17 Negotiations and everything aside, I 18 think that people need to understand that, and I think 19 that if they violate, they're going to be assessed a 20 penalty. 21 MR. ROYAL: Commissioner, I couldn't 22 agree with you more. The education-promoted voluntary 23 compliance is the method, which was why I originally 24 negotiated these in this manner. 25 Going back, having faced that, our 73 1 auditors are not seeing near as many. I don't think in 2 the past we've seen in the last six, seven months, the 3 past year, we haven't seen any gaming machines where 4 they're exchanging bingo coupons. 5 And part of that has to do with the 6 strong compliance and education message through a 7 director's message that was created when I arrived here 8 through the constant trainings that are out there that 9 we're getting voluntary compliance because I took the 10 approach that maybe they just didn't know. 11 MS. ARRIETA-CANDELARIA: Right. I agree. 12 CHAIRMAN KRAUSE: Any more questions, 13 Commissioners? 14 MS. HEEG: I have a question. So if we 15 move respectively towards trying to impose the 16 penalties, have you thought through what are the 17 ramifications in doing that? So presumably, people come 18 to the table and negotiate these settlements. Our goal 19 is to get them into compliance, and they may come to the 20 table because you're not having them pay a penalty. 21 What happens in the case where they don't come to the 22 table because they don't want to pay a penalty and they 23 fight us? 24 MR. BIARD: That would be a case where it 25 would go to the State Office of Administrative Hearings. 74 1 And the agency has full authority to -- revocation of 2 the bingo license, and they could not -- so they could 3 not operate the bingo hall. 4 MS. HEEG: Could that process drag out so 5 in the meantime, they are operating the same way? How 6 long does that process take? 7 MR. BIARD: It can take -- I mean, it can 8 take a number of months. 9 MS. HEEG: Not years. I just -- I am not 10 opposed philosophically at all. I think if they 11 violated the law, they should be penalized. I just 12 wanted to make sure that we think through the 13 consequences of those decisions. So I look forward to 14 hearing your thoughts on that. 15 CHAIRMAN KRAUSE: Mr. Fenoglio, thank 16 you. 17 MR. FENOGLIO: Thank you. 18 CHAIRMAN KRAUSE: So we've got action 19 item, and I believe we have the opportunity for a motion 20 to approve staff's recommendation on all four of these. 21 MS. ARRIETA-CANDELARIA: So move. 22 CHAIRMAN KRAUSE: Second? 23 MS. HEEG: Second. 24 CHAIRMAN KRAUSE: All in favor, say 25 "aye." 75 1 COMMISSIONERS BOARD: Aye. 2 CHAIRMAN KRAUSE: None opposed? Staff's 3 recommendation adopted. 4 Commissioners, this concludes the 5 business portion of our meeting. We are going into 6 executive session. Everybody's already commented. 7 Although, I'd be happy to open it up for public comment 8 if somebody -- hearing none, on my own motion, we're 9 going into executive session at 12 till 12:00. 10 (Executive Session from 11:38 a.m. to 11 12:42 p.m.) 12 CHAIRMAN KRAUSE: We are out of executive 13 session. It is 12:42. And Robert, I believe we have a 14 motion. 15 MR. RIVERA: Yes. I move that the 16 commissioner request the governor and the Legislative 17 Budget Board to approve the setting of a salary rate for 18 the executive director position at an amount not to 19 exceed $227,038 pursuant to Section 3.04, Article 9, of 20 the General Appropriations Act to be paid utilizing 21 general revenue dedicated to Lottery Account No. 5025 22 funding. 23 CHAIRMAN KRAUSE: Second? 24 MS. ARRIETA-CANDELARIA: Second. 25 CHAIRMAN KRAUSE: All in favor, say 76 1 "aye." 2 COMMISSIONERS BOARD: Aye. 3 CHAIRMAN KRAUSE: All opposed? Hearing 4 no opposition, carries. 5 And on my own motion, I move that we 6 adjourn. 7 MR. RIVERA: Second. 8 CHAIRMAN KRAUSE: All right. We're 9 adjourned at 12:43. 10 (Proceedings adjourned.) 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 77 1 STATE OF TEXAS) 2 **************************** 3 REPORTER'S CERTIFICATE 4 **************************** 5 I, HEIDI MORRISON, CSR, RPR, Certified Shorthand 6 Reporter in and for the State of Texas, do hereby 7 certify that the above and foregoing contains a true and 8 correct transcription of all portions of the 9 above-referenced meeting to be included in the 10 transcript of said meeting, and were reported by me to 11 the best of my ability. 12 SUBSCRIBED AND SWORN TO under my hand and seal of 13 office on this the ____ day of _______________, ____. 14 15 16 17 18 19 20 21 ______________________________ 22 HEIDI MORRISON, Texas CSR 9262 Expiration Date: 12/31/2015 23 Kim Tindall & Associates 16414 San Pedro Avenue, Suite #900 24 San Antonio, Texas 78232 (210) 697-3400 25