1 1 2 3 4 5 TEXAS LOTTERY COMMISSION 6 7 8 COMMISSION MEETING 9 10 11 December 10, 2015 12 13 10:00 a.m. 14 15 AT 16 17 TEXAS LOTTERY COMMISSION 18 19 611 East 6th Street 20 21 Austin, Texas 78701 22 23 24 25 2 1 APPEARANCES 2 CHAIRMAN: J. Winston Krause 3 COMMISSIONERS: Doug Lowe Carmen Arrieta-Candelaria 4 Robert Rivera Peggy A. Heeg 5 GENERAL COUNSEL: Bob Biard 6 DIRECTOR EXECUTIVE 7 ADMIN. DIVISION: Gary Grief 8 DIRECTOR CHARITABLE BINGO OPERATIONS: Alfonso Royal, III 9 10 DIRECTOR ADMIN. DIVISION: Michael R. Fernandez 11 CONTROLLER: Katheryn J. Pyka 12 WEAVER AND TIDWELL, (EXTERNAL AUDITOR): Kevin Sanford, CPA 13 14 ASSISTANT GENERAL COUNSEL: Deanne F. Rienstra 15 DEPUTY GENERAL COUNSEL: Andy Marker 16 ASSISTANT GENERAL COUNSEL: Kristen N. Guthrie 17 McCONNELL JONES LANIER & MURPHY, LLP: Darlene Brown 18 GOVERNMENTAL AFFAIRS 19 DIVISION LIAISON: Melissa Villaseņor 20 PRODUCTS & DRAWINGS MANAGER, LOTTERY OPERATIONS DIVISION: Robert Tirloni 21 HOBBY CENTER FOR PUBLIC 22 POLICY DIRECTOR: Dr. Jim Granato 23 TEXAS VETERANS COMMISSION DEPUTY EXECUTIVE DIRECTOR: Cruz Montemayor 24 --oo0oo-- 25 3 1 INDEX 2 Page 3 Appearances....................................... 2 4 Proceedings....................................... 4 5 AGENDA TOPIC I........................... 4 6 AGENDA TOPIC II........................... 6 AGENDA TOPIC III........................... 10 7 AGENDA TOPIC IV........................... 23 AGENDA TOPIC V........................... 31 8 AGENDA TOPIC VI........................... 46 AGENDA TOPIC VII........................... 48 9 AGENDA TOPIC VIII........................... 49 AGENDA TOPIC IX........................... 50 10 AGENDA TOPIC X........................... 52 AGENDA TOPIC XI........................... 53 11 AGENDA TOPIC XII........................... 55 AGENDA TOPIC XIII........................... 55 12 AGENDA TOPIC XIV........................... 60 AGENDA TOPIC XV........................... 61 13 AGENDA TOPIC XVI........................... 62 AGENDA TOPIC XVII........................... 66 14 AGENDA TOPIC XVIII........................... 68 AGENDA TOPIC XIX........................... 69 15 AGENDA TOPIC XX........................... N/A AGENDA TOPIC XXI........................... 80 16 AGENDA TOPIC XXII........................... 80 AGENDA TOPIC XXIII........................... 81 17 Court Reporter's Certificate...................... 82 18 --oo0oo-- 19 20 21 22 23 24 25 4 1 (Thursday, December 10, 2015, 10:00 a.m.) 2 P R O C E E D I N G S 3 CHAIRMAN KRAUSE: Good morning. The 4 Texas Lottery Commission meeting is being called to 5 order. It is December 10th, 2015. The time is 6 10:00 o'clock straight up. We have a quorum because we 7 have every single Commissioner here. I'm so proud of 8 them. 9 To begin with, we're going to have a new 10 tradition, as we are getting new Commissioners, that we 11 are going to stand and pledge allegiance to the American 12 flag and the Texas flag. 13 (Pledges recited.) 14 CHAIRMAN KRAUSE: We start off with 15 honored guests today, who are representatives of the 16 Texas Veterans Commission. If they would please come 17 forward and give us a chance to honor them, we would 18 love to do that. 19 MR. GRIEF: Mr. Chairman, may I say a 20 couple of words? 21 CHAIRMAN KRAUSE: Absolutely. 22 MR. GRIEF: Please go ahead and take a 23 seat up at the front. 24 CHAIRMAN KRAUSE: All three of you. 25 MR. GRIEF: In 2009, the 81st Legislature 5 1 passed an amendment to the State Lottery Act requiring 2 the Lottery Commission to offer for sale at all times a 3 scratch ticket in which the net proceeds were dedicated 4 for funds for veterans' assistance. Since that time our 5 Agency has been working very closely with the Texas 6 Veterans Commission on that. 7 The first two years of the program 8 started off relatively strong, followed by a couple of 9 years of declining revenue. In partnership with the TVC 10 and with our own Robert Tirloni, from the Lottery 11 Operations Division, and Melissa Villaseņor, from our 12 Governmental Affairs Division, we worked diligently with 13 our partners at the TVC to increase the profitability of 14 the scratch games for the funds for veterans assistance. 15 In the last two fiscal years, I'm very 16 proud to say we have generated $11.5 million in fiscal 17 year '14 and a record of $13.1 million in the most 18 recent fiscal year of '15. And our sales this current 19 fiscal year are also tracking very well. So, in total, 20 more than $52 million has been generated for the funds 21 for veterans' assistance through the sale of this 22 scratch-off game. 23 I want to recognize Deputy Director Tom 24 Palladino. I know Mr. Palladino is ill this morning and 25 couldn't be with us; but I want to recognize him and his 6 1 team, who is here, for the great work and strong 2 partnership that their agency has formed with our 3 agency; and we appreciate that. 4 We welcome you here and look forward to 5 hearing your comments. 6 CHAIRMAN KRAUSE: Do y'all have anything 7 to say to us? We'd love to hear from you. 8 MR. MONTEMAYOR: First of all, for the 9 record, my name is Cruz Montemayor. I'm the Deputy 10 Executive Director for the Texas Veterans Commission, 11 and I appreciate the opportunity to make our 12 presentation this morning. I'll be as brief as I can, 13 but I'd like to say a few things first. 14 The Texas Veterans Commission has had the 15 honor of working with Melissa Villaseņor since the 16 inception of the Funds for Veterans Assistance Program 17 five years. With Melissa's guidance, we've seen major 18 success with the introduction of generic designs for our 19 specific interest tickets. When we started, we had all 20 military themes; and Melissa brought new concepts, with 21 her team, new concepts that have vastly increased the 22 sales of the tickets and the revenue generated that 23 enables us to provide more grants to the veterans 24 throughout the state. 25 Since 2009 the Veterans Commission has 7 1 awarded nearly 55 million in 307 grants to 132 2 veteran-serving organizations throughout Texas. To 3 date, the Texas Veterans Commission has assisted over 4 210,000 veterans and family members with much-needed 5 services. 6 Melissa goes above and beyond keeping us 7 informed and does an exceptional job to include the TVC 8 in any marketing strategy available. She always keeps 9 us in the loop. Anytime she has new ideas, she brings 10 them to us and always involves us and values our input; 11 and we really appreciate that. 12 For example, she recently included us in 13 the current experimental campaign with the LatinWorks 14 advertising. This provided us with great exposure to 15 the UT football game during the Veterans Day promotion, 16 and we were able to do a social media giveaway with the 17 offer of Trail of Lights tickets. And that was amazing. 18 So all of these things she's brought to 19 us, her and her team; and, you know, it just amplifies 20 the whole program that we have. And we really 21 appreciate that, and we really value the partnership 22 that we have with the Lottery Commission and in all the 23 strives that they've made to increase the awareness for 24 veterans and the benefits that they receive through the 25 sales of these tickets. 8 1 So with that, I'd like to present Melissa 2 with a certificate from the Commission as wells a coin 3 that is something that we do to recognize individuals 4 that go above and beyond for veterans. And so if you 5 would allow me to do that, sir, I would like to present 6 her a certificate and coin at this time. 7 CHAIRMAN KRAUSE: Absolutely. 8 (Applause.) 9 MR. MONTEMAYOR: Charlie's going to read 10 the language. 11 MR. CATOE: The certificate reads, "In 12 recognition of her sincere dedication in working with 13 the Texas Veterans Commission's Funding for Veterans 14 Assistance to realize our common goal in assisting Texas 15 veterans and their families. Her ability to 16 successfully coordinate and collaborate with the Texas 17 Veterans Commission has brought much credit to herself, 18 the Texas Lottery Commission, and our great state. 19 Ultimately, her actions have greatly contributed to the 20 success of the Funds for Veterans Assistance Grant 21 Programs and have improved the lives of Texas veterans 22 and their families." 23 (Presentation of certificate and coin.) 24 (Applause.) 25 MS. VILLASEŅOR: Thank you. If I may, 9 1 good morning. For the record, my name is Melissa 2 Villaseņor, Governmental Affairs liaison for the Texas 3 Lottery Commission. Mr. Chairman, Commissioners, Gary, 4 and Executives, Deputy Executive Montemayor. I am so 5 taken back. Thank you for your kind words and 6 professional acknowledgment. And I humbly receive the 7 coin and Certificate of Appreciation. 8 I must first say that I work with an 9 credible Executive and Senior Management. We have 10 worked collaboratively on this initiative. I'm just the 11 voice piece in disseminating information to you. 12 There's Michael Anger, our Lottery Operations Division 13 Director; Robert Tirloni, Products & Drawings Manager; 14 and then Kelly Cripe, Media Relations Director; and 15 Kathy Pyka, our Controller, who oversees the sales and 16 revenue transfer and application to the TVC. 17 It's a pleasure and a privilege in 18 serving as the Agency Liaison on behalf of the Texas 19 Lottery Commission and Texas Veterans Commission in 20 assisting the Veterans Commission's leadership team. I 21 look forward to further building upon our agencies' 22 foster partnerships and our collaborative efforts on the 23 Veterans Initiative that provides veterans' services to 24 the men and women of the armed services and their 25 families in the state of Texas. 10 1 Again, thank you so very much; and please 2 send my kind regards to Mr. Palladino. I humbly receive 3 this. Thank you. 4 (Applause.) 5 COMMISSIONER LOWE: I want to say thank 6 you once again for the veterans of our state. 7 And I will tell the veterans in our 8 audience, Thank you for your service. If there are any 9 veterans, please stand so we can acknowledge your 10 presence today. 11 (Applause.) 12 CHAIRMAN KRAUSE: Michael Fernandez, do 13 you have a presentation for us? We also have a witness 14 to testify. 15 MR. FERNANDEZ: Good morning, 16 Mr. Chairman, Members of the Commission. For the 17 record, my name is Mike Fernandez, Director of 18 Administration. 19 As you know, Section 466 of the Texas 20 Government Code requires the Executive Director to have 21 an independent auditor conduct a demographics study of 22 lottery players; and the results of this study will be 23 reported to the Commission, to the Governor, and to the 24 Legislature prior to its Legislative Session. As you 25 also know, we conduct the study annually. 11 1 The 2015 demographic study was prepared 2 by the University of Houston and will be presented this 3 morning by Dr. Jim Granato, Director, Hobby Center for 4 Public Policy. 5 DR. GRANATO: Thank you. 6 I will briefly summarize the PowerPoint, 7 the survey; and then I'll answer any questions you have 8 about the survey. 9 The sample Texas survey was larger than 10 last year. Approximately 1,979 individuals were 11 surveyed. Unlike last year, we split the sample up to 12 be using both address-based sampling and also random 13 digital dialing. This was in light of some concerns I 14 actually had about response rates which is happening 15 across the board in many surveys in many areas, 16 including some technological issues and some other 17 things that are under study by an organization, the 18 National Science Foundation. 19 There was a time when response rates were 20 between 50 and 70 percent. That was back when I was a 21 middle-aged man. Today, you're looking at 20 percent 22 and sometimes less than that; and there are some 23 concerns about that. So one way to address it is to add 24 another sampling trend. That would be the address-based 25 sampling. 12 1 Margin of error for this survey was 2 2.2 percent. Again, the reason we used ABS in addition 3 to the random digit dialing was to ensure the area was 4 covered and to get a bump in response rates. 5 The general findings: There was an 6 overall increase of three -- almost four -- points in 7 participation this year over last year. Approximately 8 20.7 percent of individuals participated in the survey 9 over the prior year. The average spent this past year 10 was $37.59. That's lower than last year, but it's 11 higher than 2011 and about the same as 2012. 12 In terms of demographic differences, if 13 you look at Table 2 in the report -- I think it's pages 14 7 through 11 -- we found differences in three areas. 15 Now, remember when we look at the survey and we use 16 demographic characteristics, there are several issues or 17 categories we focus on; that includes income, employment 18 status, do you own or rent a home, your age, your 19 marital status, do you have children under 18 living in 20 your household, your gender, your race, are you of 21 Hispanic origin, your education level, your occupation. 22 All of those categories are used in the survey. 23 In the study to date, in Table 2, when 24 you look at just players and non-players, are the 25 distributions different? What we found was of all those 13 1 demographic categories, only three made a difference; 2 and that would be based on age -- players tend to be a 3 little older -- Hispanic origin; people of the same 4 origin tended to play a little more proportionately; 5 and, finally, education level. People that had a high 6 school diploma and some education tend to play more. 7 But those are the only three differences. No 8 differences in income or other categories that I 9 mentioned, gender, marital status, things of that 10 nature. 11 In terms of sales districts, 12 participation rates that were highest were in El Paso, 13 McAllen, and San Antonio; and the numbers are 14 provided -- margins are provided. The highest average 15 expenditure per month. The district with the highest 16 average expenditure was McAllen, with $24.74 per month. 17 The highest median expenditure per month was Houston 18 southwest, which was 17.50 per month; and that's in 19 Table 4 in the report. 20 The game results. There's several games. 21 We just summarized the top five games in terms of 22 participation. Scratch off was Number 1 this year at 23 41.5 percent. Lotto Texas was second, 31.2 percent. 24 Mega Millions was 29 percent. Powerball was 21.1 25 percent. And Megaplier at 9.9 percent. 14 1 The highest average expenditure per play 2 was Scratch Off at $11.66 per play. The highest number 3 of times played was Cash Five, about 2.8 times per week 4 and also 9.18 times per month. That's provided in 5 Table 1. 6 The game result averages in terms of 7 playing weekly, monthly, and annually. In this survey 8 we found that playing weekly, monthly, or annually was 9 stable or up, the same as last year or higher in Mega 10 Millions, Cash Five, and Texas Two Step; roughly the 11 same weekly, monthly, or even slightly down, Scratch Off 12 Extra! and Powerball. 13 In mixed, we saw some were up; and some 14 were down compared to last year. You had Lotto Texas, 15 Powerball, Megaplier, and Pick 3 Day. In terms of 16 average dollars spent per play, stable or up -- that is, 17 compared to last year -- Scratch Off, Lotto Texas, Mega 18 Millions, Powerball, Megaplier, Extra! and Pick Three 19 Day. You had more games that were either stable or up 20 in terms of dollars spent per play this year than last 21 year in those games. 22 Stable or down, Powerball, Cash Five, and 23 Texas Two Step. 24 The figure that's probably most important 25 in the survey, this is about participation; and it goes 15 1 to the historic figures. So you're looking at 2 participating in any game going back to 1993. And you 3 can see there's a general trend down throughout the 4 Nineties; and then it accelerates after 2004 and 5 stabilizes about, I'd say, 2006. There was a sharp 6 drop-off last year, probably due to the response rate; 7 but now that we've corrected some of those issues, we've 8 seen an increase in participation over the last year. 9 I'll be glad to answer any questions you 10 have. 11 CHAIRMAN KRAUSE: Commissioners, 12 questions? 13 (No response.) 14 CHAIRMAN KRAUSE: One of the things that 15 I'm always interested in with respect to the study is 16 what I perceive to be a myth about the fact that the 17 lottery is a bad thing because it preys on poor people. 18 And when I look at these numbers, you know, this seems 19 to completely rebut that. 20 And so when I look at income levels, 21 people who make less than 12,000, only 8 percent of 22 those people play. Between twelve and -- you know, 23 under 20,000, only 10 percent of those people play. And 24 the same thing with the under 30,000; only 10 percent of 25 those people play. 16 1 And so do you get the impression that, 2 based on these statistics, that people that can't afford 3 to play don't play? 4 DR. GRANATO: I can speak to the study; 5 and if you look at Tables 2 and 3, Table 2 compares 6 players and non-players. If you look at the income 7 category, there's no difference, no difference in the 8 outputs of distribution and no difference in terms of 9 percentages, in the statistical sense. 10 In the statistical sense, we're saying 11 that you can look at the numbers and say, "Well, one 12 says 32, and another one says 34." That's not the 13 issue. That can be a random difference. What you're 14 looking for is: Did that difference occur according to 15 something that's systematic, what we call "statistically 16 significant"? And the answer is: Both Tables 2 and 3 17 look at players and non-players or even players. In the 18 income category, we see no discernable difference in the 19 statistical sense. 20 CHAIRMAN KRAUSE: Okay. So then poor 21 people don't play more than anybody else? 22 DR. GRANATO: Not in this sample, no. 23 CHAIRMAN KRAUSE: Okay. Now, on Table 2, 24 page 10, people who are not working, it indicates that 25 only 5 percent of those people play. And then when you 17 1 look at some of the other ones, people who work play; 2 people who don't work don't play. Is that a fair 3 assessment? 4 DR. GRANATO: Yes, sir. 5 CHAIRMAN KRAUSE: Okay. And then when 6 you look at on page 12, education, less than high 7 school, it's obvious that people with less education 8 don't play; smart people with more education play. Is 9 that right? 10 DR. GRANATO: The cluster here is high 11 school graduates, G.E.D., and some college with no 12 degrees. That was the largest group that plays. Less 13 than high school is very small. 14 CHAIRMAN KRAUSE: Very small. Very 15 small. 16 DR. GRANATO: And that was statistically 17 significant, by the way. 18 CHAIRMAN KRAUSE: And then if we look at 19 race, on page 11, African-Americans, only 18 percent 20 play versus 56 percent Whites and then 22 percent of 21 Hispanics versus 56 percent whites. So, you know, we 22 have -- 23 DR. GRANATO: Significant differences. 24 CHAIRMAN KRAUSE: -- races that don't 25 play; and then we have races that do play. Anyway, 18 1 thanks very much. 2 COMMISSIONER ARRIETA-CANDELARIA: I have 3 a question with regards to -- on page 18, it shows that 4 El Paso has a 47.1 percent participation rate. Is that 5 number calculated based on the population in El Paso and 6 the county itself or is that -- because I think one of 7 the impacts there is the population bias. I mean, in 8 the numbers like your 1.2 million -- or I'm not sure 9 what the number is with regards to that; but I'm 10 convinced that that has a significant impact in your 11 calculation. Would you not agree? 12 DR. GRANATO: It's possible. I mean, the 13 proportion that's in El Paso, when we do these surveys, 14 they're indicating where they're located; and they're in 15 that area. So you're looking at the total number of 16 people in El Paso that are surveyed and you take the 17 portion that played divided by the total number of 18 people that you are serving in El Paso. So that's how 19 we got that number. 20 COMMISSIONER ARRIETA-CANDELARIA: Right. 21 But you're not necessarily taking another population 22 that could be potentially purchasing tickets, which is 23 the people from Mexico, because there's -- correct, in 24 that border town? Or is that just -- did you find 25 that's the same in other border towns, where the 19 1 percentage was higher? 2 DR. GRANATO: In the past, the trends 3 have been lower. Remember, when we do the survey, it's 4 people who are either residents in their household in 5 the United States -- 6 COMMISSIONER ARRIETA-CANDELARIA: Oh, I 7 see. 8 DR. GRANATO: -- or on cell phones. So 9 the sample frame we use is of U.S. citizens. For 10 example, for the sample used you're taking an entire 11 postal network, rather than -- 12 COMMISSIONER ARRIETA-CANDELARIA: It's 13 residents, not necessarily citizens? 14 DR. GRANATO: Correct. So I guess I'm 15 making the assumption that if you have a residence, 16 you're probably a U.S. citizen; but it's possible -- in 17 fact, we can try and get to that point you're getting at 18 in the next survey. 19 COMMISSIONER ARRIETA-CANDELARIA: Okay. 20 I think that would be informative since I'm from 21 El Paso. 22 DR. GRANATO: Sure. I'd be glad to talk 23 to you off line. 24 COMMISSIONER ARRIETA-CANDELARIA: Okay. 25 COMMISSIONER RIVERA: I have a question 20 1 about the overall sample itself. In the begin, you 2 mentioned a problem of having enough people to actually 3 fill out the survey and then also the scope of folks 4 who you are sampling. So are there individuals that 5 are part of this that are not from Texas, meaning, in 6 that -- I was a little confused early on with what you 7 were trying to say about who you were contacting. 8 DR. GRANATO: The citizens of Texas. 9 COMMISSIONER RIVERA: So exclusively -- 10 DR. GRANATO: The citizens of Texas, yes, 11 including cell phones and land lines; although, land 12 lines are starting to become a difficult thing to 13 capture somebody on for responses. I mean, it's a 14 generational issue. 15 COMMISSIONER RIVERA: On your first 16 slide -- can you go back to that, please? 17 (Dr. Granato complies.) 18 COMMISSIONER RIVERA: The ABS -- 19 DR. GRANATO: Yes. 20 COMMISSIONER RIVERA: -- I guess that's 21 where I was confused. So you're exclusively looking at 22 Texans? 23 DR. GRANATO: Yes, that's our charge. 24 COMMISSIONER RIVERA: Okay. Thank you. 25 COMMISSIONER HEEG: I have one question. 21 1 Do you have any observations on the long-term view of 2 aging of the population that plays the lottery? So not 3 just this year; but going back to your prior studies, 4 are the majority of people older? Is it inclusive by 5 age bracket, or is it about the same? 6 DR. GRANATO: We can go back and track 7 it, if you like. Off the top of my head, we had a 8 difference this year because if you look at Table B, 45 9 to 64, they were the proportion that played the most. 10 There are a lot of participatory groups. Those were the 11 categories, but I don't remember the trend. 12 COMMISSIONER HEEG: Yeah, sure. It would 13 just be interesting to see if there's a trend of the 14 aging population. 15 COMMISSIONER RIVERA: Do you know if 16 there's any separation between the amount of advertising 17 done per region and if there's any increase based on 18 that, or was it all uniform across the board and across 19 the state? 20 DR. GRANATO: That's beyond the scope of 21 this survey. I wouldn't know about that. 22 COMMISSIONER RIVERA: Do you think that's 23 something, Gary, that we could -- 24 MR. GRIEF: I'll ask Michael Anger. I 25 think he could speak to that, Commissioner. 22 1 MR. ANGER: Good morning, Commissioners. 2 For the record, my name is Michael Anger; and I'm the 3 Lottery Operations Director. 4 Commissioner, to your question, we have a 5 limited advertising budget; and it has decreased over 6 the history of the Agency. In '93 it was $40 million. 7 Today it stands at $32 million. So taking into account 8 inflation and kind of an expansion of media, we actually 9 have to make discreet decisions about where we place 10 advertising dollars. 11 So it is interesting that with regard to 12 the study, the participation rates, I think, were 13 highest in El Paso, McAllen -- and I can't remember the 14 third city -- 15 DR. GRANATO: San Antonio. 16 MR. ANGER: -- San Antonio. So we have 17 to actually tier our advertising. We basically put our 18 advertising dollars in a weighted fashion so we get the 19 most benefit for the State's dollars. And so we spend 20 more money in the more significantly populated urban 21 areas of the state. So Dallas, Houston, San Antonio, 22 and Austin are what we call Tier One markets; and those 23 markets would get more advertising dollars than places 24 like El Paso and McAllen. So, actually, the bottom line 25 is we're spending less in places like El Paso and 23 1 McAllen and have a smaller presence from an advertising 2 perspective; but we're seeing good participation in 3 those areas. 4 COMMISSIONER RIVERA: Okay. Thank you. 5 CHAIRMAN KRAUSE: Commissioners, any 6 other questions? 7 (No response.) 8 CHAIRMAN KRAUSE: Thank you for your 9 great report via the study. 10 Our next agenda item will be made by 11 Ms. Kathy Pyka, and we're going to meet our external 12 auditor today. 13 MS. PYKA: Commissioners, my name is 14 Kathy Pyka, Controller for the Agency. With me this 15 morning is Kevin Sanford. He is our engagement partner 16 with the firm Weaver and Tidwell, who performed our 17 required annual financial audit. 18 With that, Kevin, I'll let you proceed. 19 MR. SANFORD: Good morning 20 Commissioner Krause -- or Chairman Krause and 21 Commissioners. As Kathy mentioned, my name is Kevin 22 Sanford. I am the audit partner on the engagement to 23 conduct the audit of the Lottery's financial statements 24 for the year ending August 31st, 2015. I have a brief 25 presentation for you to summarize the results of that 24 1 audit, and we'll be happy to answer any questions you 2 have as well. 3 Hopefully each of you have the Lottery's 4 bound annual financial report. I'm going to start on 5 page 4 of that document, which is our report on the 6 Commission's financial statements. And, once again, 7 this year, that report, on the top of page 5, our 8 opinion is an unqualified opinion. That opinion is the 9 highest level of assurance that an independent auditor 10 can give to a set of financials; and it states that, in 11 all material respects, the Lottery's financials are 12 accurately reporting therein. 13 The next part of the document is 14 management's discussion and analysis on the financial 15 statements for the year. I'm going to skip through that 16 and go to page Number 18, which is the Statement of 17 Financial Position, similar to what a balance sheet 18 would be for a for-profit company. And I'll read from 19 the Total column, which is the third column on that 20 financial report. 21 The lottery system had total assets to 22 end the year August 31st, 2015, about halfway down that 23 page, of $990,516,000. There's also a deferred outflow 24 of resources. We'll talk more about that in a minute. 25 That's related to the pension liability. That is a new 25 1 standard this year of 3,966,000. The liabilities which 2 represent claims on those assets, the total of that is 3 at the bottom of page, $982,154,788. There's also a 4 deferred inflow, which, again, related to the pension 5 system, of 3,973,000. So when you take the asset, plus 6 the deferred inflow, it's less the liabilities for 7 inflows. The net position, which is amount of assets 8 exceeding liabilities, is 8,354,575 at the end of the 9 year. 10 I'm going to skip the next statement. 11 It's the statement of changes in the net position. This 12 is a statutory format. It's not laid out, in my 13 opinion, the most conducive to have a clear picture. 14 So I'm going to skip back to one that I 15 think is a little more clear, which I think is on 16 page Number 29; this is the Statement of Changes in Net 17 Position for the Lottery Fund, though it does exclude 18 the general fund, which houses the bingo activities of 19 the Commission. But the Lottery Fund, by far, as you 20 know, is a much higher level of activity for. 21 So the total revenue for the Lottery at 22 year end, August 31st, '15, was $4,530,914,000, which is 23 about a 2 and a half, 3 percent increase over the prior 24 year. The total operating expenses were 4,540,000,000. 25 So expenses exceed revenue by about $10 million; and, of 26 1 course, the largest components of the expenses are 2 2.85 billion for prize payments on those revenues as 3 well as 1,242,000,000 in transfers to other governmental 4 entities, primarily the school fund, TEA. 5 There was a small decrease in the fair 6 value of the Commission's investments of 3.7 million. 7 So the total change in net position for the year was a 8 decrease of 13,663,950. The Commission began the year 9 with net position in the lottery fund of about 10 61 million, and then you'll notice there was a 11 restatement, referring to Note 15 -- I'm going to come 12 back to that -- but that is the beginning balance of the 13 pension liability for the lottery activities of 14 35,982,971. And so the beginning of the year net 15 position, as I stated, was just over 25 million and, 16 again, with the 13-million-dollar increase, the 17 end-of-the-year net position, $11.4 million. 18 COMMISSIONER HEEG: Before you move on, 19 just to clarify, that's a reporting restatement, not a 20 financial? 21 MR. SANFORD: It is, absolutely. It's 22 just a reporting requirement. It doesn't change the 23 funding or the cash. 24 So, with that, actually, I'm going to 25 dive into that note a little bit. That is the only new 27 1 note this year. All of the other notes on the financial 2 statements are very similar to the prior year, just the 3 numbers have changed to update for current year 4 activity. But Note 7 is completely different, and that 5 begins on page number 54. This note last year was about 6 half a page. This year it's about four and a half, five 7 pages. 8 So, obviously, I'm not going to go 9 through all the detailed information; but this is a new 10 reporting requiring this year that any governmental 11 agency in the United States has to submit; and as the 12 Agency participates in ERS of Texas, the Commission has 13 to report its pro rata share of the total ERS liability. 14 And ERS calculated that amount, and it's based on the 15 pro rata contributions that the Commission furnished the 16 ERS in proportion to all state agencies. And that 17 amount was about 2 percent for the year. 18 And so you can see on page 57, in the 19 middle of the page, it has $42,632,000. That is the 20 Commission's share of the total ERS liability, and that 21 amount is then prorated via the Commission 89 percent to 22 the lottery and 11 percent to the general or bingo 23 activity fund. And that's based on payroll amounts here 24 in the Commission. And so, again, 35 -- about 25 35 million ended up going to the lottery fund and about 28 1 7 million to the general fund. And that is, again, a 2 new standard this year; and that liability, while it was 3 there last year, it was not reported in the financial 4 statements. But, again, it is just a statutory 5 requirement. It doesn't change the funding requirements 6 that the Commission has to the ERS, and it doesn't 7 change the contribution rate for this as well. 8 And then the last item I'm going to 9 present in financial report -- and, again, I'll be happy 10 to go into any more questions as well -- page 79, the 11 last page of the document. We conducted our audit in 12 accordance with government auditing standards. So we 13 tested not only the financial statements themselves, but 14 also there's a requirement that we look at certain grant 15 documents, funding requirements, and other matters that 16 could be material to the Commission. And we're pleased 17 to report that we did not have any findings to report to 18 you on internal control over financial reporting or on 19 compliance. So, literally, in all ways, shape, and form 20 it was a clean audit. 21 CHAIRMAN KRAUSE: Outstanding. 22 Questions? 23 COMMISSIONER ARRIETA-CANDELARIA: I have 24 a question. Kathy, with regard to the disclosure in the 25 net pension liability, those numbers came from a state 29 1 agency, correct? 2 MS. PYKA: They did. They came from the 3 Employees' Retirement System and the State Auditor's 4 Office within that agency, performing their required 5 audit of those figures; and then that information was 6 shared with all of the agencies that are required to 7 prepare an independent audited financial. 8 COMMISSIONER ARRIETA-CANDELARIA: Okay. 9 So to that point, are we not required to disclose that 10 we are placing reliance on those numbers, either in an 11 audit opinion or in the note? Is it disclosed, and I 12 just missed that? 13 MS. PYKA: It is included. 14 MR. SANFORD: It's in the notes. 15 COMMISSIONER ARRIETA-CANDELARIA: In the 16 report, you don't disclose that reliance? 17 MR. SANFORD: No, we do not. We 18 conducted a procedure to ensure that the numbers are 19 accurate by tying it to ERS' financial statements -- 20 COMMISSIONER ARRIETA-CANDELARIA: Okay. 21 MR. SANFORD: -- as well as revision -- 22 the primary test here is to make sure that the numbers 23 submitted to ERS are correct so that we know the numbers 24 that we get back are correct. We did our internal work 25 on that. 30 1 COMMISSIONER ARRIETA-CANDELARIA: All 2 right. But there's no requirement to disclose the 3 reliance on that opinion or those numbers? 4 MR. SANFORD: Not in this. 5 COMMISSIONER LOWE: Chairman, I have a 6 question. 7 CHAIRMAN KRAUSE: Sure. 8 COMMISSIONER LOWE: This is related to 9 the accounting for the pension liability, but not 10 really. When somebody wins a prize that has a payout of 11 $5,000 -- I think there was one guy that won 5,000 a 12 week, or something like that, for life -- how do we 13 account for that liability of future prizes like that? 14 MS. PYKA: Reported in the financial 15 statement is the annuity for that, for future payments 16 of that; and so -- Kevin is probably going to get to it 17 faster than I am, as he flips. If we look at the basic 18 financial statement and if we look at page 18 -- which 19 might be the best way to look at that -- under 20 Liabilities, Commissioner, you'll notice that under 21 Current, you'll see the annuities there. And so there 22 we have the current portion of those annuity payments; 23 and then down below, we have the non-current liability 24 and so there from the payable restricted assets we see 25 the half billion that is included for all future 31 1 liabilities and cap associated with prize winnings that 2 were paid in the annuity stream. 3 COMMISSIONER LOWE: Okay. That was my 4 question, Chair. 5 CHAIRMAN KRAUSE: Commissioners, any 6 other questions? 7 (No response.) 8 Thank you very much, again, Kathy. 9 Next agenda item was requested by 10 Commissioner Lowe. 11 Commissioner Lowe, you have the dais. 12 COMMISSIONER LOWE: Thank you, Chairman; 13 and thank you for putting this on the agenda for me. 14 I'll need General Counsel's help on this, 15 and we can talk about it. I'll start with pretty much a 16 hypothetical to Bob. Say we have an unnamed lottery 17 retailer in East Texas with a convenience store and in 18 that convenience store they sells lottery tickets, beer. 19 And when you walk into the door, there is a scratch-off 20 ticket dispenser; and next to that scratch-off ticket 21 dispenser, there are six eight-liners, which are illegal 22 gambling in State of Texas. 23 My question to you is: What authority 24 does the Lottery Commission have with respect to the 25 licensing of those people as far as either revoking or 32 1 suspending or denying a license in the future to those 2 folks? 3 MR. BIARD: For the record, I'm Bob 4 Biard, General Counsel. 5 The only express authority in the State 6 Lottery Act is to deny an application or to revoke or 7 suspend a lottery retailer for a conviction of gambling 8 or a gambling-related offense, which means there has to 9 be a final adjudication of guilt. 10 COMMISSIONER LOWE: All right. So our 11 authority is limited, is what you're telling me, under 12 our present rules? 13 MR. BAIRD: Yes. I mean, that's the only 14 express statement of the Commission's authority. 15 COMMISSIONER LOWE: Within our present 16 Lottery Commission Act, would we be able to do some 17 rulemaking to deal with the situation where you have 18 convenience store where a person could complain and we 19 could do something about it? 20 MR. BIARD: I think the question you're 21 asking raises issues about the Agency's implied 22 authority -- 23 COMMISSIONER LOWE: Yes. 24 MR. BIARD: -- which is a concept under 25 administrative law where an Agency may have powers that 33 1 are not enumerated in the statute if they are reasonable 2 and necessary in order to fulfill an express function or 3 responsibility of the Agency. So an implied power has 4 to be tied to something that is in the statute. And 5 that issue hasn't been addressed with respect to illegal 6 gambling, to my knowledge, in the courts or by the 7 Attorney General. 8 COMMISSIONER LOWE: So our options would 9 be that we could actually take our own administrative 10 action, or would it be a better course to seek the 11 Attorney General's opinion about where our implied 12 authority is with retailers who are selling lottery 13 products and are engaging in illegal activities in the 14 same location? 15 MR. BIARD: Asking for an AG opinion is 16 something that the head of the Agency can do under the 17 Attorney General's enabling statutes. If the Agency on 18 their own just started adopting rules and going down 19 this course of action, I think it's likely that we would 20 see a legal challenge as to whether the issue would fall 21 within the Agency's implied authority. 22 COMMISSIONER LOWE: So if that's the 23 direction this Commission wants to take, we should seek 24 an Attorney General's opinion about our implied 25 authority? 34 1 MR. BIARD: If this is the direction that 2 the Commission thinks it might want to go, then having 3 an Attorney General's opinion would be good support for 4 the Agency to move forward. It's not binding. If the 5 issue goes to court, the Attorney General's opinion is 6 not binding; but it's persuasive. And since the 7 Attorney General would be representing the Agency in 8 court, it would be helpful in that respect that the 9 Attorney General has already opined on the issue. 10 COMMISSIONER LOWE: All right. Well, I 11 will tell you that I would like to see the Commission 12 move toward the direction where our retailers are not 13 selling -- or not engaging in illegal activity, 14 especially in places where we're selling our products. 15 First of all, the illegal gambling is illegal; it's 16 immoral. And, also, as I've heard from retailers and 17 from friends that people are choosing between the legal 18 lottery and illegal gambling. 19 So at some point in time in the future, I 20 would like to see us, the Commission, take action as a 21 group and ask for this opinion. It's not on the agenda 22 as an item today, Mr. Chairman; but I would like to see 23 that in the future. And that's all I have. 24 CHAIRMAN KRAUSE: Mr. Biard, I've got a 25 question. 35 1 MR. BIARD: Yes, sir. 2 CHAIRMAN KRAUSE: And that is: Are we in 3 a different position when we are being asked to grant a 4 license versus revoking licenses? 5 MR. BIARD: Well, on the lottery side, 6 interestingly enough, when we are granting a license -- 7 let me make sure I'm... 8 CHAIRMAN KRAUSE: Well, while you're 9 looking at what you're looking at, I guess, maybe to 10 give you a little bit more information on my question. 11 And that is, that if we're in a position of granting a 12 license or there's a license request, does that even 13 come to us; or is that just administratively granted? 14 MR. BIARD: It's administrative. And 15 what happens on the lottery side is if it's a matter 16 that is discretionary -- it depends on whether the 17 matter is specifically enumerated in the statute or 18 whether it's a discretionary factor, which I would think 19 something like illegal gambling is not enumerated; so 20 it's discretionary. If it's a matter like that that the 21 Commission is basing a denial or revocation on, we would 22 have to give the licensee notice and an opportunity to 23 ask for a hearing. So it would go to SOAH. And in that 24 event, after that proceeding, after it was settled -- or 25 even if it wasn't settled, it would come to the 36 1 Commission eventually for a decision. 2 CHAIRMAN KRAUSE: So it almost sounds 3 like there's not really much of a difference between the 4 process of granting a license, the process of 5 determining whether or not to allow a renewal, or take 6 active steps to try and revoke a license with an action 7 that the Commission was taking? 8 MR. BIARD: On the lottery side, it's 9 always for this type of an action -- for a factor like a 10 discretionary factor, I think you're correct. 11 CHAIRMAN KRAUSE: Okay. 12 MR. BIARD: There are some factors where 13 a hearing is always required, but this is not -- this 14 factor about illegal gambling is not in the statute. 15 CHAIRMAN KRAUSE: Well, do we get to take 16 into account the moral turpitude of the applicant? 17 MR. BIARD: There is a provision in the 18 state Lottery Act that the Director may only grant a 19 license if the -- specific language, only to persons -- 20 "only if the person's experience, character and general 21 fitness are such that their participation as a sales 22 agent will not detract from the integrity, security, 23 honesty and fairness of the operation of a lottery." So 24 we generally refer to that as fitness or character. 25 CHAIRMAN KRAUSE: So we could take that 37 1 into account -- 2 MR. BIARD: Yes. 3 CHAIRMAN KRAUSE: -- if we know about it? 4 MR. BIARD: Well, I think the issue is a 5 fitness or character issue. 6 CHAIRMAN KRAUSE: I think that answered 7 my question, Mr. Biard. Thank you. 8 COMMISSIONER RIVERA: Just to get some 9 additional light on it, so what we're talking about, 10 again, is issuing or allowing lottery scratch-offs and 11 lottery ticket sales at locations that have the 12 eight-liners across the state; and if they do, then, 13 obviously, we would prefer that that's not the case, 14 that there's no mixing of the two, and that there's some 15 people that believe that since there is lottery and 16 scratch-offs being sold there, that, well, maybe it's 17 okay. Otherwise, the local sheriff or local police 18 would have shut this down. 19 So, you know, obviously, we do not want 20 to be anywhere near or associated with anything that is 21 not legal. So in our granting of a license, there is 22 nothing that specifically states now that if you have an 23 eight-liner or other machines that are not legal in the 24 state, that it does not address it; is that correct? 25 MR. BIARD: That's correct. 38 1 COMMISSIONER RIVERA: So -- 2 MR. BIARD: Only if there's been a 3 conviction for gambling or a gambling-related event. 4 COMMISSIONER RIVERA: Again, just for 5 clarification, we need an Attorney General's opinion in 6 order to incorporate language into the issuing of a 7 license to add that verbiage? Is that what we have to 8 do, or no; those are two separate things? 9 MR. BIARD: It's not a requirement to get 10 an Attorney General's opinion. This is an option that 11 is available to people all over state government who are 12 on Boards or departments and State Boards. They can 13 seek that advice and are entitled to rely on it in 14 moving forward. It won't necessarily be binding on a 15 court. 16 COMMISSIONER RIVERA: Okay. So this 17 Commission, if it were to decide to move forward, we 18 could add the language moving forward on all new 19 applicants and then also to revisit whenever they're up 20 for renewal; or we could even proactively potentially 21 remove people's licenses if they do have this type of 22 activity going on on their premises? 23 MR. BIARD: I think if the Commission 24 felt like it had that authority, that it could -- 25 COMMISSIONER RIVERA: Well, I mean, don't 39 1 we have that authority? Don't we control the license? 2 MR. BIARD: This particular factor is 3 something you can consider in granting or denying. 4 COMMISSIONER RIVERA: If the Commission 5 wanted, it could incorporate that verbiage into the 6 process of granting a license; is that true? 7 MR. BIARD: It could, but that might be 8 subject to legal challenge is what I'm trying to say. 9 Someone could challenge it if they were denied a license 10 or their license was revoked. They would go to SOAH, 11 the State Office of Administrative Hearings, and 12 possibly be -- if the Commission issues an order on it 13 and maintains this position, it could go to court; and 14 then the Court would have to decide the legal matter 15 whether this is within the Commission's authority and 16 whether it's within the Commission's reasonable exercise 17 of discretion. 18 COMMISSIONER RIVERA: Okay. Mr. Chairman 19 and Fellow Commissioners, I understand that this is a 20 topic that affects a lot of individuals across the state 21 and that this Commission, this body, you know, we're not 22 Eliot Ness and the Untouchables by any means; but if 23 there's a way to incorporate language into the process 24 of granting a license, then that's something that I'm 25 open to explore. But I have no desire to get into the 40 1 legal framework of doing the job of our local and in- 2 state and federal officials of law enforcement of actual 3 enforcement of removing the eight-liners and doing the 4 jobs of local municipalities that should have already 5 been done, quite frankly. 6 COMMISSIONER LOWE: Can I respond to 7 that? 8 CHAIRMAN KRAUSE: Sure. 9 COMMISSIONER LOWE: Having dealt with 10 this issue for the last -- for 16 years before this 11 year, the issues that you guys face -- and prosecutors, 12 as a group, there are a whole bunch of them that have 13 different attitudes towards this. And the prosecution 14 efforts and law enforcement efforts are very different 15 across statewide. I mean, if you go to the Valley, you 16 know, we have counties that are licensing eight-liners. 17 And so we are one state agency that has some statewide 18 authority, and prosecutors are limited to their 19 particular jurisdiction. The AG does not have authority 20 to do this without request from a prosector. 21 And I don't want to get into the business 22 of being Eliot Ness, either. That's not our role; but 23 if we can do something, I think that it's incumbent upon 24 us because of the trust we have in this job to do 25 something. 41 1 The other point, you know, there could be 2 a Legislative fix for this. Having dealt with the 3 Legislature on this issue in trying to figure out what 4 the fuzzy animal exception means, the Legislature has 5 not dealt with this. And so that's my only thought: If 6 there's something we can do, then I'd like to just try 7 to do it. 8 Thank you, Mr. Chairman. 9 CHAIRMAN KRAUSE: Any other -- 10 COMMISSIONER HEEG: Yes. Just to be 11 clear, I share all the concerns that have been expressed 12 on this issue; but I do not have a desire to get out 13 over our statutory authority. And it seems the prudent 14 action would be to submit a request to the Attorney 15 General to clarify what our authority is and take our 16 action from there. Otherwise, we're going to be caught 17 up in litigation; and it's my opinion it would be better 18 to address it on the front end whether we have this 19 authority or not. 20 And I agree we should be limited because 21 we do not want to be in the police efforts of seizing 22 machines; but if we do have the authority, we want to 23 pursue it through our licensing and enforcement. 24 COMMISSIONER ARRIETA-CANDELARIA: I have 25 a question. 42 1 CHAIRMAN KRAUSE: Yes, ma'am. 2 COMMISSIONER ARRIETA-CANDELARIA: So, 3 Gary, with regards to any site visits or through the 4 application process, I'm in agreement with the 5 Commissioner. In regards to issuing the license, do we 6 go out and do a site visit before we provide a license? 7 And if we have happen to run across the illegal 8 eight-liners, do we have a responsibility to report that 9 to law enforcement? And, also, I think that if we could 10 strengthen the application process where we would have, 11 you know, Have you ever been involved in illegal gaming 12 or other questions in our application process that also 13 would speak to character in the event that someone was 14 granted a license, they indicated on their application 15 that they were not running illegal gambling and then 16 they -- we discovered that they were, is there not some 17 of those procedural things that we're able to do now 18 without running afoul of our statutory authority limits? 19 MR. GRIEF: I'll let Michael talk 20 specifically to what we do on information gathering on 21 licensees; but before I do that -- and Michael may want 22 to seek help from others in the audience as well -- just 23 a comment, something you said, Commissioner, is where 24 the rubber meets the road on this issue; and that is 25 even if one were to do site inspections, site 43 1 inspections alone, there could be a bank of machines in 2 any location. Determining whether or not they are legal 3 or illegal is a difficult and slippery slope on this. 4 That's where the work and the time and, as Commissioner 5 Lowe mentioned, the prosecution efforts have to take 6 place to make that happen. 7 So with that as an introductory comment, 8 I'll turn it over to Michael to try to answer your 9 question. 10 MR. ANGER: Commissioners, for the 11 record, again, my name is Michael Anger. I'm the 12 Lottery Operations Director. 13 And so, in response to your question, 14 mechanically what happens is someone comes to submit a 15 license application for a new location, we evaluate 16 them. So we do collect information with regard to the 17 disqualifying convictions that someone might have, and 18 so the two that are significant in this area are if 19 someone was running illegal eight-liners and had been 20 convicted or prosecuted for that behavior, they would be 21 disqualified out of the gate, the same as someone who's 22 convicted of a crime of moral turpitude or a felony. 23 General Counsel here referred to the 24 general character and fitness provision; and that's kind 25 of a broader, you know, not as clearly defined category 44 1 for determination of qualifications of a licensee. We 2 don't have specific questions that may ferret out what 3 the Commission's will is with regard to defining general 4 character and fitness as a part of the license 5 application process. 6 Now, with regard to the site visits, we 7 go through a qualification process. We do background 8 work. We work with our Enforcement Division. We do a 9 preliminary background check within lottery operations. 10 We do a full background process with our Enforcement 11 Division through DPS to evaluate and vet people who are 12 applying for a license, people who are owners and 13 officers in all of these businesses, as part of the 14 licensure process. 15 Physically going out to the location, 16 that's performed by IGT through their sales force for 17 us. They're the ones who actually go out to a location 18 once the license is granted and actually do deployment 19 of equipment, the installation of equipment in their 20 location. And then their sales force who routinely 21 revisit that store on a biweekly basis or a bimonthly 22 basis or twice a month -- we have someone from their 23 personnel in the store -- their position is to have, if 24 you will, "eyes" on the store more frequently than we 25 do. 45 1 We just have a survey process that we use 2 with retailers to collect information about our 3 performance, IGT's performance, and collect information 4 to use for marketing purposes. And that's a sampling 5 methodology. And so Lottery Commission employees from 6 our Claims Division are setting foot in licensed 7 locations approximately once every four years at 8 different locations. So we don't actually go out and do 9 site visits. 10 COMMISSIONER ARRIETA-CANDELARIA: So 11 during the application, we don't have specific language 12 that asks them if they are involved in illegal gambling 13 or anything like that? 14 MR. ANGER: No. We ask about actual 15 conviction information, yes. 16 COMMISSIONER ARRIETA-CANDELARIA: Because 17 I just recently renewed my CPA license and there are 18 questions in there -- I'm not recalling specifically 19 what the questions are -- but they do speak to, you 20 know, ethical behavior; and you have to respond to the 21 questions. And I don't know if that would be out of our 22 purview to ask for those when they are applying for a 23 license, to incorporate that kind of language to, I 24 guess, validate later on their character, if you will. 25 I mean, I think that it would -- I'm with the 46 1 Commissioner. I think that maybe we can incorporate the 2 language into the application and say, Are you or have 3 you ever conducted illegal gambling activities? I mean, 4 I think there has to be some -- there can be certain 5 steps, that we take a more proactive stance on that. 6 CHAIRMAN KRAUSE: It's been a very 7 interesting topic. Any other comments by the 8 Commissioners? 9 (No response.) 10 CHAIRMAN KRAUSE: Well, thank you very 11 much. 12 Let's go ahead and move on to the 13 Powerball Rule. Ms. Rienstra. 14 MS. RIENSTRA: Good morning, Chairman, 15 Commissioners. I'm Deanne Rienstra, Assistant General 16 Counsel. This is the amendment to the Powerball Rule. 17 In your notebook it is the Proposed Amended Texas 18 Powerball Game Rule, a copy of the game rule as 19 published in the Texas Register on October 23rd, 2015; 20 and a redline copy of non-substantive clarifying changes 21 made subsequent to the publication. 22 The amendments were proposed due to the 23 Multistate Lottery Association adopting changes to the 24 Powerball game to include provisions for a Grand Prize 25 Carry Forward Pool, which implemented a jackpot 47 1 management program beginning January 31st, 2016. 2 These amendments are being presented for 3 adoption with non-substantive clarifying changes that 4 were approved by MUSL after the publication in October. 5 The redline version that is in your notebook was made 6 available on the Agency website and provided at the 7 public comment hearing held on November 4th. 8 The changes to the proposed version do 9 not affect individuals who have not been impacted by the 10 rules as proposed and do not impose more stringent 11 requirements for compliance than the proposed version. 12 Only one written comment was received 13 during the public comment period that ended on 14 November 23rd, and this opposed the amendments and asked 15 that the game rule be more specific and opposed 16 guaranteed prizes. 17 The staff recommends adoption of these 18 amendments with the non-substantive clarifying changes. 19 I'm happy to answer any questions you may 20 have. 21 CHAIRMAN KRAUSE: Commissioners, 22 questions? 23 (No response.) 24 CHAIRMAN KRAUSE: Does anybody want to 25 offer a motion to adopt the amendments? 48 1 COMMISSIONER RIVERA: Move for approval. 2 COMMISSIONER HEEG: Second. 3 CHAIRMAN KRAUSE: All in favor, say 4 "Aye." 5 (Chorus of "Ayes.") 6 CHAIRMAN KRAUSE: No opposed. The 7 amendments' are adopted. 8 MS. RIENSTRA: I don't have the next one, 9 but I'm going to wait here for the one after that. 10 CHAIRMAN KRAUSE: Okay. Well, we have 11 Andy Marker. 12 MR. MARKER: Good morning, Chairman, 13 Commissioners. My name is Andy Marker. I'm Deputy 14 General Counsel for the Agency. 15 In October staff presented amendments to 16 the Lottery Procurement Rules and we voted to approve 17 publication of those proposed amendments. Those did 18 appear in the Texas Register. We did not receive public 19 comment. And today staff is recommending that you vote 20 to adopt the proposed amendments. 21 I'll be happy to answer any questions you 22 may have. 23 CHAIRMAN KRAUSE: Commissioners? 24 (No response.) 25 CHAIRMAN KRAUSE: No public comment at 49 1 all? 2 MR. MARKER: No, sir. 3 CHAIRMAN KRAUSE: That must mean the 4 public likes it. 5 MR. MARKER: We hope so. 6 CHAIRMAN KRAUSE: All right. I'm looking 7 for a motion to adopt the amendments. 8 COMMISSIONER RIVERA: Move for approval. 9 COMMISSIONER LOWE: Second. 10 CHAIRMAN KRAUSE: All in favor, say 11 "Aye." 12 (Chorus of "Ayes.") 13 CHAIRMAN KRAUSE: No opposed. We've 14 adopted the rules. 15 MR. MARKER: Thank you. 16 CHAIRMAN KRAUSE: Ms. Rienstra. 17 MS. RIENSTRA: Yes. This is regarding 18 the Employee Tuition Reimbursement Rule. This is a new 19 rule in your notebook as proposed; and a copy was 20 published in the Texas Register on October 23rd, 2015. 21 The public comment hearing ended on November 23rd, and 22 we received no comments to this proposed rule. Staff 23 recommends adoption of this new rule as proposed. 24 I'm happy to answer any questions. 25 CHAIRMAN KRAUSE: Comments, questions? 50 1 (No response.) 2 COMMISSIONER ARRIETA-CANDELARIA: Move to 3 approve. 4 COMMISSIONER RIVERA: Second. 5 CHAIRMAN KRAUSE: All in favor say, 6 "Aye." 7 (Chorus of "Ayes.") 8 CHAIRMAN KRAUSE: None opposed. The 9 motion is adopted. 10 MS. RIENSTRA: Thank you. 11 CHAIRMAN KRAUSE: All right. It is 12 11:05, and I'm going to give my Commissioners a chance 13 to get off the dais here for about seven and a half 14 minutes. So we are temporarily adjourned. 15 (Off the record from 11:05 to 11:15 a.m.) 16 CHAIRMAN KRAUSE: The Lottery Commission 17 is reconvened after a short break. 18 So we are moving on to the next agenda 19 item which belongs to Ms. Guthrie. 20 MS. GUTHRIE: Good morning, Mr. Chairman, 21 Commissioners. My name is Kristen Guthrie, Assistant 22 General Counsel. 23 I am presenting for your consideration a 24 draft submission for publication in the Texas Register 25 that authorizes the adoption of amendments to 401.220, 51 1 the Motion for Rehearing. Without changes it was 2 published in the Texas Register. The amendments 3 implement changes to Texas Government Code 2001.146, 4 made pursuant to Section 9, enacted Senate Bill 1267, 5 which modifies certain deadlines with regard to filing 6 and responding to Rules and Motions for Rehearing in 7 contested cases under the Administrative Procedure Act 8 that clarifies the content required in a Motion for 9 Rehearing. The amendments were presented without 10 changes to the proposed version presented to you at the 11 August Commission meeting. 12 We have received no comments on this 13 proposal as published in the September 11th, 2015 issue 14 of the Texas Register. 15 Staff recommends adoption of the draft as 16 presented in your notebooks. 17 I'll be happy to answer any questions you 18 may have. 19 CHAIRMAN KRAUSE: Commissioners? 20 (No response.) 21 CHAIRMAN KRAUSE: Again, no public 22 comment at all? 23 MS. GUTHRIE: Right. 24 CHAIRMAN KRAUSE: Do I hear a motion to 25 adopt these amendments? 52 1 COMMISSIONER HEEG: So moved. 2 COMMISSIONER RIVERA: Second. 3 CHAIRMAN KRAUSE: All in favor, say 4 "Aye." 5 (Chorus of "Ayes.") 6 CHAIRMAN KRAUSE: All opposed, "Nay." No 7 nayes. It carries. 8 MR. BIARD: Commissioners, I have orders 9 for you in each of those rulemaking proceedings. 10 CHAIRMAN KRAUSE: Mr. Fernandez, we are 11 ready for you. 12 MR. FERNANDEZ: Mr. Chairman, thank you. 13 Again, for the record, I'm Mike Fernandez, Director of 14 Administration. 15 MR. BIARD: And I will interject just 16 briefly here: This is an item involving an amendment to 17 the Lottery Operator Contract, and I just wanted to 18 bring to your attention that there is provision of the 19 State Lottery Act that allows you to meet in Executive 20 Session to discuss negotiation of Lottery Operator 21 Contracts if the Commission determines that providing an 22 open would have an detrimental effect on the 23 negotiations. This is an exception to the Open Meetings 24 Act. It's my understanding that Mr. Fernandez is not 25 recommending Executive Session, but I wanted you to be 53 1 aware that you have that option. 2 CHAIRMAN KRAUSE: Outstanding. 3 MR. FERNANDEZ: Thank you. 4 Item 10 in your notebook is an action 5 item. Staff is seeking Commission approval to amend the 6 Lottery Operator Contract in order to eliminate certain 7 requirements that are no longer needed or relevant to 8 the operation. Such requirements will be replaced with 9 new services of a like value that will both improve and 10 enhance operations. Service requirements that are being 11 added are the development, printing, and installation of 12 backer boards for jackpot signs located in lottery 13 retailers; the Call Center Management Tool to support 14 customer service operations; and a conveyor belt system 15 to streamline ticket processing at the TLC warehouse. 16 I can answer any questions you may have. 17 CHAIRMAN KRAUSE: Commissioners? 18 (No response.) 19 CHAIRMAN KRAUSE: Conveyor belt, huh? Is 20 that new technology? 21 MR. FERNANDEZ: Conveyor belt? I 22 wouldn't go so far as to say it's new technology; but 23 it's improved technology, more efficient. 24 CHAIRMAN KRAUSE: Do I hear a motion on 25 that? 54 1 COMMISSIONER HEEG: I make the motion. 2 COMMISSIONER RIVERA: Second. 3 CHAIRMAN KRAUSE: All in favor, say 4 "Aye." 5 (Chorus of "Ayes.") 6 CHAIRMAN KRAUSE: All opposed? Hearing 7 no dissension, we've adopted the motion. 8 MR. FERNANDEZ: Thank you, Mr. Chairman. 9 I also have Item Number 11. 10 CHAIRMAN KRAUSE: And 12. 11 MR. FERNANDEZ: And 12. 12 Item Number 11 is to advise the 13 Commission of staff's intent to amend the Agency's three 14 instant ticket manufacturing and services contracts. 15 This amendment will provide additional pricing options, 16 tickets, supplies, and fulfillment and experiential 17 prizes, the detail of which was included in the your 18 notebook. 19 If you have any questions, I'll be happy 20 to answer them. 21 CHAIRMAN KRAUSE: Commissioners? 22 (No response.) 23 CHAIRMAN KRAUSE: Go to your next item, 24 please. 25 MR. FERNANDEZ: Item Number 12, again, is 55 1 a briefing item. Our current contract with the Lottery 2 Products Testing Services will expire August 31, 2016. 3 This item is to advise the Commission of our intent to 4 issue an RMP to product testing services. 5 That's all I have, Mr. Chairman. 6 CHAIRMAN KRAUSE: Outstanding. 7 Commissioners, any questions for this gentleman? 8 (No response.) 9 CHAIRMAN KRAUSE: Thank you, sir. 10 Ms. Pyka, the next three are yours. 11 MS. PYKA: My name is Kathy Pyka, 12 Controller; and this is Products & Drawings Manager, 13 Robert Tirloni. This is our first chart this morning, 14 sales for the week ending December 5th, 2015. Our total 15 fiscal year 2016 sales through the 14-week period are 16 $1,169,000,000, which is an increase of $28.6 million 17 over the same period last fiscal year. 18 Moving forward to our scratch ticket 19 sales, which are reflected on the second orange bar, are 20 now at $895.5 million. It's a 28.4-million-dollar 21 increase over last fiscal year, and scratch ticket sales 22 now amount to 76.6 percent of total sales through this 23 period. 24 Our fiscal year 2016 draw sales are 25 reflected on the second blue bar, $273.8 million, which 56 1 is a 197,000-dollar increase over last fiscal year. 2 Commissioners, before we move on to the 3 next slide, I wanted to share with you we have concluded 4 the first quarter of fiscal year 2016 with all-time 5 record sales for the first quarter. This included a 3.6 6 percent increase over the previous record sales for the 7 first quarter. 8 And so with that, we'll move on to the 9 next slide, which includes our cumulative average daily 10 sales for fiscal years 2014, 2015, and 2016. The 11 overall daily average sales included 2016 at 12 $4.2 million. That is a 423,000-dollar-per-day increase 13 over last fiscal year; and it's a 612,000-dollar-per-day 14 increase over fiscal year 2014. 15 We'll move first to our jackpot games 16 which are highlighted with the white font and reflect 17 the daily average of $1.61 million. That's a decline of 18 51,000 from last fiscal year. 19 And while we're showing modest increases 20 year over year for Lotto Texas and Powerball, we've not 21 experienced a large Mega Million's jackpot to date. 22 We've got decline there and a decline, also, for the 23 Texas Two Step product as well. 24 We'll move now to the blue font, which is 25 our daily sales; and we've got daily average there of 57 1 $1.27 million. That's an 85,000-dollar-per-day increase 2 over last year. Note on the slides sales are up for 3 Pick Three and Daily 4, while Cash Five and All or 4 Nothing have declined and also wanted to note the new 5 Texas Triple Chance product which shows just over a 6 100,000-dollar-per-day average daily sales rate. 7 And then moving to the very bottom of 8 chart, we see our scratch ticket sales with average 9 daily sales of $9.3 million per day. That's an increase 10 of $389,000 over last fiscal year and a 762,000-dollar 11 gain over fiscal year 2014. 12 So with that, Robert will now provide an 13 overview of actual sales by product. 14 MR. TIRLONI: Thanks, Kathy. For the 15 record, Robert Tirloni, Products & Drawings Manager. 16 We just saw average daily sales. This is 17 total sales for fiscal year '16 compared to '15. Again, 18 this is through this past Saturday, December 5th. 19 Jackpot games are at top. That category is down 20 $4.1 million. 21 There is growth in the Powerball game in 22 the Power Play feature that's due to a 301-million- 23 dollar Powerball jackpot that we experienced in early 24 October of this year. 25 That is being negated by Mega Millions, 58 1 which is in decline due to lack of jackpots. The other 2 games are pretty much holding steady in that portion of 3 the category. 4 For our daily games up, they are up 5 $4.3 million compared to last fiscal. The main reason 6 for that growth is the new Texas Triple Chance game 7 which started at the end of September. So that's 8 $7.1 million in new sales that we're experiencing this 9 fiscal. 10 Again, most of the other games are 11 holding their own. So when you look at the draw game 12 category as a whole, we are up $200,000 this fiscal 13 compared to last. 14 We continue to see very strong sales from 15 the scratch products category. Those sales for scratch 16 are up just under $29 million. So as a whole, we are 17 seeing a 28.6-million-dollar sales growth this fiscal 18 compared to last. 19 And that's our report for this month. 20 We're happy to answer any questions you might have. 21 CHAIRMAN KRAUSE: Commissioners? 22 (No response.) 23 CHAIRMAN KRAUSE: I've got a question. 24 And that is: Is Mega Millions down because of lack of 25 jackpots? 59 1 MS. PYKA: That's correct. 2 CHAIRMAN KRAUSE: What does that mean? 3 Does that mean that the winner is winning at really low 4 amounts or -- I'm guessing that's what it is because, 5 otherwise, we'd have a big old pile of money and 6 everybody would be buying tickets to get it. 7 MS. PYKA: That is exactly what it is. 8 There have not been large rolls on Mega Millions 9 jackpot. This jackpot has been hit at the lower levels. 10 CHAIRMAN KRAUSE: So we recently changed 11 our Powerball Rules to allow for bigger jackpots. 12 MS. PYKA: That is correct. 13 CHAIRMAN KRAUSE: And so are you-all 14 going to come to us at some point and want some rule 15 changes so that we can fix Mega Millions? 16 MS. PYKA: Not to rule change on Mega 17 Millions. That would actually start with the Mega 18 Millions products group, and that would be something -- 19 CHAIRMAN KRAUSE: Multi-state game. 20 MS. PYKA: Yes. It's administered by the 21 Mega Millions Consortium, and we'd have to start in that 22 direction. 23 CHAIRMAN KRAUSE: Do we have any 24 influence with them? 25 MR. BIARD: We do, Mr. Chairman. Quite 60 1 frankly, I don't see a change coming anytime in the near 2 future on Mega Millions. There was a change, when, a 3 couple of years back? A couple of years. 4 MR. GRIEF: That lengthened the jackpot 5 odds. 6 MR. BIARD: We moved the jackpot option 7 to 1 in 276 million, very high jackpot odds, which 8 Powerball has now emulated. So I just don't detect any 9 appetite among the Mega Millions group of states to make 10 a change anytime soon. 11 CHAIRMAN KRAUSE: Okay. Carry on. 12 MS. PYKA: All right. Then we will move 13 on to Agenda Item Number 14 if that is okay with you, 14 Mr. Chairman. 15 CHAIRMAN KRAUSE: Absolutely. 16 MS. PYKA: Information on the Agency's 17 transfers to the State as well as the Agency's budget 18 status. Commissioners, the report in your notebook 19 includes revenue transfers and allocations to the 20 veterans or -- excuse me -- the Foundation School Fund 21 and the Texas Veterans Commission for the period ending 22 October 31st, 2015. Our total accrued transfer to the 23 state amounted to $167.7 million for this first two 24 months of the fiscal year. Of the $167.7 million 25 transferred to the state, $166 million was transferred 61 1 to the Foundation School Fund; and $1.6 million was 2 transferred to the Texas Veterans Commission. This 3 represented a three-tenths of a percent increase or 4 $477,000 over the previous fiscal year. And I wanted to 5 share, through the October transfer, our cumulative 6 transfers to the Foundation School Fund are now at 7 $18.48 trillion. 8 The other item under this tab is the 9 final report on our agency fiscal year 2015 operating 10 budget. We wrapped up the budget at a value for lottery 11 account of $218.8 million. Of that amount, 92.1 percent 12 was expended and encumbered through this fiscal year. 13 Our bingo operation budget, funded by 14 general revenue, was $17.7 trillion; and 97.5 percent of 15 that exhibited encumbered through the end of the fiscal 16 year. 17 This concludes our presentation. We're 18 happy to answer questions. 19 CHAIRMAN KRAUSE: Commissioners? 20 (No response.) 21 CHAIRMAN KRAUSE: Do you have one more 22 item? 23 MS. PYKA: Yes. 24 Commissioners, Tab Number 15 is the 25 fiscal year 2016 Itemized Operating Budget. In 62 1 accordance with the Internal Auditing Act, Agencies are 2 required to file our Itemized Operating Budgets with the 3 Governor's Office of Budget, Planning, and Policy as 4 well as the Legislative Budget, no later than 5 December 1st of 2015. 6 So the budget documents included in your 7 notebook reflect the budget that you previously adopted 8 on August 27th of 2015, as well as actual expenditures 9 for fiscal year 2014 and '15; and that is a requirement 10 set forth by the Legislative Budget Office. This 11 document was completed by the Office of the Controller 12 on November 24th, 2015 and certified by the Legislative 13 Offices on the 1st of December. 14 I'll be happy to answer any questions. 15 CHAIRMAN KRAUSE: Commissioners? 16 (No response.) 17 CHAIRMAN KRAUSE: I'm pleased to be doing 18 a good job for the school children of the state of Texas 19 and our veterans. 20 MS. PYKA: Mr. Chairman, I'm going to 21 stay up here. The next item is Darlene's, but I also 22 have a report under this item. 23 MS. BROWN: Good morning, Commissioners. 24 I'm Darlene Brown, the Internal Auditor for the Agency; 25 and I am reporting to you on our activities that we have 63 1 completed since the last Commission meeting. The first 2 activity is we continue to review the Bingo Account by 3 reconciliation. We continue to procure the pay with 4 audits, and we anticipate wrapping that up before the 5 holidays begin. And we will be working with management 6 to get a draft report issued. 7 The second activity -- or the third 8 activity is we started the entity-wide performance 9 measure audit, and that's where we're looking at the 10 Agency's key performance measures, looking at the 11 processes that are involved, seeing if they're capturing 12 the data accurately, if their classes were being 13 reported, and if there's controls around the whole 14 process. We also anticipate wrapping that up by the end 15 of the fiscal year. 16 We have just begun the planning process 17 for the next two audits, which is the jackpot estimates 18 audit and the drawing process audit. As of two weeks 19 ago, we were at 70 percent of our budget, both on hours 20 and the financial aspect of it. And that wraps up my 21 report for today. 22 I'll be happy to answer any questions you 23 might have. 24 CHAIRMAN KRAUSE: Commissioners? 25 (No response.) 64 1 CHAIRMAN KRAUSE: Ms. Brown -- oh, Kathy, 2 did you want to say something? 3 MS. PYKA: If I might. Did you finish? 4 CHAIRMAN KRAUSE: I'll wait. 5 MS. PYKA: I wanted to also share with 6 you that the State Auditor's Office has notified us of 7 their plan to perform an audit of the Commission. And I 8 wanted to share the audit objectives and scope as they 9 provided it to us. And it is to determine whether the 10 Commission is administering blanket provisions of 11 instant ticket contracts in accordance with applicable 12 requirements. We had the entrance conference on that 13 audit on November 20th; and at that conference, they 14 shared that they planned to have their audit report 15 wrapped up by April of 2016. I wanted to share that 16 external audit activity with you as well. 17 CHAIRMAN KRAUSE: Commissioners? 18 (No response.) 19 CHAIRMAN KRAUSE: Ms. Pyka, this thing 20 that the State Auditors are looking at, have we looked 21 at that ourselves, like, you know, Darlene's people? 22 MS. PYKA: I'm not aware of that being 23 recently reviewed by the internal audit function in the 24 Agency. 25 CHAIRMAN KRAUSE: Is that something that 65 1 Weaver does? 2 MS. PYKA: Is that something... I'm 3 sorry? 4 CHAIRMAN KRAUSE: That Weaver does, our 5 external financial monitors. 6 MS. PYKA: Weaver looks at the 7 expenditure. They do test work on the inventory 8 balances related to scratch ticket products, actually 9 going to the warehouse and validating that balance, as 10 well as the evaluation of our assets. Obviously, 11 they're looking at payments through selected samples; 12 specific to the overall contract, no. 13 MS. BROWN: And from the internal audit 14 side, the audit that we currently have underway is a 15 procured pay cycle. We are looking at the contracting 16 process, but we're not looking at the same aspects as 17 the State Auditor's Office is looking at. That's more 18 under the contract management aspect, and we are looking 19 at the contract management portion next year. 20 CHAIRMAN KRAUSE: Gotcha. 21 Well, since this is all fresh on my mind 22 because I spent 30 minutes on the phone with the State 23 Auditor's Office yesterday, they were really interested 24 in fraud. So that's not something that Weaver does, but 25 that might be something that you-all do. 66 1 MS. BROWN: That is correct. 2 CHAIRMAN KRAUSE: Fraud protection 3 procedures. 4 MS. BROWN: Correct. And I also spent 5 about 45 minutes on the phone with the State Auditor's 6 Office in regard to the fraud controls in place at the 7 Agency, and I told them this Agency has very good 8 controls around everything. In every audit that we do, 9 we consider fraud and the potential for fraud in those 10 audits; and we have not seen any indicators of fraud in 11 the audits that we've completed. 12 CHAIRMAN KRAUSE: Commissioners? 13 (No response.) 14 CHAIRMAN KRAUSE: Ladies, thank you so 15 much. 16 COMMISSIONER LOWE: Thank you. 17 CHAIRMAN KRAUSE: Mr. Bingo. 18 MR. ROYAL: Good morning, Commissioners. 19 I'm Alfonso Royal. 20 In addition to the Bingo output matrix 21 included in your briefing booklets, I wanted to update 22 you on a couple of items. You heard from Darlene on the 23 account response data. There's been 142 accounts that 24 have been updated through the Bingo Operating Services 25 System, including statements mailed to organizations. 67 1 Those organizations include monies owed to the State, 2 monies overpaid, zero balance amounts. There are about 3 30 organizations who have not settled on those accounts 4 as of yet. Those organizations we will be pursuing 5 through the Agency's debt collection process. We 6 anticipate concluding all our accounts by April 2016. 7 We just wrapped up earlier this month the 8 statewide bingo training initiative. In our last event 9 in Houston, we had about 323 industry representatives 10 that attended four training sessions that included 11 accounting licensing, audit and bingo operations, and 12 most importantly, the bingo services coordinator, the 13 kind of material that's presently on the website. And 14 with the assistance of our great media team, we'll have 15 some video on the website in the coming months that 16 additional folks will be able to access. 17 The rule review that you initiated back 18 in August, we received comments from the Texas Charity 19 Advocates and Bingo Interest Group and the VFW. So 20 we're combing through those rule comments right now. We 21 made calls to the state groups and we'll have those 22 meetings starting in January. We look forward to 23 bringing some revised rules and illuminating some rules 24 to you in the coming months. 25 Lastly, I'd like to introduce you to our 68 1 Licensing and Accounting Manager, Desira Glenn. Desira 2 holds a Masters Degree in Business Administration and 3 received an honorable discharge after serving nine and a 4 half years in the Army. She has 24 years of 5 professional accounting experience, and she has a strong 6 commitment to leadership and to customer service. So 7 we're really glad to have her as part of the bingo 8 management team. 9 Commissioners, that concludes my report. 10 CHAIRMAN KRAUSE: Outstanding. Welcome 11 aboard. 12 Gary. 13 MR. GRIEF: Mr. Chairman, Commissioners, 14 other than what's in your notebook, I have one item I'd 15 like to report on today. And I'd like to ask Jan, if 16 you would, come forward and take a seat at the table 17 here, please, ma'am. 18 Commissioners, I want to publicly 19 introduce you to our new Director of Human Resources, 20 Jan Thomas. Jan joined our team on November 9th, and 21 she has absolutely hit the ground running ever since she 22 came on board. She's got extensive experience in Human 23 Resources. She has many years in State Government as 24 well. 25 In the early part of Jan's career, she 69 1 worked at the Texas Employment Commission where she 2 ultimately served as the Director for the Governor's Job 3 Bank, where she led the team that automated the State's 4 job application process. They created a uniform 5 application for the State to use, and she served as a 6 resource for about 140 state agencies during her period 7 of time there. 8 And her most recent full-time position 9 was Director of Human Resources and Staff Development at 10 the Texas Workforce Commission. 11 I'm delighted that Jan has come aboard. 12 She is at the Commissioners' service as well, and we 13 look forward to working closely with Jan. 14 That's all I have to report this morning, 15 Mr. Chairman. 16 CHAIRMAN KRAUSE: Welcome aboard, Jan. 17 MS. THOMAS: Thank you. It's my pleasure 18 to be here. I look forward to working with all of you. 19 COMMISSIONER LOWE: Super. 20 CHAIRMAN KRAUSE: Mr. Biard. 21 MR. BIARD: Yes. Commissioners, Item 19 22 in your notebook are the Enforcement Orders and twelve 23 lottery and bingo matters, Tabs A through L. These are 24 cases where the Commission staff found a violation of 25 rules and either the licensee failed to appear at the 70 1 hearing so it's received by default, staff might have 2 reached an settlement; and in some cases the licensee 3 does appear and we have a litigated hearing. 4 I'll briefly describe the cases and you 5 can take them up in a single vote if you like and if you 6 approve of the orders. Of course, pull any out if you'd 7 like to discuss them separately. 8 Tabs A through E are the non-sufficient 9 fund lottery retailer license revocations. Each of 10 these case was presented at the State Office of 11 Administrative Hearings for revocation of the retailer's 12 license on the grounds the licensee failed to have 13 sufficient funds in their bank account to cover 14 electronic fund transfers to the Lottery Commission 15 Account. In these cases the Administrative Law Judge 16 recommends revocation. And the staff recommends that 17 you move to approve the order revoking the retailers' 18 license. The order in this particular matter contains 19 technical corrections to some errors, technical errors 20 in the setup. 21 Tabs F and G are lottery agreed orders. 22 These are settlements, and these are the first two cases 23 I'm bringing to you where part of the settlement is for 24 the licensee to post at the retail location notice that 25 their license has been suspended for a period of time. 71 1 In Tab F a customer complained at a 2 7-Eleven in Allen, Texas that a clerk underpaid her for 3 prizes she won on a Texas scratch ticket. She thought 4 she'd won $20; but it turned out she's only scratched 5 part of the latex off the ticket. The clerk scanned the 6 ticket and paid her $20. The customer left the store 7 but could see back in and the clerk scratching the rest 8 of ticket and take the money out of register. And after 9 an investigation by our Commission staff it was 10 determined by reviewing the videos that the clerk had 11 collected the other $30. It was 50-dollar winning 12 ticket. So the clerk was terminated, and the licensee 13 agreed to a ten-day suspension and to prohibit the clerk 14 from ever working again at the store. 15 In Tab G a customer at Beach Chevron in 16 Galveston bought tickets, four winning tickets for $36 17 in prizes. The clerk informed her that she had to make 18 a purchase in order to be paid for prizes, which is not 19 a requirement. So the Commission, again, initiated an 20 investigation and found some other violations at the 21 time. However, the clerk was terminated; and the 22 parties agreed to a ten-day suspension of the retailing 23 license and prohibited the clerk from further employment 24 at the store. 25 Tabs H through J are default bingo 72 1 license revocation cases, and these are all based on 2 accounting errors. In all three cases the organization 3 failed to submit required information and do their 4 quarterly reports or failed to file a report at all. In 5 each case the organization did not appear at hearing, so 6 the hearing proceeded by default; and the judge 7 recommended revoking the license of each organization. 8 If staff agrees, then we have orders to revoke the 9 license in each of these cases. 10 Finally, K and L are agreed orders. 11 These settlements regarding individuals who either 12 applied to be on or are on the bingo worker registry. 13 In Tab K is the settlement with an applicant who had two 14 theft charges against her. One was resulted in 15 adjudication of guilty; and the individual was jailed 16 for a brief period of time, for 10 days, in the Harris 17 County Jail. In the other matter, adjudication was 18 deferred; and the individual was placed on community 19 supervision for 180 days. Parties agreed rather than to 20 deny her application, to limit her involvement as a 21 bingo worker. She won't be able to act as either a 22 chairperson, manager, operator, bookkeeper, or 23 designated agent; but she will be able to perform other 24 functions at a bingo hall. 25 Tab L, the final tab, is a settlement. 73 1 Bingo worker Jerry Stobaugh, who is associated with East 2 Plano Bingo Hall in Plano, Texas, in 2009 was involved 3 in numerous instances where eight-liners were claimed at 4 the hall. He was later indicted in Collin County for 5 keeping a gambling place. He pled guilty to engaging in 6 organized criminal activity, which is a felony. 7 However, adjudication of guilt was deferred; and he was 8 placed upon community supervision for two years. 9 The parties have agreed in lieu of 10 removing from registry, that he shall not act as a bingo 11 chairperson for three years. So he will be able to work 12 at a bingo hall, but he won't be the bingo chairperson 13 for any of the charity organizations for a period of 14 three years. 15 That concludes my presentation. And if 16 you approve the proposed resolutions, you may take them 17 up in a single motion. 18 CHAIRMAN KRAUSE: Commissioners, do you 19 have any questions of Mr. Biard? 20 COMMISSIONER LOWE: Mr. Chairman, I would 21 propose to being able to take all the items up in bulk 22 except for Tab L, which is Commission Order 23 Number 16-0015, and do that separately. 24 COMMISSIONER RIVERA: Second. 25 CHAIRMAN KRAUSE: All in favor, say 74 1 "Aye." 2 (Chorus of "Ayes.") 3 CHAIRMAN KRAUSE: So the vote carries. 4 Do you have a separate motion on Tab L? 5 COMMISSIONER LOWE: Well, I just wanted 6 to have some discussion about it before we vote on it. 7 CHAIRMAN KRAUSE: Okay. 8 COMMISSIONER LOWE: So my understanding 9 is he's not going to be able to run a bingo hall, but 10 can work at a bingo hall? And then after three years, 11 can get back in the business? 12 MR. ROYAL: That is correct. 13 COMMISSIONER LOWE: So as far as the 14 findings of fact, I note it says that from 2005 to 2010, 15 he had up to 130 illegal gambling devices at or near his 16 bingo hall. Right? 17 MR. ROYAL: That's correct. But Jerry 18 Stobaugh was not the actual owner. He's not the lessor. 19 He was a worker there. 20 COMMISSIONER LOWE: But he pled guilty. 21 He got up in front of the judge and said, "I'm guilty of 22 organized crime" -- 23 MR. ROYAL: -- which is a felony, not a 24 misdemeanor? He pled guilty to that and announced in 25 open court that he was guilty of that offense? 75 1 MR. BIARD: That is correct. 2 COMMISSIONER LOWE: That's all the 3 questions I have. 4 CHAIRMAN KRAUSE: Well, do I hear a 5 motion to adopt? 6 COMMISSIONER LOWE: I'm not going to move 7 forward. I would respectfully vote no. 8 CHAIRMAN KRAUSE: All right. Does 9 anybody else want to make a motion to adopt the staff's 10 recommendation, or discuss you want to discuss it some 11 more? 12 COMMISSIONER ARRIETA-CANDELARIA: I have 13 a quick question. 14 CHAIRMAN KRAUSE: Sure. 15 COMMISSIONER ARRIETA-CANDELARIA: So is 16 the negotiated -- that's what it is, really; it's a 17 negotiated outcome -- is that in line with others, with 18 other similar types of instances; or is it just a 19 case-by-case basis? 20 MR. ROYAL: Commissioner, these 21 negotiations are consistent with others that we have 22 done; and they are on a case-by-case basis. This is the 23 first that we've had this level of offense that has 24 occurred. This occurred previously to the change in 25 statute that occurred. And there are two other 76 1 individuals associated with this, but we do not have 2 those agreements in principal as of yet. 3 But this individual, being a worker, the 4 audit team had done of the hall's location. The audit 5 was clean and satisfactory. The organization is 6 generating revenue at the location. So the thought 7 process here was to put them under some sort of 8 monitoring so that we can ensure that the charities 9 continue to operate while at the same time continue to 10 monitor those individuals that are involved in the 11 operation of bingo, Mr. Stobaugh is the first individual 12 who has agreed to the terms. 13 MR. BIARD: And, Alfonso, isn't there a 14 schedule for continued inspections out there, a set 15 period of time? 16 MR. ROYAL: Yes, that is correct. 17 There's a three-year monitoring period that we would 18 continue to go to this particular hall and review the -- 19 onsite inspection, football game inspection, for three 20 years, twice a year. 21 COMMISSIONER HEEG: (Speaking without 22 microphone, inaudible to the reporter.) 23 MR. ROYAL: In my opinion, if I can speak 24 to this a little bit, this was the Occupations Code that 25 switched, which... 77 1 MR. BIARD: This is a chapter of the 2 Occupations Code, which allows a licensing agency to 3 consider deferred adjudication for convictions in 4 deciding whether to deny a license and if the Commission 5 decides that it is a crime directly related to the 6 activities being licensed. 7 So in this case SOAH received the 8 adjudication, but the Commission had a basis to revoke 9 his registration. But I believe this is a policy matter 10 where we've gone forward, as reflected for these items, 11 on an individual basis. 12 COMMISSIONER HEEG: (Speaking without 13 microphone, inaudible to the reporter.) 14 MR. BIARD: Right. 15 MR. ROYAL: On that particular offense 16 that he pled to, yes. 17 COMMISSIONER RIVERA: So if we make a 18 motion to deny, then are we looking at legal action by 19 the applicant; or what's the downside to voting "no"? 20 MR. ROYAL: I believe the applicant would 21 pursue legal action. 22 COMMISSIONER RIVERA: Okay. And that 23 legal action, then, is paid for by who on our behalf? 24 MR. ROYAL: It would go to SOAH; and 25 depending on that decision from SOAH, again, back to the 78 1 Commissioners for acceptance or denial. And from that 2 point, it's up to the applicant. 3 COMMISSIONER RIVERA: So then we risk 4 potential damages, then, if we are found restricting -- 5 MR. BIARD: Not monetary. 6 COMMISSIONER RIVERA: So there's no 7 monetary downside to withholding the applicant's 8 license? 9 MR. BIARD: Except for the administrative 10 cost of going through litigation. 11 CHAIRMAN KRAUSE: Well, let me see if I 12 understand a little bit more. So this particular fellow 13 is just wanting to be on the registry to be a worker? 14 MR. ROYAL: That is correct. 15 CHAIRMAN KRAUSE: Okay. So that doesn't 16 mean that the corporate lessor that he works for is 17 going to go out of business? 18 MR. ROYAL: No. 19 CHAIRMAN KRAUSE: Okay. So that means 20 that corporate lessor is still going to be providing 21 bingo occasions for charities? 22 MR. ROYAL: Right. 23 CHAIRMAN KRAUSE: So if we don't like 24 this guy, then they can just go find somebody else? 25 MR. ROYAL: That is true. 79 1 Now, the corporate lessor is the other 2 party that has not accepted the terms of the settlement 3 offer as of yet, that I know of. So essentially there 4 are two other individuals, the corporate lessor and 5 another worker. 6 CHAIRMAN KRAUSE: Well, it sounds dirty. 7 Maybe we need to wait until we see what they have to 8 say. 9 MR. ROYAL: That's your prerogative, 10 Commissioners. 11 CHAIRMAN KRAUSE: All right. So why 12 don't I listen for a motion to table this until the next 13 time? 14 COMMISSIONER RIVERA: Move to table. 15 CHAIRMAN KRAUSE: Second on that? 16 COMMISSIONER HEEG: Second. 17 CHAIRMAN KRAUSE: All right. I'll call 18 for a vote. All in favor of tabling, say "Aye." 19 (Chorus of "Ayes.") 20 MR. BIARD: Very good. That concludes 21 the enforcement orders. 22 CHAIRMAN KRAUSE: At this time I move 23 that the Texas Lottery Commission go into Executive 24 Session and deliberate personnel matters, including the 25 appointment, employment, evaluation, reassignment, 80 1 duties, discipline, or "dismissal" of the Executive 2 Director and the Bingo Director -- 3 (Laughter.) 4 CHAIRMAN KRAUSE: -- and the duties of 5 the General Counsel and the Human Resources Director, 6 brand-new Human Resources Director, pursuant to the 7 Texas Government Code, as well as to receive legal 8 advice on everything that we need legal advice on. 9 Do I hear a second? 10 COMMISSIONER RIVERA: Second. 11 CHAIRMAN KRAUSE: All in favor, say 12 "Aye." 13 (Chorus of "Ayes.") 14 CHAIRMAN KRAUSE: It's unanimous. We're 15 going into Executive Session at 10 until 12:00. 16 (Off the record from 11:50 a.m. to 12:37 p.m.) 17 CHAIRMAN KRAUSE: It is 11:37 [sic.] and 18 The Texas Lottery Commission is out of Executive 19 Session. There is one item that we are taking up now 20 that we are back in session. 21 COMMISSIONER RIVERA: Yes. I'd like to 22 put the item that we tabled earlier back on the table, 23 open for denial. I vote "no" on the request. 24 COMMISSIONER HEEG: Second. 25 CHAIRMAN KRAUSE: Do you want to identify 81 1 that item? 2 MR. BIARD: Yes. That is Item 19, Tab L, 3 the Jerry Stobaugh agreed order. 4 CHAIRMAN KRAUSE: We have a motion and a 5 second. All in favor, say "Aye." 6 (Chorus of "Ayes.") 7 CHAIRMAN KRAUSE: It is denied. We are 8 denying the staff's recommendation on that. 9 MR. BIARD: Thank you. 10 COMMISSIONER ARRIETA-CANDELARIA: Move to 11 adjourn? 12 MR. BIARD: Mr. Chairman, for the record, 13 the time is 12:37, just so the record reflects it 14 correctly. 15 CHAIRMAN KRAUSE: Okay. It's 12:37, and 16 we are adjourned. 17 (Proceedings concluded at 12:37 p.m.) 18 --oo0oo-- 19 20 21 22 23 24 25 82 1 STATE OF TEXAS) 2 3 **************************** 4 REPORTER'S CERTIFICATE 5 **************************** 6 7 8 I, DEBBIE D. CUNNINGHAM, CSR, Certified 9 Shorthand Reporter in and for the State of Texas, do 10 hereby certify that the above and foregoing contains a 11 true and correct transcription of all portions of the 12 above-referenced meeting to be included in the 13 transcript of said meeting, and were reported by me to 14 the best of my ability. 15 16 SUBSCRIBED AND SWORN TO under my hand and 17 seal of office on this the 14th day of December, 2015. 18 19 ______________________________ 20 DEBBIE D. CUNNINGHAM, Texas CSR 2065 Expiration Date: 12/31/2016 21 Kim Tindall & Associates 16414 San Pedro Avenue, Suite #900 22 San Antonio, Texas 78232 (210) 697-3400 23 24 25