1 2 3 4 5 ************************************************ 6 TEXAS LOTTERY COMMISSION JULY 11, 2016 7 10:00 a.m. 8 *********************************************** 9 10 On the 11th day of July, 2016, the following 11 proceedings came on to be heard in an Open Meeting of 12 the Texas Lottery Commission, held in Austin, Travis 13 County, Texas. 14 15 16 17 18 19 20 21 22 23 24 25 1 1 A P P E A R A N C E S 2 TEXAS LOTTERY COMMISSION STAFF: 3 MR. ROBERT F. BIARD, General Counsel MR. ALFONSO D. ROYAL, III, Charitable Bingo 4 Operations Division Director MR. GARY GRIEF, Executive Director 5 6 TEXAS LOTTERY COMMISSIONERS: 7 CHAIRMAN J. WINSTON KRAUSE MR. DOUG LOWE 8 MS. CARMEN ARRIETA-CANDELARIA MR. ROBERT RIVERA 9 MS. PEGGY A. HEEG 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 2 1 MR. KRAUSE: Good morning. I'm calling the 2 meeting to order of the Texas Lottery Commission. It's 3 January 11, 2016; and it is 9:59. We have Commissioners 4 Arrieta-Candelaria, Heeg, Lowe, and Rivera. Of course 5 I'm here. So, we have a quorum. We will start with the 6 pledge of allegiance to the United States flag and to 7 the Texas flag. And Commissioner Candelaria will lead 8 us. 9 (Pledge of Allegiance.) 10 MR. KRAUSE: We have a guest today; and our 11 executive director, Gary Grief, is going to introduce 12 this guest. 13 MR. GRIEF: Thank you, Mr. Chairman. 14 Doug, if I could ask you to come forward and 15 take a seat at the front. 16 Commissioners, as you know, we've made a 17 practice of bringing in our major vendors to Commission 18 meetings so the Commission can become familiar with who 19 we do business with and get a better understanding of 20 the goods and services that these major vendors who are 21 critical to our success, what exactly it is that they 22 provide to us. To that end we have with us today all 23 the way from Winnipeg, Canada, the co-CEO of Pollard 24 Banknote, Mr. Doug Pollard. 25 Pollard Banknote is one of our most important 3 1 vendor partners as they are one of the three vendors 2 that provide printing services for us of our scratch 3 ticket products. We don't want to steal any of Doug's 4 thunder from him this morning as I know he wants to 5 share some information with you about himself and his 6 company and their partnership with the Texas Lottery, 7 but what I will tell you and what I want you to know is 8 that Doug is one of the undisputed leaders in the 9 lottery industry. He is a customer first kind of guy. 10 He's one of the people in the vendor community that the 11 Texas Lottery relies on, and he is widely admired by 12 all, even his competitors in the industry. 13 I had the privilege of saying a few words on 14 Doug's behalf last year at the NASPL conference in 15 Dallas as he was being inducted into the lottery 16 industry's Hall of Fame, and I can think of no one who 17 deserves that honor more than Doug. 18 So with that I will turn it over to Doug for his 19 presentation. 20 MR. POLLARD: Okay. Thank you very much, Gary. 21 My colleague, Greg Holt, has instructed me to 22 say good morning to the Commissioners; and, for the 23 record, my name is Doug Pollard. And the company which 24 I represent is Pollard Banknote. And thank you very 25 much for the opportunity to come down and talk to you a 4 1 little bit about our company and our relationship with 2 the Texas Lottery and kind of a little bit within a 3 short period of time of how we see the lottery business. 4 So just a few things we're going cover, who we 5 are, talk about our partnership, and a little bit 6 looking ahead. 7 Our company is -- we had revenue last year of 8 about $174 million, so that was pretty big. We've been 9 around a long time. We're actually a 109-year old 10 company, if you can believe it. And my name and the 11 company name isn't a coincidence. I'm actually the 12 fourth generation Pollards that have been owning and 13 managing this company, which is quite something for 14 longevity. 15 We really had a strategic shift about 30 years 16 ago; and so, even though our company name is Banknote -- 17 that's a long story. I'll bore you with that later, if 18 you want to hear it -- but about 30 years ago we focused 19 on the lottery business, and that is virtually 20 100 percent of our business. We have production 21 facilities throughout North America. Our head office is 22 in Winnipeg, Canada; but our principal manufacturing 23 facility is in Ypsilanti, Michigan. That's where we 24 manufacture all the Texas Lottery scratch and win 25 tickets. 5 1 We work with about 50 clients from around the 2 world. Still the largest instant ticket office is in 3 North America, and principally in the United States, so 4 those docks are concentrated in the United States, all 5 the kind of lotteries that you would know, the New York 6 lottery, California lottery, Michigan lottery, et 7 cetera. Throughout Europe, all kinds of -- the French 8 national lottery, Irish lottery, Swedish lottery, et 9 cetera. And through Asia, Taiwan has become one of our 10 biggest customers, Malaysia, and Australia. 11 I'm going to leave a copy of the presentation 12 with Gary if anyone wants to see it, but that's just a 13 more detailed look at who we are. I will not read 14 through all of it. 15 Talk about our production facilities. I'll just 16 give you a little history of some of the things we've 17 come up with. One of our objectives as a company is to 18 develop innovations, and it's through innovation that 19 we're going to keep expanding our player base and 20 developing gaming responsibly; and that takes new 21 concepts. So, we're quite proud of our history in doing 22 that; and we see that as part of our role to continue 23 that. 24 We started printing our first tickets in 1986. 25 We developed these punch tickets, which were creative at 6 1 the time, die cut tickets. We were the first to do 2 these translucent marking systems, and that really 3 created a game category that allowed you to play games 4 like Bingo and Crossword that are extended play, take a 5 little more time, build on the entertainment factor of 6 games. We've done these play book style games, which 7 I'll address later, scratch effect as a way of bringing 8 some sparkle to the ticket, multicolored imaging, 9 interactive apps. I know in Texas you don't -- it's -- 10 it's not something you're considering doing, gaming by 11 the Internet, but this is a way of bringing some 12 interactive entertainment to a ticket which starts at 13 retail, you buy it at retail, get some entertainment on 14 your device, and go back to the retail with that. 15 This isn't really relevant to you guys but we 16 did launch what I think is the most successful lottery 17 I-lottery launched by a lottery in North America in 2014 18 with the Michigan lottery. They now generate about 5 19 percent of their profits from sales by the Internet, and 20 we're quite proud of our relationship there. You go 21 scratch is another concept. 22 But throughout all of that our focus is really 23 on instants. That's been a good place to be. It wasn't 24 that long ago where instants were less than 50 percent 25 of the sales of most lotteries, and some lotteries 7 1 almost an afterthought; and they've been a really strong 2 category of growth to the point where now in the United 3 States instant scratch and win tickets represent about 4 63 percent of US sales; and in Texas you're even more 5 represented, they're about 77 percent of your sales. So 6 you're emphasizing the right areas because that's the 7 part that's growing. You can see that. 8 The Texas Lottery has had a great record of 9 growth. You can see that road sign on the right, five 10 years of consecutive growth, on track for another, six. 11 You can see where that growth is coming from. It's 12 almost all from the instant category. Non-instants like 13 Powerball and Mega Millions when there's a big jackpot, 14 as you've seen, you can get sales; but in the interim it 15 can be really hard to get those sales these days, and 16 player base is shrinking, whereas in the instants it's a 17 much healthier player base and product mix and sales 18 growth curve. 19 The Texas Lottery kind of championed an 20 innovative approach at the time with their supply 21 relationships. And they said, look, this is a hard 22 business to keep growing in; and if we're going to be 23 successful, we're going to need the best ideas from the 24 best people. And whoever has got those, I want to be 25 able to work with. 8 1 So Gary and the Lottery Commission had a 2 contract with all three of the main vendors -- Banknote, 3 IGT, and Scientific Games -- and said you're going to 4 start at a third, but bring me great ideas and bring me 5 great concepts and you might be able to go from there. 6 If you don't bring me good concepts, you won't get my 7 games. In other words, don't expect to be entitled to 8 any work from me. You've got to earn it. And so, I 9 think that's a great model, that suits us well, that 10 challenges us; but it gives us a carrot, too. 11 So, what we've been working on trying to build 12 with the Texas Lottery is to bring great innovative 13 concepts to help them achieve their goals. So I wanted 14 to share a few of them that we are particularly proud 15 of. 16 We did a Star Trek theme ticket with the Texas 17 Lottery, and it was -- you can see William Shatner, 18 Captain Kirk was at the kickoff; and I got a little 19 video. It will be more interesting than listening to 20 me. And it will just take a second. 21 (Video playing.) 22 And you'll get a little bit of the sense of the 23 kinds of things we do to stand out. 24 This is footage from the kickoff event in 25 Dallas. We tried to set a Guinness record for the most 9 1 people in Star Trek costumes. We came up too short, but 2 it was -- still generated a lot of publicity. William 3 Shatner only agreed to come if we brought him Texas 4 barbecue, by the way, for the record. 5 That was just a good example of what we brought, 6 which is the concept which can help the Lottery achieve 7 some of its objectives. You can reach out to new 8 players through a new concept, generate publicity which 9 gets you free advertising -- that was in all the 10 newspapers and the TV and radio -- and we have a little 11 bit of fun. And instant games really are a chance to 12 win and entertainment, and that really embedded it 13 there. 14 We did another concept around Don't Mess With 15 Tetris. It was a Tetris themed ticket. And we did a 16 similar kickoff, we were at the Cinco de Mayo festival 17 in San Antonio; and we had -- amongst other things, we 18 had a giant Tetris board where you could play a 19 life-sized Tetris game. And there was a bunch of social 20 media events and people wandering around dressed up as 21 Tetriminos. In fact, you can't see it but at the bottom 22 right is actually me and Gary Grief wearing Tetriminos 23 on our head. We'll do anything to sell lottery tickets. 24 It was a similar concept. It generated a bunch of 25 entertainment, a bunch of attention; and in the end it 10 1 kicked off the game really well. It had an index of 2 124, which means it sold 24 percent more than a 3 comparable $2 ticket; and it was a good sales generator. 4 We've done something similar with the PlayBook 5 that the Texas Lottery did. So PlayBook is -- I don't 6 know if you have seen them, but it looks like six 7 5-dollar tickets, which you typically expect to pay $30 8 for, but you price it for $20. Very typical in the 9 consumer products business that you see on 50 percent 10 extra kind of thing. And Gary did that with the Texas 11 Lottery, and it was a great success. And it increased 12 20-dollar ticket sales by 41 percent, sold two times 13 more than a regular 20-dollar holiday game. 14 So you've got to find a way to break through and 15 get people's attention, right. We're in the impulse 16 purchase business, and you've got to catch people's 17 attention. 18 So one of the other things that we tried is what 19 we call scratch effects. I'm not sure if you can see 20 that, but it's a concept that kind of sparkles. So if 21 you're in a visual product and you want to get people's 22 attention, you've got to have something that stands out. 23 So that's what we did to the scratch effects. Again, 24 similar to the consumer packaging business. Think about 25 Aquafresh or the packaging you see that has a silver 11 1 sparkly plume. It gets your attention and can command a 2 premium price. So, the Texas Lottery did this scratch 3 effects with some of their games. At the 50-dollar 4 price point, when you added this feature, it increased 5 their sales by 100 percent. So it helps drive sales. 6 The scratch effects is an interesting concept. 7 Texas Lottery has taken it to a new level. They are 8 trying it on the 1-dollar ticket. A 1-dollar ticket is 9 where new players are going to enter the category, so 10 we're going to add some visual bling to that ticket to 11 try to catch people's attention and have people play for 12 the first time. And for a responsible game, we want a 13 broad cross-section of people playing a little. 14 They've also been pioneering in the use of 15 family games with these Weekly Grand. They are adding 16 to it. 17 And so, I'll just sort of -- I'll wrap it up by 18 saying what that shows you, and you see how we see our 19 company, which is we've got a role to not let this entry 20 become mature; and we've got to keep bringing 21 interesting, innovative, exciting products that can get 22 retailers happy, that can make our players excited, and 23 that can bring more sales to your lotteries. That's the 24 way we see our role. 25 Within our company, there's a couple of no-nos. 12 1 One of them is you never refer to our business as 2 mature. And I am always aware of the phrase, "don't 3 fall in love with your core business." There's lots of 4 growth still left in the instant category. There is 5 potential for some lotteries to sell by the Internet, 6 but that will be a small portion. Our core business and 7 the growth of our business is going to come in retail. 8 As they say, the proof of the pudding is really in the 9 eating for us. 10 We made the largest capital investment in the 11 history of our company when we built a brand-new 12 printing press in our Ypsilanti, Michigan, facility 13 about a year ago. It's three stories high. It's the 14 length of a football field. It's enormous. It can 15 produce a lot of tickets. And we wouldn't have 16 purchased that if we weren't very confident that we can 17 help the Texas Lottery and other lotteries around the 18 world continue the growth curve that they've been on. 19 So that's kind of what we see as our role in it. 20 It's a unique partnership that we have, but we're very 21 proud of it; and we're very proud of what we've 22 achieved, and we look forward to continuing to work with 23 Gary and his team to earn their business in the future. 24 So, thank you very much. Thank you for your 25 time and letting me present. I'll be around after and 13 1 happy to answer any questions or show you anything that 2 you're interested in seeing. 3 MR. KRAUSE: Commissioners, any questions or 4 comments? 5 Well, Mr. Pollard, we appreciate you coming all 6 the way down here to Texas to make this presentation. 7 And the relationship that your company has with our 8 Commission is important to us for the scratch-off is the 9 biggest part of our revenue. Very conscious of that. 10 Thank you for what you do for us. 11 MR. POLLARD: Thank you very much, Mr. Chairman. 12 And thank you to the rest of the Commissioners. 13 MR. KRAUSE: Getting back to our agenda again, 14 proceed to Item No. 2, Ms. Kathy Pyka. 15 MS. PYKA: Good morning, Commissioners. My name 16 is Kathy Pyka. I'm the comptroller for the Commission. 17 With us this morning we have the State Auditor's Office 18 to present a recent audit on select instant ticket 19 contracts. I would like to introduce the team that's 20 here. 21 So closest to me we have Lisa Collier, who's the 22 first assistant state auditor. Next to her is Cesar 23 Saldivar, who is the audit manager on the audit, 24 followed by Bobby Kiker, who is project manager of the 25 audit. And with that, I'll let the audit team present 14 1 their results. 2 MS. COLLIER: Good morning, Commissioner and 3 Commission members. For the record, my name is Lisa 4 Collier. I'm the first assistant state auditor for the 5 State Auditor's Office. And I have just a few brief 6 comments before turning it over to the audit team. 7 First of all, thank you for the opportunity to 8 present our audit results. We always appreciate it when 9 boards and commissions ask us to come and present. The 10 State Auditor's Office conducts audits of the Lottery 11 Commission fairly regularly, I would say probably every 12 two to three years; and every time that we conduct 13 audits here, we are impressed with the knowledge and 14 expertise of the staff. They've always been 15 professional, helpful, and are responsible -- and 16 responsive. So, I wanted to be sure that got passed on 17 to you. We appreciate that. 18 MR. SALDIVAR: Good morning, Mr. Commissioner -- 19 Mr. Chairman and Commissioners. For the record, my name 20 is Cesar Saldivar. I'm an audit manager out of the 21 State Auditor's Office. I was the audit manager over 22 this project, and I am also the contact manager; so, if 23 there's any questions that Gary, Kathy, staff ever 24 have -- and I want to open that up to yourselves as 25 well -- please don't hesitate to contact me if there's 15 1 anything the State Auditor's Office can do for you or 2 answer any questions. They do have my contact 3 information. 4 This audit was started in November, and we 5 wrapped up field work in April; and the report was 6 released in May. For all of our projects we provide the 7 agency report draft, and they have two weeks to respond 8 to us. That was the same for this audit. The agency 9 submitted their responses, and we cut and paste them 10 directly into the report and you can see those responses 11 into the report. 12 I do want to point out that if you see the 13 responses from the agency, the implementation date was 14 either going to be July 15th, which is this Friday, or 15 earlier; and that's not common that we actually see 16 agencies taking that initiative to implement the 17 recommendations as soon as that. I wanted that to be 18 said. 19 I also want to draw your attention to the 20 ratings in our work. That's something new that we just 21 started a couple months ago. Basically these ratings 22 are -- they come from our judgment. And when we rate 23 the audit findings that are in the report, we put a 24 rating for each of the chapters; and for this report we 25 had three lows and one medium. And basically the items 16 1 that we consider when we use the ratings is the degree 2 of risk for the effect of findings in relation to the 3 audit objective. 4 So I'm going to go ahead and hand it over to 5 Bobby to talk a little bit about those details in our 6 report. Like I said, I do want to bring it to your 7 attention that there were three lows and one medium on 8 this report. And I'm going to hand it over to Bobby to 9 talk a little bit more. 10 MR. KIKER: Good morning, Chairman Krause, and 11 Commissioners. My name is Bobby Kiker. I was the 12 project manager for the State Auditor's Office for this 13 audit. 14 The two contracts that audited were the Texas 15 Lottery Commissions' contract with Pollard Banknote, 16 Limited, for instant ticket printing and the 17 Commission's contract with IGT Corporation for 18 operations related to instant tickets. 19 The Pollard contract is a six-year contract with 20 a value of approximately $25.4 million; and the IGT 21 contract is a ten-year contract with a value of 22 approximately $601 million. The audit objectives for 23 this project were to determine whether the Commission 24 administered selected provisions of instant ticket 25 contracts in accordance with applicable requirements. 17 1 Our overall conclusion was that the Commission 2 generally planned, procured, and formed the two instant 3 ticket contracts and audited in accordance with 4 applicable statutes, rules, office of the comptroller, 5 the public accounts requirements, and the Commission's 6 policies and procedures to help assure that the state 7 is -- 8 While the Commission generally monitored the 9 contracts audited to ensure compliance with the contract 10 terms, it should improve its monitoring of the Pollard 11 instant ticket printing contract to ensure that it 12 records correct delivery truck seal numbers, 13 consistently performs required background checks on the 14 key contract personnel, and verifies that Pollard 15 provides all required reports. 16 In Chapter 1, our findings are related to the 17 contract planning, procurement, and formation. For the 18 contracts audited, the Commission generally complies 19 with applicable statutes, rules, office of the 20 comptroller of public accounts requirements, State of 21 Texas contract manager guide requirements, and the 22 Commission's policies and procedures. 23 In Chapter 2, our findings related to the 24 Pollard contract monitoring. The Commission generally 25 monitored the Pollard contract; however, it should 18 1 improve certain aspects of monitoring. The Commission 2 did not consistently follow procedures to verify seal 3 numbers on delivery trucks prior to opening and 4 accepting delivery of instant tickets from Pollard. The 5 Commission did not consistently comply with its policy 6 performing background checks on all key Pollard 7 personnel, and the Commission did not adequately monitor 8 Pollard's reporting of the delivery of second chance 9 drawing prizes. 10 In Chapter 3, our findings related to the IGT 11 contract monitoring. The Commission adequately 12 monitored the IGT contract through its monitoring 13 activities. It contracted with Grant Thornton, LLP, and 14 direct monitoring activities of its own. 15 In Chapter 4 we have findings related to the 16 invoices and payments. For both contracts audited the 17 Commission complied with the requirements in the State 18 of Texas contract management guide, its policies and 19 procedures, and specific terms in the contracts to 20 verify that the contractor invoices were valid, properly 21 supported and approved. One Commission employee had 22 access rights to the Uniform Statewide Accounting 23 System, USAS, that would allow the employee to both 24 enter and release USAS transaction. That represented a 25 weakness in segregation of duties. The Commission 19 1 removed that access after the auditors brought it to the 2 Commission's attention, and the auditors verified that 3 that employee did not both enter and release USAS 4 transactions in fiscal year 2015. 5 And that concludes our remarks for the audit. 6 Do you have any questions? We're available. 7 MR. KRAUSE: Commissioners? 8 MS. ARRIETA-CANDELARIA: I have a question. 9 MR. KRAUSE: Please. 10 MS. ARRIETA-CANDELARIA: First of all, thank you 11 so much for coming and presenting to us. I really 12 appreciate the work that was done in bringing some of 13 these issues to light. 14 One of the concerns I have is regarding -- and 15 this is probably a question more for staff, but with 16 regards to the background checks that are required, it 17 seems that that was a consistent theme between the two 18 contracts, that both background checks were not 19 completed for all staff. So is that -- is that a 20 requirement that's in our procurement? Is it something 21 that's in our contract that is considered as one of the 22 contract provisions that people need to comply with. 23 MS. PYKA: It was my understanding that this was 24 a procedure issue within the Commission that wasn't 25 followed for one particular employee of that vendor, and 20 1 it was an oversight on staff's part. We had a change in 2 employees during that tenure -- that time frame. But 3 it's also my understanding that that has been fully 4 implemented and is now corrected. 5 MS. ARRIETA-CANDELARIA: It was in both of the 6 contracts, though. It was both in the Pollard and the 7 IGT. That was a finding in both of them. 8 MS. PYKA: I'm going to refer you back to the 9 auditors on that. I was aware of it being in one of the 10 contracts. That was a Pollard item. But let's let them 11 clarify that. 12 MS. ARRIETA-CANDELARIA: On Page 5, it's listed 13 on there that it said -- the second paragraph -- 14 (Reading:) The Commission did not consistently comply 15 with its policy to perform background checks. 16 And then on Page 11 that it says (Reading:) 17 requesting background checks on key IGT personnel as 18 required. Or did adequately. Okay. I see what you're 19 saying. Okay. Thank you. 20 So on that one employee from Pollard, it was 21 cleared? 22 MS. PYKA: Yes, definitely. 23 And just to further clarify on that, I know that 24 they mentioned that we had planned to have all of the 25 recommendations implemented by July 15th. I wanted to 21 1 note that all the recommendations have now been 2 implemented, so everything is addressed. 3 MS. ARRIETA-CANDELARIA: Okay. 4 And then with regards to the Pollard -- the 5 findings regarding the verification, the seal numbers on 6 the trucks, is that when they have a seal on the back 7 that they have to take off? 8 MS. PYKA: I think that there's probably a 9 gentleman that can provide better response to that than 10 myself. So I I'll let Michael handle that. 11 MS. ARRIETA-CANDELARIA: Thank you. 12 MR. ANGER: Good morning, Commissioners. For 13 the record my name is Michael Anger. I'm the Lottery 14 Operations Director. 15 Commissioner, in response to your question, 16 that's exactly the case. Trucks are sealed at the 17 Pollard plant with the inventory on board. When they 18 get to the warehouse, the seal is cut, verified, matched 19 against communication that we receive from Pollard with 20 regard to the seal number; and then the inventory is 21 off-loaded and verified. 22 In the report you saw that there were some 23 instances where there were discrepancies with regard to 24 staff following procedural process, and SAO helped us 25 identify those. We've done some things to beef up our 22 1 procedures to make sure that doesn't happen. In 2 one case we received an incorrect seal number from 3 Pollard, which they corrected; but we recorded both seal 4 numbers -- the staff person recorded both seal numbers, 5 and one was originally recorded and the new seal number 6 on our documentation, which could create some confusion 7 about that. So we worked with the team to identify some 8 ways to correct that in our procedures and make sure the 9 staff are well-trained to handle that problem. 10 MS. ARRIETA-CANDELARIA: Thank you so much. 11 Thank you. That's all the questions I have. 12 MR. KRAUSE: Any other questions? 13 MR. RIVERA: Maybe it's already been covered and 14 I just didn't hear it, but not providing the supporting 15 documentation for the discrepancy in the seal numbers, 16 Page 5. 17 MR. ANGER: Commissioner, let me respond to 18 that. That's the same issue we were talking about. So 19 when SAO was doing their audit and they pulled paperwork 20 and were conducting their review, staff had to go back 21 to look and try to recreate documentation with regard to 22 the communications that we had with Pollard. And we 23 struggled to get some of that information, some of the 24 e-mail communications back and forth. So one of the 25 things that SAO recommended to us is that as part of our 23 1 procedural process, we make it a practice to keep all 2 the documentation associated with any exchanges that 3 occur either by e-mail or otherwise as part of the 4 complete file associated with verification of seal 5 numbers. 6 MR. RIVERA: But specifically we had nothing to 7 provide; is that correct. 8 MR. ANGER: I think we ultimately -- I'll let 9 Bobby respond to that. I think we ultimately were able 10 to find documentation related to that, but initially 11 during the review there was some confusion and we 12 struggled to locate those e-mails associated with a seal 13 from back during the audit period. 14 MR. RIVERA: I guess from the auditor's 15 standpoint you wrote here that we have not provided, so 16 does that mean that day or we did in the future? What 17 does that mean? 18 MR. KIKER: Doing field work, we identified 19 there were two of the nine seal truck numbers that we 20 tested. One of them, like Robert said, contained both 21 the incorrect number and the correct number; and the 22 other one, the second one, had a discrepancy, there was 23 no supporting documentation for why that seal number had 24 been changed. There was none available and there was no 25 documentation to support the explanation, a verbal 24 1 explanation that was given for that. 2 MR. RIVERA: Okay. So are you satisfied, then, 3 with what happened afterwards; or what are your 4 thoughts? 5 MR. KIKER: Well, our recommendation was to -- 6 in the future maintain that documentation so it could be 7 supported that the correct seal numbers were present. 8 MR. SALDIVAR: I just want to be clear, there 9 were two. For one they did provide additional 10 documentation, and the other one they did not; and we've 11 never received that. However, we talked to them how to 12 prevent this from happening in the future and, per 13 conversation with the Lottery, they've taken steps to 14 prevent it in the future, is what they've told us; but 15 for this one instance, we never received additional 16 documentation. 17 MR. RIVERA: Okay. Thank you. 18 MS. ARRIETA-CANDELARIA: Chairman, if I could 19 follow-up on that. 20 MR. KRAUSE: Absolutely. 21 MS. ARRIETA-CANDELARIA: One of the things that 22 we could do is -- because what is concerning to me is 23 that we have to have -- how many number of shipments we 24 have. 25 MR. ANGER: We produce over 90 games a year. 25 1 There's multiple trucks involved in those shipments. 2 MS. ARRIETA-CANDELARIA: Right. So I guess the 3 theory here is the extrapolation of that variance, two 4 out of the nine that you tested was -- whatever 5 percentage that is. So if you extrapolate it, it could 6 potentially be an issue. 7 And so one of the suggestions that I would have 8 is to have, you know, Darlene's here, maybe we could 9 look at the -- during the risk assessment, that that 10 would be something that we take into consideration and 11 we do some additional follow-up. Do y'all come back to 12 us at some point in time with another follow-up, or do 13 you just -- is this the end of the audit? 14 MR. SALDIVAR: Once a year the agency is 15 supposed to report to us the status and the 16 implementation of these findings. So, we typically 17 don't come back and do a follow-up on it, ma'am. 18 MS. ARRIETA-CANDELARIA: Okay. So with that 19 being said, we could look at it, it's a higher risk. 20 It's nothing we need to look at because, you know, the 21 additional concern for me is knowing what I know in 22 El Paso, the border, and some of the concerns where you 23 have a broken seal or something like that happens, and 24 not necessarily what -- that you might not receive all 25 the instant tickets but there could be a potential for 26 1 something else that could be placed in the truck. So 2 it's not just what's in there. 3 So I would say that we just -- we just make it 4 an audit concern and then elevate it to either our 5 internal auditors for them to do additional -- our 6 external auditors to do additional test work in that 7 particular area, and also ask Ms. Brown if she will 8 include it as part of her risk assessment and see if we 9 could do additional test work to give us like that 10 additional comfort that we might need with regard -- I 11 certainly would like that for the future. 12 MR. KRAUSE: Commissioners? 13 MR. LOWE: Mr. Anger, on the contract formation 14 phase in -- I guess it's Chapter 1 -- how many 15 contracting employees were involved in the Pollard 16 Banknote contract and the IGT contract? I know there 17 have got to be different numbers because they are 18 different sizes of contracts. 19 MR. ANGER: Yes. And I'm looking back at Mike 20 Fernandez, so he will step in and correct me if I fail 21 in this regard. But in our contract area there would 22 typically be three -- probably approximately three or 23 four staff members for the contract area that serve in 24 the development of each of the different contracts with 25 regard to working with staff on the development of our 27 1 putting it out for bid and going through all of the 2 contractual step process the Commission takes. 3 With regard to the committees that were formed 4 to serve in evaluating responses to the RFPs, I'm doing 5 this somewhat from recollection, so ballpark. With the 6 scratch ticket contract, I believe there were five -- 7 approximately five members of the team who served on the 8 evaluation committee; and for the lottery operator 9 contract, it was a much larger group. I believe there 10 were approximately nine members of that committee. 11 MR. LOWE: What about IGT? 12 MR. ANGER: The IGT lottery operator contract 13 RFP was approximately nine members. 14 MR. KRAUSE: 17 people in all? 15 MR. ANGER: Yes. 16 MR. KRAUSE: Okay. And then how many of those 17 are the ones that failed to sign the conflict of 18 interest forms and the nondisclosure. 19 MR. ANGER: Mike Fernandez is telling me 20 everyone. 21 MR. KRAUSE: Is that a new requirement or old 22 requirement? 23 MR. KIKER: That is a requirement by Texas 24 government code, and it was a requirement back when 25 these contracts were being processed; but as we noted in 28 1 the report, the Commission had developed procedures to 2 take care of that, to address that need going forward. 3 MR. KRAUSE: Okay. How many other requirements 4 besides, you know, the signing of these two forms are 5 there in the contract procurement, like a few or 6 hundreds? 7 MR. KIKER: I don't have the number. It's many. 8 And -- 9 MR. KRAUSE: I'm trying to get a scope of, you 10 know, we've got some forms that didn't get signed, that 11 kind of thing, out of -- I'm under the impression it was 12 a huge endeavor. 13 MR. FERNANDEZ: Well, I wouldn't classify it or 14 I wouldn't term it, Mr. Chairman, as a huge endeavor. I 15 think we've seen some changes. We've had staff sign 16 nondisclosures. I would say on the IGT contract or 17 the -- I would say there were probably 17, perhaps 18 greater, at any one time involved in that particular 19 procurement. The committee itself was large, and it was 20 comprised of division directors, stakeholders, as well 21 as senior level staff that have day-to-day business 22 operations engaged in that, as well as outside counsel, 23 as well as the AG's office, as well as a representative 24 for the comptroller's office at that time was the head 25 of procurement for the State. So there were a number of 29 1 staff as well as attorneys present in that room as we 2 went through that process. 3 I think we have always had a nondisclosure 4 signed by staff that participated in the projects. That 5 has been expanded under the last session, SB 20; and 6 you've seen some of the results of that because every 7 time we get ready to move or sign a contract, we go to 8 you -- Angela Zagarba, who's on our team, goes to each 9 of you with an e-mail outlining who the principals are, 10 what company it is, and to see if you have any 11 association with that company. 12 So I wouldn't say that these are excessive. And 13 I would say that over the years, or over my time in 14 government, you know, from time to time we read in the 15 newspapers of events in other organizations or agencies 16 where something has happened and that's come to the 17 attention or raised concern with the legislator and 18 we've seen that enacted in statute. 19 So for our contracts folks -- and I can't speak 20 for Bob, but I think for his contract attorneys -- I 21 don't -- I don't view this or any of the things that we 22 do as superfluous. I think it's a part of doing 23 business. I think it puts additional safeguards in 24 place. But I don't view that, nor I have heard that 25 expressed from our contract staff or from Bob's 30 1 attorneys. 2 MR. KRAUSE: So we have signed conflict of 3 interest forms from everybody now? 4 MR. FERNANDEZ: That's correct. 5 MR. KRAUSE: That means that at the time that 6 there were no conflicts of interest, it just hadn't been 7 documented? 8 MR. FERNANDEZ: For that one individual -- I 9 believe you're speaking about this audit? 10 MR. KRAUSE: No. I'm talking about -- there are 11 17 people involved in procurement of the IGT contract, 12 and none of them had signed the conflict of interest 13 forms; but now that they're signed, there's no conflict, 14 right? 15 MR. FERNANDEZ: That's my knowledge, no 16 conflicts. 17 MR. KRAUSE: So we didn't have any conflicts 18 then, we just didn't have a piece of paper that said so. 19 Got ya. Okay. 20 I guess that's all I have. 21 MS. HEEG: Can you tell me -- just stepping back 22 a bit -- what's the internal process to making sure that 23 we have steps in place that we're doing all the 24 monitoring called for under the contract. 25 MR. FERNANDEZ: Well, my division, especially on 31 1 the contract side -- and quite frankly I required the 2 person that handles this to be at this meeting, but 3 what -- we're a group of checklisters. And so, what 4 occurred is -- I think a good example is Senate Bill 20. 5 It had some reforms in terms of transparency. But what 6 occurred is Ms. Erickson took that bill working with her 7 senior staff as well as contract attorneys and went 8 through every piece of that legislation; and from that 9 Ms. Erickson built procedures, but what she also did for 10 our contract staff is we built checklists. So within 11 all those files, every time we go through the -- through 12 those procedures, as we follow those procedures, we also 13 note that on a checklist. It goes into that contract 14 file. 15 And that's what we have tried to do over the 16 years. I mean, not just because SB 20 but over the 17 years, that's the way we have tried to operate that. 18 And throughout our purchasing process, throughout our 19 contracting processes, any of our RFP processes, and 20 that's what we tried to follow. And those are 21 incorporated in performance for our employees. That's 22 what we're looking at. That's what they're looking at. 23 That's what we try to do to ensure that we don't -- that 24 we don't miss a step -- miss a step. And when the State 25 Auditor comes in or when anyone comes in. 32 1 MR. KRAUSE: Commissioners? 2 Appreciate your report. Thank you. 3 Next we have bingo rule changes. Bob, this is 4 your item. I think that Mr. Alfonso is going to join 5 you. 6 MR. BIARD: Thank you, Commissioner. 7 For the record, I'm Bob Biard, General Counsel. 8 I took over this matter from James Person, a former 9 attorney in my division who left the agency in May to go 10 to work in Governor Abbott's office. And this is a 11 rulemaking as staff recommends adoption of amendments to 12 29 bingo rules and one new proposed bingo rule in your 13 notebook materials with changes to some of the proposed 14 amendments but without changes to the text of the new 15 rule. 16 I think Alfonso might have some preliminary 17 comments he would like to make. 18 MR. ROYAL: Thank you, Bob. 19 Commissioners, at the April 14th meeting, you 20 approved the process to begin the rulemaking which 21 included a public comment period and comment hearing on 22 the rules that Bob had mentioned. Comments and public 23 testimony provided was considered by staff to propose 24 further revisions to the proposed rules which are in 25 your notebooks. 33 1 The proposed rules continue to allow the 2 division to maintain the statutorily required regulatory 3 oversight of the bingo industry in Texas aligned with 4 statutory provisions, streamline regulation, and promote 5 efficiency while at the same time removing obsolete and 6 unnecessary rules that create barriers and complicate 7 the conduct of bingo. 8 I again want to thank the 13 members of the 9 industry stakeholder work group and Commissioner Lowe, 10 the designated bingo commissioner, who worked in 11 conjunction with agency staff on the rule review. 12 Commissioners, I'll turn it back over to Bob to 13 speak specifically on the rule proposals. 14 MR. BIARD: Yes. Thanks Alfonso. 15 The 30 rules in this proceeding cover 16 many aspects of charitable bingo. The more significant 17 proposed amendments include changes to the manner in 18 which bonds are maintained by licensees, changes to the 19 manner in which pull-tab tickets are sold and played, 20 the removal of obsolete references to the payment of 21 gross rental taxes; and in response to the Sunset 22 Commission recommendations, changes to a chart that 23 lists the most common violations of the Bingo Act and 24 Commission rules and the sanctions generally assessed 25 with those violations. 34 1 The purpose of the proposed new rule is to 2 implement Occupational Code Chapter 55 which requires 3 state agencies that issue occupational licenses to adopt 4 rules and policies to streamline the licensing of active 5 military personnel, their spouses, and military 6 veterans. 7 Nine commentors appeared and testified at a May 8 11th public comment hearing, and seven commentors 9 submitted written comments, four of whom also appeared 10 at the hearing. A summary of the comments and the 11 Commission's proposed responses are set forth in the 12 preamble in your notebooks. 13 And in response to comments, staff proposes nine 14 additional changes to the proposal on the 29 existing 15 rules. And those are summarized in the cover memo in 16 your notebook. The most significant of those changes is 17 probably to clarify that all prizes of $50 or less 18 awarded in a single bingo game do not count toward the 19 2500-dollar prize cap for a bingo occasion. This 20 clarification was requested by State Representative 21 Senfronia Thompson as well as several industry 22 representatives. 23 We recommend making no changes to the proposed 24 new rule on military veterans. All comments were 25 supportive on this rule as proposed. 35 1 I do understand that several commentors have 2 asked to address the Commission on this matter, and I 3 would just like to recommend that they limit their 4 comments to ones that have already been made and not 5 raise new issues because the official comment period has 6 ended; and there's a statutory requirement for the 7 Commission to summarize and respond in writing to a 8 proposed -- to comments made. And if new comments are 9 made at this hearing that we haven't already considered, 10 then staff is going to need more time to summarize those 11 and put those in writing. 12 But with that I'm -- it's fine to allow the 13 people who would like to speak to come address the 14 Commission on this. 15 And, again, we recommend adoption of 29 amended 16 rules and one new rule. 17 MR. KRAUSE: Before we hear from our witnesses, 18 we're going to open it up for Commissioner comment. 19 We're going to start, though, with our bingo 20 commissioner. 21 Do you have any comments on this type of big 22 rulemaking project? 23 MR. LOWE: It was a huge project, and I 24 compliment Alfonso for putting together the meetings 25 that we had. I was able to physically attend one, 36 1 monitor the other ones by telephone conference; and I 2 feel like that we've had a good process, that we fleshed 3 out a lot of concerns. I think we conceded on some 4 things. And, of course, we haven't conceded on 5 everything as far as the rules; but I feel that we have 6 a good set of rules and that the process was well done. 7 MR. KRAUSE: Any other Commissioners? I guess 8 this is a question for, I guess, Bob, although 9 Mr. Person was in charge of it, and our bingo 10 Commissioners. Do you-all feel like that this was a 11 fairly robust public comment response, both oral and 12 written? 13 MR. BIARD: Yes, I do. 14 MR. KRAUSE: Well, I think it's important for 15 our rulemaking process to hear from our customers who 16 are the charities and the corporate lessors and the 17 manufacturers and that kind of thing because we are not 18 out there in your business. We are -- but we regulate 19 your business. So, as a consequence, we need to know 20 what we're doing that makes sense and doesn't make sense 21 and that kind of thing. So, public comment is really, 22 really important to us. So don't hold back on that. 23 At this point, though, I'm ready to hear from 24 our witnesses; and we start in the order of our 25 familiarity with witnesses. Because Kim Kiplin is a 37 1 former General Counsel to the Lottery Commission, she 2 gets to go first. 3 COMMISSIONER HEEG: Commissioner Krause? 4 MR. KRAUSE: Yes, ma'am. 5 COMMISSIONER HEEG: Before we get started, I 6 just want to follow up on one of the comments you made. 7 I really appreciate the group's willingness to submit 8 written comments. As we contemplate these rules in 9 preparation for the meetings, it's very helpful for us 10 to have written comments. We welcome the oral 11 presentations too, but it's so much more meaningful to 12 have something in writing in advance for us to 13 contemplate. 14 MS. KIPLIN: Thank you, Chairman Krause, for 15 those kind remarks. 16 My name is Kimberly Kiplin. I'm an attorney 17 here in Austin, Texas; and today I'm here on behalf of 18 the Department of Texas Veterans of Foreign Wars. 19 We did comment on the proposed amendments on the 20 two bingo rules; and we also commented on the new rule 21 on military service members, the veterans and the 22 spouses. And we did that at the May 11, 2016, public 23 comment. My comments today are within the record, and 24 appreciate General Counsel making that clear to you-all. 25 I do appreciate the willingness of you-all to have other 38 1 people come before you today, even though the comment 2 period is closed. 3 What I want to really speak to is the process. 4 I want to echo what Commissioner Lowe said about the 5 process that Mr. Royal and his staff, along with the 6 agency's attorneys, undertook during the formation of 7 the proposed amendments. And that occurred before the 8 rules were proposed. There were several stakeholder 9 workgroup meetings. I think it was a great process. I 10 think it allowed for open discussion, candid 11 communications. We know we all did not agree on every 12 single thing, and that's because we have different 13 perspectives, regulator versus the industry. But I 14 think that it allowed the opportunity for this exchange 15 so that the different perspectives could understand the 16 other position. 17 I know that in my conversations with Mr. Royal, 18 he's indicated a willingness and commitment to continue 19 that process; and I want to acknowledge him on the 20 record for that commitment today. 21 The gist of many of the VFW's comments were to 22 streamline these burdensome rules, eliminate unnecessary 23 paperwork and recordkeeping. I think the continuation 24 of that work in process is going to help with the 25 identification and elimination of what I would consider 39 1 paternalistic regulatory measures that still are in 2 existence, and we'll look forward to working to try to 3 identify and possibly eliminate or modify, one of the 4 two, that we commented on, as the game schedule. So 5 we'll look forward to that continued participation. 6 With regard to the new rule, the VFW supports 7 that; and we really appreciate the Legislature and this 8 Commission recognizing the service that our veterans 9 give to our Country. 10 With that, I have no further a comments; and I'm 11 happy to answer any questions y'all have. 12 MR. KRAUSE: Commissioners? 13 All right. Thank you very much. 14 MS. KIPLIN: Thank you. 15 MR. KRAUSE: Next we get to hear from our next 16 most well-known witness, and that is Mr. Steve Fenoglio. 17 He has been a regular witness since I've come on this 18 division in 2009. 19 MR. FENOGLIO: Thank you. 20 For the record, my name is Stephen Fenoglio. 21 I'm an attorney that represents the Texas Charity 22 Advocates. I did file both oral and written comments as 23 a part of the discussion. 24 I want to direct your attention to one rule and 25 one rule only 402.703 at page 29 of the discussion in 40 1 the notebooks. This has to do with audits of charities. 2 And I get retained a number of times when there's an 3 audit ongoing. 4 Two things. One, at the very bottom of the 5 page, we had requested -- when I get retained, what does 6 the audit say. And to back up -- so the charity will be 7 notified after they've had either a quarterly audit 8 performed or a yearly. We want to meet with you. Let's 9 choose a convenient time and day. And that's usually 10 when I get hired. And so, we negotiate, if you will, 11 the meeting. 12 I want to see, well, what is it the auditor is 13 going to say? They have a formal written report that 14 they hand to the licensee, and literally -- usually -- 15 read the entire document, which is particularly helpful, 16 because I can read it a lot faster. I want an advanced 17 copy. More advanced copies is better than less. And if 18 you think about it, in practice in any government agency 19 you meet with, what's the agenda, and what is it you 20 guys want to discuss in detail. 21 They've already finished their audit by the time 22 we're scheduling the meeting. And so, at the bottom of 23 it, it's going to be three days' provision. Our 24 suggestion is 10 business days. It may be that I need 25 to have some back and forth with an independent 41 1 bookkeeper, sometimes a CPA; and if it's just 2 three days, you can imagine everyone's schedule. It's 3 difficult to arrange that. So what we asked for was 4 more advance time. And again, the audit has already 5 been finalized when they start discussing when the 6 meeting will occur. More time is better than none. 7 And the other comment, it is an offensive 8 comment to the charitable legal industry; and it's found 9 on pages 29, pages 12 to 14. What we've asked for in 10 the past is, in the course of an audit, the auditor will 11 observe certain facts; and the rules say, what you are 12 doing is a violation of law. Let us know that in 13 advance. Give us the detail of that. The statement 14 says any additional notification, including potential 15 violations found during an audit, could disrupt the 16 ongoing audit inspection and may prompt a licensee to 17 destruct relevant evidence, ignoring the fact that under 18 the definition of government record under the penal 19 code, destruction of evidence is a violation of Texas 20 law. It's offensive to us to introduce the notion that 21 charities would discard of evidence. I've asked today 22 for an Open Records for the documentation on that. 23 I've represented probably 100 charities in 24 audits in the last 10 years. I know of no instance 25 where someone has suggested that documentation was 42 1 destroyed, hidden, lost. I'm not saying that evidence 2 or the documents don't get misplaced. We can all think 3 of examples in our professional lives where we've 4 misplaced a record, but to just say out of the blue, may 5 prompt a licensee to discard relevant evidence, with no 6 evidence of that is offensive. 7 I'll be happy to answer any questions. 8 MR. KRAUSE: Let's start with the bingo 9 commissioner. 10 MR. LOWE: As far as the wording of that 11 comment, I would have to confer to Bob, I guess, or 12 General Counsel prepared that response. 13 MR. BIARD: I think I'm probably going to need 14 to ask Alfonso about -- 15 MR. LOWE: Because it's a bit inartful, but I 16 have to ask somebody to elaborate. 17 MR. ROYAL: We realize that, yes, how volatile 18 that word could be; but the possibility does exist that 19 during the course of an audit there may be discovery of 20 criminal violations. We have had one case whereby there 21 was an individual who -- that was discovered during the 22 course of an audit that did steal some $90,000. It took 23 several years for that case to go forward. If those 24 records were destroyed or made aware, then that perhaps 25 may not have been the reality of it. Does it happen all 43 1 the time? No. But the possibility does exist that it 2 could happen. 3 MR. LOWE: And I agree that it's a possibility. 4 I'm not sure how we could rephrase the comment, and I 5 apologize if anybody was offended; but I do think that 6 if there's accuracy in that statement that it could 7 happen. 8 MR. FENOGLIO: And it's a possibility we could 9 all fly to the moon tomorrow, but we know that's not 10 going to happen. My suggestion is, it hasn't happened; 11 so where did this come from. 12 By the way, thank you all for posting on your 13 website these documents. I was in trial Thursday and 14 Friday and did not have a chance to read these comments. 15 They were posted sometime Friday morning. So thank you 16 all. Kudos to you for getting it up so we could have 17 comments. 18 And I want to echo, also, I would be remiss if I 19 didn't, the extraordinary efforts that this man, Alfonso 20 Royal, did for getting us all together for hours for 21 meetings. We appreciate it. 22 But suffice it to say, it's an offensive 23 comment; and it creates division where there shouldn't 24 be. 25 And then on the other issue, I can't imagine why 44 1 we can't have more than three days' notice of a written 2 document that the agency has already prepared if, in 3 fact, in this audit meeting you want a back and forth 4 discussion of understanding what the auditors believe is 5 wrong, the incorrect conduct that occurred, the missing 6 inventory, whatever it is that that audit has 7 discovered. More advanced notice from us, the details 8 of it, the better. 9 MR. KRAUSE: Thank you, sir. 10 MR. BIARD: I was just going to say one other 11 thing about that, and that is that the main thrust of 12 the response to the comment about requiring an auditor 13 to promptly notify a licensee was that, you know, the 14 auditor, him or herself is not empowered to make the 15 ultimate finding that a violation has occurred, but they 16 would collect the information and bring it back to the 17 division and then the -- a determination is made whether 18 there has been a violation. That's the main part of the 19 Commission's response to that. 20 The sentence that Mr. Fenoglio was referring to 21 is certainly not essential to a response, I think, to 22 this thing. And if it was the Commission's desire, it 23 could be removed from the response. 24 MR. LOWE: You could eliminate that sentence? 25 MR. BIARD: Sure. 45 1 MS. ARRIETA-CANDELARIA: With regard to the 2 comment, just being in a position to participate in 3 quite a number of audits, I have found where people have 4 tried to destroy books, you know, audit books and stuff 5 like that, receipts, to eliminate the paper trail. And 6 I think that's what the intent of the comment was to 7 preserve that audit trail. 8 I would agree that it could be seen as 9 potentially offensive; but perhaps if we could, you 10 know, change the language, we could say any additional 11 notification, including potential violations found 12 during an audit, could disrupt the ongoing audit 13 inspection and may not give -- and may not give the CBOD 14 an opportunity to review relevant evidence, or something 15 to that effect. I think we could change that to make it 16 more palatable. 17 But I have had firsthand experience where people 18 have destroyed records or they've disappeared, they 19 haven't been presented, even though they may exist. So, 20 you know, I think that's where the division was coming 21 from with regard to that. At least I would believe that 22 that's the case. 23 With regards to the Commission response on the 24 three days, that is not atypical for an audit exit 25 conference. So what happens is that you're given the 46 1 report, and then shortly thereafter it should be an exit 2 conference so that the auditors can leave the field work 3 or the place of audit and then go off and do their 4 report and stuff like that. But, you know, I would 5 agree -- I think 10 days is considerable because I think 6 what you're asking here is that the division is going to 7 give you an audit report, then there -- I think they 8 can't leave the audit -- or the place of audit for the 9 exit conference until after the exit conference. 10 Is that not correct? Or do you pull out of the 11 field. 12 MR. ROYAL: That's not correct, Commissioner. 13 Let me clarify a couple of things here. 14 The auditee is given a draft report; and within 15 three days of receiving that draft report, we would like 16 to schedule the exit conference. At that point at the 17 exit that we will turn all the records back to the 18 auditee. The auditee then has 20 days to respond to the 19 audit, and then at such time we would incorporate the 20 information that's provided. Some of the findings are 21 mitigated because of the information that they find, for 22 example, the inventory, then we would alter that in the 23 report so that the final report does include all of 24 those factors. 25 We heard earlier today from the State Auditor 47 1 whereby they like to do their exit within 2 weeks. 2 We're giving the auditee 20 days, and then we really 3 work within their schedule. Most times if we try to 4 schedule that exit conference, it's a little longer than 5 the three days that we generally like to do. We really 6 work with our licensees to schedule that out for them. 7 MS. ARRIETA-CANDELARIA: Right. And that is not 8 atypical. So what happens is you are going to get the 9 draft report. You have three days until an exit 10 conference where they go over those findings; and then 11 after that exit conference, and you have -- you 12 typically have a time period -- Alfonso is saying it's 13 20 days after, you can negotiate some of those findings 14 after the fact. 15 MR. FENOGLIO: I don't disagree. The language 16 is actually Page 136, quote, at least three business 17 days before the audit exit conference -- and this is 18 with the draft audit -- but only to the extent it is 19 practical the Commission will send a copy of the draft 20 audit report to one e-mail address or facsimile number. 21 Again, the conference, the meeting, is going to 22 be scheduled -- my experience has been at least 2 weeks 23 in advance because you've got multiple people you've got 24 to get to the same location at the same time. So, 25 again, my suggestion is, they've already finished their 48 1 draft report when they're starting to tell us we want to 2 meet with you, and we want to present to you the draft 3 audit. Why just three days to give a copy of the draft 4 audit. They already have it in their possession. It's 5 finished in draft form. So if you want to have a give 6 and take in that meeting, there's -- there has to be a 7 reason for the meeting, and I suggest the reason for the 8 meeting is to have some give and take, this is what the 9 auditor has found, what -- and this has happened in real 10 life audits -- audit meetings. What is your response. 11 Having that document earlier gives me the 12 opportunity to, A, read it, understand it -- I wasn't 13 involved at all before I get the phone call -- have a 14 lengthy discussion with your independent bookkeeper, 15 perhaps with a CPA, perhaps with bingo employees. It's 16 a very short period of time. And -- I think there's a 17 reason they want to have that meeting. I think it's a 18 good idea to have the meeting. I'm just saying more 19 advanced notice of the written document that's going to 20 be discussed is better than at least three days, but 21 only to the extent it is practical. They've already 22 drafted it. 23 MS. ARRIETA-CANDELARIA: Alfonso, would an 24 extension of that time period negatively impact the test 25 work or anything that you've done, the audit? 49 1 MR. ROYAL: Only to the extent that we've 2 attempted to meet the industry's desire to have audits 3 started and completed within a certain time period, and 4 that time period that we have considered is inclusive of 5 all of that. We have -- as you're aware with any audit, 6 you typically work with that organization throughout the 7 audit. If there's questions or clarification, their 8 bookkeepers, we work specifically with the organization 9 that we are auditing. Any time period outside of that, 10 that draft report is provided to them. They pretty much 11 are aware of what is going to be in that draft report. 12 MS. ARRIETA-CANDELARIA: Because you've been 13 gone -- and that's typical. You tell them, look, I 14 think this is going to be a fine on potential issues 15 that has come up in the audit. 16 MR. ROYAL: Correct. 17 MS. ARRIETA-CANDELARIA: I have -- I don't know 18 what the other Commissioners want to do. I don't mind 19 meeting in the middle or giving more days. I think ten 20 days is a long time. I hear your concern. I would not 21 be opposed to giving them additional days. 22 MR. LOWE: So where do you think we are, Bob? I 23 mean, can we change it today? 24 MR. BIARD: Yeah. That's a change that's easy. 25 MR. LOWE: So, Alfonso, you're the one that has 50 1 to run this show. So tell me what's feasible. 2 MR. ROYAL: If that's the will of the 3 Commission, we'll follow the will of the Commission. 4 MR. LOWE: Well, Mr. Fenoglio says that you 5 already know what the report is going to say when you 6 schedule the conference, right? You know what it's 7 going to say? 8 MR. ROYAL: Correct. 9 MR. LOWE: Do you actually have it done at that 10 time, or is there a delay? 11 MR. ROYAL: In some instances it may be 12 completed and some instances it may not be. I think the 13 addition he keeps pointing out is when practical. And 14 we try to provide as much information to the auditee as 15 possible. We don't want to hide the ball, so to speak. 16 MR. LOWE: So what is our practice currently, 17 because it said at least three days. Are we running up 18 to that three days? 19 MR. ROYAL: We're running up to that three days. 20 He is correct in those instances where when you audit a 21 unit, you're looking at five to seven different 22 organizations. It's extremely difficult to coordinate 23 to get that bingo chair person at the audit table. 24 Again, our preference is not the designated agent but 25 the actual bingo chair person that represents those 51 1 particular organizations to be at the table along with 2 their bookkeeper and those individuals so that they're 3 clearly aware of the results of the audit. 4 And it's difficult. He is correct in that 5 instance. It may take up to a month. And in the 6 summertime as we're going to through right now, we've 7 got one organization I think we're trying to do 8 six weeks. I think we're trying to pull all the 9 individuals together. 10 MR. LOWE: Well, at the very least, I think we 11 can say to change it to working days so you wouldn't 12 have a situation where you've got a draft on a Friday 13 and had to come to the meeting on a Monday or Tuesday, 14 right. So we can change it to three working days. 15 MR. BIARD: It is three business days as 16 written. 17 MR. LOWE: So it's already three business days? 18 MR. ROYAL: Commissioners, as a practical 19 matter, I have no objection whatsoever of the minute 20 that draft report is completed to just immediately going 21 ahead and providing it. I don't think that would 22 necessitate any changes in the rules. It already says 23 whenever practical, so the minute that report is 24 available in a draft form, we go ahead and send that 25 out. 52 1 The problem is the minute we send that out, at 2 that point in time we have the records; and so, we have 3 not had an exchange of records. And what will happen is 4 that we will not be able to -- at that point you will 5 have some organizations that will want to immediately 6 start addressing and having discussions about it; and 7 when we're not able to meet with them to discuss it 8 because, again, it is in draft format and all the other 9 parties may not be at the table and the fact that we 10 still have the records at that point, it makes it quite 11 difficult and we may be -- we're not serving our 12 customer well at that point. Yes, we have provided the 13 document to them; however we're not able to further 14 assist them or digest it with them because we haven't 15 had that formal meeting. That's the negative side of 16 doing that. 17 But I would -- just having that caveat, I would 18 not have a problem, policy wise, of providing that 19 report to them, the draft report immediately the minute 20 it's complete. 21 MR. KRAUSE: Commissioner Rivera? 22 MR. RIVERA: Thank you, Chairman. 23 Question: How long until you know you can see 24 the light at the end of the tunnel that you're going to 25 be complete with the report, typically? 53 1 MR. ROYAL: It typically depends upon the nature 2 of the records from the organization and how responsive 3 those organizations are. That's pretty much the way to 4 sum up in dealing with auditees of bingo. As 5 Mr. Fenoglio mentioned, a lot of times the records are 6 just not there. They're at two or three different 7 locations or whatsoever. There's some organizations who 8 use a -- sort of a centralized bookkeeper, and the 9 records are much better. 10 MR. RIVERA: So once you receive all of the 11 information and documentation that you need in order to 12 do your due diligence and craft the document, how long 13 does that typically take you to produce your final 14 draft? 15 MR. ROYAL: At that point we're somewhere in the 16 neighborhood of 40 to 60 days. 17 MR. RIVERA: 40 to 60 days once you have 18 everything you need? 19 MR. ROYAL: I'm sorry. Once we have all the 20 information, we're less than 30 days to go through our 21 audit reviews. 22 MR. RIVERA: Okay. So then having said that, 23 once you have all of the pieces of the puzzle that 24 you're going to use, 30 days out, then why not at that 25 point then set a date 30 days out to get everybody at 54 1 the table and try to coordinate it then at that point so 2 then your three-day notice, if, you know, Alfonso gets 3 everything prepared then three or five business days 4 ahead of time, you should be working with the -- with 5 him up through that point. So you set it out a month in 6 advance, and it could be a date that could move based on 7 how you're doing; but, again, you'll know several weeks 8 in advance if you need to push it back, then you will, 9 but at least you would give everybody about a month to 10 put the meeting together. And then it becomes final 11 more -- I guess kind of to confirm that we're on and 12 we're going to meet in five business days. 13 That's what I would like to see. Is that 14 something that could be possible? Meaning you set it 15 out a month, and then you say we're going to confirm 16 this about a week out? 17 MR. ROYAL: Commissioner, make sure I understand 18 you. You're suggesting scheduling an extra conference 19 without the actual creation of a draft report? 20 MR. RIVERA: Right. On the expectation that you 21 know historically that it takes you about a month to do 22 all the things you need to do once you have all the 23 pieces of the puzzle moving forward. 24 MR. ROYAL: I like that idea. 25 MR. RIVERA: Great. 55 1 MR. KRAUSE: What I'm going to do is I'm going 2 to ask for our bingo commissioner to make the motion to 3 adopt most of the rules except with the change that 4 we're discussing on this one rule. 5 MR. LOWE: Well, okay. 6 MR. KRAUSE: Unless you think that that's -- 7 MR. LOWE: Here's where I am. I think this is a 8 management issue, personally, that we can have set this 9 in place and say, Alfonso, we expect you to do this. 10 But as far as the rules, I think there's a distinction 11 that we need to have -- our goal is to have it when we 12 have the report as soon as we give it to them. But our 13 drop dead deadline is three days. And I would like to 14 see that without specific examples of problems that have 15 been in the past, going forward to say, let's see where 16 we are; and if there are problems, let's come back and 17 address it at that point in time. That's what I would 18 like to see happen. 19 MR. KRAUSE: You want to go ahead and make a 20 motion? 21 MR. LOWE: But we have other witnesses. 22 MR. KRAUSE: We do? I'm sorry. 23 Are you finished? 24 MR. FENOGLIO: I think. 25 MR. KRAUSE: You're excused. 56 1 Will Martin. 2 MR. MARTIN: Good morning. I'm Will Martin. 3 I'm a chairman of the legislative commission for the 4 American Legion for the State of Texas, and I'm also 5 vice president for Conservative Texans for Charitable 6 Bingo. 7 I wanted to comment on two items in connection 8 with Mr. Royal's report to the Commission. First with 9 regard to the ledger reconciliation project and the 10 notices of outstanding liabilities due that were issued 11 to organizations for which there were no supporting 12 documents to establish a debt. I don't understand why 13 the division has an issue to refunds to these 14 organizations. I would like to know why this hasn't 15 occurred yet, and I would like to know when they will be 16 issued. I've had quite a few American Legion posts that 17 have paid money in, and now they're calling me wanting 18 to know when they're going to get a refund. 19 MR. LOWE: Can I interrupt you, Mr. Martin? Can 20 I interrupt you? 21 MR. MARTIN: Yes, sir. 22 MR. LOWE: At this point in time we're talking 23 about the Rules, right, the rule changes. Do you have 24 comments directly related to the rule changes? 25 MR. MARTIN: No. I don't know why they called 57 1 me up. I was supposed to go after No. 13. 2 MR. LOWE: I don't mind hearing from you, but 3 right now we're trying to get through these rule changes 4 if that's okay. 5 MR. KRAUSE: That's right. This note says that 6 this is for agenda Item No. 3. I'm going to change it 7 to 13. You're going to speak on 13? 8 MR. MARTIN: Yes, sir. I'll be back. 9 MR. BIARD: I'll take the blame on that one. I 10 think I put the wrong number. 11 MR. KRAUSE: I am looking for a motion to do 12 something with these rules. 13 MR. LOWE: Is that all the witnesses? 14 MR. KRAUSE: That's all the witnesses. 15 MR. LOWE: I'm going to move that we adopt the 16 rule changes as presented to us in our packet, which is 17 found in tab No. 3 in their entirety. 18 MR. KRAUSE: Do I hear a second? 19 MS. HEEG: Second. 20 MR. BIARD: Could I ask for a clarification? 21 Would you like for us to modify the language in the 22 preamble regarding that possible destruction? 23 MR. LOWE: Excuse me. My oversight. I don't 24 know if Carmen can recount her exact language. 25 MR. BIARD: I wrote it down. On page 29 of the 58 1 preamble, starting on line 12, it would say "Any 2 additional notification, including potential violations 3 found during an audit, could disrupt the ongoing audit 4 inspection and may not give the CBOD an opportunity to 5 review relevant evidence." 6 MS. ARRIETA-CANDELARIA: That sounds fine. 7 MR. KRAUSE: So, Commissioner Lowe, are you 8 willing to accept that amendment to your motion? 9 MR. LOWE: So moved. 10 MR. KRAUSE: Do I hear a second? 11 MS. ARRIETA-CANDELARIA: Second. 12 MR. KRAUSE: All in favor say "aye." 13 All opposed say "nay." 14 Passed by acclamation. 15 MR. BIARD: Thank you, Commissioners. 16 MR. KRAUSE: We are moving on to Mr. Michael 17 Fernandez, who is going to report and give us possible 18 discussion about actions and/or agency -- on agency 19 major contracts. 20 MR. FERNANDEZ: Good morning, Mr. Chairman, 21 Commissioners. 22 For the record, my name is Mike Fernandez. I'm 23 the director of administration. Item No. 4 in your 24 notebook is to advise the Commission of staff's intent 25 to amend our three major contracts for scratch ticket 59 1 printing. The proposed amendments address a change to 2 the deadline for working papers and the addition of 3 pricing for various scratch print options. 4 Also, Mr. Chairman, Commissioners have 5 independently confirmed they do not have any financial 6 interest in any of the printing vendors. 7 If you have any questions, I would be happy to 8 answer. 9 MS. ARRIETA-CANDELARIA: I have a question, 10 Mr. Fernandez. 11 So in light of the -- in light of the audit that 12 we heard earlier today, I want to make sure that -- if 13 there's anything that we need to -- any amendments that 14 we need to make with regard to the background in the 15 seal procedures, that if they're not in the contract 16 that we look to make sure that those are considered. 17 MR. FERNANDEZ: Commissioner, we will take a 18 review of those; and I have the manager here this 19 morning, a senior manager that deals directly with that; 20 so we will review that. 21 MS. ARRIETA-CANDELARIA: Sounds great. 22 And Mr. Pollard is here today, so he can meet 23 with you immediately after the meeting. 24 MR. POLLARD: Absolutely. 25 MS. ARRIETA-CANDELARIA: Thank you so much. 60 1 Do you need a motion? 2 MR. KRAUSE: No, ma'am. 3 Any other comments in Item 4? 4 We move on to Item 5, which is also 5 Mr. Fernandez. 6 MR. FERNANDEZ: Item 5 in the notebook is to 7 advise you of our intent to extend the current document 8 managing services contract with Canon Solutions America, 9 Inc., for a one-year period. And that's a briefing 10 item, also, for your information. 11 Also, Commissioners independently confirm they 12 do not have any financial interest in Canon Solutions 13 America. 14 That's all I have, Commissioners. 15 MR. KRAUSE: Any questions of Mr. Fernandez by 16 the Commissioners? 17 You're excused. Thank you, sir. 18 Item No. 6, Mr. Bob Biard. 19 MR. BIARD: Yes, Commissioners. Item No. 6 is a 20 policy statement required by the Commission's 2013 21 Sunset legislation that delineates the policy making 22 responsibilities of the Commission and the management 23 responsibilities of the executive director and 24 Commission staff. 25 The Sunset Commission recommends such a policy 61 1 for all State agencies. Our agency was not singled out. 2 This policy was first adopted in December, 2013, and is 3 on the agency's schedule for review and readoption this 4 year with one minor recommended change. The proposal -- 5 the proposed change on Page 2 states that in the 6 executive director's absence, the executive director may 7 delegate their authority to a division director or other 8 management employee. The previous language limited 9 delegation to a division director or employee that 10 reports directly to a division director. 11 Also, this entire policy is not intended to 12 be -- it is intended to be descriptive of existing 13 practice, so it is not new in that respect. 14 The staff recommends that the Commission adopt 15 revised policy P 002 effective on today's date. 16 I'll be happy to answer any questions. 17 MR. KRAUSE: Any discussion by the members? 18 This is an action item. 19 No discussion? 20 May I have a motion on approving the proposed 21 revised policy? 22 Do you have any comment? Any motion. May I 23 hear a motion on adopt ing the proposed revised policy? 24 MS. HEEG: So moved. 25 MR. KRAUSE: Second? 62 1 MS. ARRIETA-CANDELARIA: Second. 2 MR. KRAUSE: All right. I call for a vote. All 3 in favor say "aye." 4 All opposed say "nay." 5 The ayes have it. 6 MR. BIARD: Thank you, Commissioners. 7 MR. KRAUSE: We're going to do one more item, 8 and then we're going to take a little break. We're 9 going to call Mr. Michael Anger. 10 MR. ANGER: Good morning again, Mr. Chairman, 11 Commissioners. For the record, my name is Michael 12 Anger. I'm the lottery operations director. 13 Before you, you have a copy of the fiscal year 14 2017 comprehensive business plan and annual report. A 15 copy of this plan was provided to you in your June 2nd 16 packets. The document contains a summary of fiscal year 17 2015 results and performance included in the annual 18 report section, followed by the fiscal year '17 business 19 plan. 20 The plan confirms -- conforms with requirements 21 detailing the agency's Sunset legislation passed during 22 the 83rd legislative session. The business plan section 23 of the report contains ten key performance factors 24 identified by the staff to capture key measures on 25 agency efficiency and performance. The plan contains 63 1 targets and/or projections for each of the factors and 2 reports on the agency's past performance against the 3 plan. 4 I would like to note one change to the version 5 before you from the version that you received on June 6 2nd on Page 11 of the agency's core values that are laid 7 out. The innovation core value has been modified to 8 clarify the agency's intent with regard to innovation is 9 limited to those things that are statutorily authorized 10 by the legislature. 11 Otherwise there are no differences from the 12 reports you received on June 2nd. 13 I'm happy to respond to any questions or 14 comments that you may have before the staff seeks your 15 approval of the plan today. 16 MR. KRAUSE: This is an action item. Do we have 17 comment or questions from the Commissioners? 18 We don't have any comments from the 19 Commissioners; so, therefore, do I hear a motion to 20 approve the plan? 21 MS. HEEG: So moved. 22 MR. RIVERA: Second. 23 MR. KRAUSE: All in favor say "aye." 24 All opposed say "nay." 25 They ayes have it. 64 1 We're going to take a 9-minute break. We're 2 going to readjourn (sic) at 11:30 sharp. 3 (Brief recess.) 4 MR. KRAUSE: The Lottery Commission is back in 5 session, and we are going to hear, with the next four 6 agenda items, Kathy Pyka. 7 MS. PYKA: Good morning, Commissioners. My name 8 is Kathy Pyka, controller for the Commission; and with 9 me to my right is Robert Tirloni, Commission's Products 10 and Drawings Manager. 11 Commissioners, the first part that we have 12 before you this morning replaces our comparative sales 13 data through the week ending July the 2nd, 2016. Our 14 total fiscal year 2016 sales through this 44-week period 15 are now at $4,291,000,000, which is an increase of $433 16 million over last fiscal year. This is an 11.2 percent 17 growth rate. 18 Our fiscal year 2016 scratch sales, which are 19 reflected on the second orange bar, at $3,136,000,000; 20 and this is $179 million growth over last fiscal year. 21 And as you can see our scratch ticket sales now are 22 reflected at 73.1 percent of total sales for the fiscal 23 year. 24 Our fiscal year 2016 draw sales on the second 25 blue bar are at $1,154,000,000, which is a $253 million 65 1 gain over last fiscal year, or a 28 percent growth over 2 last fiscal year. 3 So with that Robert is now going to provide an 4 overview of actual sales by game. 5 MR. TIRLONI: Thanks, Kathy. 6 Good morning, Commissioners. So this slide is 7 our 2016 fiscal year sales through Saturday, July 2nd, 8 compared to fiscal year 2015. I'll start by giving the 9 summary of draw games. 10 Draw games overall are up $253.9 million of -- 11 compared year over year. Again, most of that gain is 12 coming from the jackpot games, specifically the 13 Powerball game due to that $1.5 billion jackpot 14 experienced earlier this year. 15 Now, as of last week, Mega Millions had a very 16 good roll-up. It rolled up to a $540 million jackpot. 17 So when we met last, the deficit being experienced by 18 Mega Millions was much larger; and that has definitely 19 shrunk as a result of that jackpot roll. So the jackpot 20 games are up $239 million. 21 The blue font represents our daily games. They 22 are up $15 million. We continue to see growth of the 23 Pick 3 and the Daily 4 product. 24 Moving down towards the bottom of the slide, our 25 scratch tickets are continuing to do very well this 66 1 fiscal year. You are seeing an almost $180 million 2 sales increase this year compared to last year. So when 3 you look at the portfolio as a whole, sales are up $433 4 million this fiscal compared to last. 5 I do have a brief update. 6 MR. GRIEF: I'm sorry. Mr. Chairman, can I add 7 something to that report? 8 MR. KRAUSE: Please. 9 MR. GRIEF: I just want to say something about 10 these numbers to try to put it more in layman's terms 11 for the Commission. 12 I know Kathy has 4.291 million -- or billion -- 13 I'm sorry -- 4.291 billion as of the date this chart was 14 prepared. Through last week, we're now closer to 15 4.4 billion. We still have six weeks remaining until 16 the end of this fiscal year. That 4.4 billion we're 17 almost at to date, that eclipses every single full 18 fiscal year in our history, with the exception of last 19 year at our 4.53 billion. We are going to bury that 20 record that we set last year in a very short time, and 21 I'm very confident we're going to eclipse $5 billion in 22 sales when we come to the end of the fiscal year at the 23 end of August. That's a very significant 24 accomplishment. 25 We only crossed the $4 billion mark in total 67 1 sales as a lottery four short years ago. So we have 2 taken this lottery to a from a $4 billion lottery to a 3 $5 billion lottery in four years, where it took us 4 17 years to take it from a $3 billion lottery to a $4 5 billion lottery. 6 So I just want to -- the Commission to 7 understand the success that not only the Texas Lottery 8 team has had but our vendors and all of our retailers 9 out there who are important sales agents for our 10 products. 11 So with that, Robert, I would ask you to 12 continue. 13 MR. Tirloni: So, Commissioners, I do have a 14 brief update for you today regarding our partnership 15 with the Dallas Cowboys. Our partnership with the 16 Dallas Cowboys provided us with many marketing and 17 promotional opportunities, and I want to share one of 18 those with you today. 19 As you're well aware, the Commission's primary 20 beneficiary is public education. Our partnership with 21 the Dallas Cowboys ties directly into our mission to 22 support public education in Texas, and the Cowboys U 23 opportunity expounds on that -- on that public 24 beneficiary. Cowboys U provides us an opportunity to 25 partner with the Dallas Cowboys to support an important 68 1 community event. 2 The fifth annual high school football camp was 3 held for student athletes at the Valley Ranch training 4 facility on Thursday, June 9th. The student athletes 5 that participated were selected by their high school 6 football coaches, and they represent approximately 20 7 North Texas high schools from ten different school 8 districts. Dallas Cowboys players and coaching staff 9 worked with the students to provide football instruction 10 but also off the field life skill topics. So, 11 basically, they form eight different teams -- the 12 students form eight different teams, and they're coached 13 by Dallas Cowboys players. 14 Some of the players that participate that are 15 big names from the team, Tony Romo, Barry Church, Jason 16 Witten, Sean Lee, you can see Tony Romo in the bottom 17 right-hand corner of this slide. Here's some additional 18 photos from the event. 19 In a press release the Cowboys' coach Jason 20 Garrett said "We hope that the camp will provide an 21 impactful experience for deserving student athletes who 22 will remember the event for years the come. This camp 23 offers a unique opportunity for our players and our 24 coaches to make a meaningful difference in the lives of 25 these young men." 69 1 So in these photos you can just see Coach 2 Garrett addressing a group of students. Again, you can 3 see a lot of the Cowboys players participating. 4 You'll notice -- it's a little hard for you to 5 see, probably, but all of the shirts are branded with 6 Texas Lottery, noting that we are a sponsor of this 7 event. It was heavily promoted by the Dallas Cowboys on 8 social media -- Facebook, Twitter. 9 Again, you can see some of the other sponsors; 10 but we are one of the main sponsors of this event with 11 the Dallas Cowboys. 12 In closing, Cowboys U demonstrates a deep 13 commitment to the community and education in Texas; and 14 the Texas Lottery is certainly proud to be a part of 15 this program and proud to be able to sponsor this 16 program with the Dallas Cowboys. 17 And that concludes our presentation for today. 18 We're happy to answer any questions y'all may have. 19 MS. PYKA: Can we skip back to Item 9? 20 MR. KRAUSE: Sure. 21 MS. PYKA: Item 9 includes information on the 22 agency transfers to the State as well as the agency's 23 budget status. And, Commissioners, while the report in 24 your notebook includes the transfer data through the 25 period ended May 31st, we did finish the June transfer 70 1 last week; so, I would like to provide an update on 2 this. 3 So our cumulative transfers for the period 4 ending June 30th, 2016, are now at $1,140,000,000 for 5 the first 10 months of the fiscal year. And that's a 6 $1,140,000,000 transfer to State; $1,072,000,000 was 7 transferred to the Foundation School fund; $9.2 million 8 was transferred to the Texas Veterans Commission; with 9 the remaining balance of $59 million transferred for 10 unclaimed prizes. 11 Commissioners, this represents a 13.9 percent 12 increase, or $130.9 million gain over revenue 13 transferred to the Foundation School funds as compared 14 to last fiscal year. And our cumulative transfer to the 15 Foundation School fund are now at $19.43 billion. 16 The final item under this tab is the agency's 17 fiscal year 2016 method of finance summary for the 18 quarter ending May 31st, 2016. The Commission's Lottery 19 account budget for fiscal year 2016 is $219.9 million; 20 and of this amount 91 percent was expended and 21 encumbered through the third quarter. And our retail 22 operations budget funded by general revenue is at 23 $15.4 million, and we have 82.6 percent expended and 24 encumbered at the end of the third quarter. 25 I would be happy to answer any questions. 71 1 MR. KRAUSE: Commissioners? 2 Sounds like good news. 3 Item 10? 4 MS. PYKA: Certainly. 5 Commissioners, I'm seeking your approval this 6 morning on the fiscal year 2017 operating budget in the 7 amount of $247,656,966 and 330 full-time equivalent 8 positions. The budget was developed in accordance with 9 the appropriation amounts outlined in House Bill 1, 10 adjusted for Article 9 funding provisions as well as our 11 rider appropriations. The initial draft of the budget 12 was developed by the office of the controller with 13 division management input, and the final draft was 14 developed after receiving feedback from the divisions as 15 well as the review of the executive management. 16 I would be happy to answer any questions about 17 the document, and I am seeking your approval of the 18 document. 19 MR. KRAUSE: Commissioners? 20 There's no comment. Then is there a motion to 21 accept this budget. 22 MR. RIVERA: Move for approval. 23 MR. KRAUSE: Second? 24 MS. ARRIETA-CANDELARIA: Second. 25 MR. KRAUSE: All in favor say "aye." 72 1 All opposed say "nay." 2 It's approved. 3 MS. PYKA: Thank you, Commissioners. 4 MR. KRAUSE: Article 11. 5 MS. PYKA: Certainly. 6 Commissioners, this morning I wanted to provide 7 a brief update on our legislative appropriation request 8 guidelines that were released by the governor's office 9 and the Legislative Budget Board on July the 1st. 10 Commissioners, I've noted that as a starting 11 point for their budget deliberations, they're requiring 12 that each agency reduce their base appropriation levels 13 by 4 percent. At this point in time we have not 14 received the values that they're seeking the reduction 15 for, but certainly we've calculated with an internal 16 calculation. The policy letter does provide an 17 exception to the limitation in the fact that it doesn't 18 include maintenance funding for the Foundation School 19 Program, which in years past has been through the 20 Lottery dedicated account, has been exempt from the 21 reduction; but, of course, we're waiting for that final 22 policy guidance on that. 23 So, as soon as we receive the update from the 24 Legislative Budget Board, I'll be providing you with a 25 final document that outlines reductions by funding 73 1 programs for the agency. As of right now we do know 2 that general revenue will be included in that reduction. 3 I'll be happy to answer any questions. 4 MS. ARRIETA-CANDELARIA: I think we spoke about 5 that earlier with regard to your looking when we were 6 discussing the review of the agenda, and one of the 7 things that I just want to comment is that I understand 8 that the 4 percent across the board that was requested. 9 But, again, Commissioner, if we generate our own 10 revenue, and so I would hope that we would be exempt 11 once again from that requirement because I do think that 12 we are looking from the trends that we have today and 13 anticipate that we would probably increase our revenues 14 for the next fiscal year that we would not have to be 15 subject to that 4 percent cut. That would be my only -- 16 MR. KRAUSE: Historically, we've been exempt. 17 MS. PYKA: On the Lottery side, but we have not 18 been exempt from the bingo side. 19 MR. KRAUSE: Any other discussion by the 20 Commission? 21 MS. ARRIETA-CANDELARIA: Alfonso will just have 22 to find more money. 23 MS. PYKA: Thank you, Commissioners. 24 MR. KRAUSE: Darlene Brown. 25 MR. BIARD: Excuse me, Commissioners. I wasn't 74 1 sure. We may have had -- I think Mr. Bresnen may have 2 asked to comment on the last item. 3 MR. KRAUSE: Oh, indeed. Item 11. Sorry. We 4 skipped over you. No problem. 5 MR. BRESNEN: Thank you for letting me speak on 6 this item. 7 A little history for y'all that needs to be 8 avoided going forward, and I would request that the 9 Commission communicate with the leadership regarding 10 this. 11 The way bingo works, the -- half of the bingo 12 prize fee is collected by this agency, deposited into 13 the treasury, and appropriated by the legislature back 14 to local governments. Before this last cycle when these 15 edicts went out to all the agencies to cut their 16 budgets, that percentage cut was applied to the prize 17 fee. So if that, whatever it is, 4 percent is applied 18 to the prize fee, you obviously can't take that out of 19 what gets appropriated or is required by statute back to 20 these local governments. So the total number is derived 21 from the full budget of bingo, but the cut has to be to 22 the personnel cost. 23 Am I being clear about this? 24 So the problem is, we've been decimated in the 25 past in the enforcement of bingo by this problem. Now, 75 1 this was brought to their attention last time around; 2 and they corrected that. But as I understand it, 3 there's an ambiguity -- I haven't seen the communication 4 from the leadership, but as I understand it we don't 5 have the detailed instruction yet on how to do that; and 6 that would not be a good thing for those of us who 7 believe that the Bingo Enabling Act needs to be 8 enforced. So I would request that the appropriate 9 person on behalf of the Commission communicate to the 10 leadership that you're assuming then would request that 11 we follow the most recent practice. And I can assure 12 you on behalf of those of us who represent bingo at the 13 capitol building that we'll be speaking to the 14 Lieutenant Governor and Speaker's Office and urging them 15 to take that approach. 16 The second thing that I would like to say to you 17 is that we believe that there probably are going to be 18 some reductions. We think there's probably other ways 19 to fund the bingo function, and we're talking about some 20 of those things; but we also think that the cloth can be 21 cut to the pattern by getting rid of some of the 22 burdensome statutory provisions that you really can't do 23 anything about. 24 I think the rulemaking process did a good job of 25 eliminating some of those things that are marginally 76 1 driving up costs, but you guys are stuck with an 2 apparatus that nobody would invent if they were doing it 3 today, 30 years and some change after the Bingo Enabling 4 Act was essentially first put into place. 5 So I would request that either the same group 6 or -- that worked on the rules or a different group be 7 assembled to work with the agency and us. We've already 8 started our discussions amongst the major bingo groups 9 to make those recommendations to the Legislature. And 10 my experience is, it works a lot better if we can all go 11 up there kind of hand-in-hand. Recognizing that there 12 are limitations on the agency and its ability to lobby, 13 I can assure you that I can get at least one member of 14 the 181 up there to request you provide information 15 about those ideas and work with the regulated community 16 to do that. 17 So, I would -- I would further request that the 18 Commission indicate to staff that within the boundaries 19 of the current law that they be -- that they be working 20 with us and looking at ways that we might reform and 21 streamline the Bingo Enabling Act with the idea of -- 22 being to reduce some of the costs. 23 If we should get lucky and your full 24 appropriations request and not taking the 4 percent 25 reduction get adopted, it still would be a good idea to 77 1 do that because then we could reduce license fees; and 2 that would increase the net proceeds to charities if we 3 were able to do that. 4 Thank you very much for the time to address you 5 on this matter. And if you have any questions, I would 6 be glad to answer them. 7 MR. KRAUSE: Commissioners? 8 Thank you, sir. 9 Darlene Brown. 10 MS. BROWN: Good morning, Commissioners. I have 11 a status report to provide to you today plus three audit 12 reports. 13 So, in our status report, the biggest 14 accomplishment we completed was the reviews of the 15 ledger reconciliations. So in total we completed 16 reviews of 1,586 different ledger accounts. Over the 17 past month and a half since your last audit meeting -- 18 commissioner meeting where you gave us directive to 19 focus on these efforts. We spent 527 hours wrapping up 20 this project, so it became pretty much a full-time job 21 for the two of us that had been working on them. But as 22 soon as we wrapped those up, then we focused back on 23 getting some audit reports out to you. 24 We've also started the audit of what we're 25 looking at, the bingo restructuring project that 78 1 occurred during last year and a half and then the Boss 2 implementation project. And what we're doing with that 3 is making sure that the processes that were put in place 4 are tweaked for the right reasons within the system, and 5 then we're going to look at the system now to see if 6 it's really supporting the need of the bingo division 7 and if it needs any further refinements. So that's 8 where we're at on that one, and we will have that 9 completed before the end of this fiscal year. 10 So that is that on my status report. Then I'll 11 present the individual audit reports to you unless you 12 have some questions on status. 13 MR. KRAUSE: Commissioners? 14 I think we're ready for you to tell us about the 15 audit reports. 16 MS. BROWN: Okay. 17 The first audit, we looked at the entity wide 18 performance measures, and the Texas Lottery Commission 19 is required to report on 60 different performance 20 measures to the Legislative Budget Board. So our audit, 21 we focused on 19 of those so. That represented 22 32 percent of the performance measures. What we found 23 was that there were some improvement opportunities; 24 however, each one of these areas that we looked at and 25 we found observations that were low risk to the agency. 79 1 These performance measures are items where they're 2 reporting on outcomes and they're not necessarily key 3 business driver outcomes. 4 So in total we determined that the performance 5 measures that were being reported for Lottery operations 6 were accurate and correct; however, in the bingo, five 7 of the ten performance measures were inaccurately 8 reported and three of the ten cannot be recalculated 9 because documentation just wasn't available to 10 recalculate those. 11 The other observations that we noticed were just 12 generally the procedures are being followed but they 13 weren't being documented when the -- a review is 14 conducted prior to submission up to the Office of 15 Controller to submit over to the LBB, and then 16 supporting documentation was not being maintained on a 17 consistent basis. 18 So those were the primary findings in that audit 19 report, and I would be happy to answer any questions. 20 And I'm asking for you to approve that report. 21 MR. LOWE: I have one question. The State 22 Auditor's Office uses a rating system. I think they 23 said they just started using it. Do you use a similar 24 system where low, moderate risk, high risk? 25 MS. BROWN: We actually do use that in our 80 1 planning; and the next series of report that you're 2 going to see after these, we've modified our reporting 3 template so not only does the audit itself have a low, 4 medium, high rating that you'll see, but each audit 5 finding has a low, medium, high rating; and then we're 6 going to evaluate the controls within those whether or 7 not there's an observation and tell you whether there's 8 low, medium, or high. 9 MR. LOWE: So the deficiencies with regard the 10 your previous comments, are they low, medium? 11 MS. BROWN: They're all very low. 12 MR. LOWE: That's all I have, Mr. Chairman. 13 MR. KRAUSE: Any other comments? 14 Are there more than one audit report? 15 MS. BROWN: Yes, sir. 16 MR. KRAUSE: Why don't you just tell us about 17 all reports, and we'll either accept them or not all at 18 once. 19 MS. BROWN: The next audit report was on our 20 jackpot estimation process, and we determined that 21 the -- we looked at the period from September 1st, 2014, 22 through December 31st, 2015, and looked at all the 23 documentation processes. The actual estimations were 24 accurate compared to what was advertised. That's a 25 tremendous accomplishment when you're trying to estimate 81 1 all of these big jackpots. 2 And then we also said that the internal control 3 processes are effective. We had no observations to 4 report on that audit. 5 And then the third one was we looked at the 6 drawing process for the lottery, lottery drawings over 7 the studio. We determined that, again, the processes 8 were being followed; however, there were one -- some 9 improvement needed in that the security division does 10 observe the drawings, but they were not documenting what 11 they were observing. So, we recommended that they 12 prepare a checklist and update the procedures; and that 13 has already been corrected. 14 That's it. That's all three reports. 15 MR. KRAUSE: Comments and questions? 16 MS. ARRIETA-CANDELARIA: I just have one 17 question. 18 With regard to the jackpot estimations, while I 19 recognize that the percentage of the variance is very, 20 very low, what is the industry standard across the board 21 on the estimations? Do you know that? 22 MS. BROWN: I really don't know what the 23 industry standard for estimations is; but I know a 24 general acceptance is if you're within 5 percent, then 25 you're good. 82 1 MS. ARRIETA-CANDELARIA: That's what I wondered. 2 All right. Thank you. 3 MR. KRAUSE: Any other comments, questions? 4 All right. This is an action item, and I'm 5 looking for a motion to approve Ms. Brown's audit 6 reports, all three of them. 7 MR. LOWE: Move to approve. 8 MS. ARRIETA-CANDELARIA: Second. 9 MR. KRAUSE: All in favor say "aye." 10 All opposed say "nay." No nays. It carries by 11 acclamation. 12 Thank you, ma'am. 13 All right. Item 13, our bingo director. And we 14 do have two witnesses. 15 MR. ROYAL: Commissioners, in addition to what's 16 in your briefing booklets, I wanted to provide you an 17 update on the account ledger reconciliation project. 18 You've already heard from internal audit that 19 their review portion of our work is complete, and we 20 definitely appreciate all of their efforts with the 21 project. The remaining phases of the project are solely 22 being and require some program assistance from 23 informational resources that is already in progress. I 24 believe last meeting I reported it would take 25 approximately 60 days for us to complete the work of 83 1 entering data to adjust the ledgers to the correct 2 balances and communicate with licensees, and at this 3 time I do not foresee any issue that would cause delays. 4 Commissioners, you also asked last meeting for 5 us staff to look further into the debt collection 6 processes and the cost of collection efforts. As a 7 result of that direction and further analysis by General 8 Counsel, the division is no longer pursuing collection 9 efforts of debt that cannot be established with actual 10 records. This is similar to the standards used by the 11 comptroller of public accounts. As a result of this 12 change, licensees who have received an invoice for 13 payment of old debt may be eligible for a refund of the 14 amount paid if records associated with the invoiced 15 amount are not available. If the same licensee had 16 received an invoice for payment of old debt that has not 17 paid, the amount in the ledgers will be adjusted to zero 18 because that debt cannot be established. The last 19 example is what is being programmed in the bingo 20 operating system as the system was not built with that 21 scenario in mind. 22 Again, we anticipate concluding this project 23 this fiscal year, an update of these actions will be 24 communicated to the industry in my August, 2016, 25 director's message. 84 1 That concludes my report for day No. 740. 2 MR. KRAUSE: We have witnesses. Let's hear from 3 Mr. Bresnen first. 4 MR. BRESNEN: Thank you, Mr. Chairman. My name 5 is Steve Bresnen. I'm here on behalf of the bingo crew, 6 and I will be brief. 7 I think what's been demonstrated by the 8 rulemaking process that we just went through is that 9 having an ongoing involvement with the staff and the 10 industry works. It works very well. I would request -- 11 although it's not on your agenda today, I would request 12 respectfully that you institutionalize that process by 13 exercising your authority under the Bingo Enabling Act 14 to appoint a Bingo Advisory Committee and have that as 15 an ongoing basis. Since you won't be meeting again, I 16 would assume, for a couple months, to get that done and 17 get it -- invoke that mechanism as part of the process 18 for revising the Bingo Enabling Act is probably not 19 possible to get that done on a timely basis; but I would 20 suggest that you think long and hard about doing it. We 21 have shown that people will come, and they will 22 participate. 23 We got down into the nitty-gritty, didn't we, 24 Commissioner Lowe? 25 MR. LOWE: We did. 85 1 MR. BRESNEN: And I will say that I think the 2 industry was very candid. They were very well-prepared. 3 They didn't overreach. And I think the staff showed an 4 exemplary capability of making decisions and then 5 thinking about them and coming back and revising those 6 decisions. It takes not only a very competent staff 7 person but an excellent individual to be able to do 8 those kinds of things. 9 So you have a basis for doing something that's 10 really right here. This works very well at TDLR and the 11 various industries that they regulate. It works very 12 well at the DMV. I'm aware of many state agencies that 13 have advisory committees, and they use that capacity. 14 It works very well. And I urge you to consider doing 15 that. 16 And I'll just keep my remarks to that today. 17 Other than to say to Mr. Royal and to Ms. Glenn, and if 18 I'm leaving anybody out, I thought they did a very, very 19 fine job; and I think people in the industry are very, 20 very heartened by the approach that's been taken. 21 And, Commissioner Candelaria, I really 22 appreciate the benefit of your financial expertise and 23 your auditing expertise that you have brought to these 24 meetings -- not to short anybody else -- but I think you 25 did a great job. And, in particular, I think that that 86 1 helped us get the whole ledger thing and the refunds and 2 all that turned around. That was a real burr under the 3 saddle for a lot of people for a long time. 4 Appreciate you, Bob, for the work you and your 5 staff did on that. Mr. Royal, thank you for being 6 flexible. 7 I think if you'll institutionalize the 8 capability that the BAC represents that we can do this 9 on an ongoing basis and make a very large difference. I 10 personally would ask not to be appointed to the bingo 11 advisory committee. Okay. That leaves me flexible to 12 bitch when I go to the capitol building. 13 MR. KRAUSE: Mr. Will Martin. 14 MR. MARTIN: Thank you, Chairman. 15 I was going to comment on two items. Mr. Royal, 16 shot me in the foot on the issuance of refunds. 17 Second, I would like to echo Mr. Bresnen's 18 comments on requesting the Commission reestablish a 19 Bingo Advisory Committee. Under the Bingo Enabling Act, 20 the Commission has the discretion to appoint the 21 committee. We believe the Commission would benefit 22 greatly from having a committee advise it on needs and 23 problems of the bingo industry. While we appreciate the 24 work group Mr. Royal convened for the bingo rule 25 project, we think the Commission should have an advisory 87 1 committee that reports directly to the Commission. 2 I would like to commend Mr. Royal and his staff 3 on the rulemaking process. It was great working with 4 them. And on behalf of the American Legion and 5 Conservative Texans for Charitable Bingo, I want to 6 thank y'all all for your time. 7 MR. KRAUSE: This is nonaction item, so we're 8 going to move on the next item, which is report from 9 our -- 10 MS. HEEG: Mr. Krause, can I -- 11 MR. KRAUSE: Sure. 12 MS. HEEG: Can you, Alfonso, explain what the 13 refund process will be, and timing? 14 MR. ROYAL: Sure, Commissioner. 15 What we have to do at this point is go through 16 the -- internal audit has already looked at the -- 17 internal audit has already looked at the individual 18 accounts. What we have to do in turn is take that 19 information and make adjusting entries in the actual 20 ledger itself; and those organizations that whereby as I 21 mentioned previously that had actually been invoiced 22 early on in the process, we've sent them a letter -- 23 some of those organizations have actually paid, some of 24 them have not. Those that have paid and those that have 25 not, we still have to go through the actual records. 88 1 There's a document repository. We look on the system to 2 see if we can actually substantiate the amounts that we 3 have identified as debt for any refunds with actual 4 records. In those instances where we cannot 5 substantiate those debts, collections, whatever they 6 are, then we end up making adjusted entries to adjust 7 those account balances to zero. 8 In the instances where those organizations have 9 actually in good faith got our letter, whether they 10 agreed with it or not, and paid the amounts, we're 11 searching the records to make sure that, again, the 12 amount paid was not actually due; and, if so, we 13 actually process that through a refund. And those have 14 to go through from -- leave the bingo, go up to the 15 Office of the Controller, and then process through the 16 state. 17 MS. HEEG: How long do you think that will take? 18 MR. ROYAL: That's within that 60-day period. 19 What we're waiting on right now is just some programming 20 that needs to go on. And simultaneously while the 21 programmer are working on the system, we're actively -- 22 Ms. Glenn's team is reviewing those individual accounts 23 and looking for those records. 24 MS. HEEG: Thank you. 25 MR. KRAUSE: Any other comments from the 89 1 Commission? 2 All right. 3 Mr. Executive Director. 4 MR. GRIEF: Thank you, Mr. Chairman. 5 Commissioners, in addition to what's in your 6 notebook this morning, I just have a couple of 7 conferences I want to mike you aware of that are coming 8 up. 9 The first will be the World Lottery conference. 10 That's going to be held in Singapore, November 6th 11 through the 9th. This conference is biannual and put on 12 by the World Lottery Association, or WLA, as it's known, 13 of which the Texas Lottery is a member. I'm planning to 14 attend, and I will be representing both the Texas 15 Lottery and the Multi-State Lottery Association as the 16 president of MUSL; and my travel expenses will all be 17 covered under our membership with the World Lottery 18 Association. 19 I also want to let you know about a conference 20 that's going to be held here in Austin December 4th 21 through the 7th. The La Fleur's Lottery Concave will be 22 held here at the InterContinental and Stephen F. Austin 23 hotel. We had that conference here two years ago, and I 24 have recruited that conference back again this year. 25 Chairman Krause actually spoke at the conference two 90 1 years ago. Terri Markle and Bruce La Fleur are the 2 organizers of that particular conference, and they are 3 going to have a terrific program in store for us. 4 Concurrent with that conference I'm going to be 5 calling a full board meeting of the Multi-State Lottery 6 Association which will bring an additional 25 to 30 7 lottery directors from around the country here for the 8 board meeting as well as attendance at the conference. 9 So, we expect that to be a very productive and robust 10 week for us. 11 Commissioners, that concludes my report this 12 morning. I will be happy to answer any questions that 13 you might have. 14 MR. KRAUSE: Commissioners? 15 Mr. Biard? 16 MR. BIARD: Thank you, Commissioners. Item 15 17 in your notebook are the enforcement orders. This tab 18 contains 19 lottery and bingo enforcement matters, Tabs 19 A through S. These are cases where commission staff 20 found a violation of statute or rule, and in most cases 21 the licensee failed to appear at the hearing and it 22 proceeded by default or the staff and licensee reached a 23 settlement. 24 Today the last item, Tab S, is a fully litigated 25 bingo case; and my understanding is the applicant is 91 1 here and has asked to address the commission. 2 I'll briefly describe the cases, and you can 3 take them up in a single vote if you'd like, except 4 perhaps on the last item, S, which you may want to 5 discuss further. 6 Tabs A through K are nonsufficient funds that a 7 lottery retailer license revocation that are handled in 8 a single order. Each case was presented at the State 9 Office of Administrative Hearings for revocation of the 10 retailer license on the grounds the licensee failed to 11 have sufficient funds in their bank account to cover 12 electronic fund transfers to the Commission's account. 13 In each case the administrative law judge recommended 14 revocation. 15 Next we have five lottery agreed orders, Tabs L 16 through P. Tab L is from Mickey's Pit Stop #2 in 17 Robinson which is Marion County. In this case the 18 licensee store owner accepted a credit card as payment 19 for scratch tickets and agreed to a ten-day suspension. 20 Tab M is for Smitty's Grocery in Houston. In 21 this case a store owner and a managing member of the 22 licensee tried to claim two winning scratch tickets for 23 a customer. He signed the Commission claim form stating 24 that no other person is entitled to any part of the 25 prize payment and that he understood it was a violation 92 1 to do so. And it is a violation for someone to claim a 2 prize for another person, even if they do not charge a 3 fee, as was the case here, mainly because of the 4 agency's duty to check for and deduct amounts that a 5 prize winner owes to the State. The licensee agreed to 6 a 30-day suspension. 7 Tab N is for Valero Corner Store #929 in 8 San Antonio. In this case the Commission received an 9 anonymous complaint that a store clerk was scratching 10 tickets and selling the nonwinning tickets to customers. 11 On our investigation the clerk admitted to doing this; 12 and it turns out that the clerk had claimed $5,000 in 13 prizes on five occasions. She has been terminated from 14 employment, and the licensee agreed to a 30-day 15 suspension. 16 Tab 0 is for Ice Box #4969 in Port Arthur. In 17 this case the Commission received a complaint the store 18 was charging sales tax on debit card purchases of 19 lottery tickets. The complainant had a receipt showing 20 the charge. The Commission investigator purchased three 21 tickets at the store using a debit card and was not 22 charged tax. However, the store owner admitted that one 23 of the clerks had been charging tax and said the store 24 policy had changed so debit cards were no longer allowed 25 on lottery purchases; and the licensee agreed to a 93 1 ten-day suspension. 2 Tab P is for Quick Mart in New Braunfels. In 3 this case a store employee of the licensee accepted a 4 credit card for payment on multiple occasions and also 5 sold tickets at a greater price than the price 6 established by the Commission by charging a fee on 7 credit card purchases. Both of these actions are 8 violations. The licensee agreed to a 30-day suspension. 9 Next is Tab Q, and it is a bingo agreed order. 10 In this case bingo worker Dana Armstrong has a series of 11 convictions and deferred adjudications, some involving 12 theft, some for issuing bad checks, and some for 13 tampering with a governmental record, dating from 14 January 1995 to September 2012. These actions could 15 disqualify her from being listed on the bingo worker 16 registry. However, she currently works two other jobs 17 and supports three children and produced seven letters 18 of recommendation from her supervisors at her jobs, 19 which are all factors that may be considered in deciding 20 whether to disqualify her. The Commission staff agreed 21 that she may remain on the registry if she does not act 22 as a bingo chair person, manager, operator, bookkeeper, 23 cashier, or designated agent for any bingo conducted for 24 the next three years. 25 The next tab, R, is the removal of a 94 1 disqualified bingo worker from the bingo worker 2 registry. This case went to SOAH. In this case the 3 worker was sent a notice that she was going to be 4 removed from the registry based on a plea of guilty to 5 aggravated assault with a deadly weapon, which is a 6 second-degree felony. The Commission received no 7 response and set the matter for hearing. The hearing 8 was called. The worker failed to appear. So the matter 9 proceeded by default, and the judge prepared a proposal 10 for decision recommending that she be removed from the 11 registry; and the staff agrees. 12 And the last is Tab S. This is the application 13 of Habitable Spaces for a conductor license. The judge 14 recommends denying the application. The staff 15 recommends the same. 16 So this was a case where the bingo staff denied 17 the application administratively, and the applicant 18 requested a hearing. And the applicant is here today 19 and has asked to address the Commission. 20 Both parties submitted a one-page summary of the 21 case, which is located after the proposed order in your 22 notebooks. The issues are legal ones and fairly 23 straightforward. The key issue is whether under the 24 Bingo Act a fraternal organization must have maintained 25 a 501(c) status with the Internal Revenue Service for 95 1 three years to be eligible for a conductor license. 2 This applicant Habitable Spaces has not had a 501(c) 3 designation for three years. 4 The staff position is, yes, this is required 5 because the fraternal organization must be a nonprofit 6 organization that has been organized in the State for at 7 least three years. The statutory definition of a 8 nonprofit organization requires tax exempt status under 9 501(c) of the Internal Revenue Code, and reading those 10 statutes together the argument is a fraternal 11 organization must have had its 501(c) status for at last 12 three years. 13 The applicant argues it was a new interpretation 14 of the Bingo Act and that the agency has a policy of not 15 requiring 501(c) status for three years. They ask for 16 the Commission to remand the case to SOAH to allow 17 expert testimony on what Commission policy has been in 18 the past. 19 There is a second issue, which is that the 20 applicant has not been organized -- or whether the 21 applicant has been organized as a fraternal organization 22 for three years. 23 That concludes my presentation. And, as I said, 24 the applicant, Mr. Heinemeier, is here today to address 25 the Commission. And we have our legal staff here and 96 1 Mr. -- 2 MR. KRAUSE: So here's how I would like to 3 propose handling this; and that is, on items A through 4 R, means not including S, I would like to -- unless 5 there's only -- I would like to have discussion about 6 that, have a vote on that; and then we're going to 7 handle item S separately so we can hear from our witness 8 and then also hear from our Commissioners. 9 MS. ARRIETA-CANDELARIA: So moved. 10 MR. KRAUSE: Second. 11 MR. RIVERA: Second. 12 MR. KRAUSE: All in favor say "aye." 13 Items A through R, the staff recommendation is 14 adopted. 15 So, now, you've already discussed Item S. Let's 16 hear from our witness, and our witness is Eddie 17 Heinemeier. 18 MR. HEINEMEIER: Yes, sir. 19 Mr. Chairman, Commissioners, appreciate your 20 time. 21 This was a situation in preparedness. When the 22 original Habitable Spaces put their application in, they 23 started this in October of 2014. At that time the 24 understanding was that you could get your license as 25 long as you were a 501(c)(3) at the time the license was 97 1 issued. They put it in in January of 2015. 2 The -- the ruling and the way that it was being 3 interpreted changed in 2016. They were denied their 4 license. And according to the statute, they cannot get 5 their $3300 back; so the only way that they can proceed 6 at all would be getting their license. And we've asked 7 as a fairness situation here if you could remand this 8 back and let it be considered. At the time that they 9 went before the judicial judge, they did not have legal 10 support here. They thought it was a factual situation. 11 And it was said it was an expert witness. And so, 12 therefore, Steve Fenoglio and Phil Sanderson were not 13 allowed to testify at the time; and they both had 14 background information showing that this had been the 15 procedure before the change. 16 So we're asking for relief in this of some way 17 just because the charity had a hard time putting their 18 money together. I represent 21 different bingo halls 19 and about 110 charities across the State, and they just 20 ask to please what could be done in this situation. 21 MR. KRAUSE: Any questions of this witness? 22 MS. HEEG: I have a question and comment. I'm 23 sympathetic to the position of the applicant, but I'm 24 also concerned with we are obligated to follow the law. 25 And I am questioning staff whether there is an 98 1 alternative approach here rather than adopting staff's 2 recommendation or adopting the applicant's 3 recommendation and send it back to an ALJ for another 4 round of hearing and another round of expenses. 5 It looks like we are now nine months or so away 6 from applicant being qualified under the law. And is 7 there a way that we can come up with so that the 8 applicant could get their authorization in March, 2017, 9 and not have to submit another application fee? 10 MR. BIARD: Commissioner, if -- I think I have a 11 couple of thoughts on that. If the matter is remanded 12 to SOAH, as Mr. Heinemeier is requesting, there's no 13 assurance that the judge will come back with a different 14 recommendation. Her position in the PFD was pretty 15 strong. So, I mean, I think there's a risk you may come 16 back with the same recommendation, in which case the 17 Commission would be in a position of having to change 18 findings of fact and conclusions of law made by the 19 judge, which is -- to do it to this extent, it would be 20 pretty extensive. We would basically have to write a 21 complete opinion to justify why we're going against the 22 judge. 23 Another option that I think you could consider 24 is whether the bingo division and the applicant could 25 negotiate an agreed order, the type that, you know, you 99 1 see at all the Commission meetings that perhaps could 2 resolve this matter on a prospective basis perhaps by, 3 you know -- assuming that there are protections in place 4 to make sure that, you know, the applicant remains 5 otherwise eligible -- that could grant a license 6 effective three years after their 501(c) status was 7 granted by the IRS, which I believe is going to be in 8 March, 2017. 9 I've never seen anything exactly like that 10 before; but in a settlement negotiation, I think 11 generally the parties are free to negotiate whatever 12 they want as long as it's not contrary to statute. So, 13 I mean, I think that is an option, to ask the parties to 14 work on an agreed order that would be brought back to 15 the Commission at a later meeting. 16 MR. KRAUSE: So does that make this an action 17 item, or do we take it off the agenda so that staff can 18 work on it? 19 MR. BIARD: I think you can give direction to 20 staff. It would not be an action item. It would not be 21 an order that you would sign. 22 MS. ARRIETA-CANDELARIA: Alfonso, did you want 23 to address that? 24 MR. ROYAL: Yeah, I had some -- just some 25 concerns, and that's something if that's the direction 100 1 that the Commission wants to go, we need to look at that 2 because I'm not sure, I guess, fee wise how that would 3 actually work. Those fees have already been paid and 4 expended during the year that they were collected in; 5 and so, we're talking about going back. I'm sure -- 6 this would be something we would have to look at. There 7 may be some -- 8 MR. BIARD: There's some -- there are probably a 9 number of detailed issues that we probably have to scrub 10 and drill down on to be sure that we're -- 11 MR. LOWE: We have a meeting August 12th, and 12 that gives us about a month and -- this is right around 13 a month, right? So my preference is to see if we can't 14 negotiate a resolution that's acceptable to both sides 15 and look at it again in August, would be my preference. 16 I think that we can. So I move we table this until 17 August 12th. 18 MR. KRAUSE: Second? 19 MR. RIVERA: Second. 20 MR. LOWE: Second. 21 MR. KRAUSE: All in favor say "aye." 22 So the ayes have it. It's tabled for the time 23 being. 24 MR. HEINEMEIER: Thank you, Commissioners. 25 MR. BIARD: That's all of the enforcement items 101 1 on Tab 15. 2 MR. KRAUSE: So at this point we don't have any 3 other public comment items, and I move the Texas Lottery 4 Commission into executive session to deliberate 5 personnel matters under Government Code Section 551.074 6 and receive legal advice from our lawyers -- and it's 7 also under the Government Code -- as so posted in detail 8 in our open meeting minutes. Is there a second? 9 MR. RIVERA: Second. 10 MR. KRAUSE: All in favor say "aye." 11 We are adjourned for executive session. 12 (Executive session at 12:23 p.m.) 13 MR. KRAUSE: The Texas Lottery Commission is out 14 of executive session at 12:54 p.m. There is no action 15 to be taken as a result of executive session. This 16 concludes the business of this Commission and for this 17 meeting. Is there a motion to adjourn? 18 MS. HEEG: So moved. 19 MR. LOWE: Second. 20 MR. KRAUSE: All in favor say "aye." 21 We are adjourned. 22 23 24 25 102 1 2 3 ************************************************ 4 TEXAS LOTTERY COMMISSION 5 JULY 11, 2016 10:00 a.m. 6 7 *********************************************** 8 I, Janalyn Elkins, CSR, certify that the 9 foregoing is a correct transcription of the proceedings 10 in the above-entitled matter. 11 I further certify that I am neither counsel 12 for, related to, nor employed by any of the parties to 13 the action in which this hearing was taken, and further 14 that I am not financially or otherwise interested in the 15 outcome of the action. 16 17 18 ____________________________ Janalyn Elkins, Texas CSR 3631 19 Expiration Date: 12/31/16 16414 San Pedro, Suite 900 20 San Antonio, Texas 78232 Firm Registration 631 21 22 23 24 25 103