1 1 2 3 4 5 TEXAS LOTTERY COMMISSION 6 7 8 COMMISSION MEETING 9 10 11 August 12, 2016 12 13 10:00 a.m. 14 15 AT 16 17 TEXAS LOTTERY COMMISSION 18 19 611 East 6th Street 20 21 Austin, Texas 78701 22 23 24 25 2 1 APPEARANCES 2 3 CHAIRMAN: J. Winston Krause 4 COMMISSIONERS: Doug Lowe Robert Rivera 5 Peggy A. Heeg 6 GENERAL COUNSEL: Bob Biard 7 EXECUTIVE DIRECTOR: Gary N. Grief 8 CHARITABLE BINGO OPERATIONS 9 DIVISION DIRECTOR: Alfonso D. Royal III 10 CONTROLLER: Katheryn J. Pyka 11 12 13 --oo0oo-- 14 15 16 17 18 19 20 21 22 23 24 25 3 1 TABLE OF CONTENTS 2 Page 3 PROCEEDINGS, FRIDAY, AUGUST 12, 2016................. 4 4 I The Texas Lottery Commission will call the meeting to order................................ 4 5 II Report, possible discussion and/or action on 6 the FY 2018-19 Legislative Appropriations Request......................................... 4 7 III Report by the Charitable Bingo Operations 8 Director and possible discussion and/or action on the Charitable Bingo Operations 9 Division's activities, including licensing, accounting and audit activities, pull-tab 10 review, and special projects.................... 12 11 IV Report by the Executive Director and possible discussion and/or action on the agency's 12 operational status, major contracts, agency procedures, awards, and FTE status.............. 13 13 VIII Adjournment..................................... 17 14 REPORTER'S CERTIFICATE............................... 18 15 --oo0oo-- 16 17 18 19 20 21 22 23 24 25 4 1 AGENDA ITEM I 2 CHAIRMAN KRAUSE: Good morning, Ladies 3 and Gentlemen. I'm calling the meeting of the Texas 4 Lottery Commission to order. It's August the 12th. It 5 is 10:00 a.m. Commissioners Heeg, Lowe, and Rivera, are 6 present. We have a quorum. 7 We will start with the pledge of 8 allegiance to the U.S. and the Texas flags. 9 Commissioner Rivera, will you lead us? 10 COMMISSIONER RIVERA: Sure. 11 (Pledges.) 12 AGENDA ITEM II 13 CHAIRMAN KRAUSE: We have a very short 14 agenda today, and we're going to be very efficient with 15 our time. So we're going to start off by hearing from 16 Katheryn Pyka about the Legislative Appropriations 17 Request. 18 Kathy. 19 MS. PYKA: Good morning, Commissioners. 20 This morning I am seeking your approval of the 21 Commission's Legislative Appropriations Request for 22 fiscal years 2018 and 2019. 23 The Commission's fiscal year 2018 to 2019 24 Legislative Appropriations Request was developed in 25 accordance with guidelines from the leadership offices 5 1 which stated that, as a starting point for budget 2 deliberations, each agency is required to trim 4 percent 3 from base appropriation levels. 4 MR. GRIEF: Kathy, would you turn your 5 mic on? 6 MS. PYKA: There's another mic I can try. 7 Better? 8 MR. GRIEF: Yes. 9 MS. PYKA: The letter from leadership 10 notes specific exemptions to the baseline request 11 limitation and notes that any requests above the 12 baseline amount may be submitted as exceptional items. 13 Notice was received from the Governor's 14 Office that the Commission's General Revenue Dedicated 15 Account would not be exempt from the reduction plan as 16 we have had in previous LAR submissions. 17 Our 4 percent biennial reduction for 18 General Revenue and for the regulation of charitable 19 bingo amounts to $1,236,387 out of their appropriation 20 of $30,909,677, while the 4 percent reduction for the 21 General Revenue Dedicated Account and for the 22 administration of the lottery area is $18,631,452 of our 23 appropriation of $465,786,305. 24 In order to comply with the mandatory 25 reduction, agency programs were carefully reviewed to 6 1 determine where the 4 percent reduction to the General 2 Revenue and Lottery Dedicated Account would be taken. 3 Commissioners, as you are aware, our 4 funding under the Lottery Dedicated Account is primarily 5 devoted to outsourced services. The Texas Model that we 6 operate under includes almost 90 percent of the 7 Lottery's budget dedicated to either outsourced services 8 or retailer compensation. 9 Based on this funding model, it was 10 clear that our functions not outsourced, which amount to 11 $52.6 million for the biennium, could not absorb the 12 4 percent reduction amount of $18.6 million as this 13 would result in a 45 percent reduction to our lottery 14 staff used to support the administrative, regulatory, 15 and management of the Lottery. 16 We then reviewed outsourced services and 17 retailer compensation to determine which activities 18 could be reduced while still performing core lottery 19 functions and also recognizing that an impact to revenue 20 generation could not be avoided. 21 The following outsourced programs or 22 retailer compensation programs were selected for the 23 4 percent reduction: Mass Media Advertising Services, 24 a reduction of $7.1 million; the Scratch Ticket 25 Production Services, a reduction of $6.7 million; the 7 1 Retailer Commissions Incentive Program, a reduction of 2 $4.8 million. 3 While the budget reduction of 4 percent 4 amounts to $18,631,452, this reduction has a greater 5 impact to our revenue to State beneficiaries, retailers, 6 and players. So we've calculated the impact over the 7 biennium as a result of the budget reduction. We would 8 see a sales reduction of $1.2 billion; our revenue to 9 Foundation School Fund would be a reduction of 10 $255 million; and our retailers would receive a 11 compensation reduction of $64 million. 12 To ensure that the Lottery revenue to 13 Foundation School Fund is not impacted by the budget 14 reduction, our LAR includes one exceptional item for 15 $18,631,452 to seek restoration of the 4 percent budget 16 reduction to the Lottery Dedicated Account. 17 Commissioners, based on the unique 18 situation the lottery is in, being a revenue generator 19 for the Foundation School Fund, we are taking additional 20 steps to address the budget reductions in the spirit of 21 the policy letter from leadership. So we will modify 22 the baseline document that is before you today by an 23 additional $450,000 above the 18.6-million-dollar 24 required reduction and not seek restoration of this 25 funding. The reduction will be made to the 8 1 administrative strategy. 2 The LAR does not include an exceptional 3 item to seek restoration of the 4 percent budget 4 reduction to the General Revenue Account. The 5 administrative budget reduction to bingo operations 6 amounts to $225,547 and two positions and is not 7 included as there are not lower-priority programs or 8 other cost savings available for consideration, as 9 outlined in the Exceptional Item Request Policy in the 10 June 2016 letter. 11 Finally, the balance of the GR reduction 12 of $1,010,840 is a reduction to bingo prize fees. It is 13 assumed there would not be an impact to the counties and 14 municipalities that benefit from these prize fee 15 allocations as this appropriation is estimated based on 16 actual bingo prize fees collected. 17 I would like to move on to Rider 18 Revisions, which are reflected now on page 3.B. of the 19 LAR, which incorporate a revision to the Commission's 20 current Rider structure that includes just routine 21 revisions; and then we also have one new Rider for 22 Scratch Ticket Production and Services Contracts. 23 This is outlined in Rider 701, and the 24 current funding structure for our Scratch Ticket 25 Production and Services Contract is a fixed budget. So 9 1 what we're trying to do is to ensure that we can provide 2 for increased sales from scratch ticket product growth. 3 The proposed Rider in your document would 4 provide for an estimated funding structure similar to 5 our lottery operations funding structure outlined in 6 Rider 10 and additional funding via the proposed Rider 7 would only occur if scratch ticket sales would reach a 8 certain threshold. 9 Included at the dais is an updated copy 10 of the Rider revisions, from the document I provided to 11 you earlier this week. There's an edit on Rider 11 on 12 page 4 of the packet. And what we've included is an 13 edit to the justification requesting clarification that 14 if new Rider 701 is funded by the Legislature, Rider 11 15 should be revised to exclude the Scratch Ticket 16 Production and Services Contract from contractual 17 obligations that can be funded by Rider 11. 18 Agencies are also required to submit a 19 supplemental schedule in the LAR detailing how they 20 would reduce the baseline request by an additional 21 10 percent in general revenue related funding. 22 Our 10 percent reduction plan for General 23 Revenue is $2,967,329, while the GR Lottery Dedicated is 24 $44,715,485. 25 The proposed plan for the 2.97-million- 10 1 dollar reduction in the bingo area includes a staffing 2 reduction of six positions as well as a reduction to 3 prize fees of $2.4 million. 4 In order to achieve the 10 percent 5 across-the-board reduction for the lottery account, the 6 plan would include a 44.72-million-dollar reduction from 7 the following programs: Mass Media Advertising would 8 have a reduction of $17 million from the 56.9-million- 9 dollar budget; Scratch Ticket Production would include a 10 16-million-dollar reduction from the 53.6-million-dollar 11 budget; and Retailer Commissions Incentive portion would 12 have a reduction of $11.7 million from 13 39.3-million-dollar budget. 14 Similar to the 4 percent reduction, we 15 included the impact to the economy as a result of the 16 10 percent reductions; and that would be a sales 17 reduction of $2.8 billion, revenue to the Foundation 18 School Fund would be a reduction of $611 million, and 19 our retailers would receive a reduction of $153 million 20 in compensation. 21 The LAR does also include information 22 regarding the agency's exempt position, noting that the 23 current classification of the exempt position as 24 compared to our most recent State Auditor's Office 25 report on executive compensation. 11 1 The LAR is due to leadership offices next 2 Friday, August the 19th. In addition to filing hard 3 copies of the document, we are required to file it 4 electronically within the ABEST system, to the 5 Legislative Budget Board, as well as submit PDF copies 6 to the Governor's Office. 7 As soon as we complete the document, we 8 are required to provide both the LBB and the Governor's 9 Office certification that the dual submissions are one 10 and the same; and we will have that document signed next 11 week. 12 Our budget hearing before the Governor's 13 Office and LBB is scheduled for 2:00 on Thursday, 14 September 8th. 15 So, Commissioners, in closing, I am 16 seeking your approval of the Commission's Legislative 17 Appropriations Request for fiscal years 2018 and '19. 18 The baseline request before you will be reduced by 19 $450,000, which will modify the amount to $460,920,662. 20 The baseline request with an exceptional item request of 21 $18,631,452 results in a total LAR of $479,552,114 and 22 324 Full Time Equivalent positions. 23 I'll be happy to answer any questions. 24 CHAIRMAN KRAUSE: Commissioners? 25 (No audible response.) 12 1 CHAIRMAN KRAUSE: It has been customary 2 for the Lottery Dedicated Account to be excluded from 3 across-the-board reductions. The account is not part of 4 the budget certification process. Under current 5 guidelines, however, we will remain optimistic that, 6 one, the process will conclude with our lottery budget 7 restored to protect revenue to the Foundation School 8 Fund and because the Bingo Division is finally back at 9 an adequate funding level, staffing level, to regulate 10 the industry, that there also be a careful review of the 11 budget reduction for the regulation of bingo. 12 With that said, is there a motion to 13 approve the LAR? 14 COMMISSIONER RIVERA: Motion to approve. 15 COMMISSIONER LOWE: Second the motion. 16 CHAIRMAN KRAUSE: All in favor say aye. 17 (Chorus of "Ayes.") 18 CHAIRMAN KRAUSE: Motion carries. 19 AGENDA ITEM III 20 CHAIRMAN KRAUSE: And we have a couple of 21 reports. Let's hear from our Bingo Director first. 22 MR. ROYAL: Commissioners, I just wanted 23 to provide a status update on Account Ledger 24 Reconciliation Project. We are approximately two weeks 25 away from completing the debit and credit establishment 13 1 review, along with adjusting entries into the individual 2 bingo accounts. 3 Once complete, we will resume the process 4 of communicating the outcome to the licensees. That 5 outcome will either be an invoice from the State that 6 shows a liability debt due to the State or a credit that 7 will be used for current or future services or a refund 8 due. 9 Again, all the outcomes will be supported 10 with actual records; and the final status of this 11 project will be submitted at the next commission 12 meeting. 13 That's all I have, Commissioners. 14 CHAIRMAN KRAUSE: Thank you. 15 AGENDA ITEM IV 16 CHAIRMAN KRAUSE: Mr. Grief. 17 MR. GRIEF: Commissioners, other than 18 what's in your notebooks, I do have one item I would 19 like to report to you on; and that is the latest in our 20 efforts to continue to grow in the area of responsible 21 gaming. 22 Since the inception of the lottery, we 23 have been generating revenue for good causes through the 24 innovative design of our lottery games, but that's only 25 part of our mission. Encouraging the public to play 14 1 responsibly continues to also be a very critical 2 component. The agency's efforts in this area over the 3 years have been focused on educating our players, our 4 retailers, and our employees about responsible gaming. 5 While the vast number of lottery players play our games 6 without issue, we do recognize that for some people, 7 playing our games can cause problems. 8 As a member of the National Council on 9 Problem Gaming, the North American Association of 10 State & Provincial Lotteries, and the World Lottery 11 Association, the Texas Lottery actively supports and is 12 engaged in the robust problem gambling initiatives of 13 all three of those organizations. 14 The agency has been a long-time 15 participant in the annual National Council on Problem 16 Gambling "Problem Gambling Awareness Month" campaign, 17 and for over a decade the Texas Lottery's Play 18 Responsibly message has been a key component of the 19 agency's communications at retail. 20 And in 2014 the agency added the Play 21 Responsibly Brochure to our communication materials that 22 are available at retail, in our claims centers, and on 23 our website. 24 We are also making sure that all of our 25 employees, all of IGT's sales representatives, and all 15 1 of our retailers are educated on this important issue 2 via our training programs. 3 In our efforts to continue to ensure that 4 we follow the industry's best practices regarding 5 responsible gaming, last year we achieved Level 2 6 Responsible Gaming Certification with the World Lottery 7 Association. This effort allowed us to perform a gap 8 analysis on our responsible gaming programs that we have 9 in place to identify some opportunities where we can 10 make improvements. 11 I want to make you aware that we have 12 been working on those opportunities to strengthen our 13 program, and we are vigorously pursuing the World 14 Lottery Association Level 3 certification this fall as a 15 part of our continuing efforts in this very important 16 mission. 17 As a team we recognize that our 18 commitment to social responsibility is integral to our 19 mission for generating revenue for the State through the 20 responsible sale of our lottery products. Responsible 21 gaming is and will continue to be a very important 22 component of the culture we've developed not only for 23 our Agency, for our vendors, for our retailers, and for 24 our players as well. 25 Commissioners, that concludes my report 16 1 this morning. I'd be happy to answer any questions. 2 CHAIRMAN KRAUSE: Commissioners? 3 COMMISSIONER LOWE: So how much money are 4 we allowed to spend on responsible gaming? 5 MR. GRIEF: The only mention in the 6 statute on responsible gaming is that there is a 7 requirement that we not unduly influence anyone to play 8 the lottery. Commissioner, we take that very, very 9 seriously; and we take that to mean that it is our duty 10 to make sure that that's enforced. So we must find -- 11 we don't have any specific money allocated towards this 12 in the appropriations process -- but we view that as 13 part of our mission in the appropriate spending of 14 lottery dedicated funds. 15 COMMISSIONER LOWE: I forgot the name of 16 the organization, but there's a national organization 17 for responsible gaming. Please help me out. 18 MR. GRIEF: The National Council on 19 Problem Gambling, NCPG. 20 COMMISSIONER LOWE: Are we a member of 21 that organization? 22 MR. GRIEF: Yes, we are. 23 COMMISSIONER LOWE: Do we contribute to 24 their efforts? Are we able to do that? 25 MR. GRIEF: Yes, we do. 17 1 Any other questions? 2 CHAIRMAN KRAUSE: Commissioners? 3 (No audible response.) 4 CHAIRMAN KRAUSE: Thank you very much. 5 AGENDA ITEM VIII 6 CHAIRMAN KRAUSE: We don't have any 7 requests for public comment. So I'm going to make my 8 own motion. I make a motion we adjourn. 9 COMMISSIONER RIVERA: Second. 10 All in favor say aye. 11 (Chorus of "Ayes.") 12 CHAIRMAN KRAUSE: We're adjourned at 13 10:15, a world record. 14 (Proceedings concluded at 10:15 a.m.) 15 --oo0oo-- 16 17 18 19 20 21 22 23 24 25 18 1 STATE OF TEXAS) 2 3 **************************** 4 REPORTER'S CERTIFICATE 5 **************************** 6 7 8 I, DEBBIE D. CUNNINGHAM, CSR, Certified 9 Shorthand Reporter in and for the State of Texas, do 10 hereby certify that the above and foregoing contains a 11 true and correct transcription of all portions of the 12 above-referenced meeting to be included in the 13 transcript of said meeting, and were reported by me to 14 the best of my ability. 15 16 SUBSCRIBED AND SWORN TO under my hand and 17 seal of office on this the 15th day of August, 2016. 18 19 ______________________________ 20 DEBBIE D. CUNNINGHAM, Texas CSR 2065 Expiration Date: 12/31/2016 21 Kim Tindall & Associates 16414 San Pedro Avenue, Suite #900 22 San Antonio, Texas 78232 (210) 697-3400 23 24 25