1 1 2 3 4 5 TEXAS LOTTERY COMMISSION 6 7 8 COMMISSION MEETING 9 10 11 12 April 6, 2017 13 14 10:00 a.m. 15 16 AT 17 18 TEXAS LOTTERY COMMISSION 19 20 611 East 6th Street 21 22 Austin, Texas 78701 23 24 25 2 1 APPEARANCES 2 CHAIRMAN: J. Winston Krause 3 COMMISSIONERS: Doug Lowe Carmen Arrieta-Candelaria 4 Robert Rivera Peggy A. Heeg 5 GENERAL COUNSEL: Bob Biard 6 EXECUTIVE DIRECTOR: Gary Grief 7 CHARITABLE BINGO OPERATIONS 8 DIVISION DIRECTOR: Alfonso D. Royal III 9 LOTTERY OPERATIONS DIRECTOR: Michael Anger 10 SUPPORT SERVICES MANAGER: Toni Erickson 11 HUB COORDINATOR: Eric Williams 12 LICENSING AND ACCOUNTING SERVICES MANAGER: Desira Glenn 13 ADMIN. DIVISION DIRECTOR: Michael R. Fernandez 14 CONTROLLER: Katheryn J. Pyka 15 McCONNELL JONES 16 LANIER & MURPHY, LLP: Darlene Brown 17 PRODUCTS & DRAWINGS MANAGER, LOTTERY OPERATIONS DIVISION: Robert Tirloni 18 19 20 --oo0oo-- 21 22 23 24 25 3 1 TABLE OF CONTENTS 2 Page 3 I The Texas Lottery Commission will call the meeting to order. 4 Pledge of Allegiance to the U.S. and Texas flags........................................... 6 5 II Report, possible discussion and/or action on the agency's advertising strategy, including 6 functions of the advertising vendor under the advertising services contract................... 14 7 III Report, possible discussion and/or action on agency major contracts, including amendment, 8 renewal or extension of the contracts for instant ticket manufacturing and services....... 34 9 IV Report, possible discussion and/or action on agency prime contracts, including amendment, 10 renewal or extension of the contract for promotional products............................ 36 11 V Report, possible discussion and/or action on agency prime contracts, including the contract 12 for promotional and sponsorship agreement with ARK Group of Irving, Inc. for the Irving Music 13 Factory......................................... 36 VI Report, possible discussion and/or action on 14 HUB and/or minority business participation, including approval of the agency's Fiscal 15 Year 2016 Minority Business Participation Report.......................................... 61 16 VII Report, possible discussion and/or action on lottery sales and revenue, game performance, 17 new game opportunities, advertising, promotional activities, market research, 18 trends, and game contracts, agreements, and procedures...................................... 65 19 VIII Report, possible discussion and/or action on transfers to the State and the agency's budget.. 69 20 IX Report, possible discussion and/or action on the 85th Legislature and the agency's 21 Legislative Appropriations Request for FY 2018-2019.................................... 70 22 X Report, possible discussion and/or action on external and internal audits and/or reviews 23 relating to the Texas Lottery Commission, and/or Internal Audit activities, including approval of 24 audit reports regarding Scratch Ticket Warehouse Receiving Controls, Scratch Ticket Reconstruction 25 Controls, and Charitable Bingo Operations Division Audit Services Review........................... 80 4 1 XI Report, possible discussion and/or action, including approval, on the Charitable Bingo 2 Operations Division annual report for calendar year 2016.............................. 86 3 XII Report by the Charitable Bingo Operations Director and possible discussion and/or action on the 4 Charitable Bingo Operations Division's activities, including licensing, accounting and audit 5 activities, pull-tab review, and special projects XIII Report by the Executive Director and possible 6 discussion and/or action on the agency's operational status, major contracts, agency 7 procedures, awards, and FTE status.............. 88 XIV Consideration of the status and possible 8 approval of orders in enforcement cases......... 95 Lottery NSF License Revocation Cases (Default) 9 A. Docket No. 362-17-1943 - V S Market B. Docket No. 362-17-1945 - Mikes 09 10 C. Docket No. 362-17-1947 - Alton Grocery & Meat Market 11 D. Docket No. 362-17-2353 - In & Out E. Docket No. 362-17-2354 - Amigo's Market 12 Lottery Agreed Orders F. Case No. 2017-98 - In & Out Express #3 13 G. Case No. 2017-263 - Chawla's Citgo Bingo Agreed Orders 14 H. Case No. 2016-1232 - Jena Kay Hutchings Memorial Scholarship Tournament, Inc. 15 I. Case No. 2017-116 - Lawrence D. Whittington (Bingo Worker) 16 J. Case No. 2017-121 - Derrick Lowry (Bingo Worker) 17 K. Case No. 2017-374 - Consuelo Rodriguez (Bingo Worker) 18 L. Case No. 2017-651 - Nancy Duran (Bingo Worker) 19 Bingo Revocation and/or Denial Cases (Default) M. Docket No. 362-17-0236.B - Salado Volunteer 20 Fire Department N. Docket No. 362-17-1619.B - Andrea Patterson 21 (Bingo Worker) XV Public comment.................................. XX 22 XVI Commission may meet in Executive Session........ XX A. To deliberate personnel matters, including 23 the appointment, employment, evaluation, reassignment, duties, discipline, or 24 dismissal of the Executive Director and/or the Charitable Bingo Operations 25 Director pursuant to Section 551.074 of the Texas Government Code. 5 1 TABLE OF CONTENTS (Continued) 2 Page B. To deliberate the duties of the 3 General Counsel and/or the Human Resources Director pursuant to 4 551.074 of the Texas Government Code....... XX C. To receive legal advice regarding 5 pending or contemplated litigation or settlement offers, or other legal 6 advice, pursuant to 551.071(1) and (2) of the Texas Government Code, 7 including but not limited to legal advice regarding the following items: 8 Pending and potential litigation regarding Fun 5's Scratch Ticket 9 Game #1592, including Travis Co. District Court Cause No. D-1-GN-005114, 10 Third District Court of Appeals Cause No. 03-16-00172-CV (Steele, et al. 11 v. GTECH Corp.); Dallas Co. District Court Cause No. DC-14-14838, Fifth 12 District Court of Appeals Cause No. 05-15-01559-CV (Nettles v. GTECH 13 Corp. and Texas Lottery Commission); and El Paso County Court Cause 14 No. 2014-DCV-4113 (McDonald v. GTECH Corp.), State of Texas v. Equal 15 Employment Opportunity Commission et al. Legal advice regarding Texas Government 16 Code Chapters 466 (State Lottery Act) and 467, the Bingo Enabling Act, the Open 17 Meetings Act, the Public Information Act, the Administrative Procedure Act, 18 employment and personnel law, procurement and contract law, evidentiary and 19 procedural law, ethics laws, and general government law. 20 Legal advice regarding any item on this open meeting agenda. 21 XVII Return to open session for further deliberation and possible action on any 22 matter posted for discussion in Executive Session. Any matter posted for Executive 23 Session also may be subject of discussion and/or action in open session prior to 24 Executive Session............................. XX XVIII Adjournment...................................102 25 Reporter's Certificate..............................103 6 1 P R O C E E D I N G S 2 AGENDA ITEM I 3 CHAIRMAN KRAUSE: This meeting of the 4 Texas Lottery Commission is called to order. It is 5 exactly 10:00 a.m. on April 6th, 2017. We have all our 6 commissioners here. 7 MR. GRIEF: Microphone. 8 CHAIRMAN KRAUSE: I need a microphone? 9 (Laughter.) 10 CHAIRMAN KRAUSE: There we go. For those 11 who didn't get it before, we are already in order. 12 So, anyway, we have all of our 13 commissioners here, which means we have more than a 14 quorum. We have a super-quorum, so a hundred percent 15 present. 16 And we have our special pledge 17 commissioner, who is -- her duty is to lead us in the 18 pledge of allegiance and the Texas pledge. 19 So, Carmen, if you would do so, it would 20 be great. 21 (Pledges recited.) 22 CHAIRMAN KRAUSE: We're going to take an 23 item out of order. We're going to call Gary Grief to 24 the stand and have him testify. 25 (Laughter.) 7 1 CHAIRMAN KRAUSE: There are many things 2 that we need to hear about from Mr. Grief. 3 So, anyway, the floor is yours, 4 Mr. Grief. 5 MR. GRIEF: Thank you for that warm 6 introduction, Mr. Chairman. 7 (Laughter.) 8 MR. GRIEF: Good morning, Mr. Chair and 9 Commissioners. 10 This morning we have a special guest who 11 has come a long way to address the Commission. Marco 12 Sala is the Chief Executive Officer of IGT; and IGT, as 13 the Commission is well aware of, has provided services 14 as our lottery operator since the very inception of the 15 Texas Lottery, back in 1992. And as a result of our 16 recent contract extension, will be providing those goods 17 and services through August of 2026. 18 In his role as CEO, Marco is responsible 19 for overseeing the strategic direction of the entire 20 company, which is publicly traded on the New York Stock 21 Exchange. Marco works directly with his Board of 22 Directors and other senior management of the company to 23 establish long-range goals, strategies, plans, and 24 policies of the company. 25 Prior to April of 2015, Marco served as 8 1 the Chief Executive Officer of Gtech and had held that 2 position since April of 2009. In that role Marco was 3 responsible for overseeing all of the company's 4 segments, including the Americas, international, Italy, 5 products and services. 6 Mr. Chairman and Commissioners, I present 7 Marco Sala. 8 Marco. 9 MR. SALA: Mr. Chairman, Members of the 10 Lottery Commission, good morning. 11 CHAIRMAN KRAUSE: Officially, good 12 morning. Welcome to be here. 13 MR. SALA: Thank you. 14 I have to tell you: I am very pleased to 15 be here. My remarks will be very brief because my main 16 purpose for this visit is to thank you. Thank you for 17 the contract extension of the Lottery. Thank you to 18 allow us to continue to serve the state of Texas. 19 Texas is one of the most important 20 contracts in our North American portfolio, the commander 21 in the North American market, around 70 percent of the 22 lottery -- 70 percent market share in the lottery 23 business. And Texas is very important for us because 24 it's a contract where we provide the most comprehensive 25 array of services. 9 1 So we are cooperating with the Texas 2 Lottery, but also we learn from working with the Texas 3 Lottery. And that's the reason why it's a very fruitful 4 relationship and I continue to say it's a privilege to 5 have the opportunity to extend the relationship over 6 time. 7 When I talk about learning, I want to 8 make a couple of comments regarding Director Grief 9 because I think he's one of the most reputated, 10 considered Lottery Directors in the country; and the 11 relationship with him, it has been over time a very 12 solid, fruitful, productive relationship. Not only was 13 he able to grow the lottery business here in Texas very 14 responsibly, achieving great results, in my opinion, 15 because when the Lottery is having wagering of in excess 16 of 5 billion, it means that a great job has been done, 17 especially, if it has been done so carefully. But not 18 only he did a great job here, I think he is a key player 19 in the North American industry. 20 I want to remind you that his 21 contribution was fundamental in the last couple of years 22 in announcing the multi-state lotteries, Powerball two 23 years ago -- and Powerball is doing very well -- after 24 that, and more recently, Mega Million, where we expect 25 the business will get back to the growth it has been 10 1 missing in the last years. 2 So those are things that are critically 3 important for the industry; and we look at the industry 4 overall because for us, it's important that ideas of 5 innovation that we are trying to provide to our 6 customers are well received and they will turn into 7 executable business plans. And that is really the 8 gratitude for him and for his leadership in Texas but in 9 North America overall. 10 Now, I will spend a few words regarding 11 our company. It's interesting because I joined this 12 company 14 years ago in Italy. And in Italy was a 13 lottery contractor, slightly bigger than the Texas 14 Lottery; but we started from there. And I was doing the 15 same job Gary Grief is doing, managing on behalf of the 16 Italian government. The structure is different because 17 they (inaudible) the management of the lottery; but as a 18 matter of fact, we were doing the same job. 19 After we grew in Italy, because the 20 Italian Regulator, Italian Government, decided to 21 regulate other sectors of the gaming space, and we took 22 advantage of it for it to grow our market share in 23 Italy. And ten years ago we decided to do the first 24 major acquisition for us. That was Gtech. 25 Gtech was a 5-billion-dollar acquisition. 11 1 At the time, Gtech, was bigger than the company in 2 Italy; but the Board decided to pursue this initiative 3 to become the lottery leader in the world. And since 4 then, we grew. And more recently we did another major 5 acquisition a couple of years ago, buying IGT. It has 6 been a transaction of $6.5 billion. 7 So in the last ten years we invested in 8 this country $11.5 billion, becoming the worldwide 9 leader in this space, if we keep aside the casino 10 (inaudible.) 11 We said that, as Gary Grief mentioned, we 12 are now listed on the New York Stock Exchange. Our 13 company is a company of an enterprise value in excess of 14 $12 billion. We had last year revenues for 15 $5.2 billion; and our portfolio is very well distributed 16 across the business segments, lotteries, gaming, 17 digital, and other businesses that we do more specific 18 in Italy and geographically. The first country was the 19 United States, where our turnover represents 48 percent 20 the total turnover. The second is Italy, slightly in 21 excess of 30 percent; and the rest is spread across all 22 the continents. We are present in 100 countries, and we 23 employ more than 12,000 employees; but what I want to 24 underline is that we invested last year $340 million in 25 R&D, research and development, because we strongly 12 1 believe that the growth of these sectors over time is 2 related to the innovation. 3 Innovation is the key word in this 4 industry, irrespective from the fact that some 5 categories appear to be mature because players always 6 positively react to innovation; and that, for me, is 7 very clear across the continents. We are going to 8 invest 340 million in two things, content and 9 technology. Content because you have always to bring 10 new ideas in all sectors in all job areas. Because the 11 demand is there, it's up to the states and the operators 12 to decide how to satisfy responsibly these demands. The 13 demand requires innovation to keep the portfolio up to 14 date, and that is the effort that has to be done and the 15 technology is an enabler to do that the proper way. 16 We recently invested also in the scratch 17 and win area. We started from scratch some years ago 18 with a plant in Florida. Now we are investing again to 19 enlarge our production there in order to provide the 20 best possible content in the space that for the lottery 21 in Texas that represents the most part of the turnover. 22 And that's it in a nutshell what we did. 23 And the second reason to be here, in 24 addition to thank you for the extension, is to give you, 25 to bring you our commitment to continue to serve the 13 1 Texas Lottery at the maximum possible level. We will 2 devote all our energy to continue this relationship with 3 the Texas Lottery. We intend to invest in it. We 4 intend to be a good partner to grow the business and to 5 allow, through the growth of the business, to continue 6 for the State of Texas to invest in education and on the 7 veterans that I know are the main purposes, the main 8 objectives for using the funds of the lottery. 9 And with that said, I want to thank you 10 again for having me here. I'm ready to reply to 11 questions if you feel appropriate; otherwise, I get back 12 to my seat. 13 (Laughter.) 14 CHAIRMAN KRAUSE: All right. Well, 15 before you do, I'm just going to tell you that we 16 appreciate you being here today. It's important to us 17 because your company is one of the primary reasons why 18 the Texas Lottery has enjoyed -- and it's been a joint 19 effort -- astounding success, breaking revenue records, 20 reaching more Texans, having just phenomenal results in 21 entertaining our people here in Texas with great games, 22 well-executed; and so, you know, you've got great people 23 that help support us. We've got some fabulous creators 24 -- creatives; I guess they're call "creatives" -- on our 25 staff. And so the combination has been outstanding, and 14 1 so we want to thank you for that. 2 In many instances success has many 3 fathers; failure has few. And, unfortunately, the 4 success that we have had has been viewed almost somewhat 5 unfavorably over by the Legislature. We do not 6 understand that because we are raising money for the 7 school children of Texas. But, notwithstanding, that, 8 it does not diminish the bright contribution that IGT 9 brings to what we do; and thank you for having a great 10 company -- 11 MR. SALA: Thank you very much. 12 CHAIRMAN KRAUSE: -- working with us. 13 MR. SALA: Thank you, again. 14 CHAIRMAN KRAUSE: Anybody have any 15 questions or comments? 16 COMMISSIONER ARRIETA-CANDELARIA: Thank 17 you, Mr. Sala. 18 MR. SALA: So thanks, again. 19 CHAIRMAN KRAUSE: Now we turn to probably 20 the second-most important reason for our success, and 21 that has to do with our advertising. And so we're going 22 to hear from Michael Anger on that. 23 AGENDA ITEM II 24 MR. ANGER: Good morning, Commissioners. 25 For the record, my name is Michael Anger; 15 1 and I'm the Lottery Operations Director for the 2 Commission. 3 This item is a follow-up to a request 4 from Commissioner Lowe from our February Commission 5 Meeting and a discussion that took place at that meeting 6 requesting that the Commission receive an overview of 7 the strategy employed relating to the advertising 8 contract and the ad vendor's theory in approaching our 9 expenditures to reach consumers relating to the agency's 10 limited advertising budget. 11 I have a brief refresher presentation for 12 you this morning on the agency's advertising strategy 13 and the role of agency staff in guiding and overseeing 14 the advertising vendor in shaping that strategy. 15 I'm also joined this morning by Christy 16 Kranik, who is the Chief Client Officer and Partner with 17 LatinWorks, our advertising vendor. Ms. Kranik will 18 also share with you information about LatinWorks and the 19 approach that they take in helping us communicate 20 effectively with the public about many products the 21 Commission offers. 22 Commissioners, this slide captures the 23 current contract that we have with LatinWorks. 24 LatinWorks began as the primary advertising vendor for 25 the agency since May of 2012. The initial term of that 16 1 contract extended through August 31st of last year; and 2 we executed the renewal on that contract, one of two 3 renewals that are available under that contract, last 4 year, extending that contract to August 31st of 2018. 5 There is an additional renewal available should the 6 Commission decide to extend the contract that would take 7 the contract through August 31st of 2020. 8 Commissioners, the Texas Lottery 9 Commission staff are ultimately responsible for the 10 agency's advertising strategy and the related tone that 11 it's established for the Texas Lottery brand in the 12 marketplace. Our advertising strategy is guided by the 13 State Lottery Act, specifically Section 466.110, related 14 to prohibited advertisements. The Legislature intends 15 that advertising or promotions sponsored by the 16 Commission or the Division of the Lottery not be of a 17 nature that unduly influences any person to purchase a 18 lottery ticket or number. 19 Commissioners, you've seen the agency's 20 advertising sensitivity guidelines previously; but I 21 thought it would be helpful as a refresher to revisit 22 these briefly with regard to our advertising strategy 23 and their implications with regard to the statutes. I 24 want to specifically highlight a few of the advertising 25 sensitivity guidelines that are directly related to our 17 1 statute that we embed in our guidelines. 2 Number 1, advertising should not unduly 3 influence. Number 2, advertising should not over- 4 promise. Number 3, advertising should not show a change 5 of lifestyle. Advertising should not present, directly 6 or indirectly, any lottery game as a potential means of 7 relieving any person's financial or personal difficulty. 8 Number 5, advertising should not portray product abuse, 9 excessive play, or preoccupation with gambling and 10 should also not imply or portray any illegal activity. 11 And rounding out the guidelines, Number 8, advertising 12 should not specifically target with the intent to 13 exploit any person or specific group or economic class. 14 Commissioners, at a macro level, we 15 establish performance goals and guidelines for the 16 advertising agency; and these are the goals that we have 17 currently in place for the advertising agency that 18 they're executing against. And I'd like to highlight 19 the third, increasing overall participation in lottery 20 games. Really, that's our core goal that we believe 21 drives the first two goals that are established there 22 which are focused on generating incremental revenue for 23 the Foundation School Fund and the Funds for Veterans 24 Assistance. We focused very carefully on that. We 25 spent a lot of time on advertising and communicating 18 1 about our products not only to our existing players but 2 also focusing on getting communications in the 3 marketplace that we're intending to reach light and 4 lapsed players to encourage, you know, other players to 5 participate in the lottery games. And so we're very 6 focused on increasing kind of the broad platform of 7 people who are participating in playing the lottery. 8 Commissioners, as I noted, the Texas 9 Lottery staff are primarily responsible for the agency's 10 advertising strategy and ensuring that the agency's 11 advertising vendor complies with our standards and our 12 guidelines. We plan the Texas Lottery's advertising 13 strategy working one fiscal year in advance. We're 14 currently in the planning stages for our fiscal '18 15 advertising plan. We work with them to determine the 16 product initiatives for the upcoming year, so inhouse 17 staff build the product initiatives plan to lay those 18 out on a calendar and identify those that are the 19 primary area of focus for the agency. We share those 20 with the advertising vendor and then LatinWorks takes 21 that and goes away and develops an advertising plan 22 proposal for us based on new, innovative ideas and 23 opportunities that exist in the marketplace. They bring 24 that back to us and we go through an iterative process 25 of reviewing that plan and obtaining feedback. We ask 19 1 questions, and we go back and develop additional 2 information for us and we finally land on an agreed-upon 3 plan. 4 Once that's done, they then go back and 5 develop a media production plan for the agency that 6 takes into account what was developed in the advertising 7 plan and the agency's overall budget for the next fiscal 8 year. Once that's in place, we execute against that 9 plan, keeping in mind changes in the marketplace, new 10 products that may arise that we add into the plan that 11 weren't contemplated at the time that we developed the 12 initial plan. So the document essentially becomes an 13 iterative process as we work through the year. 14 And then, finally, with regard to 15 creative, we work very closely with the advertising 16 agency on the development of the creative content that 17 goes into our advertising campaigns, executing against 18 those sensitivity guidelines that we just covered. We 19 work very closely on the strategic effort. 20 And that really concludes my portion of 21 the presentation. I'd like to turn things over to 22 Christy now and allow her to share with you some 23 information about LatinWorks, their philosophy in 24 considering different strategies that they employ in 25 helping to optimize our advertising strategy and our 20 1 expenditures. 2 MS. KRANIK: Great. Thank you, Michael. 3 Good morning. For the record, I'm 4 Christy Kranik, Chief Client Officer and Partner at 5 LatinWorks. And thank you so much for having me today. 6 You know, now that Michael has provided 7 kind of those key milestones in the planning process, 8 what I'd like to do is provide you with a little bit of 9 a peek behind the curtain of what goes on at the agency 10 in order for us to be able to build and recommend the 11 annual advertising strategy as well as a media plan. 12 I'm also going to touch upon how we 13 evaluate tactical partners and partnerships throughout 14 the year to help achieve our goals. Now, there are 15 many, many factors and variables going into building an 16 annual plan. So I'm going to be as concise but as 17 thorough as possible. 18 So at a macro level our planning process 19 always begins with understanding the business roles, as 20 Michael laid out. So understanding that we are driving 21 year-over-year sales, participation, and also, the most 22 important, the annual contributions of over $1 billion 23 to Texas education and veterans services. 24 So equally important as we kick off this 25 planning process is the advertising agency having the 21 1 established budget as well as the product and promo 2 roadmap for the year ahead. So our overarching strategy 3 in exceeding our goals really is the following: First 4 and foremost is driving awareness; and we do that 5 through optimal reach, reaching as many adult Texans as 6 possible with our message. Now, we have to balance that 7 with also driving engagement; and, really, this is to 8 help strengthen the brand's connection with consumers. 9 And this is typically achieved through more emerging 10 media, such at digital and experiential. Consumers more 11 and more want to have a conversation with the brand. 12 They want to experience the brand versus a brand just 13 pushing a message to them. 14 And, finally, once diving deeper, when we 15 have the channel strategy defined on how we're going to 16 reach them, the next important step is the message. 17 What is that creative expression; what is that message 18 that we're trying to communicate with our great 19 products, which is part of our ongoing collaboration, as 20 Michael mentioned, with the Texas Lottery and really 21 informed by our deep understanding of the adult Texan 22 consumer. 23 So as a cross-cultural agency, we are 24 constantly monitoring the ever-changing consumer and 25 media landscape. This is important because we believe 22 1 that successful brands really thrive on their connection 2 with culture, and the attitudes and behaviors of 3 consumers are also really key to this cultural change. 4 We recognize that for the Texas Lottery to credibly 5 affect culture, it needs to be a natural part of adult 6 Texan lives in the things they do for fun and how they 7 engage with others and in how they use media and 8 technology. 9 So today, spurred on by part of the 10 immediacy of mobile, culture is evolving faster than 11 ever and especially among younger adults. This also 12 highlights the importance of experiential as there's 13 this innate desire among event-goers to share the fun 14 with others that they're experiencing on their smart 15 phones. This trend is expected to continue, even to 16 accelerate, as new technologies are introduced and 17 adopted. 18 Under the leadership of Mr. Grief and his 19 team, we continue to take strides in accelerating the 20 evolution of our communication and marketing plans to 21 focus more on where consumers are spending their time. 22 As our audience is generally on the go, highly engaged 23 in social media, and attending events with friends and 24 family, mobile, digital, experiential are becoming more 25 important parts of our plan. 23 1 Now, to optimize our approach based on 2 these learnings, you can see in the plans over the past 3 few years that there's been a shift from traditional 4 media, such as television, to more of the emerging 5 media, like mobile, digital, and experiential. 6 Now, also critical to achieving our goals 7 is how we identify partners. So specific to 8 experiential, for example, we have a set criteria in 9 place as opportunities present themselves throughout the 10 years. So these are some of the filters that we go 11 through in assessing each opportunity: One is market 12 coverage. Two is event attendance and if it's attended 13 primarily by Texas residents. We look at the type of 14 event. Is it sports; is it music, understanding key 15 passion points for our consumers. Also the value of the 16 entitlement, including the prominence of the potential 17 partnership and what that would give to the Texas 18 Lottery. And then, always taking budget considerations 19 into play. These opportunities present themselves 20 throughout the year. So we must understand where we are 21 from a budget standpoint, and that plays into the 22 decision as well. 23 So from a media strategy perspective, we 24 focus on identifying where the consumers are going so we 25 can meet them there and effectively engage them with our 24 1 message. In the case of digital media, we also can 2 evaluate performance and optimize as necessary. Now, I 3 want to be mindful in stating that although consumer 4 intercept points like mobile, digital, and experiential 5 are becoming more a part of our consumers' lives, 6 traditional media, such as outdoor and in-store point of 7 sale, continue to play a significant role in our overall 8 media mix for the Texas Lottery. 9 Therefore, hopefully you've been able to 10 see that there are many variables that go into putting 11 together the optimal plan for the Texas Lottery to help 12 achieve success for our stated goals and, most 13 importantly, for the state of Texas. 14 I hope this has been helpful; and with 15 this, I conclude my presentation. 16 CHAIRMAN KRAUSE: Ms. Kranik, thank you 17 for your presentation. 18 And, Michael, thank you for doing a good 19 job of working with them. 20 Like I said before, the advertising 21 contractor is a very, very important contractor; and I'm 22 going to remind a lot of people who don't have the 23 institutional knowledge of this that LatinWorks was not 24 our prime contractor before May of 2012. They were a 25 subcontractor; and it was fascinating to me that the 25 1 subcontractor was winning award after award after award 2 for the great work that they were doing, the fantastic 3 creativity that they were bringing to other clients and 4 to us; yet, they were a subcontractor. And that was 5 wrong. 6 And so finally in May of 2012, we made 7 the decision to take on LatinWorks as our prime 8 contractor. The results are, as you've seen, growing 9 revenues, increased participation by our customers and 10 more excitement by, you know, players who are playing 11 different games that we have. And so, anyway, I 12 appreciate LatinWorks being mindful of the, I guess, 13 limiting factors that we have to have in our advertising 14 criteria, given the politics of what we do; and, yet, in 15 spite of that, you guys hit the ball out of the ballpark 16 campaign after campaign after campaign, putting the 17 State's best interests forward. And so I just can't say 18 enough how grateful our Commission is to LatinWorks, who 19 does a great job. 20 MS. KRANIK: Thank you, Mr. Chairman. 21 CHAIRMAN KRAUSE: Commissioners, 22 questions? 23 Please. 24 COMMISSIONER LOWE: So I guess I'm kind 25 of the reason that you're here today, and I appreciate 26 1 you being here. I got my degree a long time ago in 2 marketing; and, of course, at that time, it was how to 3 design an ad so it read to the bottom and how to do a 4 30-second radio spot. So that was before law school. 5 But I want to talk to you about the 6 political reality of where we are now. It looks like 7 that we're going to have a pretty significant decrease 8 in the amount of money that you're going to be able to 9 work with. And we had a study that was completed by 10 Texas A&M that evaluated potential revenue decreases; 11 and I think it looks to me like what the Legislature is 12 hoping for is another 1.5-billion-dollar jackpot, which 13 that may not happen. 14 So, Ms. Kranik, are you in consensus with 15 our Texas A&M study that we will see a significant 16 decrease in our revenue; and if it's, in fact, reduced, 17 the amount of money that you're able to work with, do 18 you foresee that as well? 19 MS. KRANIK: Well, I think it goes back 20 to really truly understanding the consumer trends and 21 understanding the media landscape and how those two 22 intersect, right? There is not a perfect science when 23 putting together a plan. It's looking at how do we 24 achieve this optimal reach, but how do we engage and how 25 do we bring consumers into the fold. 27 1 So I think if we're really smart about a 2 limited budget and we look at the different media 3 vehicles to achieve what we're trying to achieve that we 4 will continue to be successful. 5 COMMISSIONER LOWE: Well, do you foresee, 6 though, that we will have some decreases? 7 MS. KRANIK: Decrease in participation? 8 COMMISSIONER LOWE: Revenue. 9 MR. ANGER: So, yeah, I think framing the 10 question, you know, the Texas A&M study shows that we 11 would have substantial loss of revenue tied to the cuts 12 in our overall advertising budget. 13 COMMISSIONER LOWE: Right. 14 MS. KRANIK: So I don't know to what 15 extreme, but that could definitely be a possibility. 16 COMMISSIONER LOWE: All right. Thank 17 you. 18 CHAIRMAN KRAUSE: Please. 19 COMMISSIONER ARRIETA-CANDELARIA: But 20 what I'm hearing, Christy, is that the marketing 21 strategies have changed over the years. So, whereas, 22 Commissioner Lowe was saying maybe back in the day -- 23 COMMISSIONER LOWE: "Back in the day." 24 COMMISSIONER ARRIETA-CANDELARIA: -- back 25 in the day, we had more paper; it was definitely 28 1 driven -- we were doing something different at that 2 time. We're looking at social media, a less costly 3 alternative, some of those things. So I hear what 4 you're saying. You're trying to utilize those tools we 5 do have now, despite the reduction in budget, to try to 6 minimize the impact to our revenues. 7 MS. KRANIK: Yes, absolutely. 8 And I think the other piece, as we look 9 to emerging media, is the data that we get from it, 10 almost realtime, in order to optimize. So that also 11 will help us throughout the year to adjust, to ensure 12 that we're reaching the goals that we need to reach. 13 COMMISSIONER ARRIETA-CANDELARIA: Right. 14 And that goes back to the strategy that you develop and 15 the ads that you develop and then the way that you 16 actually push out that content. 17 MS. KRANIK: Yes. 18 COMMISSIONER ARRIETA-CANDELARIA: So 19 we're hopeful that it doesn't impact it; but recognizing 20 what Michael is saying, we have to be prepared as an 21 agency to possibly not transfer as much money to the 22 Foundation School Fund in the coming years. 23 MR. ANGER: Commissioner, if I could tag 24 into that discussion; so we, the staff, are very 25 concerned about potential cuts to the advertising 29 1 budget. We've been operating with essentially a 2 32-million-dollar advertising budget for an extended 3 period of time and we've already seen significant 4 attrition in what we've been able to do with regard to 5 our advertising strategy and we have to make hard, 6 discrete choices. 7 We've segmented our markets. There's 20 8 designated market areas in the state of Texas; and 9 already today, we choose not to do TV and radio in 10 certain markets because there's simply not enough money 11 to do the things that we -- you know, we can't do that 12 in all the markets. We have to focus our advertising 13 energies in larger markets and make those types of 14 difficult decisions within the budget structure that we 15 have today. 16 When the agency started in 1992 -- so 25 17 years ago -- we had a 40-milllion-dollar advertising 18 budget and we sit here today with 32 and significant 19 cuts on the table potentially coming forward for our 20 advertising budget. 21 I think what you hear Christy and I 22 saying is we don't control that. We don't have any say 23 in that. We will be working actively to exercise and 24 deploy the Commission's resources in the best way 25 possible to continue to reach our customers and reach 30 1 potential new customers using new forms of media and 2 things like that; but, yes, we're very concerned about 3 not being able to reach -- I mean, we can't sell any new 4 products, if people don't know they're there. And 5 that's the difficult challenge for us. 6 COMMISSIONER ARRIETA-CANDELARIA: And I 7 also will remind the Commission that last year we had -- 8 or I guess it was in 2016 we had a record Powerball. 9 And so we recognize that we're not achieving that level 10 of revenue that we did last year because we haven't had 11 one of those in this current year, correct? 12 MR. ANGER: Yes, that's absolutely 13 correct. We've not had anything close to that with 14 regard to jackpot levels this year. 15 COMMISSIONER LOWE: Can I ask one more 16 question? 17 CHAIRMAN KRAUSE: Yeah, well -- 18 COMMISSIONER LOWE: Go ahead. 19 CHAIRMAN KRAUSE: -- go ahead and ask all 20 yours; and then I'll have mine. 21 COMMISSIONER LOWE: I'm sorry. 22 You spoke a little bit about experiential 23 targeting. So I guess are you talking about events? 24 Because in one of our items today we're going to talk 25 about events, right? And I guess my question about that 31 1 is it seems like, say, you only have a thousand or 2,000 2 people there at that event. How do you translate those 3 2,000 people into having this experience other than 4 those 2,000 people? How does that work? 5 MS. KRANIK: So I think just in terms of 6 our overall plan, each piece plays a different role, 7 right, in helping us achieve that goal. So we may go 8 into an event and have a certain objective here that's 9 helping to feed in the overall plan. So there are so 10 many different factors that go into making those 11 decisions that it's not necessarily just looking at that 12 singular piece, but it's looking at how that's working 13 with everything overall to ensure that we're driving 14 awareness; but we're also coupling that with driving 15 engagement with consumers. 16 After each event we do work with the 17 Texas Lottery Commission. We do a post mortem. We do a 18 post analysis very diligent on: Did this achieve what 19 we intended this specific event to achieve in order to 20 feed into the overall plan? And there are many 21 different factors that also go into that post analysis, 22 but it definitely is something that we work in very 23 close collaboration to define what is the success metric 24 necessary for this piece that feeds into the overarching 25 plan. 32 1 COMMISSIONER LOWE: Okay. 2 CHAIRMAN KRAUSE: So, Mr. Anger, please 3 correct me if I'm wrong about this; and that is, we have 4 not just a study from A&M but we also have a 5 corroborating study from the University of Texas focused 6 the same question and that is: What is the 7 effectiveness of our advertising? 8 And I believe that both of them agree 9 that for every dollar that we spend, it results in $7. 10 Every dollar of advertising money that we spend results 11 in $7 to the Foundation School Fund. And so with our 12 two flagship universities establishing that, it is so 13 surprising to me that people that are making decisions 14 about our advertising budget that are apparently giving 15 that no weight. 16 So tell me if I'm wrong about this: A 17 1-million-dollar reduction ought to be $7 million dollar 18 less money to the Foundation School Fund. 19 MR. ANGER: The studies were tied to 20 sales. So the number from the Texas A&M study was 21 approximately 1 to 7. So for every dollar that we spend 22 on advertising, we achieve $7 in sales. 23 And I believe -- and the UT study goes 24 back a ways; and I'm doing this from memory, 25 Mr. Chairman -- but I believe it was closer to 1 to 8, 33 1 if I'm not mistaken, with regard to the sales figure. 2 MR. GRIEF: I believe that's correct. 3 Let me ask Kathy to step forward if we could. 4 CHAIRMAN KRAUSE: While y'all are moving 5 around then, I'm interesting in knowing: Do we know our 6 relationship between sales and then how much goes in the 7 Foundation School Fund? So that's what I'm interested 8 in. 9 MR. GRIEF: I think Kathy can clarify. 10 CHAIRMAN KRAUSE: Well, That's great. 11 MS. PYKA: Certainly. The study was 12 prepared -- for the record, Kathy Pyka, Controller for 13 the Commission. 14 We're looking at a 27-dollar return on 15 the sale for every dollar of advertising expended, which 16 then correlates to a 7-dollar-20-cent return in revenue 17 to the Foundation School Fund for every dollar in 18 advertising expended. 19 MR. GRIEF: So you were correct, 20 Mr. Chairman. 21 CHAIRMAN KRAUSE: Okay. Well, I was 22 understating it, apparently; and apparently UT might 23 have had a little bit sharper pencils because they had 24 $8. 25 MS. PYKA: That is correct, the 34 1 University of Texas study reflected slightly higher 2 value in their return. 3 When the school of Mays came in from 4 Texas A&M, they pulled all of our actual sales data, 5 along with our advertising campaigns, as they developed 6 their study results; and so all of the material that we 7 have submitted to the Texas Legislature has been 8 supported by the most recent Texas A&M study. 9 CHAIRMAN KRAUSE: So a 10-million-dollar 10 cut would be $72 million less money to the Foundation 11 School Fund. 12 MS. PYKA: That is correct. 13 CHAIRMAN KRAUSE: Let it be known it's a 14 matter of public record now. 15 Anybody have anything else to say? 16 MR. GRIEF: Yes, sir. We're going to get 17 into that in a little bit more depth later in the 18 commission meeting in this agenda. 19 CHAIRMAN KRAUSE: Later today? 20 MR. GRIEF: Yes, sir. 21 CHAIRMAN KRAUSE: Good. 22 Thank you very much. We love LatinWorks. 23 Mr. Fernandez. 24 AGENDA ITEM III 25 MR. FERNANDEZ: Good morning, 35 1 Mr. Chairman, Commissioners. 2 For the record, my name is Mike 3 Fernandez. I'm the Director of Administration. Item 4 Number III in your notebook is a briefing item; and it's 5 to advise the Commission of staff's intent to amend 6 particular ticket contracts, to update size and ticket 7 quality. 8 For the record, the Commissioners have 9 independently confirmed they do not have any financial 10 interest in Pollard Bank Note Limited, Scientific Games 11 International, or IGT Global Solutions Corporation. 12 If you have any questions, I'd be happy 13 to answer. 14 CHAIRMAN KRAUSE: I have a question. 15 Apparently there's a bill in the Legislature that's 16 going to inhibit our ability to pay for these things. 17 Is that going to put us in default of our contracts? 18 MR. FERNANDEZ: It's not going to 19 jeopardize these contracts to my knowledge. 20 MR. GRIEF: If I could offer some 21 clarification on that, these are contracts where the 22 goods and services offered are available at different 23 prices; and it's up to the agency to determine how much 24 and of what quality of goods and services we'll be 25 purchasing. So there's no pre-commitment on our part to 36 1 purchase a set amount. 2 CHAIRMAN KRAUSE: Gotcha. Okay. I 3 wanted to make sure we don't have some kind of minimum 4 threshold in order to achieve preferential pricing. 5 Gotcha. 6 MR. FERNANDEZ: Mr. Chairman, I also have 7 the next agenda item, Number IV in your notebook. 8 AGENDA ITEM IV 9 MR. FERNANDEZ: This is also a briefing 10 item. It's to advise the Commission of staff's intent 11 to our amend our current promotional products contract 12 to include additional products. 13 Again, the Commissioners have 14 independently confirmed they have no financial interest 15 in our contractor, Beehive Specialties. 16 If any questions, I'll be happy to answer 17 those. 18 CHAIRMAN KRAUSE: Commissioners? 19 (No response.) 20 MR. FERNANDEZ: Mr. Chairman, I also have 21 the next item. It's Item Number V. 22 AGENDA ITEM V 23 MR. FERNANDEZ: This is also a briefing 24 item. It is to advise the Commission of staff's intent 25 to enter into a promotional and sponsorship agreement 37 1 with the ARK Group of Irving for the use of the Music 2 Factory facility located in Las Colinas. 3 To further describe the Music Factory, 4 I'd like to ask Eric Sudol, Vice President with Legends, 5 and Michael Anger, our Lottery Operations Director, to 6 join me. 7 And as they're coming up here, do you 8 have any comments you'd like to supply? 9 MR. GRIEF: Yes, I would. Thank you, 10 Mike. 11 Commissioners, as I mentioned just a 12 moment ago, later on in the agenda today, you're going 13 to be briefed in detail on the latest developments 14 regarding our appropriations request and the way that 15 request is being vetted and addressed by the Legislature 16 this session. In short, the Texas Lottery is going to 17 be asked to do more with less; and that's not something 18 that those of us who have been around a while are 19 unaccustomed to doing. 20 I've mentioned to the Commission before 21 that I continually look for more efficient and effective 22 ways to stretch our advertising and promotion dollars to 23 maximize the value of those ever-shrinking dollars. 24 What we've done with our agreement with 25 the Irving Music Factory -- and what you're going to 38 1 hear today from Michael and Mr. Sudol -- is to identify 2 a very creative way to put our brand out front and 3 center in a venue that will, unlike any traditional 4 advertising campaign that's based on TV and radio, what 5 this will do is promote the Texas Lottery brand year 6 round in perpetuity to thousands of people, cementing in 7 the public's consciousness, hopefully, that relationship 8 between the tremendous amount of revenue that this 9 agency produces for the state and the benefit to public 10 education that that revenue then gives. 11 So with that, I will turn it over to 12 Mr. Sudol and Mr. Anger as we try to pursue the 13 ever-elusive millennial market in the advertising world. 14 MR. SUDOL: Thank you, Mr. Grief. 15 Good morning, Commissioners. 16 For the record, my name is Eric Sudol. 17 I'm the Senior Vice President of Legends Global 18 Partnerships. 19 I have my cell phone on the table, not to 20 be rude; but I have been known to get longwinded. So if 21 I hit the button, it keeps the time within reason. 22 So I'm happy to be here. I want to thank 23 Mr. Fernandez. 24 Legends is representing the ARK Group in 25 the sponsorship sales of a 17-acre development in 39 1 Irving, Texas, located in the Las Colinas District, 2 which is what you see before you. 3 Before I get into maybe the elements of 4 what we're trying to achieve here, it really echos a lot 5 of what Mr. Anger and LatinWorks talked about, 6 experiential marketing, how we get younger, how we focus 7 on brand image. And I want to show a little bit of the 8 vision and the timeline of what is transpiring here in 9 the Dallas/Fort Worth area. 10 As you look at the map before you, 11 Austin, Texas being one of the cities, you see a number 12 of cities up there -- Memphis, Nashville, et cetera -- 13 when you think of those cities, you think of music. I 14 think currently when you think of Dallas/Fort Worth -- 15 the other part of my job is I do work with Dallas 16 Cowboys; you see a subliminal star up there in 17 background -- you may not think of music. You think of 18 some other things, and that star is probably one of 19 them. The vision of what we're doing here is to change 20 that. 21 So a complex is being developed and an 22 amphitheater and a whole development that is really on 23 par in the amphitheater world with what AT&T Stadium 24 became and is currently today in the world of stadiums. 25 That's the vision. So with that in mind, the goal is 40 1 then that when you do think of Dallas/Fort Worth, you 2 think of music as part of the brand of the city. 3 That will be achieved in two parts -- you 4 will see here momentarily -- one with live music on 5 year-round basis, and I think Michael may speak a little 6 bit, too, later about what you've done in this space 7 already and some of the success that you've had. 8 We won't worry with all the stats you see 9 up there, but in totality it's this: You can't buy 10 emotion. Music and sports are two avenues that you can 11 purchase emotion. As we talked about great memories in 12 building your brand and changing your image, music leads 13 the way in that space. As I mentioned, the other part 14 of my job is I worked in the NFL; and the NFL is a very 15 powerful vehicle. As you see in the upper right, the 16 NFL doesn't have about 93 percent of the people that 17 listen to it weekly; music does. And I think if you 18 think about shared experiences in life, we all can 19 relate to that in some capacity. To that end and 20 moreover, music is one of the few platforms where it's 21 younger; it's affluent; and it hits the female 22 demographic. And that's the summation of really what 23 you see there in the great unifier that it is. 24 It is located right in the heart of the 25 metroplex, obviously a very important market to the 41 1 agency. It is, in conjunction, in a very thriving 2 business district in the Irving/Las Colinas area. And I 3 know you're very familiar with that, obviously, the 4 number of corporations already reside there. I think 5 there's now 12,885 single-family -- or, multi-family 6 unit homes. That's actually growing. So it has become 7 a destination for the young professional as well. 8 As Mr. Fernandez mentioned, ARK is the 9 primary developer on the 17 acres, obviously the city of 10 Irving has bought. I will talk about Live Nation here 11 momentarily. Live Nation is the largest concert 12 promoter in the world and has a significant stake in 13 this development. 14 So kind of in summation, to give you an 15 overview of what that 17 acres looks like, it's really 16 broken down as follows: You have the music pavilion, 17 which will be operated by Live Nation. That has a 18 capacity of about 8,000 maximum. The acts have already 19 started to pour in. It will be opening Labor Day 20 weekend of 2017, and the slate is already strong. 21 As it relates to the size, Live Nation 22 likes the size because performers like to play in a 23 little bit more intimate environment. As a matter of 24 fact, in that picture up there, that's a little bit like 25 the retractable roof at AT&T stadium. That's actually 42 1 retractable glass to give a little bit of an 2 indoor/outdoor feel so that we can have concerts on a 3 year-round basis. 4 As it relates to what makes this really 5 unique and is the Lottery's primary asset as a part of 6 this partnership is this 50,000-square-foot plaza. This 7 plaza will be operated by another group; and is in 8 conjunction with five restaurant concepts at the C1, C2 9 buildings you see there. There will be a promotional 10 budget against this to have live music year round when a 11 music act is not taking place in the pavilion. So if 12 you think about having live music literally on a year- 13 round basis in the heart of one of the major cities, we 14 believe it can become that brand and that vision that we 15 achieve. 16 You're going to see here momentarily the 17 Lottery has a very significant position and entitlement. 18 And as we talked about social media making your ad 19 dollars work harder and how you tie into something like 20 that, where you're getting the residual impact, which is 21 for free, through social media and other social 22 channels. 23 Real quickly, the rest of the development 24 is primarily the restaurants, which there's an 25 impressive list that's already been leased or LOI'd; and 43 1 there is a hotel that is set to take place between this 2 facility and the Irving Convention Center, which is a 3 Phase 2 development, but an active space already. And 4 then there's an office tower, which is currently fully 5 leased. So there's been a lot of plans. A lot's been 6 done; and as you see, I'm going to try to show, 7 depending on my technological skills, a brief video to 8 maybe summarize that. 9 It is along the orange line, the dark 10 line, which is near the DFW Airport; and it's also 11 located along Highway 114, what you'll see here 12 momentarily, which is one of the highest-traveled roads 13 in Dallas/Fort Worth. 14 (Video playing.) 15 MR. SUDOL: So as much as I like the 16 theme music, for the sake of time, I am going to end the 17 video and we'll continue onward, maybe. 18 Perfect. There we go. 19 So a brief overview of kind of the asset 20 package associated that the Lottery will have, and the 21 key one being the entitlement zone. There will be a 22 naming-rights partner associated with the entire 23 development; but I would say if you look at the second- 24 most-prominent position in this development, the lottery 25 owns that space, which is this main plaza. You saw the 44 1 plaza in the video. It's active and vibrant. It is 2 really the heartbeat of the campus. Where much of the 3 live music will take place on a year-round basis. So if 4 you think about, they're with friends, the promotional 5 events that will be taking place there and the residual 6 media associated with that, a significant amount of 7 earned media and value comes from that piece. 8 In conjunction, there'll be fixed 9 positions associated with that. As you see overlooking 10 the plaza, that upper piece will be called the Texas 11 Lottery Plaza. The board below that is digital and 12 rotating; we'll cover that here in a second. 13 Obviously, the exact execution of how all 14 this looks will be worked on with LatinWorks and 15 Michael's team on that piece, whether that's into the 16 heartscape, overlooking the plaza, and then, obviously, 17 on the stage, which, like I said, is the heartbeat where 18 the majority of the action will take place. 19 In conjunction with this package there's 20 a number of -- and we've talked about, event-based 21 things, of activation opportunities, whether that's in 22 the plaza while the events are going on or in the atrium 23 of this pavilion inside the amphitheater. In 24 conjunction with that, too, we'll kind of use -- whether 25 that's tickets to create a media promotional value or 45 1 whether that's with retailers through IGT, so some 2 hospitality, or vis-a-vis promotional-based 3 opportunities. 4 And then very significant to the package 5 is, you know, Las Colinas does not have a tremendous 6 amount of outdoor -- LatinWorks had focused on the 7 importance of the outdoor campaign to the Lottery, 8 still. So Highway 114 -- I think in TxDOT's last report 9 in 2011 was 50 million -- there will be a large marquee 10 on 114 as well as on Las Colinas Boulevard of which the 11 Texas Lottery has very prominent rotational exposure on 12 that. 13 And then, lastly, when you think about 14 kind of the experience -- I don't know if you've ever 15 been to LA Live in L.A.; but you have this energy that 16 takes place. And part of the energy that it comes from 17 is really this digital atmosphere. So this is tight. 18 It's unique. So it's throughout the pavilion; and then 19 on the mixed use, they have these large boards that are 20 pushing promotional advertising. They're showing the 21 concerts. So they really create the energy associated 22 with the experience. That's part of kind of building 23 the brand and connecting with the millennial generation. 24 Let me show you: Our founding partners will have very 25 large static signs which you see there. 46 1 And then the last piece I want to touch 2 on is, obviously, the digital. I know the word 3 "digital" has been talked a little bit about here today. 4 It may be one the hardest things to quantify; but I 5 think in this scenario, it may be the one with the 6 largest value. Because of the residual impact and 7 social atmosphere of that, the Lottery will have a 8 significant presence through all those. Just in general 9 then, obviously, when you think about the tagging and 10 the promotion of us trying to drive traffic to the plaza 11 and to various acts at the pavilion, there will be 12 tagging there when acts are on the Texas Lottery Stage 13 or in the Texas Lottery Plaza. 14 So that concludes the formal portion of 15 my presentation. Thank you. 16 MR. ANGER: Commissioners, if I might, I 17 have a few comments. 18 Commissioners, at the February commission 19 meeting, Gary previewed this opportunity in the context 20 of presentation we did at that meeting on the Sound & 21 Cinema engagement that we did in partnership with Do512 22 here in Austin; and he spent a little time talking about 23 South by Southwest and the agency's past relationship 24 with South by Southwest and doing sponsorship partner 25 opportunities. 47 1 This opportunity is really a broad 2 extension of that type of approach, our engagement; some 3 of the things that Christy talked about in her 4 presentation, getting into an experiential area and 5 reaching consumers where they live. As Gary previously 6 noted, integration around music in an experiential 7 environment is a powerful way to connect with consumers 8 where they will stop, listen, and take the time to learn 9 about our products and our message and what we want to 10 share with them. We really believe that this allows us 11 to become part of the fabric of mainstream outreach to 12 people where they want to be. 13 And that goes to something that Christy 14 said in her presentation about consumers really want to 15 have a conversation with brands today. They don't want 16 really the hard sell. They want to have a conversation. 17 They want to be approached by it. They want to have a 18 relationship with it, and they want to come to 19 understand it over time. And we believe that this 20 allows us to do that; and, critically, we also believe 21 that it allows us to reach millennials in a relevant 22 way. And that's a demographic that we've really looked 23 to try to find new ways to reach. They're very 24 difficult to find. Traditional media is really not the 25 best avenue to reach that audience; and so as we try to 48 1 reach new players, that's a key area of focus for us. 2 By having the plaza and stage-naming 3 rights, we'll be a part of the concert communications 4 and other event messaging that Eric talked about 5 regarding performing artists and different events that 6 will occur on the Texas Lottery branded plaza and will 7 appear on our branded stage at the venue. This extends 8 the Lottery brand beyond the physical presence at the 9 venue itself and into a more integrated approach in 10 creating the excitement and the build-up that leads up 11 to the events before people even arrive at the venue. 12 As the Music Factory is not just a 13 concert venue but an entertainment destination where 14 people will go to dine, spend time, spend an evening, 15 and enjoy live music, we believe it's going to allow our 16 brand message to both integrate and be effective on 17 onsite activations to reach new players through this 18 non-traditional retail environment. 19 As traditional media such as broadcast TV 20 viewership continues to decline, we believe that the 21 Music Factory and opportunities like it really give us a 22 unique vehicle and a new way to reach a mass audience of 23 consumers over time and share information about our 24 products and deliver the Texas Lottery's message. 25 Commissioners, that concludes my 49 1 comments. I'd be happy to answer any of your questions, 2 and I know Eric would as well. 3 CHAIRMAN KRAUSE: Yes. 4 COMMISSIONER RIVERA: All right. I have 5 a couple of questions. First, I love the idea for a lot 6 of reasons; and I think you-all have hit them pretty 7 well. So this is very exciting for a lot of reasons. 8 Question: You mentioned the plaza. So 9 then the Lottery would have naming rights over the 10 plaza; is that correct? 11 MR. ANGER: Yes. 12 COMMISSIONER RIVERA: Okay. The same 13 with the stage? 14 MR. ANGER: Yes. The plaza stage is also 15 the Texas Lottery branded plaza. 16 COMMISSIONER RIVERA: Two separate 17 things, right? The plaza is one thing, and the stage is 18 another; is that correct? 19 MR. ANGER: The stage is housed in the 20 plaza. 21 MR. SUDOL: Yeah. We will promote Texas 22 Lottery Plaza, you know, and then the stages, branding 23 within that. The plaza is the primary asset. 24 COMMISSIONER RIVERA: Okay. So the plaza 25 is where people would then, obviously, sit, congregate, 50 1 et cetera. Okay. And so those are the only two parts 2 of Music Factory that would have the lottery umbrella; 3 is that correct, or naming rights? 4 MR. ANGER: There's other signage across 5 the platform -- 6 COMMISSIONER RIVERA: In terms of real 7 estate. 8 MR. ANGER: The physical real estate, 9 yes. Yes, that's our space. 10 COMMISSIONER RIVERA: So then backing up 11 a little bit, so the Music Factory itself, though, will 12 have naming rights, whether it's Papa John's or AT&T, or 13 someone else; is that correct? 14 MR. SUDOL: That's correct. 15 COMMISSIONER RIVERA: So it will be 16 Corporation Music Factory. So then from a social media 17 standpoint for whoever is going to be out there, 18 regardless of age, whether it's Facebook or Snapchat or 19 Instagram, are you going to be able to tag "Lottery 20 Stage" or "Lottery Pavilion" to a photograph or a video 21 versus "AT&T Music Factory" to the photograph or video? 22 Who's going to get that social media location attached? 23 MR. SUDOL: Shared voice? That's a good 24 question, a very good question, Mr. Commissioner. I 25 would say -- let's say you took -- let's say it remained 51 1 Irving Music Factory, which it likely will not, it would 2 be the Texas Lottery -- you know, Mr. Rivera performing 3 live on the Texas Lottery Plaza at Irving Music Factory 4 or Corporate Music Factory. So we've worked hard on the 5 marketing of how both will have shared voice. 6 Now, if it's something that's happening 7 not at the plaza but it's somewhere else within the 8 Music Factory, right, then the overarching name brand 9 would take lead there. 10 COMMISSIONER RIVERA: Right. So I guess 11 what I'm getting at, let's say you have George Strait 12 there performing on the stage. Obviously, from the 13 Lottery's perspective and for the State of Texas, we 14 would like to have that ability to tag and be the lead 15 that's on our, quote, stage. So that's the whole reason 16 that, you know, we pay for over half a million dollars a 17 year for that right. 18 So is there ways to work with IT folks or 19 whoever is going to be setting up that digital branding 20 in terms of to create that location footprint for us? 21 And maybe those are things that really haven't been 22 thought out yet; but, really, that is going to be where 23 the value is, to reach more people. Sure, you're going 24 to have -- how many people does this thing hold, 8,000? 25 MR. SUDOL: The amphitheater holds 8,000. 52 1 COMMISSIONER RIVERA: Okay. So greater 2 than just the 8,000 who are physically present, because 3 not all 8,000 are going to be able to go out and buy a 4 lottery -- maybe at some point in future they will; but 5 not all 8,000 will. Really what we're targeting is the 6 echo and the other eyes and ears that are going to be 7 seeing where these 8,000 are; and that will then ripple 8 throughout the social media world. And so whatever ways 9 that you can ensure that the state is going to be 10 covered and this truly is a quality investment, that's 11 really what I'd like to see. 12 MR. GRIEF: If I could, Michael, it might 13 be helpful for the Commissioners if you can talk about 14 the exercise that we went through with LatinWorks to 15 value the purchased media for this particular 16 investment. 17 MR. ANGER: So as LatinWorks does with 18 any opportunity that we have them evaluate, they went 19 through and did a media evaluation for the deliverables 20 that Eric's outlined here. One of the things that they 21 didn't give valuation to, Commissioner, in response to 22 your comments, is just what you said, because they 23 couldn't quantify, going in, how many times when Live 24 Nation books an act on that outdoor stage or how many 25 times other events take place there that our name would 53 1 go out into the marketplace and be tagged for that. So 2 they couldn't place a value on that. 3 Yet, I will tell you the valuation on the 4 opportunity exceeded the value of what we're agreeing to 5 with this agreement; but we believe that one of the 6 really big deliverables that we can't measure at this 7 time is exactly what you said. It's the name mentions 8 that we get outside of the venue and the ability to 9 reach people. 10 And when people come to recognize, you 11 know, they're going to see events and acts and 12 activities in the plaza, the Texas Lottery Plaza on the 13 Texas Lottery stage. And we think there's a huge 14 opportunity to leverage that and work to really drive 15 additional mentions and reach. 16 COMMISSIONER RIVERA: Right. And then a 17 final question or statement then is, obviously, you're 18 going to have some smaller amount of real estate out 19 there that hopefully every square footage part of it 20 isn't going to be claimed; but would there be a way that 21 we could have a kiosk there for events, whether it's 22 permanent or for periodic events? 23 MR. ANGER: So, Commissioner, we have 24 negotiated the opportunity to have self-service 25 equipment placed at the facility; and we'll work through 54 1 with them the actual placement locations to be able to 2 sell our product onsite. We've also negotiated as a 3 part of the agreement for -- basically for a quarterly 4 event on an annual basis where we would come in and we 5 would bring in a big selling trailer and have a big 6 presence, you know, focused specifically on the lottery 7 and the activities, the player education activities and 8 messages that we do through our promotional efforts. 9 COMMISSIONER RIVERA: Perfect. Awesome. 10 Thank you. 11 MR. ANGER: Thank you. 12 COMMISSIONER HEEG: A question. 13 CHAIRMAN KRAUSE: Commissioner Heeg. 14 COMMISSIONER HEEG: Yes. This is very 15 exciting and, Michael, we've been discussing the budget 16 impacts and we started this effort not realizing the 17 budget cuts that we're probably going to be facing. And 18 on all these investments you're asking us to make, given 19 the reality where we are, is this the best use of our 20 money and how are we going to evaluate those tough 21 decisions that we're going to have to make? 22 MR. ANGER: We believe that it is. As we 23 look to move away from more traditional forms of media, 24 as we've talked about -- the agency has already moved in 25 that direction -- significant budget cuts will probably 55 1 force us to make more drastic decisions in that space. 2 So what I'm talking about is TV and radio, which have 3 big-dollar price tags to advertise, even in the markets, 4 the limited markets that we advertise in today -- as I 5 mentioned, we've scaled back which markets we advertise 6 in -- but even to do that TV and radio advertising, we 7 spend significant dollars. And that's very focused. 8 We're only in market for a few weeks at a time for a 9 campaign. This allows us to have a 24/7 presence, 365 10 days a year, where we're reaching consumers in the 11 Dallas/Fort Worth market. I think Eric's slides 12 identified that that market is approximately 7 million 13 people here in the state of Texas. So it's essentially 14 25 percent of the population of the state, ballpark. 15 And so these actually are the types of 16 opportunities that we will likely move more and more 17 toward, along with digital advertising; but I think 18 we're going to be moving more towards experiential and 19 digital in a more significant way. We've already been 20 moving that direction, but I think cuts in the budget 21 would accelerate this type of activity. 22 MR. GRIEF: If I could add one thing to 23 Michael's discussion, Commissioner, on any type of 24 contractual relationship that we enter into like the one 25 we have with this particular group and others, much to 56 1 the chagrin of our partners, we insist that in the 2 contract there be a funding-out clause that in the event 3 that the Legislature decides to reduce or eliminate our 4 monies for this particular endeavor, then the contract 5 becomes basically null and void. 6 COMMISSIONER HEEG: So how does that work 7 if it's a reduction and the reduction is not targeted to 8 a specific contract? 9 MR. GRIEF: I think I would defer to my 10 lawyer for that discussion; and I don't know, Bob, if 11 you want to get into that. 12 COMMISSIONER HEEG: We can discuss it 13 later if you're not prepared to. 14 MR. BIARD: Yeah, I think we ought to -- 15 I'd like to have the actual language in front of me. 16 COMMISSIONER HEEG: That's fair. 17 COMMISSIONER LOWE: What's the term of 18 the contract, ten years? 19 MR. ANGER: Yes. 20 COMMISSIONER LOWE: Does it have options 21 to renew after after the ten-year period? 22 MR. ANGER: It's a straighten ten-year 23 agreement, Commissioner. 24 COMMISSIONER LOWE: Okay. I do have one 25 question. You mentioned that Live Nation is a partner. 57 1 Are they going to receive any funds from the Lottery? 2 MR. SUDOL: Yeah. Our -- Legends, sales 3 and marketing, as the sales agent on the project, our 4 relationship is with the ARK Group. It was the 5 contractual relationship that we have here. I can't 6 really speak to Live Nation's relationship with the ARK 7 Group other than the fact that Live Nation is the 8 operator of the amphitheater. 9 COMMISSIONER LOWE: Okay. 10 MR. SUDOL: Does that make sense? 11 COMMISSIONER LOWE: Okay. I do -- I need 12 to ask a question. Can we take a break before we vote? 13 We don't have to do it right now, but can we take a 14 break before we vote? 15 MR. GRIEF: Commissioner, Mike needs to 16 clarify. 17 MR. FERNANDEZ: This is a briefing item. 18 COMMISSIONER LOWE: Oh, okay. I'm sorry. 19 COMMISSIONER ARRIETA-CANDELARIA: Can I 20 just make a comment? 21 CHAIRMAN KRAUSE: Yeah, let's make a 22 comment. 23 Are you asking to go into executive 24 session? 25 COMMISSIONER LOWE: Well, no, I just need 58 1 to ask my lawyer a question because I will tell you 2 this: My son is one of the 1,352 guitar pickers in 3 Nashville; and so as a result of that, I said, you know, 4 maybe I need to get to learn this business. So I bought 5 some stock in Live Nation. I don't know if that 6 disqualifies me because that wasn't asked in the 7 disclosure. So I don't know if I need to disclose that 8 now or not, Bob. 9 CHAIRMAN KRAUSE: This is not an action 10 item for us. 11 COMMISSIONER LOWE: Well, I know; but I 12 had to disclose any financial interest in ARK. And if 13 there is a financial interest in Live Nation, I just 14 wanted to make sure that wouldn't be an issue. I mean, 15 it's not very much stock. I just wanted to know, so. 16 MR. BIARD: Let me check on that, 17 Commissioner, because I think that there are some 18 exclusions for a person who is a minority shareholder in 19 a publicly traded corporation. 20 COMMISSIONER LOWE: Okay. 21 COMMISSIONER HEEG: When will we vote on 22 this? 23 MR. GRIEF: Commissioner, it's not a 24 voting item. 25 COMMISSIONER HEEG: I know. 59 1 MR. GRIEF: It's just a briefing item. 2 COMMISSIONER HEEG: So we won't be voting 3 on it at all? 4 MR. GRIEF: Correct. 5 CHAIRMAN KRAUSE: Any more questions? 6 COMMISSIONER ARRIETA-CANDELARIA: I just 7 have a quick comment. 8 CHAIRMAN KRAUSE: Please. 9 COMMISSIONER ARRIETA-CANDELARIA: I think 10 the opportunity here is a great opportunity. It's a 11 great partnership. I think that the market outreach to 12 the millennial group I think is important to the Lottery 13 long term. I think that what Commissioner Rivera 14 indicated about the ability to expand the outreach, 15 people that are there, that really is a lot of value to 16 be able to reach a lot more people, not just the people 17 that are attending. 18 And I also think that this is a great 19 opportunity not just for Irving or Dallas/Fort Worth but 20 really to Texas. I think you'll get a lot of draw from, 21 statewide, and I think that will be a great exposure for 22 Texas Lottery in the longer term. 23 I think the venue is very attractive. I 24 think the positioning of the lottery and the presence in 25 the multiple areas around the venue is really good for 60 1 us, very prominent. I like the naming rights. And so I 2 think that I see it as a good investment. I haven't 3 seen the ROI numbers or anything like that, but I do see 4 it as a really good investment, particularly to that 5 group that we're looking at, because longer term we need 6 to be able to build that consumer base; and I see this 7 as a good way to do that. So good job. 8 Thank you. 9 MR. FERNANDEZ: Mr. Chairman, if I may, 10 to close this item, if there are no other questions, all 11 commissioners have independently confirmed they have no 12 financial interest in the ARK Group. 13 CHAIRMAN KRAUSE: Excellent. 14 And on that note, we're going to take a 15 brief call-to-nature recess here at about 4 till. 16 (Off the record from 11:15 to 11:26 a.m.) 17 CHAIRMAN KRAUSE: We are reconvening. 18 Obviously, I misread the time when I said that we were 19 taking our break because I know it hasn't been 30 20 minutes, so. It doesn't matter. We are reconvening now 21 here at 11:27. 22 So, anyway, we have our next item; and 23 next-item people are already properly situated at the 24 podium. 25 Go. 61 1 AGENDA ITEM VI 2 MS. ERICKSON: Good morning, 3 Commissioners. 4 For the record, Toni Erickson, Support 5 Services Manager. 6 Before we start this item, I'd like to do 7 a quick introduction. At the table with me this morning 8 is Eric Williams, our new HUB coordinator. Our 9 previous, long-standing HUB Coordinator, Joyce 10 Bertolacini, she retired last August. 11 Eric has been with the Texas Lottery in 12 the Legal Services Division for more than 13 years. 13 Prior to joining the Texas Lottery, he served our 14 country in the U.S. Navy for 20 years, including time at 15 the Judge Advocate General's Office. 16 We were very excited to lure him away 17 from Legal Services to join our team. He had big shoes 18 to fill following Joyce, but I can tell you that he's 19 done a phenomenal job embracing the program in 20 representing the Texas Lottery. 21 So with that introduction, I'm going to 22 turn it over to Eric, but I do want to do a quick 23 reminder that this is an action item at the end. 24 MR. WILLIAMS: Thank you, Toni. 25 Good morning, Chairman, Commissioners. 62 1 For the record, my name is Eric Williams. 2 I'm the Coordinator of the Lottery Commission's 3 Historically Underutilized Businesses Program or HUB 4 Program. The HUB Program is a statewide initiative that 5 provides assistance and contracting opportunities to 6 minorities, women, and service-disabled veteran-owned 7 businesses. 8 I'd like to provide a very brief update 9 on our program before I speak about the Minority 10 Business Participation Report. At the beginning of each 11 year the agency sets it's annual internal HUB goals, as 12 required by the Comptroller's rules. This year's goals, 13 as set out in a summary report, was sent to you last 14 fall. 15 As part of our outreach to HUBs, the 16 Lottery Commission must also implement a mentor/protege 17 program. This is an ongoing initiative to match HUB 18 vendors with mentor companies to assist with specific 19 business development goals. Currently, the Lottery 20 Commission has two mentor/protege relationships in 21 place: ITT and Business Asset Enterprises, LP, as well 22 as ITT and Diversified Computer Supplies, Inc. 23 The Lottery Commission also conducts an 24 annual HUB forum to provide information and networking 25 opportunities. This event is currently in the planning 63 1 stage but will be scheduled for either June or July. 2 A copy of the agency's finalized Fiscal 3 Year 2016 Minority Business Participation Report is 4 included in your notebook this morning. The annual 5 report is required by Section 466.107 of the State 6 Lottery Act. This must be made available to the 7 Governor, Lieutenant Governor, Speaker of the House, and 8 members of the Legislature. It requires your formal 9 approval prior to being printed and published on the 10 Lottery Commission's website. 11 The report documents minority and HUB 12 participation in our agency contracting activities and 13 also includes information on the number of licensed 14 minority retailers. During fiscal year 2016 the agency 15 achieved an overall participation rate of 13.34 percent 16 in its minority HUB contracting activity. 17 In addition, of the 17 largest spending 18 state agencies, the Lottery Commission ranked twelfth by 19 overall HUB percentage. During this reporting period 20 the agency also had 7,696 minority retailers, which 21 represented 43.62 percent of the Texas Lottery's 22 retailer base. 23 I will be happy to answer any questions 24 regarding the report at this time. 25 CHAIRMAN KRAUSE: Commissioners? 64 1 So, Eric, when LatinWorks, I guess, 2 changed its -- it didn't change it. I guess its status 3 changed from no longer being a HUB. 4 MS. ERICKSON: It graduated. 5 CHAIRMAN KRAUSE: It graduated. I was so 6 bummed out about that. 7 (Laughter.) 8 CHAIRMAN KRAUSE: They made our stats 9 look so good. 10 So, anyway, let's see if we can find 11 another big one. 12 MR. WILLIAMS: That's our plan, sir. 13 CHAIRMAN KRAUSE: All right. Thank you. 14 MR. WILLIAMS: This is an action item, as 15 Toni said, the staff recommends for your approval of the 16 Fiscal Year 2016 Minority Participation Report. 17 Chairman Krause, I provided General 18 Counsel Bob Biard the report cover letter for your 19 signature. 20 CHAIRMAN KRAUSE: Outstanding. 21 MR. WILLIAMS: This concludes my remarks. 22 CHAIRMAN KRAUSE: I'm looking for a 23 motion. 24 COMMISSIONER ARRIETA-CANDELARIA: So 25 moved. 65 1 COMMISSIONER RIVERA: Second. 2 CHAIRMAN KRAUSE: All right. All in 3 favor say aye. 4 (Chorus of "Ayes.") 5 CHAIRMAN KRAUSE: All opposed? 6 (No response.) 7 CHAIRMAN KRAUSE: Hearing none, passed by 8 acclamation. 9 MR. WILLIAMS: Thank you. 10 CHAIRMAN KRAUSE: Next item, Kathy Pyka. 11 The next three items. 12 AGENDA ITEM VII 13 MS. PYKA: Good morning, Commissioners. 14 My name is Kathy Pyka, Controller for the 15 Commission; and with me this morning is the Commission's 16 Products and Drawings Manager, Robert Tirloni. 17 Commissioners, our first chart that we 18 have for you this morning reflects our comparative sales 19 for the week ending April 1st, 2017. Our total fiscal 20 year 2017 sales through this 31-week period are about 21 $2,890,000,000. That's a decrease of $159 million or 22 5.2 percent as compared to sales for the same period 23 last fiscal year. 24 As we discussed in our February 25 Commission Meeting, we continue to see the impact of the 66 1 record-setting 1.6-billion-dollar Powerball Jackpot in 2 our year-over-year sales. However, I wanted to note 3 that due to our strong sales that we had during the 4 month of March, our deficit gap that was 203 million the 5 last time we met has now been reduced to 159 million, 6 which is a net positive change of $44 million over the 7 previous nine-week period. 8 So we'll drill down now to look at our 9 2017 Scratch sales reflected on the second orange bar. 10 They're at $2,271,000,000; and that's an 82-million- 11 dollar increase over the last fiscal year. And our 12 sales now are at 78.76 percent of total sales. 13 Our fiscal year 2017 draw sales reflected 14 on the second blue bar are at $618 million, which is a 15 240-million-dollar decrease or 28 percent under the 16 figure as reported last fiscal year. 17 So with that, Commissioners, Robert will 18 now provide an overview of the sales by detail. 19 MR. GRIEF: Kathy, if I could interject, 20 I just want to emphasize: When you look at the orange 21 bar on this particular chart and you see the increase in 22 Scratch Ticket Sales, the last five weeks of Scratch 23 Ticket Sales here in Texas have been the greatest five 24 weeks of Scratch Ticket Sales in our agency's history by 25 a very large margin. And that is due, not just in part, 67 1 in full, to the use of innovation and thoughtful ticket 2 distribution as we developed our game ticket plan. So 3 I'm just kind of laying the table for a later discussion 4 for you. 5 Yes, sir. 6 COMMISSIONER RIVERA: Can you explain the 7 five-fold ticket distribution? What does that mean? 8 MR. GRIEF: Correct. What we're coming 9 up with are new and vibrant ticket styles in working 10 with our vendor, IGT, particularly on the higher price 11 points, the 20-dollar tickets, 10-dollar tickets. We 12 know not every Lottery retailer can carry that price of 13 tickets. 14 We've gotten better and better over time 15 in identifying the types of retailers that thrive in an 16 environment where they have more complex, higher-priced, 17 longer-playing scratch tickets. And those tickets cost 18 money to print. The investment in those tickets is 19 immaterial as compared to the amount of revenue that 20 they gain. Any accountant would tell you the investment 21 is negligible when it comes to that investment, but it 22 is a fixed budget. 23 With that, I didn't mean to interrupt; 24 but I just thought I'd... 25 COMMISSIONER RIVERA: Thank you. 68 1 MR. TIRLONI: So this is the breakdown by 2 product through last Saturday, April 1st. I'm going to 3 drop down to the bottom for the draw games total. Draw 4 games as a whole are down almost $241 million. As we've 5 discussed, if you look right up here in the jackpot 6 category, almost 220 million of that 241-million-dollar 7 deficit is from the two multistate jackpot games, 8 Powerball and Mega Millions. And not to beat a dead 9 horse, but -- we've discussed this numerous times -- 10 we've just not had the jackpot this fiscal year that we 11 encountered last fiscal year. 12 Commissioner, you mentioned in an earlier 13 presentation the 1.6-billion-dollar jackpot last year, 14 in '16; and I think Mr. Anger mentioned we've gotten 15 nowhere close to any jackpot level like that this 16 fiscal. So when we don't have those jackpots, 17 obviously, it really prevents the driving of what I 18 would call the lapsed player or the occasional player 19 into retail, which prevents those people from being 20 exposed to our whole portfolio of products, both other 21 draw games and scratch. 22 We see Two Step is up a little bit. 23 That's a small jackpot game. That's on Mondays and 24 Thursdays. That's up a little bit. In the Daily Game 25 category we continue to see growth of the Daily 4 69 1 product. We believe, though, as we gain on Daily 4, we 2 see a little bit of decrease on Pick 3; and that's been 3 the trend here. 4 The good news, as Gary just mentioned and 5 Kathy mentioned, we're having phenomenal Scratch Ticket 6 sales this fiscal; and we are up $82 million on Scratch. 7 So it has helped with the draw deficit a little bit; and 8 overall, we're down just under 159 million. We hope we 9 can continue to shrink that deficit with the strong 10 Scratch sales between now and the end of the fiscal 11 year. 12 And that concludes our presentation today 13 on sales. 14 CHAIRMAN KRAUSE: Excellent. 15 AGENDA ITEM VIII 16 MS. PYKA: All right. Commissioners, 17 moving on to Item Number VIII, this is information on 18 agency transfers to the state and our fiscal year 2017 19 operating budget. 20 The report in your notebook includes the 21 accrued the revenue transfers and allocations to the 22 Foundation School Fund and the Texas Veterans Commission 23 for the period ending February 28th of 2017. Our total 24 accrued revenue transfers to the State amounted to 25 $571 million for the first six months of the fiscal 70 1 year. Of the $571 million transferred to the State, 2 $527 million was the amount of revenue transferred to 3 the Foundation School Fund; and we transferred 4 $9.7 million to the Texas Veterans Commission with a 5 balance of $34 million transferred in unclaimed prizes. 6 Our total cumulative transfer to the Foundation School 7 Fund through February now amount to $20.2 billion. 8 And the final item under this tab is the 9 agency's Fiscal Year 2017 Method of Finance Summary for 10 the period ending February 28th of 2017. The 11 Commission's Lottery Account Budget for fiscal year 2017 12 is $234.2 million; and of this amount, 81.4 percent was 13 expended and encumbered through the end of the second 14 quarter. 15 Our Bingo Operations Budget, funded by 16 general revenue funds, is $15.4 million with almost 17 60 percent of that expended and encumbered through the 18 end of the second quarter. 19 Commissioners, this concludes my 20 presentation. I'd be happy to answer any questions. 21 CHAIRMAN KRAUSE: Commissioners? 22 COMMISSIONER RIVERA: Good job. 23 CHAIRMAN KRAUSE: Next item. 24 AGENDA ITEM IX 25 MS. PYKA: So, Commissioners, Tab IX is 71 1 an update related to the agency's budget request before 2 the 85th Legislature. The chart before you includes the 3 current status of our budget request. The Senate 4 adopted their budget on March the 28th, while the House 5 is considering their version on the House floor today. 6 The information that I have before you 7 today is the House budget as adopted by the House 8 Appropriations Committee. We appreciate that there are 9 a variety of amendments that could further impact the 10 values that are included here under the House budget 11 amount. 12 I'd like to begin with the first item, 13 which is the restoration of budget reductions in which 14 the Commission sought restoration. We included those 15 based on any revenue-generation activities of the 16 agency. The Senate's budget bill included an 17 18.1-million-dollar reduction to the Lottery Dedicated 18 Account, and we requested $16.1 million of that to be 19 restored to our budget. The House version of the budget 20 included a 6-million-dollar reduction to the Lottery 21 Dedicated Account, and the agency sought restoration of 22 $4 million of that reduction. 23 As we look at the detail there, you'll 24 see that under Item 1A, Advertising Services Contract, 25 the bulk of the reduction included the reductions to 72 1 advertising services with a 14.7-million-dollar 2 reduction in the Senate version of the budget and a 3 2.6-million-dollar reduction in the House version of the 4 budget. Neither the Senate or the House voted to 5 restore these budget reductions within their budget 6 bill. 7 So now we're at the point that the 8 decision regarding the value of the budget reduction 9 that will be adopted in the ultimate budget bill is 10 basically left to the Budget Conference Committee. It 11 will either be a 23 percent reduction to our advertising 12 line item based on the Senate version of the bill or a 13 4 percent reduction based on the House version of the 14 bill. There's not the ability to negotiate the dollar 15 value. It will be one or the other as the budget is 16 presented to the Conference Committee. 17 Included on the chart before you are the 18 projected economic impacts of these budget reductions. 19 On the Senate version of the budget, if the value of 20 $16.1 million is the value that is adopted, we're 21 anticipating a sales reduction of almost $400 million, a 22 revenue reduction of $108 million, and a reduction of 23 $20 million in compensation to our retailers. 24 CHAIRMAN KRAUSE: Kathy? 25 MS. PYKA: Yes. 73 1 CHAIRMAN KRAUSE: Okay. When you say 2 "revenue reduction," what you really mean is how much we 3 can send to the Foundation School Fund? 4 MS. PYKA: That is correct, Mr. Chairman. 5 CHAIRMAN KRAUSE: Okay. So that's our 6 net-net. It's not really our revenue. That's our net 7 income that goes to them. 8 MS. PYKA: That is correct. 9 CHAIRMAN KRAUSE: Okay. 10 MS. PYKA: As we look at the House 11 version of the budget, we are projecting a sales 12 reduction of $75 million; a reduction of funds returned 13 to the State, to the Foundation School Fund, of 14 $20 million; and a reduction in compensation to 15 retailers of $3.7 million. 16 So I'd like to move on to the second part 17 of the presentation related -- 18 MR. GRIEF: Kathy, could I ask you to 19 clarify: That's a biennial amount, correct? 20 MS. PYKA: That is correct, Gary. The 21 values that are presented here before you are the 22 biennial amounts of the budget reductions as well as the 23 biennial value of sales revenue and retailer 24 compensation. 25 So now, moving on to the new Scratch 74 1 Ticket rider that addresses the funding of the strategy 2 used to pay for the printing of scratch tickets, the 3 Senate did not adopt the rider that we requested. The 4 House elected to adopt the rider but placed it in 5 Article XI of their budget, which is essentially a wish 6 list placement in their budget. 7 For recall, the basis for our rider 8 request is that the current funding structure of our 9 Scratch Ticket printing is a fixed budget, which doesn't 10 provide for any increased sales growth that we have in 11 the Scratch Ticket product. To kind of give you the 12 basis of the impact to us, we anticipate spending just 13 over $50 million this fiscal year on Scratch Ticket 14 printing, which takes into account the growing demand 15 for our Scratch Ticket product. The budget that's 16 currently adopted by the Senate and the House reflects 17 an annual budget of 30,150,000. So we're looking at a 18 20-million-dollar difference between what we're spending 19 today and what is included in the budgets before the 20 Senate and the House. 21 In order to be responsive to the market 22 preferences of our consumers, as Gary noted earlier, 23 we've explored new Scratch Ticket game opportunities and 24 product enhancements that allow for us to generate 25 revenue to the Foundation School Fund and the Texas 75 1 Veterans Commission. So it's projected that if our 2 funding of the budget remains at the baseline level as 3 presented, the Commission will not be able to continue 4 to offer the unique and innovative products that we've 5 been able to offer to provide for those incremental 6 sales and revenue values. 7 In fiscal year '16 our Scratch Ticket 8 sales were $3.72 billion, and that was an increase of 9 more than $200 million over the previous fiscal year. 10 That growth was attributed to the introduction of those 11 innovative products that Gary talked about that have 12 incorporated special features and those products alone 13 generated $400 million in fiscal year 2016 and revenue 14 for those products of about $63 million. So the concern 15 is that we're not going to be able to continue revenue 16 and sales growth with the limited fixed Scratch Ticket 17 printing budget that is before us. 18 The other point that I'd like to make is 19 as we look at the funding items of the Scratch Ticket 20 rider as well as the budget restoration, neither of 21 those items would cost the budget bill because the 22 Lottery Dedicated Account is not part of the 23 Comptroller's certification of the budget bill. 24 So this is where we stand as of today. 25 Obviously, today the House will be considering a variety 76 1 of budget amendments that could further impact the House 2 version of the budget. We have great concern with 3 regard to the Scratch Ticket printing as well as, 4 obviously, the reductions that we're seeing on the 5 budget restoration items. 6 I'll be happy to answer any questions. 7 CHAIRMAN KRAUSE: Commissioners? 8 COMMISSIONER RIVERA: Good work. 9 CHAIRMAN KRAUSE: Commissioners? 10 COMMISSIONER ARRIETA-CANDELARIA: I'd 11 like to make a comment. 12 CHAIRMAN KRAUSE: Please. 13 COMMISSIONER ARRIETA-CANDELARIA: So I 14 think when working for an entity that has a direct 15 impact, I can tell you that school districts across 16 Texas are in need of funding; and I think that the loss 17 to those school districts, to public education across 18 our state, is a real threat to our ability to deliver 19 that instruction. 20 So I can just speak for myself because I 21 am in that business that any loss in revenue here has to 22 be replaced from somewhere else. And so I think that to 23 reduce the budget here then really translates to just a 24 loss in public education dollars; and I would hope that 25 our Legislature certainly considers that when they are 77 1 considering these types of bills because I can tell you, 2 being out there on the front lines, we need every dollar 3 that we can get at the school district level. We have 4 budgets that -- you know, we have school teachers that 5 we have to pay and instruction that we're required to 6 deliver and these shrinking budgets do directly impact 7 public education students across Texas and I think 8 anything we can do to augment to continue to fund 9 education, I think we really need to look at that 10 because it has a direct impact. 11 We don't maybe see it here on a 12 day-to-day basis, as we sit here and deliberate these 13 actions; but at the end of the day, these dollars go to 14 the Foundation School Fund, which makes them a portion 15 of the total funding for public education; and I think 16 that's one of the reasons that I like to serve, because 17 I think -- because of that mission, those dollars do go 18 to public education. 19 It's my responsibility as a commissioner 20 to ensure that budgets are efficient here, that we're 21 running a good ship, that I'm helping my commissioners 22 in those decisions; but ultimately, at the end of the 23 day, the more money that we can send to public education 24 through our transfers, I think benefits so many kids 25 across the state. And I think it's incumbent upon all 78 1 of us here to call on the Legislature and impress upon 2 them how important it is that these dollars are approved 3 and that we get our budget restored to last year's level 4 so that it can directly impact our sales and ultimately 5 those dollars that go to public education. 6 CHAIRMAN KRAUSE: Any other Commissioners 7 before I weigh in? 8 (No response.) 9 CHAIRMAN KRAUSE: All right. Kathy, 10 thank you for this information. This really helps me 11 understand how alarming these proposed budget bills are 12 to what we do here. We run a business, and we run a 13 business with the goal of running the best business that 14 we can; and our goal is to raise as much money as 15 possible for the school children of Texas and our Texas 16 Veterans, plain and simple. 17 Now, we have rules of engagement that 18 shackle us with a variety of principles that keep us 19 from being able to compete in the same way another 20 commercial enterprise might. However, we are laser 21 focused on doing the very best job we can; and I'm very 22 proud of the fact that our staff has been able to 23 innovate so much and do so much with so little that it 24 looks, apparently, to the Legislature like we don't need 25 what we've got. And that's astounding to me. It's 79 1 astounding that we are that successful; and, yet, our 2 success is being used against us. And so, anyway, the 3 bottom line is that it's going to hurt what we do. It's 4 going to hurt what we do. 5 There is, frankly, some hostility up at 6 the Legislature about what it is that we do. And I 7 don't understand why in the world they just want to make 8 it harder for us to do what we do; but it's a difficult 9 budget situation. It would be really great if our 10 budget writers would pay a little bit more attention to 11 that; but, frankly, I believe they don't give us any 12 credibility when we go up there and tell them, "You 13 slash us. You slash our advertising budget by a dollar. 14 That is $7 to the Foundation School Fund that it will 15 not receive." 16 I see a number up there, it's 17 $400 million less money over the next biennium to the 18 Foundation School Fund. Astounding. Astounding. As if 19 education is not important here in Texas; and as if 20 paying for education is not a challenge for the state. 21 And so, anyway, I'm really at a loss. And I wish that I 22 could, you know, just go up there and knock their heads; 23 but I can't. 24 And so, anyway, I share the concern that 25 you-all have. And I hope that we have -- I hope that we 80 1 are delighted with the result and surprised, but I'm not 2 optimistic about that. So, anyway, thank you, Kathy. 3 MS. PYKA: Thank you, Commissioners. 4 CHAIRMAN KRAUSE: Darlene, we have some 5 reports to approve. 6 MS. BROWN: We do. 7 AGENDA ITEM X 8 MS. BROWN: For the record, I'm Darlene 9 Brown, the Internal Auditor. 10 I have a status report, and then I have 11 three auditor reports. First, I want to let you know 12 that our firm is celebrating two milestones this month. 13 The first one is we were recently nominated to the top 14 20 accounting firms in the southwest region of the 15 country by Accounting Today; and second, and most 16 important, we are celebrating 30 years in business. So 17 our firm is moving along quite well. 18 Our activities since the last period, we 19 completed the audit review services project; and we are 20 reporting on that today. We also completed the retailer 21 management audit, and I will give the report to you on 22 the next commission meeting. Just a heads-up, we had no 23 findings there. Everything's pretty well. 24 And then also, we've completed planning 25 for our next three audits, which will be the Time and 81 1 Attendance Audit, the Active Directory Audit -- that's 2 an IT audit -- and then our Second-Chance Drawings 3 Audit. We anticipate that those will go relatively 4 quickly, and we're still on target to complete our audit 5 plan by August 31st. 6 We're at 50 percent of our budget 7 fiscally and about 54 percent of our budget on hours, 8 but that will even out as we go into different types of 9 audit. 10 So that concludes the status report to 11 you. I'll be happy to answer any questions if you have 12 any. 13 CHAIRMAN KRAUSE: Commissioners? 14 We've got three reports to prove. 15 MS. BROWN: Okay. The first report that 16 I highlighted to you at the last meeting was on the 17 Scratch Ticket warehouse receiving controls; and just to 18 reiterate, we had zero observations noted in that one. 19 We concluded that the internal controls over the agency 20 Scratch Ticket warehouse receiving functions and 21 processes were effective and working as intended; and in 22 that process we looked at the shipping notifications, 23 the transportation security proceedings, and the 24 inspection of those trucks when they arrive at the 25 docks. 82 1 The second one is the Scratch Ticket 2 Reconstruction Audit. We had no observations in that 3 one, also. We concluded that the internal controls over 4 the agency's Scratch Ticket reconciliation -- I mean, 5 reconstruction function and processes are effective and 6 working as intended. 7 We looked at their request process. We 8 also looked at the security over that information once 9 it is received within this agency. We looked at the 10 reconstruction -- at the reconciliation process, where 11 they reconcile what was requested versus what was 12 received and used. And then we also looked at how the 13 data is used. And, again, no observations. 14 The next audit that we concluded was in 15 the Bingo Audit Services area. This audit was performed 16 at the request of the Bingo Director. Basically, we had 17 six questions that we were identifying and trying to see 18 what the answers to these questions were. 19 The first one was: What are the root 20 causes leading to the lengthy audit completion times? 21 Second was: How can we change the customer/license 22 holder's perceptions of the Audit Services Department 23 and processes? The third one is: How can we improve 24 the audit transparency? Fourth was: What audit 25 processes can be enhanced or eliminated? Fifth was: 83 1 How can the audit procedures be organized to be more 2 efficient? And then the sixth: Is the Audit Services 3 Department appropriately staffed? 4 Out of those procedures we gained an 5 understanding of the whole audit process, and to do that 6 we also went out to some bingo halls and observed those 7 operations. 8 So we concluded that the current 9 processes that the Bingo Audit Services Team have, 10 they're effective to ensure that the license holder is 11 in compliance with BEA and administrative rules; but we 12 also identified six different opportunities for them to 13 improve on how they go about executing the audit 14 process. 15 So we came up with six different 16 recommendations, and we helped develop a project plan to 17 implement everything for them. The first recommendation 18 is that they need to restructure the process from the 19 way they're doing the risk assessments and the factors 20 that are included in the risk assessments, to the way 21 they plan and actually execute the audits and then 22 report on the audits. 23 We said they need to establish some 24 processes to improve perceptions, where they're not only 25 auditing the license holders, but they're providing some 84 1 guidance and some education along the way. 2 We want them to issue audit notification 3 letters six months in advance so it gives the 4 organizations more time to plan and respond. 5 We want them to obtain some data 6 analytics software and then begin requiring that the 7 data, to the extent possible, be submitted in electronic 8 format so they can use the data analytic software to get 9 these audits completed quicker and more effectively. 10 And then organize the work papers into a 11 different manner so they can get through the audit 12 quicker; and then they need to revise their staffing 13 model to add a couple different positions. 14 So that concludes my three reports, and 15 I'll be happy to answer any questions. 16 CHAIRMAN KRAUSE: Commissioners? 17 (No response.) 18 CHAIRMAN KRAUSE: All right. Do we have 19 a motion to approve the three reports? 20 MR. ROYAL: Mr. Chairman? 21 CHAIRMAN KRAUSE: Yes. 22 MR. ROYAL: If I may make a few comments 23 on Darlene's reports? 24 CHAIRMAN KRAUSE: As very concise as you 25 can. 85 1 MR. ROYAL: I just really appreciate the 2 work Internal Audit did on those programs and the 3 conclusion that the current audit program is effective 4 and ensures the license holder is compliant with the 5 Bingo Enabling Act. 6 However, there are opportunities for 7 improvement; and that was my desire for the program. I 8 asked for the review and look forward to implementing 9 their recommendations as it will strengthen our ability 10 to help our charities and ensure the proceeds are 11 properly accounted for and used in a timely manner. 12 We have already begun organizing the 13 Audit Restructuring Project, which is going to be led by 14 Joy Bishop. Joy Bishop has spent the majority of her 15 15 years with the agency in Audit; but most recently 16 Accounting Services Coordinator who was responsible for 17 leading the charge to help assist in the charities with 18 their quarterly reporting and improving their financial 19 position. She's done a great job, and I look forward to 20 her and am confident in her that she will lead this new 21 charge. 22 CHAIRMAN KRAUSE: Excellent. 23 MR. ROYAL: Thank you. 24 CHAIRMAN KRAUSE: Any motions? 25 COMMISSIONER HEEG: So moved. 86 1 CHAIRMAN KRAUSE: Second? 2 COMMISSIONER ARRIETA-CANDELARIA: Second. 3 CHAIRMAN KRAUSE: All in favor say aye. 4 (Chorus of "Ayes.") 5 CHAIRMAN KRAUSE: It carries. We have 6 approved these reports. 7 MS. BROWN: Thank you. 8 CHAIRMAN KRAUSE: Alfonso, you have the 9 next two items. 10 AGENDA ITEM XI 11 MR. ROYAL: Commissioners, you should 12 have a copy of the 2016 Charitable Bingo Operation 13 Division Annual Report. The annual report provides 14 financial information on the condition of bingo in the 15 State and is statutorily required to be submitted to 16 State leadership biannually. 17 I've asked Desira Glenn, the Bingo 18 Division's Licensing and Accounting Services Manager, to 19 highlight the financial data in calendar year 2016. 20 Before she begins, I do want to mention a 21 few non-financial accomplishments of the Division. The 22 Bingo Industry Stakeholder Workgroup is comprised of 23 various industry representatives of the bingo community, 24 Commission staff, and Bingo Commissioner Doug Lowe. Its 25 purpose was to collaborate on industry-related topics, 87 1 rules, and review challenges and opportunities in an 2 effort to better serve and improve charitable bingo in 3 Texas. 4 I'm real proud of the results of the 5 meetings we attended; and, in particular, the 6 administrative rule review that resulted in the adoption 7 of 30 administrative rules that aligned with statutory 8 provisions to streamline regulation and promote 9 efficiency, while at the same time removing obsolete 10 requirements in the conduct and operation of charitable 11 bingo. 12 Also in 2016 the redesigned Charitable 13 Bingo website was launched. It allows users to browse 14 information with improved user accessibility. The 15 website provides enhanced experience when navigating 16 bingo information and provides various loading of 17 websites quicker. 18 A new social media page was unveiled. By 19 implementing social media presence through Facebook, the 20 Division is able to further foster communications with 21 the bingo industry and the public. 22 And, as we just heard from Darlene, our 23 audit program continues to excel. Audits resulted in 24 the increase of charitable distributions of 25 approximately $45,000. The audits revealed incorrect 88 1 valuations of merchandise prizes, lack of documentation 2 for expenses, and unreasonable or unnecessary expenses. 3 Those $45,000 went directly to the bottom line of the 4 charities as charitable distributions. 5 I'll now turn it over to Desira to speak 6 specifically on our financial data. 7 AGENDA ITEM XII 8 MS. GLENN: Good morning, Mr. Chairman. 9 Good morning, Commissioners. 10 For the record, may name is Desira Glenn; 11 and I'm the Licensing and Accounting Services Manager. 12 I'm excited about this presentation 13 because the state of charitable bingo continues to 14 progress and improve. I believe that the effort put 15 forth by us as the regulator, together with the bingo 16 industry, has created a charitable gaming platform that 17 allows the current and continued success of bingo in 18 this state. The data contained in this overview of 19 calendar year 2016's Charitable Bingo Operations is as 20 of March, 2017. The 2015 data, used for comparison, is 21 from the 2015 Annual Report. 22 In calendar year 2016 there were a total 23 of 1,001 organizations licensed to conduct charitable 24 bingo. This is the population of licensees that held 25 regular, annual, or biannual licenses. Fraternal 89 1 organizations, totalling 676 or 67.5 percent of the 2 total, are the largest segment of licensed conductors, 3 with veterans and religious organizations being the next 4 two largest segments. 5 This slide shows where the money comes 6 from. Regular bingo sales, which includes both card and 7 electronic card sales, account for 46 percent of total 8 gross receipts, while pull-tab event and instant sales 9 account for 54 percent of total gross receipts. Total 10 gross receipts were just under $761.5 million. This 11 includes approximately $346.4 million of regular bingo 12 sales and $415.1 million of pull-tab sales. 13 Total gross receipts increased by more 14 than $4.7 million this past year. This is largely 15 attributed to the 1.4 percent or 5.6-million-dollar 16 increase in pull-tab sales. 17 Total prizes awarded increased by 18 approximately .8 percent in 2016. This slight increase 19 in prizes awarded yielded a minor increase in adjusted 20 gross receipts of .1 percent. Any increase is favorable 21 and largely attributed to the good business practices of 22 many of bingo's conductors. 23 Now, this slide shows where the money 24 went. In 2016 player prizes awarded were 579.7 million 25 or 76.2 percent of total expenditures. Rent payments 90 1 paid to the commerical lessor, 45.8 million or 6 2 percent; bingo worker salaries, 42.7 million or 5.6 3 percent of total expenditure; costs of goods purchased, 4 which includes bingo paper, pull-tabs, and other 5 products, approximately 33.1 million or 4.4 percent of 6 total expenditures charitable distributions were 7 approximately 30.2 million or 4 percent of expenditures. 8 All others expenses, which included items 9 such as security, bookkeeping, and legal services, 10 advertising and bingo equipment purchases, totalled 11 14.7 million or 1.9 percent of total expenditures. 12 Premises expense, approximately 11.5 or 1.5 percent of 13 total expenditures. And, finally, license fees, which 14 represent the smallest amount at $3.1 million or less 15 than half of 1 percent of total expenditures. 16 The purpose of charitable bingo is to 17 generate positive proceeds, thus ensuring sufficient 18 charitable distributions; and I'm pleased to report yet 19 another increase in charitable distributions for the 20 second consecutive year and surpassing the 30-million 21 threshold for the first time since 2010. 22 In 2016, 1.6 million more charitable 23 dollars were invested into our state's communities in 24 various ways than in 2015. This increase in charity 25 through bingo is due to the long-standing good business 91 1 practices of many licensed authorized conductors and the 2 Division's practice of reaching out to licensed 3 conductors to assist them with quarterly reporting and 4 by providing relevant, consistent, and accessible 5 education on regulation. 6 This is a look at how charitable 7 distributions related to gross receipts and adjusted 8 gross receipts. As total gross receipts increased, 9 charitable distributions increased. Last year gross 10 receipts totalled more than $761 million; and of that, 11 4 percent or 30.2 million were charitable distributions. 12 Similarly, adjusted gross receipts totalled more than 13 $181.7 million; and of that, 17 percent was used for 14 charitable purposes around this state. 15 Winners of charitable bingo pay 5 percent 16 prize fees. This fee is retained from the winnings of 17 the players. Charitable bingo conductors collect the 18 fees from the players' winnings and remit them to the 19 State quarterly. Each quarter we distribute the prize 20 fees to the local jurisdictions and the state as 21 allocations. Last year approximately $29 million was 22 collected from the charitable bingo winners as prize 23 fees and disbursed as allocations to the state and local 24 governments. 25 That concludes my summary of the 2016 92 1 annual report. 2 MR. ROYAL: Commissioners, 2016 was a 3 great year; and I do look forward to the current year 4 surpassing it was we continue our approach of educating 5 our licensees to operate profitable charitable bingo. 6 I do want to emphasize on the expenditure 7 slide that license fees, which represent the smallest 8 amount of total expenses at 3.1 million are only less 9 than half of 1 percent of total expenses. Often, we 10 hear of license fees -- and those in ear's length of the 11 discussions leave with the thought that $3,300 is a lot 12 of money for a license fee for bingo -- and they often 13 don't understand the second part of that equation; and 14 that is that $3,300 is for license fees for gross sales 15 in excess of $400,000. Again, it's still less than half 16 of 1 percent. In fact, it's .008 percent. 17 I agree with our industry leaders, more 18 funds need to be going to the charities; and we need to 19 do more on getting costs and expenses down. Attendance, 20 sales, prize payouts, and charitable distributions all 21 increased in 2016, which are good measures for 22 profitable bingo. However, expenses also increased; and 23 it was not the license fees that caused the increase. 24 Some of those expenses -- for example, 25 rent -- are related to prior reporting periods; and in 93 1 some instances prior years and older obligations that 2 were paid but never -- that were never paid because 3 there were no funds available. And in some instances, 4 the charities are unaware of those prior period or 5 years' debts. We will focus in on those in 2017. 6 I ask for your approval of the report. 7 MR. BIARD: Commissioners, I failed to 8 flag this for you. This is an action item. It does 9 require a vote by the Commission. 10 CHAIRMAN KRAUSE: All right. Well -- 11 COMMISSIONER LOWE: I have one comment 12 before we vote. 13 CHAIRMAN KRAUSE: Yes, please comment. 14 You're our -- 15 This is or Bingo Commissioner. He's our 16 expert. 17 COMMISSIONER LOWE: Thank you. 18 CHAIRMAN KRAUSE: Yeah. We rely on him. 19 COMMISSIONER LOWE: So I think one of the 20 things that I've been doing that I think that it's not 21 really a realistic way of looking at the revenue versus 22 the money to charities. I think that a more realistic 23 way to look at is not as a percentage of the sales, but 24 as a percentage of the sales less the cost of goods 25 sold, which would be the money to the prize winners. So 94 1 if you take that out -- are you following me, what I'm 2 saying? If you take out -- I guess in business it would 3 be EBITA; is that right? That's 205 million. That's 4 the money after you take out the prize package, the 5 prizes awarded. So 14 million, I think -- excuse me -- 6 30 million would be about 14 or 15 percent of 7 205 million. I think, really, that that's a more 8 realistic number, not as percentage of gross sales, but 9 as of the net after we deduct the prizes. 10 So with that, I think with that we're -- 11 that's not a bad profit to a business, 14 percent. In 12 the retail business, I think its' 2 or 3 percent. So I 13 think we're making a lot of progress; and and I think a 14 lot of it -- I know lot of it is through your efforts 15 that you're making in the Bingo Division. I think maybe 16 there should a slide to add what is the percentage of 17 the net. That's that comment. 18 I move to adopt the report. 19 CHAIRMAN KRAUSE: All right. Second? 20 COMMISSIONER HEEG: Second. 21 CHAIRMAN KRAUSE: All in favor say aye. 22 (Chorus of "Ayes.") 23 CHAIRMAN KRAUSE: It is adopted, duly 24 adopted. 25 Now, do we still need to hear from our 95 1 Bingo Director? 2 MR. ROYAL: Real quick, sir. 3 In addition to what's in your briefing 4 books, I just wanted to make a note that the Bingo 5 Industry Stakeholder Work Group met in February and will 6 continue to streamline operations under the bingo work 7 group; and we'll be putting together a rules review 8 packet for consideration at a later date. And hopefully 9 they will have some enacted legislation from the 85th 10 Texas Legislature available as well. 11 That's it. 12 CHAIRMAN KRAUSE: Outstanding. Thank 13 you. Appreciate all the work. 14 Gary? 15 AGENDA ITEM XIII 16 MR. GRIEF: Mr. Chairman, other than 17 what's in your notebooks, I have nothing further to 18 report. 19 CHAIRMAN KRAUSE: All right. Thank you. 20 Bob, how concisely can we get through 21 Number XIV? 22 AGENDA ITEM XIV 23 MR. BIARD: I'm going to try to be really 24 fast, but I wanted to touch on a couple of issues -- 25 CHAIRMAN KRAUSE: All in favor say aye. 96 1 (Laughter.) 2 MR. BIARD: Commissioner Heeg asked the 3 question what about a partial funding reduction that's 4 something less than total de-funding related to 5 contract; and I had an opportunity to look at the draft 6 contract, which hasn't been executed yet. There is a 7 right for the Commission to terminate on five days' 8 notice upon either the failure of the Legislature to 9 appropriate funds for the Commission for this agreement 10 or any act or omission by the Legislature which renders 11 performance of the Commission impossible. It doesn't 12 speak exactly to this situation, but I think it's as 13 close as I can find to something of a partial de-funding 14 that would make our performance impossible. 15 There's a force majeure provision, but it 16 specifically says it does not include financial 17 hardship. 18 I think as a practical matter the parties 19 would probably get together and try to renegotiate this 20 going forward consistent with the restrictions on our 21 budgets. I can't speak for the business folks, but 22 that's always an option going forward. 23 And on Commissioner Lowe's comment -- 24 MS. HEEG: Bob, is that similar language 25 in most of our contracts? 97 1 MR. BIARD: Yes. 2 I'll be happy to talk to you some more 3 about it if you'd like to offline. 4 And, Commissioner Lowe, on the issue that 5 you raised about the investment in Live Nation, there 6 are, just real quickly, a few provisions I just wanted 7 to touch on. I think you're okay is the bottom line. 8 In terms of your eligibility as a commissioner, you're 9 okay if you own less than 10 percent of a company that 10 the agency -- that receives funds from the agency. 11 The state contracting statutes, what we 12 refer to as Senate Bill 20, they have a more stringent 13 requirement, prohibiting contracts with which a Board 14 member -- where they own 1 percent or more of a 15 corporation. And we checked the Live Nation market cap, 16 and they're at 6.34 billion. 17 COMMISSIONER LOWE: I'm pretty safe. 18 (Laughter.) 19 MR. BIARD: But also, you're also okay 20 because you publicly disclosed it in this meeting; and 21 under the statewide ethics statutes, they do prohibit 22 personal investments that could reasonably be expected 23 to create a substantial conflict between the 24 Commissioner's private interests and the public's 25 interest; but if a Commissioner has a private interest 98 1 in a measure, proposal, or decision before the Board, he 2 must disclose that fact to the rest of the Board in the 3 meeting and refrain from voting or otherwise 4 participating in the matter. 5 So I think you covered yourself there. 6 And it's not a matter that's coming to the Commission 7 for voting, but my advice on caution would be to 8 restrict your participation. 9 COMMISSIONER LOWE: So, the first 10 question was: Does a partnership with that entity, ARK, 11 does that trigger disclosure for their partners? 12 MR. BIARD: Well, I think the Legislature 13 intends for those Senate Bill 20 provisions to be 14 construed very strictly. So I would say so because Live 15 Nation would be indirectly receiving funds from the 16 State. 17 COMMISSIONER LOWE: Okay. Thanks. 18 MR. BIARD: And with that, I will go 19 through the 14 enforcement matters under Item XIV. 20 There's 14 matters. Tabs A through E are the 21 Non-Sufficient Fund Lottery Retailer License Revocation 22 matters. They are handled in a single order. These 23 were cases where the licensee failed to have funds in 24 their bank account to cover electronic fund transfers to 25 the Lottery Commission. These were all default matters. 99 1 They went to SOAH, and the retailer did not show up. So 2 these are all handled in single order, which is in your 3 notebook under Tabs A through E. 4 Tabes F and G are Lottery Agreed Orders. 5 In Tab F, this is for In & Out Express of San Antonio. 6 In this case the Commission received a complaint that 7 the store was charging a 5 percent fee on debit card 8 purchases and there was a sign in the store that stated 9 this policy. Our investigator went to the store and 10 confirmed those facts and the licensee agreed to a 11 ten-day suspension. 12 Tab G is for Chawla's Citgo of Houston. 13 In this case the store clerk tried to validate a 14 customer's 75-dollar winning ticket and the terminal 15 message read "Claim at Lottery." The clerk paid the 16 customer $20 for the ticket and tried to claim the prize 17 at the Houston claim center. It turned out the ticket 18 was from a pack that had been stolen two days earlier. 19 The owner was cooperative and agreed to a ten-day 20 suspension. 21 Tabs H through L are Bingo Agreed Orders. 22 Tab H is a net proceeds case involving the Jena Kay 23 Hutchings Memorial Scholarship Tournament. This 24 organization had negative net proceeds of $12,000 from 25 the second quarter of 2015 through the first quarter of 100 1 2016. Mr. Royal agreed to give the organization another 2 chance to demonstrate they could generate positive 3 proceeds from the second and third quarters of 2017. So 4 there's an Agreed Order in your notebook which is 5 similar to several you've seen before on net proceeds. 6 Tabs I through L are all Bingo Worker 7 Agreed Orders that allow the individuals to be listed on 8 the Worker Registry with a restricted registration for 9 the next three years. This means that for three years 10 the worker cannot act as a bingo chairperson, manager, 11 operator, bookkeeper, or designated agent. 12 Tab I is for Lawrence Whittington, who 13 had two deferred adjudications on felony drug charges in 14 2010. He provided letters of recommendation from the 15 bingo hall manager and an officer of several charities. 16 Tab J is for Derrick Lowry, who had one 17 conviction in 2013 for an assault and one deferred 18 adjudication in 2014 for felony assault of a security 19 officer. He provided a letter of recommendation from 20 the bingo hall manager and documentation that he was 21 discharged early from community supervision in the 22 felony case. 23 Tab K is for Consuelo Rodriguez. This 24 person had one deferred adjudication in 2005 for 25 gambling promotion. She provided letters of 101 1 recommendation from the bingo hall manager, a retired 2 sheriff's deputy, and a member of the Texas Department 3 of Corrections. 4 Tab L is for a Nancy Duran, who had a 5 2013 conviction for a burglary of a vehicle. Her 6 sentence was suspended, and she was placed on community 7 supervision for two years. She also provided letters of 8 recommendation from the bingo hall manager and an 9 officer of several bingo charities. 10 And the last two items were both default 11 cases for bingo. Tab M is a license revocation for 12 Salado Volunteer Fire Department, which failed to 13 generate positive net proceeds for all of 2015. The 14 negative proceeds were in excess of 20,000. The 15 organization asked for a waiver that Mr. Royal did not 16 grant. The matter went to hearing, and the organization 17 failed to appear. 18 And the last item, Tab N, is the removal 19 of Andrea Patterson from the Bingo Worker Registry. In 20 this case this person had deferred adjudication in 2009 21 for forgery, which is criminal fraud. A conviction for 22 criminal fraud would have been a lifetime ban to working 23 in bingo. So Mr. Royal did not settle with this person. 24 The matter was scheduled for hearing, but Ms. Patterson 25 did not appear. So the matter was remanded to the 102 1 Commission to handle as a default. 2 That concludes my presentation, and you 3 may take all these matters up in a single vote if you 4 like. And I have ten orders. 5 CHAIRMAN KRAUSE: Do I hear a motion to 6 accept the staff's recommendations on these items? 7 COMMISSIONER ARRIETA-CANDELARIA: So 8 moved. 9 COMMISSIONER RIVERA: Second. 10 CHAIRMAN KRAUSE: All in favor say aye. 11 (Chorus of "Ayes.") 12 CHAIRMAN KRAUSE: All opposed? 13 Hearing no opposition, they are all 14 approved. 15 We also have no public comments and no 16 need to go into Executive Session. This is becoming a 17 habit with us. 18 And so on my own motion, I'm going to 19 make a motion that we adjourn. Anybody want to second 20 that one? 21 COMMISSIONER RIVERA: Second. 22 CHAIRMAN KRAUSE: All in favor say aye. 23 (Chorus of "Ayes.") 24 CHAIRMAN KRAUSE: We are done. 25 (Proceedings concluded at 12:23 p.m.) 103 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 an excerpt of the 12 above-referenced meeting to be included in the 13 transcript of said meeting, and was 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 18th day of April, 2017. 18 19 ______________________________ 20 DEBBIE D. CUNNINGHAM, Texas CSR 2065 Expiration Date: 12/31/2018 21 Kim Tindall & Associates 16414 San Pedro Avenue, Suite #900 22 San Antonio, Texas 78232 (210) 697-3400 23 24 25