0001 1 2 3 4 5 6 7 8 9 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 10 TEXAS LOTTERY COMMISSION HEARING 11 MARCH 11, 2005 12 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * 13 14 15 16 17 BE IT REMEMBERED that the TEXAS LOTTERY 18 COMMISSION meeting was held on the 11th day of March, 19 2005, from 9:00 a.m. to 1:05 p.m., before Steffanie L. 20 Decker, CSR in and for the State of Texas, reported by 21 machine shorthand, at the Offices of the Texas Lottery 22 Commission, 611 East Sixth Street, Austin, Texas, 23 whereupon the following proceedings were had: 24 25 0002 1 APPEARANCES 2 Chairman: 3 Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Mr. Rolando Olvera 6 Mr. James Cox, Jr. 7 General Counsel: 8 Ms. Kimberly L. Kiplin 9 Executive Director: 10 Mr. Reagan E. Greer 11 Charitable Bingo Operations Director: 12 Mr. Billy Atkins 13 Deputy Executive Director: 14 Mr. Gary Grief 15 16 17 18 19 20 21 22 23 24 25 0003 1 AGENDA 2 AGENDA ITEM NO. DESCRIPTION PAGE 3 4 I The Texas Lottery Commission 6 will call the meeting to order 5 II Report and possible discussion 6 6 and/or action on bingo financial information and statistics, 7 including charitable distributions 8 III Report, possible discussion 39 and/or action on lottery sales, 9 game performance, and trends 10 IV Report, possible discussion 45 and/or action on Mega Millions, 11 including possible contract amendment and/or proposal of 12 amendments to 16 TAC Sec. 401.315 relating to Mega Millions on-line 13 game 14 V Report, possible discussion 134 and/or action on the 79th 15 Legislature 16 VI Consideration of and possible 139 discussion and/or action on 17 recognition of the Charitable Bingo Operations Director's 18 length of service with the Commission 19 VII Commission may meet in Executive 142 20 Session: 21 A. To deliberate the duties and evaluation of the Executive 22 Director and/or Deputy Executive Director pursuant 23 to Section 551.074 of the Texas Government Code 24 B. To deliberate the duties and 25 evaluation of the Internal Audit Director pursuant to 0004 1 Section 551.074 of the Texas Government Code 2 C. To deliberate the duties and 3 evaluation of the Charitable Bingo Operations Director 4 pursuant to Section 551.074 of the Texas Government Code 5 D. To deliberate the duties of 6 the General Counsel pursuant to Section 551.074 of the 7 Texas Government Code 8 E. To receive legal advice regarding pending or contemplated 9 litigation and/or to receive legal advice pursuant to Section 10 551.071(1)(A) or (B) of the Texas Government Code and/or to 11 receive legal advice pursuant to Section 551.071(2) of the 12 Texas Government Code, including but not limited to: 13 Patsy Henry v. Texas Lottery 14 Commission Sandy Surber et al. v. GTECH 15 Corporation Linda Cloud v. Mike McKinney et al. 16 James T. Jongebloed v. Texas Lottery Commission 17 Russell Vierney v. Carol Keeton Strayhorn, Greg Abbott, and Reagan 18 E. Greer, in their individual and official capacities 19 Employment law, personnel law, procurement and contract law, 20 evidentiary and procedural law, and general government law, 21 Mega Millions agreement and/or game. 22 VIII Return to open session for 145 23 further deliberation and possible action on any matter discussed 24 in Executive Session 25 0005 1 IX Consideration of the status and 143 possible entry of orders in: 2 A. Docket No. 362-05-2442- Joe's Country Store, Inc. 3 B. Docket No. 362-05-2443-ASN Enterprises 4 C. Docket No. 362-05-2444-Stafford Rose Business, Inc. 5 D. Docket No. 362-05-2445-Bong Sub Yoon E. Docket No. 362-05-3323-C Store #4 6 F. Docket No. 362-05-3096-Rose Food Store 7 G. Case No. 2005-208-Lotto Food Mart 8 X Report by the Executive Director 139 and/or possible discussion and/or 9 action on the agency's operational status, FTE status, and retailer 10 forums 11 XI Report by the Charitable Bingo 143 Operations Director and possible 12 discussion and/or action on the Charitable Bingo Operations 13 Division's activities 14 XII Public comment 146 15 XIII Adjournment 147 16 17 18 19 20 21 22 23 24 25 0006 1 MARCH 11, 2005 2 MR. CLOWE: Good morning. The time is 3 9:00 a.m. The date is March 11, 2005. Commissioner Cox 4 is here. Commissioner Olvera is here. And by way of 5 recognizing Commissioner Olvera, I'd like to congratulate 6 you on your confirmation as a commissioner. We are very 7 happy and pleased that that has happened and are glad to 8 see that occurrence. 9 MR. OLVERA: Thank you, Mr. Chairman. 10 MR. CLOWE: The Lottery Commission will 11 come to order and we will begin on Item II in the Agenda, 12 report and possible discussion and/or action on bingo 13 financial information and statistics, including charitable 14 distributions. 15 Good morning. 16 MR. SANDERSON: Good morning, 17 Commissioners. For the record, I'm Phil Sanderson, the 18 Assistant Director of the Charitable Bingo Operations 19 Division. At the last meeting held on February the 28th 20 you had some questions regarding charitable distributions 21 and whether or not there are organizations not making a 22 distribution. Additionally, you asked Mr. Fenoglio if he 23 would be interested in presenting the industry perspective 24 on this issue. And I understand that he has provided you 25 some information. We have been working together very 0007 1 closely on the analysis of this data. 2 First, I would like to preface my comments by 3 reminding you that the 35 percent minimum distribution 4 requirement as laid out in the Bingo Enabling Act can 5 result in a zero amount of distribution being required. 6 We have reviewed the return information that was filed by 7 organizations that are currently active and hold a license 8 for the period of 2002, 2003, and 2004. Information that 9 I have provided you with this morning is the current 10 35 percent distribution formula that's contained in the 11 Bingo Enabling Act, as well as a report of the number of 12 organizations that were not required to make distributions 13 on a quarterly basis based on that formula, and a number 14 of those organizations that went ahead and made a 15 distribution. The other document I've provided you is our 16 first attempt to hopefully address the request by 17 Commissioner Cox on how we report the revenue from 18 charitable bingo. 19 And if there's no questions at this time, then 20 I'll proceed to go through on the reports that I've 21 provided you. 22 MR. CLOWE: Are there any questions? 23 Phil, go ahead, please. 24 MR. SANDERSON: Thank you, sir. The 25 35 percent distribution formula is calculating on the -- 0008 1 based on the gross receipts from the prior quarter, which 2 is your regular electronic and instant sales. And you 3 subtract from that the prizes, regular prizes, instant 4 prizes, the cost of goods sold, lease payments to 5 distributors, and that equals your adjusted gross receipt. 6 You take 35 percent of that adjusted gross -- excuse me, 7 gross receipt and from that they can get an expense 8 credit, which is either 6 percent of the gross or their 9 allowable expenses, whichever is less, and that leaves the 10 required distribution. 11 On a comparison chart based on a quarterly 12 basis, these are organizations that had gross receipts 13 during each individual quarter and, for example, in 2002, 14 the first quarter, there were 1,542 organizations that 15 reported gross receipts. Based on the calculations, 301 16 of those organizations were not required to make a 17 distribution. However, 195 of those organizations did 18 make a distribution. The reported distribution amount of 19 $572,000 is what those 195 organizations had reported. 20 Then the overall required distribution is statewide of all 21 1,542 organizations. Based on the calculation, they were 22 required to distribute 3.2 million; however, they did 23 distribute 8.3 million. And those numbers are on a 24 quarterly basis. One of the things, if you'll look at the 25 second quarter of each year is usually lower as far as the 0009 1 number that are not required to make a distribution. And 2 primarily, that is because the first quarter is usually 3 the highest quarter as far as sales go for the year. And 4 therefore, more of them usually have to make a 5 distribution in that second quarter. I'll give you a 6 minute to look over that, if you have any particular 7 questions on any particular quarter. 8 MR. CLOWE: Okay. 9 MR. SANDERSON: And I would like to turn it 10 over now to Mr. Fenoglio who has analyzed the 11 organizations that are currently active and the 12 distributions that they have made or not made over the 13 last 12 quarters. 14 MR. CLOWE: Good morning. 15 MR. FENOGLIO: Good morning, Mr. Chairman, 16 Commissioners. My name is Stephen Fenoglio. I'm an 17 attorney in Austin, and I'm not real sure exactly what 18 group of clients I represent because of the data that we 19 had to calculate. Most clients haven't even seen the 20 data, much less the letter I sent. But I do know I 21 represent a number of clients on this, and I'm sure most 22 of them will ultimately share the conclusions, they just 23 haven't seen them yet. 24 We tried to drill down pursuant to the request 25 that you all made of us in late February, and at the top 0010 1 of Page 2 of my letter is where we're starting to drill 2 down to -- you know, there are 1400-plus organizations, 3 and where do you start? And we chose the bottom at -- 4 pursuant to your directions and focused on the lowest 40 5 charities that reported distributions, if any. And you 6 can see in bullet format the broad conclusions that I 7 reached. 8 MR. COX: Now, Stephen -- 9 MR. FENOGLIO: Yes, sir. 10 MR. COX: -- you looked at the lowest 40 in 11 terms of what? 12 MR. FENOGLIO: Distributions. Reported 13 proceeds distributed on their quarterly reports. 14 MR. COX: Okay. But I think what we were 15 interested in were not -- that would be one sort, but the 16 other sort would be big revenue. What I think we were 17 interested in is how many of them had big revenue and no 18 distributions and why? 19 MR. FENOGLIO: And we have given you some 20 of that analysis. Again, we started with the lowest 40 21 that reported. And if you'll look at Exhibit A that 22 contains--it's the eight-and-a-half by 14 23 spreadsheet--contains an analysis of what was reported on 24 their charitable distributions and what is their adjusted 25 gross and then some notes in the comments period. And, 0011 1 for example, Commissioner Cox, you'll notice on Line 24 at 2 the bottom of Page 1, VFW Post 2466 reported 109,000 in 3 adjusted gross. And adjusted gross for me means gross 4 receipts less the prizes paid, the whole, if you will. 5 MR. COX: Okay. 6 MR. FENOGLIO: Turning to the next page, 7 you'll see Gulf Coast Council of LaRaza at 336,000 in 8 adjusted gross. That's line 25. 9 Jump down to Line 35, American GI Forum, 10 Westport Women 250,000. So -- 11 MR. COX: There you go. 12 MR. FENOGLIO: Yes. And then my analysis 13 segue, Commissioner Cox, into this -- you'll notice that 14 two of those halls are conducting Corpus. And then my 15 drilling down further, the Corpus Christi Bingo Hall 16 section at the bottom of Page 2, I go into that. And I 17 don't represent these charities. I actually don't 18 represent any -- I represent a number of VFW posts, 19 including some who conduct in Corpus, but it seems to me 20 -- it occurs to me that there are too many bingo halls in 21 Corpus Christi today. And my conclusion is there are six 22 commercial halls. And commercial, I mean organized 23 primarily for profit, hopefully conducting at least 12 24 sessions per week of a maximum 14 regular sessions. I'm 25 -- I ignored the VF -- there's a VFW Post that is a 0012 1 one-location location where they're conducting on their 2 post. There are six halls. The footnote shows you the 3 population of Corpus at 277,000, roughly. I compare that 4 to Austin, Texas, same number of commercial halls, and 5 yet, the market is 656,000. And so when I look at that, 6 Commissioner Cox -- and I did place a call to a charity 7 rep, never received a call back, I did independently 8 confirm the six commercial halls by talking to Suzanne 9 Taylor who is affiliated with one of the halls, not the 10 one, Las Vegas Bingo, that I drilled into. And by the 11 way, there are four of the charities that are on Exhibit 12 A, conduct at this particular hall. 13 MR. COX: Well, now Stephen, I see here in 14 looking at Item 25, Gulf Coast Council at LaRaza, Inc., 15 336,000 in adjusted gross. 16 MR. FENOGLIO: Yes. 17 MR. COX: I see that that's in Corpus, but 18 how would the fact that there's a lot of competition 19 affect the ability of somebody bringing in that kind of 20 money to make or not make a charitable contribution? 21 MR. FENOGLIO: I don't know. I think you 22 would have to have some discussions with those 23 representatives. I do note to the side on that same page 24 you're looking at they had undistributed proceeds, 25 initially it was 75,000. Phil corrected that and I think 0013 1 it's 71,000-and-change in profits they have set aside that 2 they're not required to distribute under the formula and 3 have not distributed, but are profits, nonetheless, that 4 they could distribute. Those are undoubtedly earned over 5 a period of time. It could be this entire three-year 6 period or it could be going back further than that. 7 MR. COX: Okay. 8 MR. FENOGLIO: We don't know. The only 9 thing we know is what they have reported, and they have 10 reported zero in proceeds that were distributed. And 11 under the 35 percent formula, they're not required to 12 distribute. Which as you know, Commissioner Cox, and at 13 my end I will come back to the recent development in house 14 -- now it's committee substitute to House Bill 1138 where 15 absent exigent circumstances, at least 25,000 of that sum 16 would have to be mandatorily distributed. 17 MR. COX: (Nods head.) 18 MR. FENOGLIO: So in answer to your 19 question, we did try to drill down to the higher 20 performing but -- the higher receiving but lower 21 performing charities. And I -- I don't -- what I have 22 heard anecdotally, as well as in discussions with a number 23 of individuals, including Ms. Taylor, I think the price 24 structure in Corpus is upside down. I am told by her and 25 others that their regular bingo, and by that I mean either 0014 1 paper bingo or electronic, is a loss leader to a 2 significant degree. You -- Mr. Chairman, I think you were 3 on the Commission when several years ago Ms. Taylor and 4 others requested a meeting with the Commission and you all 5 went to Corpus. And the subject at the time was, 6 Commission, please impose price controls on bingo. And 7 under the statute, arguably, you have that authority. Ms. 8 Kiplin is nodding a little bit because she and I have 9 talked about that some, whether or not you -- the statute, 10 Bingo Enabling Act, gives you that authority, but whether 11 or not some of the federal laws prohibit that. The 12 conclusion by the Commission was, we don't think it's a 13 good -- my belief is, the conclusion, I wasn't there, it's 14 not a good idea. The prices may be upside down, and 15 they're practically giving away bingo, I believe, but 16 nonetheless, the Commission is not going to intervene to 17 that extent. You declined to exercise what apparent 18 authority you have so... 19 MR. COX: So, Stephen, they're giving away 20 bingo in favor of what? 21 MR. FENOGLIO: I think to stay open is my 22 conclusion. And again, Mr. Chairman, I've not talked at 23 all, but I can -- when I look at Austin's market and -- 24 you know, another study would be to go look at the six 25 bingo halls charity by charity in this analysis in Austin 0015 1 versus Corpus. And I'm not suggesting the Corpus market 2 and Austin market are perfectly comparable. But when you 3 have got six commercial halls in Austin which has over 4 twice the population that Corpus does, my belief is -- and 5 I certainly know because I represent a number of charities 6 in Austin, including River City Bingo group of charities, 7 and I know what their distributions are like. And they're 8 very -- we believe, very robust. Our target is about 9 60,000 in distribution per charity per year. And we are 10 on target for that practically every year. That I believe 11 that, you know, there's just too much bingo for the market 12 -- for the Corpus Christi market. And so when I look at 13 it from that level -- you know, people are trying to stay 14 in business, they're trying to hang on, but they're not 15 particularly efficient. If efficiency is the bottom line, 16 how much are the charities making. But that's not my call 17 to make. That's a particular charity's or a particular 18 hall operator's call. And then to conclude again with the 19 changes in committee substitute to House Bill 1138, which 20 were the interim report which staff and the industry 21 participated in, one of their recommendations was to force 22 charities to disgorge, if you will, 100 percent of their 23 profits from bingo over needed operating capital. That 24 has now found it's way into a legislative statement. And 25 I cite the language at the bottom of Page 3 and the top of 0016 1 Page 4. So if the language in committee substitute to 2 House Bill 1138 were in effect, there would be far more 3 profit being delivered to charities in the form of monies 4 from the bingo account into their general fund to be 5 utilized for charitable purposes than is the standard 6 today. 7 MR. COX: So this proposed legislation, 8 Stephen, if I'm looking -- I'm looking at Page 4, 9 Paragraph H says that they can keep operating capital 10 equal to a quarter's operating expenses, and anything over 11 and above that they have to distribute? 12 MR. FENOGLIO: Yes. 13 MR. COX: Which recognizes something that 14 we talked about in the last session, which was they need 15 to be able to retain adequate working capital. 16 MR. FENOGLIO: Yes, sir. 17 MR. COX: Okay. 18 MR. FENOGLIO: And to be clear, there's 19 additional language I didn't quote. There is an 20 opportunity for charities to retain more than this amount, 21 but they're required to make a filing with the staff and 22 the staff would then conduct an analysis to determine if, 23 in fact, there's more working capital needed. But the -- 24 the standard is, you know, they're -- and as Phil's 25 document points out, there's a lot of money sitting in 0017 1 bingo accounts that is waiting to be distributed but has 2 not been distributed. And this new statutory standard, if 3 it's enacted, would mandate that to be distributed. 4 MR. SANDERSON: Commissioners, one thing 5 I'd also -- 6 MR. CLOWE: Wait just a minute, sir. 7 Steve, while you're on that area, I'd like to 8 ask a question and I want to make it clear that this 9 Commission has no involvement in any legislative activity. 10 But since we are talking about this and you've introduced 11 the bill by Representative Flores, I'd like to ask you the 12 question, have you discussed this with him and do you have 13 any sense of his desires in this bill along those lines? 14 MR. FENOGLIO: Yes, we have. And this is 15 actually an amendment that he proposed in the House 16 committee hearing. The language we are quoting, it was -- 17 it was introduced and then it needed some work. And we 18 worked with him on that and that is his language, and I 19 think he's pretty adamant about that. I can tell you, 20 Commissioners, that there have been some in the industry 21 who have contacted me wanting to know -- charity reps, 22 wanting to know, you know, why is the Lottery Commission 23 in the business of telling us what to do with our money. 24 And I've pointed out to them, this isn't the Lottery 25 Commission, this is the Legislature. Well, why is the 0018 1 Legislature? And I've tried to share with them the 2 concerns that have been raised by a number of elected 3 officials at the Legislature, the same concerns we 4 discussed last meeting and we have had this ongoing 5 dialogue for the last two years. I'm not going to suggest 6 to you that everyone in the industry supports this 7 language. And, you know, as we talked in -- on 8 February 28th, philosophically, from a business 9 perspective, it seems odd that, one, a Legislature is 10 imposing a certain business practice on a particular 11 business mandating they make a profit within a year and 12 mandating that they distribute those proceeds when you 13 don't do that for others. And that may be true, but I 14 don't expect any reaction, but I wanted to highlight to 15 you that not everyone in the industry, I believe, will 16 ultimately support this language. And I didn't want you 17 to be surprised by that fact, but nonetheless, it's the 18 position that Mr. Bresnen's clients support, and it's a 19 position today that my clients unanimously support. As 20 they examine that, they may come to different conclusions. 21 I don't know. I hope I answered your question. 22 MR. CLOWE: Yeah, you did. And, you know, 23 not to get into it, but I think when there is an activity, 24 like gaming, that's authorized by the Legislature, then 25 the Legislature has the right to step in and to be more 0019 1 involved than it would if it were regulating, for example, 2 for safety reasons, a business. That's a philosophic 3 position on my part, but we are going to follow the 4 legislation, whatever that is. 5 MR. FENOGLIO: And I've tried to urge that 6 to my clients that once the legislation is in place -- 7 MR. CLOWE: Yeah. And therein lies why 8 this subject came up, the Sunset recommendation for 9 legislative change. And that's what is causing all of 10 this introspection. And I thank you for this work, you 11 and Phil, and we are going to study this. We haven't had 12 the time at it -- 13 MR. FENOGLIO: Sure. 14 MR. CLOWE: -- that you have, but in 15 thanking you for it, I just wonder, do either or both of 16 you have any overall observation that you'd like to give 17 us resulting from the time that you've spent drilling down 18 and crunching these numbers and locking up your computer? 19 You said you had done it two or three times. 20 MR. FENOGLIO: Yes. It's a massive 21 undertaking. As I was sharing with the Chairman, Phil had 22 tried to send me several times very voluminous data and my 23 server wouldn't accept it and it shut down our system. So 24 I guess if we do this again, and Phil and I -- I mean, one 25 time I was calling him at 8:00 o'clock at night going over 0020 1 the data. My goal initially was to get you all something 2 by Monday, then it became Wednesday. And of course Phil 3 had a report to produce to you all, so he couldn't spend 4 all his time working just on what I wanted -- or what I 5 felt you needed. But if you're going to ask for 6 additional data, I would ask that it be as specific as 7 possible, because it is a massive undertaking. The 8 computer runs that he was sending me were eight-and-a-half 9 by 14 horizontals about 1200 pages. And, of course, with 10 computers you can look for particular isolated events, but 11 it's still a massive undertaking to, quote, "drill down" 12 to the level so... 13 MR. COX: Phil, are these -- are these 14 files in Excel spreadsheet format or a database format of 15 some sort that could be sorted? 16 MR. SANDERSON: Yes, sir. They're in our 17 database and we can pull them out -- we can extract them 18 into an Excel spreadsheet and manipulate them and sort 19 them -- 20 MR. COX: However you sort them, I'd like 21 to see you doing them on a sort of highest revenue, 22 highest percentage of operating expenses, and lowest 23 percentage of distributions. Now, on those three sorts, 24 see who shows up at the top. 25 MR. SANDERSON: Yes, sir. 0021 1 MR. FENOGLIO: And when you say highest 2 revenue, you mean highest hold? 3 MR. COX: That's probably the more 4 appropriate number, Stephen, yes, because you can't 5 distribute ticket sales. 6 MR. ATKINS: Commissioner Cox, kind of in 7 conjunction with that, I think you had requested some 8 additional information on the 28th that Phil has that he 9 can share with you that may help clarify Steve's question. 10 MR. COX: Okay. 11 MR. SANDERSON: First, before I get into 12 that, on the charities at Corpus Christi that Steve was 13 referencing, one of the things that I noticed and I think 14 Steve also noticed, their prize payout percentage was 15 running about 85 percent of their gross, where the state 16 average is between 70 and 75. So that -- that follows up 17 with his conclusion and conversations that they're losing 18 money on regular bingo probably. Every time they open the 19 doors, they're probably giving away more money than 20 they're taking in on the regular bingo sales. 21 MR. COX: So when you say regular bingo, as 22 opposed to -- 23 MR. SANDERSON: Instant bingo, pull tabs. 24 MR. COX: So they're bringing them in with 25 the -- that and making it over here? 0022 1 MR. SANDERSON: Yes. 2 MR. COX: But they're making it off -- if 3 they're making a profit, they're making it from bingo and 4 not some other activity? 5 MR. SANDERSON: They're making it from the 6 instant pull tabs. 7 MR. COX: Okay. 8 MR. SANDERSON: So that's just a conclusion 9 that we -- came up when we noticed that number, you know, 10 in that organization was running about 85 percent. 11 MR. COX: Well, it's -- I guess that if 12 they're paying back a larger percentage, they're doing it 13 for a reason, and it's probably unrelated to operating 14 expenses or if it's related to operating expenses, it will 15 show up in that sort. But if you want to sort it by prize 16 pay back and the expenses and those ways, you know, 17 however you do it -- 18 MR. SANDERSON: We would love to. 19 MR. COX: And let's just see if there are 20 folks out there that are bringing in big bucks and not 21 giving much or anything to charity. 22 MR. SANDERSON: Yes, sir. And now for the 23 third page that I've provided y'all, and I hope this -- 24 MR. CLOWE: And before you get into that, 25 Steve, thank you for bringing the Corpus Christi example 0023 1 to our attention. And for the record, I was not on the 2 Commission at the time that you were citing that the 3 Commission went to Corpus and got involved in that issue. 4 And did I hear you say that it was your opinion as an 5 attorney that the Commission has the authority to set the 6 prize payout for bingo? 7 MR. FENOGLIO: Under the Bingo Enabling 8 Act, it is unquestioned that you do. But the other shoe 9 is what does the federal act say under Title 15 of the 10 U.S. Code. And generally speaking, they frown on any type 11 of price regulation. I have not performed any formal 12 legal analysis to see if the federal law trumps, but if I 13 were going to go down that road, at a minimum if I were 14 sitting in your shoes, I'd want to have a legal brief that 15 says we have the authority under both State and federal 16 law because there are some criminal penalties involved if 17 you violate those statutes. And, Mr. Chairman, no, I 18 never reached a conclusion, but I've got to tell you, it 19 -- and Kim's kind of smiling because I don't know that she 20 ever did either, but -- at least I never heard that she 21 did, but it's hard to do. It's hard to regulate price 22 under the federal statute -- statutory prohibition. 23 MR. CLOWE: And, Counselor, could you give 24 us a comment on that? 25 MS. KIPLIN: Sure, Mr. Chairman. I'd be 0024 1 glad to. I don't think there was any kind of legal 2 analysis or legal opinion that was issued regarding the 3 issue that Mr. Fenoglio has raised. I don't recall the 4 Commission -- the governing body, the three-member 5 governing body going to Corpus, but I do recall the issue 6 coming before the Commission at the time. I believe it 7 was around the '99 time period, maybe longer than that, 8 Mr. Atkins, and there were -- 9 MR. CLOWE: In '99? 10 MS. KIPLIN: In 1999, maybe earlier. 11 MR. CLOWE: Yeah, I think it had to be 12 earlier, because I came on the Commission in November of 13 '98, and I do not recall that at all. 14 MS. KIPLIN: Then I'm off on the time, but 15 I do recall staff traveling to Corpus and meeting with the 16 charities. And we can go back and take a look at 17 transcripts because there was discussion in open meetings, 18 I'm thinking at least on two occasions during that period 19 of time where the matter was brought to the attention of 20 the Commission. And I believe the Commission -- this is 21 recall, and I could be completely wrong, but I believe the 22 Commission opted not to exercise whatever authority it 23 might have under the Bingo Enabling Act regarding price 24 regulation and price control. I think -- frankly, I 25 think, as I recall, the issues really centered around more 0025 1 practical aspects on how one would go about engaging in 2 that type of activity across the State when you did not 3 necessarily have similarly situated halls, charities, and 4 the like. But I'll be glad to go back and see what I can 5 glean from the transcripts and -- at the request of the 6 Commission, put it on the Commission agenda, if you'd 7 like. 8 MR. CLOWE: If you can do that, I think it 9 would be educational for the current Commissioners to have 10 the benefit of the knowledge that would come out of that 11 record, not that there's any inclination on my part to 12 examine that aspect or be involved in that, but since 13 Mr. Fenoglio brought it up, I would like to be educated 14 about where the Commission went at that time in regard to 15 that issue as it relates to the discussion we are having 16 here today. 17 MS. KIPLIN: I'll -- I'm sorry. 18 MR. FENOGLIO: And, Mr. Chairman, and Ms. 19 Kiplin, if I may, I think the request was purely for the 20 Corpus Christi area. I don't think that anyone has 21 requested a statewide price mechanism be put in place, but 22 it is what it is. And I'm not necessarily advocating 23 that, Mr. Chairman. 24 MR. CLOWE: And I'm not reacting positively 25 to the idea. It's just simply related to the idea that we 0026 1 are discussing -- 2 MR. FENOGLIO: Sure. 3 MR. CLOWE: -- that's evolving from our 4 Sunset Bill about how do the charities get more money. 5 And I'd just like to be educated on that aspect of this 6 problem as it was covered by a former Board and be made 7 aware of that as we look at this information and develop 8 facts today relative to the current Sunset Bill. 9 MR. ATKINS: Mr. Chairman, if I could, just 10 a little more background. I believe it was probably in 11 the '96 or '97 time period. Specifically, I seem to 12 recall that it was a time prior to changes being made to 13 the Bingo Enabling Act where the Director of Bingo 14 reported directly to the Commission. The Bingo Director 15 at the time reported to the Executive Director, and I seem 16 to recall the then Executive Director and then Director of 17 Charitable Bingo went to Corpus for a meeting with a 18 number of charity representatives in that area. I don't 19 know if there was a formal record made of that meeting. 20 But the specific provisions of the Act that are being 21 referred to are -- I believe are 2001.056 C through E that 22 reference the Commission's authority to develop or adopt a 23 price schedule. And I do recall one outcome of that. 24 There were questions about, do you set the face of the 25 card statewide at three cents per face, at seven cents per 0027 1 face, what. I will tell you it's my recollection that 2 it's not uncommon in other jurisdictions for there to be a 3 provision in the statute that doesn't set an amount that a 4 bingo card face can be sold at, but it does set a 5 requirement that the organization may not sell the card 6 face for less than they pay for it. 7 MR. CLOWE: Thank you. 8 Okay. Now, Phil. 9 MR. SANDERSON: Thank you, sir. The other 10 sheet that I provided you is over the last three years, 11 2002 to 2004, trying to determine exactly which number 12 you're interested in. And I think all of them are pretty 13 relevant. The first column is hold. And by hold what we 14 define that as is gross receipts from bingo minus the 15 prizes paid out. Then the adjusted gross is what the 16 statute defines as gross receipts minus prizes minus the 17 cost of goods sold. And that's where the 35 percent 18 number is calculated from. 19 MR. COX: The cost of goods sold is the 20 cost of -- 21 MR. SANDERSON: Paper, pull tabs, and the 22 lease payments for electronic devices. 23 MR. CLOWE: Okay. And no labor or other 24 related operating expenses? 25 MR. SANDERSON: That's correct. 0028 1 MR. CLOWE: Okay. 2 MR. SANDERSON: Then other income, there 3 are charities that hold both a conductor and a lessor 4 license. The majority of that other income is rent income 5 that they receive as being a lessor. Additionally, they 6 have interest that's earned on their bingo accounts, which 7 is not as large an amount. And then there's merchandise 8 prizes that are donated. The value of those prizes, 9 because the prize amount is reported under the prizes, so 10 we have to include that as part of their income. And then 11 that leaves the net revenue, which is all your receipts 12 minus all your expenses. And then the last column is the 13 amount that was distributed during that period of time. 14 MR. COX: Okay. So your question is which 15 of these do we think is relevant? 16 MR. SANDERSON: Yes, sir. 17 MR. COX: I think they're all relevant. 18 And I think the two you left off are also relevant, which 19 are ticket sales less prizes paid. 20 MR. SANDERSON: The regular gross receipts 21 and the prizes? 22 MR. COX: Yes. 23 MR. CLOWE: What you had to have to get the 24 whole -- 25 MR. SANDERSON: Yes, sir. 0029 1 MR. COX: The point that I have made in the 2 past was that -- however, if we emphasize that gross 3 receipts number, that ticket sales number, which is a 4 very, very big number, then it raises automatically the 5 question, why are distributions so low. Because if that 6 number were on here, it would be 700, 800, something like 7 that. But if you emphasize wins less losses, which is 8 what gambling organizations typically report as revenue, 9 you've got a number that people can look at and say, well, 10 they brought in 160 and they distributed 31, not bad. 11 MR. SANDERSON: Yes, sir. 12 MR. COX: Whereas, if they say they brought 13 in 800 and distributed 31, not good. So that's the point 14 that I was making. While I think they're all useful for 15 analysis purposes, the emphasis on the number that came in 16 after prizes paid out helps people have more reasonable 17 expectations as to what a charity making that kind of 18 money might distribute. 19 MR. SANDERSON: And I think that if you 20 look at the whole column and you can see for 2002, 3 and 4 21 that the differences from year to year are small. 22 MR. COX: Uh-huh. 23 MR. SANDERSON: And when you look at the 24 gross receipts, which is the number that we have been 25 reporting over a period of time, it's gone from like 550 0030 1 million to 575 to 600 million over that same period of 2 time. 3 MR. COX: Yes. 4 MR. SANDERSON: And the bottom line is that 5 they've still got the same amount of dollars to work with, 6 even though gross receipts have gone up. 7 MR. CLOWE: Good. 8 MR. ATKINS: So can I -- Commissioner Cox, 9 based on your discussion on the work Phil's done to 10 develop hold, et cetera, and the request for additional 11 information that you made earlier, does that need to be 12 incorporated in that earlier request? I think you'd asked 13 for net revenue. 14 MR. SANDERSON: (Nods head.) 15 MR. COX: All the numbers that I'm 16 interested in but for ticket sales and prizes are on this 17 page. 18 MR. ATKINS: Okay. 19 MR. SANDERSON: Yes, sir. 20 MR. COX: And I don't know how you report 21 those. The lottery reports revenue different from the way 22 casinos report revenue. If the lottery reported revenue 23 the same way casinos reported it, we'd be reporting 24 something like a billion, a billion four, a billion five, 25 something like that because we'd be reporting not ticket 0031 1 sales at the top line, we'd be reporting ticket sales less 2 prizes paid. So you still have to capture all those 3 numbers. And my point is not that we quit reporting and 4 looking at ticket sales, but that the industry would be 5 well served to put the spotlight on the net sales to sales 6 less prizes to generate more reasonable expectations as to 7 what they might be distributing. 8 MR. SANDERSON: Yes, sir. There are a 9 couple of items that we do receive information on the 10 quarterly reports that aren't on here. And that's 11 primarily the prize fees that are withheld and the prize 12 fees that are paid. And I didn't include those amounts 13 because it is a pass-through. It should be a wash. They 14 collect it and they disburse it. As well as, 15 organizations are allowed to request a transfer of funds 16 between their general account and bingo account and 17 they're required to pay that back, so, once again, that's 18 considered a pass-through. 19 MR. COX: Okay. 20 MR. ATKINS: And one last thing -- 21 MR. CLOWE: Well, let me make a comment 22 while we are right in this vein of the conversation. I 23 think there's a bit of history here I'd like to give you 24 and it's just an observation that I've had since I've been 25 on this board. Relative to the prize payout and how it 0032 1 affects the net proceeds, and I know your experience is 2 much broader than mine by far, but what little experience 3 I've had with it, the Legislature reduced the prize payout 4 in the lottery at one point in time. 5 MR. COX: Yes. 6 MR. CLOWE: And it had a dramatic effect in 7 my opinion on the attractiveness of the lottery and the 8 net proceeds. And the Legislature at a point in time 9 restored that payout and it seemed to have a very positive 10 effect. And so as we focus on this, and I -- and as we 11 continue to focus on lottery operations, I want to be 12 mindful for myself of -- that prize payout is so critical, 13 and I think I'm seeing it in the instant tickets. 14 MR. COX: Sure. 15 MR. CLOWE: And I'm sitting at your knee 16 and learning now as we go through all this, but is -- do 17 you agree with that observation and what would your 18 comment be on that? 19 MR. COX: Well, I can agree or disagree 20 depending on what the circumstances I believe are. In Las 21 Vegas we learned in the '80s with slot machines that the 22 more you give back, the more you make. 23 MR. CLOWE: Generally. 24 MR. COX: With slot machines in Las Vegas. 25 MR. CLOWE: Okay. 0033 1 MR. COX: The idea being that if you raise 2 the payback to the player from 80 percent to 95 percent, 3 you're generally not giving him anything other than more 4 time at the machine. Because you're going to win what he 5 brought unless he wins a big jackpot. So the idea was 6 there, don't worry about the payback percentage, look at 7 your income. And in Las Vegas they don't report coins in, 8 less prizes paid equals revenue. They start at revenue. 9 So in that particular instance, it was proved to be true 10 and continues today to be proven true that the more you 11 give back, the more you make. Now, does that apply to 12 bingo? I don't know. Does that apply to the lottery? I 13 don't know. 14 MR. CLOWE: Thank you. That's very 15 helpful. And I think it's in agreement with the point 16 that I made about my experience here at the lottery. And 17 I don't think we should have this discussion without also 18 commenting on the fact that we here are concerned about 19 the correctness of what we do relative to the population 20 aspect and that we do not want to make these games of 21 Texas so attractive that people do not play responsibly 22 and we are responsible for directing people into gaming 23 that, I don't know how you say, should not be doing it, 24 because we don't have that right to make that judgment and 25 that determination. But we want to be mindful of the fact 0034 1 that there are people who don't play and people who don't 2 want to play and don't want others to play and conduct our 3 operations in good balance and good sense. So it's a 4 little bit different than being a commercial operation. I 5 -- I assume there are those sorts of concerns in a private 6 business entity, but this is a public entity, so help me 7 with a comment on that. How do you feel about that? 8 MS. KIPLIN: May I interrupt? I'm trying 9 to track what item you all are on. Are you still under 10 bingo? 11 MR. CLOWE: I think we are still on bingo, 12 and I think we are talking about the distribution of bingo 13 funds, and it relates back to Mr. Fenoglio's comment about 14 controlling the pricing, and therefore, controlling the 15 prize payout. I think it's all relevant. 16 MS. KIPLIN: Thank you. 17 MR. COX: I don't know. It's certainly an 18 important point. And I don't know where you draw the 19 line. Is it our responsibility to generate as much money 20 as we can for the school children of Texas while operating 21 within the lottery act or should we moderate that, taking 22 into consideration social issues like you raised? It's a 23 wonderful question. I don't have an answer. 24 MR. CLOWE: Well, I think the fact that we 25 brought it up and made it a part of this discussion is 0035 1 very positive and I appreciate indulgence while we cover 2 this because as we get into things like the demographic 3 study and the issue is raised about who are the players 4 and, you know, are they the right players, and do we have 5 the right to determine who are the right players and the 6 wrong players, that's where this Commission wants to be 7 mindful of those kinds of considerations. And again, in 8 bringing this discussion to a close, I want to state that 9 we are going to follow the law, whatever the Legislature 10 gives us and -- and be very mindful of that. But within 11 the rules that we make, we want to make rules that are 12 correct and profitable. And again, this all relates back 13 to the Sunset Bill and where we are going on this issue 14 with particularly bingo. 15 Okay, Phil. Take another whack at it. 16 MR. OLVERA: And, Phil, before you do that, 17 let me interject just one minor question. And if this has 18 been addressed and I just didn't catch it, forgive me. 19 But if I recall correctly, and I'm shooting from the hip 20 here, in our November meeting prior to meeting with the 21 Bingo Advisory Council, we had some statistics that were 22 confusing to me and that are confirmed, for example, in 23 item -- in the year 2002 where you have a figure in 24 distribution that exceeds net revenue. And I don't -- I 25 don't see how that's possible, but -- or at least explain 0036 1 that to me. 2 MR. SANDERSON: The organizations right now 3 as of the end of December have around $26-and-a-half 4 million in their bingo accounts. 5 MR. CLOWE: Surplus accounts. 6 MR. SANDERSON: In their surplus. So there 7 are times when they may distribute more because it's 8 carried over from a previous year. 9 MR. OLVERA: Okay. 10 MR. SANDERSON: Or they may distribute less 11 one year because it ends up being distributed the next 12 year. In this -- for example, in 2004, they showed a net 13 gain in their bingo accounts of $1.6 million, I believe. 14 So that's why the distributions are probably less in 2004 15 than what they actually distributed. 16 MR. CLOWE: And it's an excellent question 17 because that's one of the comments, if not a criticism, 18 that's been made of these surplus accounts; are they 19 excessive. And I think the bingo industry will tell you 20 that not only have they been trending, but with any year, 21 year to year, the quarters will vary. And some are more 22 lucrative, if that's the right word, than others, and that 23 they use those surplus accounts to pave over, if you will, 24 when they don't have operating income and they want to 25 make charitable distributions. That's what I've been 0037 1 told. 2 MR. SANDERSON: That is correct. There's 3 areas of the state that are cyclical. The Valley, for 4 example, they are real slow during the summer months, but 5 they pick up in the winter months. And so they tend to 6 hold money over, make sure they get through that slow 7 period and then they distribute it, you know, two quarters 8 later probably, somewhere in there. 9 MR. OLVERA: Okay. 10 MR. CLOWE: Good question. Thank you. 11 MR. FENOGLIO: And Commissioner Olvera, 12 just briefly, most halls statewide will lose money in the 13 summer months, just a fact of nature. Kids are home for 14 the summer and so the parents aren't coming or 15 grandparents or whoever is playing. 16 MR. COX: And looking, Phil, at the 17 proposed legislation that Mr. Fenoglio pointed out to us, 18 is one-quarter operating expenses for those real seasonal 19 periods, is that going to be enough? 20 MR. SANDERSON: I was thinking that it was 21 four times that. I can't -- I'll have to go back and 22 reread the language, but one-quarter probably would not be 23 enough, no, sir. 24 MR. COX: Of course, I think Mr. Fenoglio 25 also said that the post-legislation would give the Lottery 0038 1 Commission the authority to make exceptions and let them 2 keep more if they justify it. 3 MR. SANDERSON: Yes, sir. 4 MR. FENOGLIO: And it is the average bingo 5 expenses per quarter for the full year -- for the fourth 6 quarter basis. 7 MR. COX: Okay. 8 MR. FENOGLIO: It's not -- if I said that, 9 I misstated. 10 MR. COX: Oh, I was just -- you didn't say 11 it. I read it. So I read it wrong. Thank you. 12 MR. SANDERSON: One other thing I'd like to 13 add is starting with the first quarter of 2005, we have 14 implemented a new quarterly report that will give us a 15 more detailed breakdown on the operating expenses instead 16 of just claiming them as other expenses, so we'll be able 17 to see, hopefully a year from now, where salaries and, you 18 know, janitorial services, and advertising, where those 19 numbers fall into their expenses. 20 MR. ATKINS: And I believe also that report 21 will have the organizations reporting in terms of net 22 proceeds. 23 MR. SANDERSON: (Nods head.) 24 MR. CLOWE: Any other question? Anything 25 further? 0039 1 MR. SANDERSON: No, sir. 2 MR. CLOWE: Thank you all very much. This 3 is very helpful, and I think the Commission is now going 4 to take more time to study this. And, Counselor, if 5 you'll see that this is a continuing item on the agenda so 6 that we can bring it back up and discuss it as we wish to, 7 we'll keep pursuing this. Thank you both very much. 8 Thank you, Billy. 9 MR. ATKINS: Thank you. 10 MR. CLOWE: Anything further on this item 11 on the agenda? We'll move then to Item III, Report, 12 possible discussion and/or action on lottery sales, game 13 performance and trends. 14 Mr. Deviney, are you prepared to testify? 15 MR. DEVINEY: Yes, sir. I've got it all 16 straight now. 17 MR. CLOWE: Okay. Good. 18 MR. DEVINEY: We don't have a report for 19 you this week other than we have prepared one document. I 20 don't know, Reagan, do you want to cover that or do you 21 want me to comment on it? 22 MR. GREER: No. I want you to walk them 23 through the document, then I would like to make some 24 points. There was a handout that Lee provided you just a 25 few moments ago in reference to a follow-up to the 0040 1 conversation we had in our meeting on the 28th in 2 reference to net win and net revenue. 3 MR. DEVINEY: Commissioners, for the 4 record, I'm Lee Deviney, Financial Administration 5 Director. And what we have provided for you, and I think 6 the genesis of this report was a request Commissioner Cox 7 had made. We can present this to you on a monthly basis 8 if you like this. This is a comparison or report, 9 year-to-date report on net win, which is a defined term. 10 It's sales less prize expense. It's something that you 11 can use at -- you know, through time to measure the 12 performance of the lottery. And then below that we have 13 calculated net revenue as we use that term in State 14 government to get down to the bottom line of what we 15 transfer to the Foundation School Fund. So you can see 16 both of -- both of these measures on one page and then -- 17 and then track them through time. 18 The only comment I would make on -- on net 19 revenue is that there is some variability in net revenue. 20 Specifically, the last line item that reads -- well, 21 actually -- yeah, it reads, "Statutory administration 22 appropriation up to 4.30001 of sales." You'll find that 23 probably in about the month of May or June that that 24 number is going to decline because we will have fully 25 funded our Legislative appropriations. So we won't draw 0041 1 any more money away from sales to fund that appropriation 2 until another appropriation technique called Rider Four 3 kicks in, and then we will start drawing some money again. 4 But if you look at the line above that, that's the 5 percentage that we draw down each month to fund the 6 lottery operator contract. If you add those two bottom 7 numbers, it adds up to 7 percent. Well, what will happen 8 is after we fully fund our appropriation, instead of 9 drawing down 7 percent each month from sales, it will drop 10 to zero until Rider Four kicks in, and then it will draw 11 down 4.19 percent which -- from which we will fund any 12 additional due to the lottery operator through the end of 13 the year. What that will mean is the net revenue 14 percentage should increase towards the end of the year is 15 what it amounts to. 16 MR. GREER: And, Commissioners, 17 specifically I asked Lee to bring this up today to get 18 your feedback. I think that we had a good discussion on 19 this at our last Commission meeting and that this might be 20 a vehicle to continue to keep you better informed on where 21 we are. And I'd just like your feedback. 22 MR. COX: Lee, I think I've got a couple of 23 cosmetic suggestions. You've captured what I wanted -- 24 what I talked about and certainly "win" was the term I 25 used. I think that's a little more commercial term than 0042 1 we might want to use here. 2 MR. DEVINEY: All right. 3 MR. COX: So I would suggest that maybe we 4 call the top line "Ticket sales." I think that's what it 5 is. 6 MR. DEVINEY: Okay. 7 MR. COX: And then the next one I have a 8 question on. Is that prizes paid or is that prizes 9 accrued? 10 MR. DEVINEY: That is what we book as prize 11 expense. 12 MR. COX: Okay. But is that cash basis or 13 accrual basis? 14 MR. DEVINEY: This is cash basis. 15 MR. COX: So the unclaimed prizes -- 16 MR. DEVINEY: I'm sorry. I'm sorry. I'm 17 confusing this with a transfer memo. It's accrual basis. 18 MR. COX: Okay. It's accrual basis, so 19 then some portion of that becomes unclaimed and that's an 20 offset down below at some point. So I would -- I think 21 prize expense is probably the proper -- if it had been 22 cash, I was going to ask you to call that prizes paid. 23 But I think prize expense is proper. And then that "net 24 win" line, I think I would call that "lottery revenue," if 25 that isn't confusing to people, or something like that as 0043 1 opposed -- 2 MR. CLOWE: Maybe gross revenue. 3 MR. COX: Maybe -- I think probably if 4 somebody wanted to call something "gross revenue," they'd 5 call that "sales" not the "gross revenue," Tom. 6 MR. CLOWE: Okay. 7 MR. COX: So let's work for something 8 that's less commercial sounding than "net win" number, but 9 is not confusing either. So lottery something. Lottery 10 revenue or -- it's really more of a net revenue than a 11 gross revenue, but I don't like net. Let's see what -- if 12 anybody else is doing this around the country, see what 13 they're calling that. 14 MR. CLOWE: I think net revenue is the best 15 one. 16 MR. COX: But then we have another net 17 revenue down below, so that's why I was thinking lottery 18 revenue. But make that a place holder and find something 19 that -- if there's anybody else in the industry that 20 reports this way, see what they're calling it. Maybe 21 there are some ideas out there. But this captures the 22 numbers that I wanted to see. 23 MR. DEVINEY: Okay. And one last comment 24 I'd make on this is when you see this going forward, you 25 also see the monthly transfer memo. And they will not tie 0044 1 out. The last line net revenue of the State as calculated 2 here is not going to tie. It will be close, but it's not 3 going to tie to what we show on the cash basis monthly 4 transfer memo. 5 MR. CLOWE: And then relative to this, 6 Gary, prior to the current GTECH contract, what was the 7 percentage paid to GTECH, if you recall offhand? 8 MR. GRIEF: I want to say -- Ben, do you 9 recall exactly -- 10 MR. NAVARRO: 3.05 starting 2002. It was 11 2002 -- 12 MR. CLOWE: Come on mic, if you will, 13 please, so we can get that on the record. 14 MR. GRIEF: This is Ben Navarro -- 15 MR. NAVARRO: For the record, my name is 16 Ben Navarro. I'm the Accounting Reporting Manager for the 17 Texas Lottery Commission. Prior to the new contract where 18 it was changed to 2.699 percent, the percentage paid to 19 GTECH was 3.05 percent of sales. 20 MR. CLOWE: That's my recollection, and 21 therefore, the net revenue to the State increased after 22 that contract was negotiated, which was a benefit to the 23 Foundation School Fund. And in light of that, Lee, I'd 24 like to see us go back some period of time, whatever 25 number of years is appropriate, three to five would be 0045 1 what I would suggest, so we can measure this net revenue 2 to the State in light of historical contributions to the 3 FSF and keep tabs of it that way as well as going forward. 4 Thank you very much. 5 MR. DEVINEY: Thank you. We can present 6 that at the next meeting. 7 MR. CLOWE: Okay. 8 MR. GREER: As a follow-up on this, we are 9 going to -- that discussion, we are going to include this 10 in our future conversations in reference to sales so that 11 we can have a little better picture painted each month. 12 And I wanted also to reinforce the fact that Mike 13 Hernandez and Mike Anger are working on a presentation 14 that will better highlight where we are on the instant 15 side and the on-line side to go into some of the 16 conversation we had in reference to prize payout and other 17 issues that came forward in the last Commission meeting 18 and we'll roll that out at our next meeting following 19 this. 20 MR. CLOWE: Very good. Anything further on 21 this item? 22 MR. OLVERA: No. 23 MR. COX: No. 24 MR. CLOWE: We'll move to Item No. IV then, 25 Report, possible discussion and/or action on Mega 0046 1 Millions, including possible contract amendment and/or 2 proposal of amendments to 16 TAC 401.315 relating to Mega 3 Millions on-line game. 4 Mr. Greer. 5 MR. GREER: Thank you, Mr. Chairman. Today 6 we are going to talk further about the possibility of 7 moving forward with a change to the Mega Millions game 8 with reference to California having an interest in joining 9 the game. We touched on it last month in detail, and we 10 do have that presentation available if you need to refer 11 back to it, some of the reasons that California looked at 12 Mega Millions and also the reasons that we consider it to 13 be a benefit overall from a staff perspective to have 14 California enter the game. Just as a quick review, 15 obviously you bring in a large state like California, 16 there's higher population which we are anticipating means 17 more sales. With increased sales, you have increased 18 jackpots because the sales have a major correlation to the 19 way that the jackpots are set. We also in this review of 20 the California scenario looked at a matrix change, which 21 we are going to discuss in detail here in our agreement 22 and some other things that we are going to bring forward. 23 And in that prize tier level, the second tier and the 24 third tier level will be raised to 250 and $10,000 from 25 their current 175 and $5,000. We felt that was a benefit 0047 1 from a marketing perspective, because of the Megaplier, 2 that will allow us at the 250 level to potentially see 3 some million dollar winners which we haven't been seeing 4 in a second tier level before. To put that in 5 perspective, since we've joined Mega Millions, 16 6 individuals have Megaplied that have won that second tier 7 level, and nine of those won the top prize level of 8 $700,000. So we'll see potentially an increase from the 9 seven to the million-dollar bracket, and we think that 10 will be a positive for the players, as well as for the 11 potential of allowing players more information on the 12 Megaplier feature. 13 There's also increased revenue that we discussed 14 in reference to the matrix change of approximately $67 15 million over the next five years that came forward through 16 the cost-benefit analysis that our financial division did. 17 With California entering the game and not making a matrix 18 change it shows that we would have an increase of about 19 $8 million over the short run, but in the long run it 20 would decline. And with all games, the freshness and the 21 newness of the game is something we are always looking at. 22 Adding California does bring a new level of excitement in 23 because of these things that I've mentioned. I want to 24 talk about it some more, but I'd like Robert to start into 25 his presentation, because I felt it was important to bring 0048 1 you up to date on where we are currently with our Mega 2 Million sales and revenue to the State. 3 MR. TIRLONI: Thanks, Reagan. Good 4 morning, Commissioners. For the record, my name is Robert 5 Tirloni. I am the Products Manager for the Texas Lottery. 6 And as Reagan said, I have a brief presentation this 7 morning just to give you some up-to-date facts and figures 8 on the Mega Millions game in Texas. These numbers are 9 from when we started in the game in December of 2003 and 10 they are through the drawing that took place last Friday. 11 And you see our Mega Millions draw sales are slightly over 12 $278 million. Our Megaplier draw sales, which are still 13 accounting for almost 19 percent of the total, are at just 14 under 65 million, giving us a total on the game of 15 slightly over $343 million. And you see the corresponding 16 revenue, Mega Millions revenue just under -- I'm sorry, 17 just over 105 million and the Megaplier revenue also just 18 over 30 million, giving us a total of 136 million. 19 Our average Mega Millions jackpot since we have 20 been participating in the game is 56.4 million. And we 21 experienced a $290 million jackpot since we joined in 22 December. We have had 22 drawings where the jackpots have 23 been at least 100 million. And we have had 58 drawings 24 where the jackpots have been at least 50 million. 25 Now in terms of winners, we have had over 0049 1 6.5 million winners in Texas. That translates to over 2 $112 million in prizes. The winners who have Megaplied 3 come out to about 1.5 million, and that translates to over 4 26 million in prizes. The new information on this slide 5 is the red two that you see for jackpot Texas winners. 6 And I'll talk about that more in a second. 7 Reagan just mentioned the second tier prize, 8 that $175,000 prize. We have had 100 of those. And as I 9 said, these were through Tuesday. That number is actually 10 -- I'm sorry, last Friday so that number is now actually 11 101. The 16 is correct. We have had 16 of those second 12 tier winners who Megaplied. And as Reagan said, nine of 13 those 16, the Megaplier number was four, and so those 14 players received $700,000 as opposed to the base prize 15 which is 175,000. 16 MR. COX: Robert? 17 MR. TIRLONI: Yes, sir. 18 MR. COX: Let's go back a slide if we can. 19 Okay. We got 18.9 percent of draw sales in Megaplier. 20 MR. TIRLONI: Uh-huh. 21 MR. COX: So let's say -- we'll call it 22 19 percent of the people who bought a ticket bought a 23 Megaplier. Okay. Let's go to the next one. And 24 23 percent of the winners had bought a Megaplier ticket, 25 but only 16 percent of the second tier winners. Is there 0050 1 anything statistically significant going on there? 2 MR. TIRLONI: Not that I know of off the 3 top of my head, to be honest with you. 4 MR. COX: Would you have your statistician 5 take a look at that and see if there's a sample big enough 6 yet to say somethings out of whack there? 7 MR. TIRLONI: I will absolutely have 8 Dr. Eubank look at that for us. 9 MR. CLOWE: And, Robert -- 10 MR. TIRLONI: Yes, sir. 11 MR. CLOWE: -- on this game, we are still 12 at a low per capita level, are we not? 13 MR. TIRLONI: That's correct. That's 14 correct. Our average per capita increases as the jackpot 15 increases. And I have those stats for you if you would 16 like to know what they are. 17 MR. CLOWE: No, I just -- I want to make 18 certain my recollection is correct. Compared to many 19 other states, we are still at a low per capita involvement 20 as far as this game. 21 MR. TIRLONI: That's correct, sir. 22 MR. CLOWE: Thank you. 23 MR. TIRLONI: As I just mentioned a moment 24 ago, Texas has had a second Mega Millions jackpot ticket 25 sold. That ticket was sold in Rowlett at the Dal Rock 0051 1 Grocery on the Tuesday, March 1st drawing. The advertised 2 jackpot was $112 million. So besides this being the 3 second jackpot ticket sold, it's also -- the jackpot in 4 both cases has been over $100 million. The ticket was a 5 Quick Pick. The player selected cash value option and 6 that cash value is approximately $68.2 million. The Dal 7 Rock Grocery is eligible for a $1 million retailer bonus. 8 And my staff is in contact with and working with a 9 potential claimant at this point in time. 10 MR. COX: That's going to make the Dal Rock 11 Grocery's year. 12 MR. CLOWE: They should close up after 13 this. 14 MR. TIRLONI: Yes. The retailer is 15 extremely happy. 16 MR. OLVERA: Is there a set percentage on 17 the cash value option? How is that calculated? 18 MR. TIRLONI: Lee? Lee Deviney is more of 19 the expert in that area than I am, Commissioner Olvera. 20 I'll let him explain that to you. 21 MR. DEVINEY: Commissioner Olvera, I'm Lee 22 Deviney, Financial Administration Director. The 23 advertised jackpot is an annuitized value. The present 24 value of that is the cash value. And that is calculated 25 when we do the -- when we set the jackpot or the jackpot 0052 1 is set, there is a number that is calculated. It's called 2 the annuity factor or the -- and so anyway, if you take 3 the -- if you take the factor and multiply it by the 4 amortized value, then you get the cash value. But it's 5 determined in advance at the time we set the jackpot. Now 6 in the event that we can fund up the advertised jackpot to 7 the next fully funded million, then that amount you would 8 still multiply by the interest factor to get your cash 9 value. 10 MR. COX: Lee, in simpler terms, is it not 11 the present value of a future annuity and calculated -- 12 MR. DEVINEY: That's correct. 13 MR. TIRLONI: Moving forward. We have a 14 status report update. We showed the slide at the February 15 28th meeting and we are putting it back up here for the 16 discussion that will now take place. 17 MR. GREER: I'd like to -- we brought this 18 back up. The Chairman -- we discussed this last week and 19 the Chairman and I had an opportunity to re-look at this 20 through this whole situation. I just wanted to reinforce 21 some of the headway that we have made and then it also 22 segues well into the fact that I'm going to ask Andy, 23 who's up here, to walk through the agreement and be sure 24 that we are all clear on some of the things that have 25 happened in that area as far as the agreement with Mega 0053 1 Millions is concerned. 2 The first point which is the audit separate 3 committee versus the subcommittee, we have an opinion that 4 from an auditing perspective there is a need for a 5 committee to be set up to look at the different audit 6 standards around the country. And the directors of Mega 7 Millions did vote in Georgia last year that we would 8 pursue that idea first off with a subcommittee. That's 9 where that stands right now. One of the things that you 10 will see and we'll be pointing out to you as far as the 11 language and the documents that we are going to look at 12 today, there was an issue from our perspective on the fact 13 that the auditing language needed to be cleaned up some, 14 i.e., a term in the accounting world at a station and the 15 use of which group and how that was going to be measured, 16 that has been included in the new documents and we'll be 17 touching on that. 18 We had another concern in reference to the 19 disaster liability language. And specifically, with the 20 potential of California coming into the game, and not to 21 be negative but to be realistic, you're looking at a state 22 that does have its share of disasters from an earthquake 23 perspective or mudslides or there's all kinds of things 24 that have gone on out there recently that we tracked. So 25 we were really wanting to get some language in there that 0054 1 would give some clarity if there was a disaster as to how 2 the jackpot levels would be set. And Andy will be walking 3 through that in a section of the agreement as well as a 4 rule. The ticket validation issue continues to be one 5 that we're monitoring. That issue has been referred to 6 the finance committee of Mega Millions. And currently, 7 there are five different things that have been outlined as 8 far as validating a ticket, and you have to address three 9 of the five before you can move forward in the validation 10 process. We hopefully will be making progress on trying 11 to bring that three figure to a two. Because of the 12 technology we have in our State, we don't need to do quite 13 as many steps, but that is still in the works with the 14 Mega Millions group. 15 The next point is the second tier prize 16 structure and liability. This is a point that we 17 discussed last month that was brought for right up-front 18 because this was an issue that we had when we got into 19 Mega Millions. California is asking for and, in the 20 documents you will see, receiving an exception because of 21 the fact that California law prohibits them from entering 22 into any type of a scenario that doesn't strictly pay 23 pari-mutuel prizes. And as we have discussed in our Mega 24 Millions game, they are fixed prizes. So we can talk 25 about that some more, but that's where that scenario is 0055 1 and how it affects this situation. 2 And then the last point is jackpot management. 3 Potentially, with the addition of California and the added 4 population, we are going to see more high jackpots. You 5 don't know because they're just random, but working with 6 the statistician and some other things that we've seen, 7 potentially we could see some numbers that are 8 unprecedented in the lottery industry. So we are going to 9 continue to work with the finance committee on jackpot 10 management. The beginnings of that are in this new 11 agreement that we worked through in reference to how the 12 jackpots can be set and oriented towards the disaster 13 scenario, but there is much more we can do in that vein. 14 So those are points -- that's not all the 15 things, but those are some of the key elements that I've 16 been working on since we have entered into the Mega 17 Millions game over a year ago. The directors continue to 18 be focused toward making the game better and I'll continue 19 to work toward bringing these issues up in future 20 meetings. I just wanted you to know where we were on 21 that. 22 MR. CLOWE: Reagan, in addition to these, 23 what other wants, needs or problems which you mentioned 24 are you addressing? 25 MR. GREER: Specifically, and I'll defer to 0056 1 Andy because from an agreement perspective, there was some 2 language issues, I think, that we thought might, you know, 3 still be out there. But those are the ones that came off 4 the top of my head. 5 Robert, can you help me with any other major 6 issues that we are looking at? 7 MR. TIRLONI: I don't know of any other 8 major issues than these at this point in time. 9 MR. CLOWE: What about you, Andy? 10 MR. MARKER: Good morning, Commissioners. 11 For the record, my name is Andy Marker. I'm the Deputy 12 General Counsel for the Lottery. With regard to the -- 13 with California lottery joining Mega Millions -- 14 MR. CLOWE: Yes. My problem's in general. 15 MR. MARKER: I was trying to give you some 16 background. The direction from the party lottery 17 directors was to address those immediate concerns that 18 needed to be resolved before the California lottery could 19 start selling Mega Millions tickets. Some of those issues 20 -- most of those issues have been addressed. There may be 21 some other issues that Texas has identified. Reagan 22 mentioned the audit committee, also ticket validation 23 requirements. Those have been referred to subcommittees. 24 Specifically with regard to ticket validation, there is a 25 Mega Millions operations committee and it was agreed that 0057 1 that operations committee would look at the ticket 2 validation requirements with an auditor perhaps making 3 changes at a later date. Other than -- from a legal 4 perspective, there are no outstanding issues that I'm 5 aware of in terms of the documents that you have in front 6 of you. 7 MR. CLOWE: Thank you. 8 MR. COX: Mr. Chairman? 9 MR. CLOWE: Sir. 10 MR. COX: Andy, I've also heard that the -- 11 there may be some governance issues. Are those -- is any 12 progress being made or are those even a concern to anyone 13 other than Texas? 14 MR. MARKER: Yes, Commissioner Cox. And 15 you will find in what I provided to you this morning 16 copies of the new agreement that adds the California 17 lottery. And you'll find in the multistate -- that the 18 amended multistate lottery agreement, this issue was 19 raised by the New York lottery with the general counsel 20 and changes have been made to the multistate agreement, 21 specifically to Section 3 -- 3.3 that now requires the 22 party lottery directors appoint a lead director and charge 23 that lead director with maintaining and taking additional 24 minutes and recording all of those. And so this is a 25 shift away from -- in the past Mega Millions has had 0058 1 elected officials and so they've had a president and a 2 secretary. This moves more toward improving recordkeeping 3 and trying to address some governance issues with -- a 4 good deal of Mega Millions business is transacted through 5 via conference calls. In terms of regular meetings, they 6 may have quarterly, sometimes not that often, but actually 7 face-to-face meetings. And the idea was to try and make 8 sure we can build the record so that all the party 9 lotteries know what notes have been taken and what issues 10 have been addressed. 11 MR. COX: That sounds like an excellent 12 step. Now, one of the things I'm concerned about, if I 13 understand it correctly, is that any three directors can 14 increase the advertised jackpot. 15 MR. MARKER: The finance procedures 16 currently provide that a minimum of three party lottery 17 directors must approve an advertised jackpot. That -- the 18 procedures that you have in front of you increase that 19 number to four. In terms of increases in the jackpot, 20 that would still be correct. The new provision that has 21 been added that Reagan mentioned, disaster liability, that 22 was the basis for it. The language that, you know, apply 23 in finance procedures does not reference a disaster. It 24 really goes to any instance where the party lotteries 25 could not fund an advertised jackpot by at least 0059 1 $12 million. And so there would be an automatic trigger 2 if sales came up more than $12 million below the 3 advertised jackpot and this trigger would kick in to where 4 the amount that would be paid would be the lower by the 5 advertised jackpot plus -- excuse me, lowered by the 6 actual sales plus $12 million for the advertised jackpot 7 itself. 8 MR. COX: So looking again at that three or 9 four that could increase the jackpot, is that a designated 10 group or is that any three? 11 MR. MARKER: That is any three -- currently 12 any three party lottery directors. And once this 13 agreement is signed, it would be any four directors. 14 MR. COX: So is it then possible that four 15 states could, excluding the other eight, do something 16 irresponsible? 17 MR. MARKER: There's nothing to 18 specifically address that. What the finance procedures 19 provide now is that there are two weekly calls on Tuesday 20 and Friday when the advertised jackpot is set. It does 21 contemplate that the party lottery directors -- the party 22 lotteries can compare sales forecasts at any time for 23 possible increases. The trigger that I mentioned only 24 goes to decrease the jackpot. But to address your 25 question, there is no prohibition against any four or more 0060 1 directors voting to increase an advertised jackpot. 2 MR. COX: Outside of the twice weekly 3 meetings? 4 MR. MARKER: Correct. Because they could 5 compare sales forecasting at any time. 6 MR. COX: Reagan, are you comfortable with 7 that? 8 MR. GREER: What has been taking place up 9 to this point has been that we do have Tuesday and 10 Friday -- today there will be a call and finance will be 11 on, I'm sure, because I'm in here. But the scenario is 12 that each state is required to either have their director 13 on or their finance director on to report what's been 14 going on in their state and come to some kind of consensus 15 as a finance committee before the directors ever vote on 16 it. That's based on sales and a very conservative 17 perspective. So in the year-plus that we have been in, it 18 has not been an issue. There has been times, I will say, 19 it has been interesting, but everybody has busy schedules, 20 and there may be only three directors, me being one of the 21 three. And that we come together based on the finance 22 committee's recommendation to recommend what the jackpot 23 roll will be up to. Other times we may have eight. 24 Sometimes we have all the directors on. It a lot of times 25 just depends on the weather, but what I can tell you is 0061 1 from a comfort level perspective, currently what has taken 2 place over the last year-plus has worked well for us 3 because there is a checks and balances in there, because 4 the finance committee, which is made up of all the finance 5 directors of the states, get involved in making a 6 recommendation. 7 MR. COX: And that's how it works, but what 8 I understood Andy to say was that it doesn't have to work 9 that way, that any four could go crazy without informing 10 the others and just as a group change the jackpot. Did I 11 hear you right on that, Andy? 12 MR. MARKER: What the agreement provides is 13 that it takes a minimum -- what's proposed is it would 14 take a minimum of four directors to approve jackpot, 15 advertised jackpot. And outside of the Tuesday and Friday 16 weekly calls, it does say that the party lotteries can 17 compare sales forecasts at any time as agreed for possible 18 increases in the grand jackpot prize amount. 19 MR. COX: And so four could get together 20 outside of these twice-a-week meetings and change the 21 jackpot? 22 MR. MARKER: There may be other issues in 23 terms of the on-line gaming systems and how they would 24 actually affect that. But, yes, any -- party lottery 25 directors can confer at any time, and again, it only takes 0062 1 a minimum of four to set a jackpot. 2 MR. COX: I sure would like to see a 3 provision that says the jackpot can only change at those 4 twice-a-week meetings or at some other meeting which every 5 lottery director is informed of and has an opportunity to 6 participate in. Maybe that isn't for this document, but 7 I'd sure like to see that on our agenda. 8 MR. GREER: Well, and I will tell you when 9 it has happened other than a Tuesday or Friday has been -- 10 had some of those really high jackpot levels that they ask 11 for a follow-up call. And maybe like if it's on a Friday 12 call and if we roll, that on Monday we get back together, 13 which we have done, to increase the jackpot. Because what 14 we are looking at is a scenario when you're paying 15 advertised sales, you want to be, you know, conscious of 16 that, so you're looking at the potential of -- let's say 17 sales are more than we thought, we might raise the jackpot 18 another $5 million, which we are going to pay anyway and 19 so you may as well get the word out on it. I understand 20 what you're saying and we will, you know, continue to 21 monitor that issue. But if they go crazy, I'll obviously 22 be bringing you all into the loop. But so far that hasn't 23 happened because we all have a vested interest in staying 24 conservative on this because it would give the game a 25 negative connotation and we don't want that. 0063 1 MR. COX: And if in those high jackpot kind 2 of situations the group were to delegate it to four 3 particular ones, then I would have no problem with that. 4 I would just like for it to be a forum. 5 MR. GREER: Yes, sir, I understand. And 6 all I can tell you so far, like I said, is that it's 7 worked well. Each of the directors and the financial 8 directors have taken this very seriously and get on the 9 calls and it's been done in a way that I think we can look 10 you in the eye and say it's worked well so far. If 11 there's a problem down the road, we'll certainly bring it 12 to your attention. 13 MR. COX: Okay. 14 MR. GREER: Can we turn the lights on? I 15 think that this part of the -- what we wanted to 16 accomplish was just to bring you the most current 17 information. We can -- 18 MR. CLOWE: Before you get into that, 19 Reagan, I think, you know, as we review this and you're 20 going to bring a proposal to us, this is an opportunity 21 for us to examine our relationship with this game and pick 22 at it, if you will. And we brought up this issue -- or 23 Commissioner Cox has mentioned governance. And your 24 explanation was that New York has brought it up and now 25 there's going to be a change. My reaction is why did New 0064 1 York have to bring it up? Hadn't we been talking about 2 it -- 3 MR. GREER: Yes. 4 MR. CLOWE: -- and been concerned about it? 5 MR. GREER: Yes. 6 MR. CLOWE: What enables us to get -- I 7 understand we are one of the 11, maybe one of the 12 in 8 the future, but when you have an idea like good governance 9 and keeping the minutes and doing the right thing, why 10 can't one lottery put an issue like that forward and see 11 some positive action? What -- what's the hold-up? What's 12 the deal there? 13 MR. GREER: Well, we have been talking 14 about that specific issue for many months. In any 15 organization that you're involved in, you have an 16 opportunity to bring things to the table, but it's up to 17 the group as a whole to decide whether or not they're 18 going to embrace it. When I brought it up in the past it 19 was an issue that they said we would continue to monitor 20 but it wasn't really embraced. We continued as a part of 21 looking at California coming to the game to bring this to 22 the forefront. And it worked to our favor because another 23 large state, New York, embraced the idea. That would be 24 based on phone calls that I made and then our legal group 25 worked with me on to clarify what our intent was and to 0065 1 begin to put the message out to the other states who 2 ultimately agreed with the decision that came forward from 3 the recommendation of the legal committee made to include 4 this in the language. So we planted the seed, I guess is 5 one way to look at it. It was sort of dormant. The seed 6 grew as interest went to a higher level based on 7 conversations and E-mails and other things that we did to 8 try to create a level of urgency to put it into this 9 document. So we were a catalyst in making that happen. 10 MR. CLOWE: Well, you know, there are some 11 of these states, if my memory serves correct, in the group 12 that do not have open records acts. Am I correct in that, 13 if anyone knows? 14 MR. GREER: All the states kind of do it 15 differently. I'll let Andy speak to it. 16 MR. MARKER: I can't speak to all the party 17 lotteries. I'm sure there are differences in the 18 requirements. And I know we have had comments from other 19 party lotteries that Texas' open record -- the Texas Open 20 Record Act is much broader than some other states. 21 MR. CLOWE: And that's my feeling, as well, 22 Andy. And I would like us to maintain that kind of 23 openness. And I think minutes that are kept of a meeting 24 go to that issue and, you know, there may be other states 25 that don't want a record. And I think we ought to 0066 1 continue to stand for the right thing and try to uphold 2 our standards of open meetings and open records in this 3 group so that our players can be satisfied if and when 4 that ever becomes necessary. 5 MR. GREER: Yes, sir, I agree. At this 6 point, if you're comfortable, I'd like Andy to walk you 7 through some of the document that can specifically address 8 some of these issues that we talked about to give you a 9 higher level of comfort. And the first issue is in the 10 document in front of you, the agreement -- this document. 11 It's on Page 3, and it's Section 3.3 that talks about the 12 changes that went into the agreement. That was certainly 13 one thing I'd draw your attention to, but I'll ask Andy if 14 you would walk us through an overview of what's before us. 15 And prior to doing that, I want to again go on record and 16 thank Andy and Kim, specifically, for all their work in 17 helping to craft this document. There was a lot that went 18 into this, many hours. I spent a lot of time on the phone 19 and in conferences, et cetera, to continue to create an 20 environment that makes this a professional organization 21 and a professional document. And there's always 22 opportunity to make it better, but we have made some 23 strides in this agreement before you. And, Andy, if you'd 24 take over. 25 MR. MARKER: Thank you. Commissioners, I'd 0067 1 direct your attention to -- I'm just going to hit some 2 high points in these agreements. And, again, if you have 3 questions, feel free to ask them. What you have in front 4 of you are the proposed new Mega Millions agreements, 5 which consist of the amended multistate lottery agreement, 6 finance operations procedures, the official game rules for 7 Mega Millions, and also the official draw procedures for 8 Mega Millions. 9 Commissioner Cox, going to the issue that you 10 had raised about governance that's in Section 3.3 of the 11 amended multistate agreement, it says, "Party lottery 12 director upon majority vote shall appoint a lead director 13 for each fiscal year. The lead commissioner shall have 14 certain administrative duties assigned by the party 15 lottery directors from time to time, which will have an 16 independent power or authority over any other party 17 lottery director." Then it continues, "The lead director 18 or his or her designee shall be responsible for taking and 19 maintaining the official minutes and votes at party 20 lottery directors' meetings and conference calls." And, 21 again, this issue has been an issue that Texas has been 22 concerned about for some time. It came to the forefront 23 with -- within the last few weeks about the New York 24 counsel because he was concerned from the audit 25 perspective. He anticipates his internal auditor -- or 0068 1 state auditor coming in to audit this agreement, so it's 2 an issue that they proposed and that Texas fully 3 supported. And so what this would do is require the Mega 4 Millions lead director, that lead director would be chosen 5 annually, would then be charged with keeping the official 6 minutes, not only of those meetings where the directors 7 actually come together, but actually conference calls, 8 since much of the business of Mega Millions is transacted 9 via conference call. 10 And then also we direct your attention to 11 Section 6, changes made to the prize liability section. 12 Some language has been added at the end. It says, "The 13 California State Lottery shall be solely responsible for 14 payment of all prizes with Prize Levels 2 through 9 for 15 tickets to California state lottery sales. And, again, 16 this is based on representations by the California lottery 17 that California can only pay pari-mutuel prizes. As a 18 result, California will only share in prize liability of 19 the jackpot money. Prizes below the jackpot level will be 20 paid solely out of sales drive from ticket sales in 21 California. 22 MR. COX: Now, how does that make 23 California different from Texas? 24 MR. MARKER: Well, it would -- based on 25 California's law -- and we have not researched this. This 0069 1 is a representation made by California's lottery general 2 counsel. California lottery does not -- cannot pay fixed 3 prizes. Their games have to -- can only pay pari-mutuel 4 prizes. So the way this would work is that Texas would 5 continue -- the game, at least, for Texas would continue 6 as is. Texas would share prize liability of all levels, 7 the jackpot through Prize Level 9. California would 8 participate in the jackpot only. California also would 9 participate in terms of reporting numbers, but in terms of 10 having to share prize liability, California would not 11 participate below the jackpot level. 12 MR. COX: Does this have to do with that 13 reserve that -- that fund that hangs around that helps 14 people that come up short? 15 MR. MARKER: I'm not sure what California's 16 specific issue is. And again, we were not provided with 17 the statute. 18 MR. COX: No. I mean, there is some kind 19 of an equalization fund. 20 MR. MARKER: Oh, in terms of the Mega 21 Millions game? 22 MR. COX: Yes. 23 MR. MARKER: There is an annual 24 reconciliation that's done at the end of the fiscal year 25 where the idea is that no party lottery will ever be out 0070 1 of balance based on its percentage of Mega Millions sales. 2 But there is -- there is both an annual reconciliation and 3 then there is what is called a special reconciliation, so 4 then if at any time -- currently, if any -- if at any time 5 a state is out of balance by at least $1 million, it would 6 trigger the special reconciliation. The finance and 7 operations procedures before you would increase that 8 threshold from 1 million to 1.5 million. But, again, 9 California would not participate in that reconciliation. 10 MR. COX: Okay. So that is the difference 11 here, they are directly responsible for their lower tier 12 prizes and we are directly responsible for paying ours, 13 but there's an annual or more often settlement that 14 equalizes that among the other 11 states? 15 MR. MARKER: That is correct. 16 MR. GREER: And I'd like to add to that, 17 Commissioner, because that was one of the risks that as we 18 got into this game we talked about a lot. And Lee and Ben 19 have done a good job of keeping Gary and I apprised of 20 that scenario. We get e-mails and other things that let 21 us know where we stand as far as our level of involvement 22 in that process. And up to this point it has worked okay. 23 We'll just continue to monitor that issue. 24 MR. CLOWE: But we have asked for that 25 status and have wanted that status from the very 0071 1 beginning, as I recall. 2 MR. COX: Yes. 3 MR. CLOWE: And we have been denied that 4 status. 5 MR. GREER: Yes, sir. 6 MR. COX: So they got what we wanted 7 because they represent that they have a law that says 8 that's required? 9 MR. MARKER: That's my understanding. And 10 it is written into the finance procedures specifically 11 that California State Lottery is prohibited from paying 12 fixed prizes. 13 MR. COX: How hard would it be to find out 14 whether they really have a law like that? 15 MR. MARKER: You know, certainly we can 16 confirm that. There is never anything to suggest to the 17 contrary. You know, we didn't undertake the research of 18 California law to confirm that. It was simply -- and 19 Texas, again, requested that same consideration, that 20 other party lotteries be allowed to opt out. And I think 21 it was the consensus of the party lottery directors to 22 only offer it to California because their understanding of 23 California law were representations made by the California 24 lottery that they would like to explore and possibly 25 change the law to allow them to pay fixed prizes, but that 0072 1 was not an option at this time. 2 MR. COX: Ms. Kiplin, when we went into 3 this thing, did we thoroughly research whether there was 4 anything anywhere in Texas law that would preclude our 5 participating in this pool with the other 11 states? 6 MS. KIPLIN: In terms of the shared prize 7 reconciliation? 8 MR. COX: Yeah. 9 MS. KIPLIN: I think we did take a look 10 at -- do a very comprehensive legal analysis in all 11 aspects of the game at the time that we joined the game, 12 so I'll just leave it at that. 13 MR. COX: And there wasn't anything 14 directly or indirectly that precluded our doing -- 15 MS. KIPLIN: No, not that I'm aware of. 16 Not that was brought to my attention. 17 MR. CLOWE: That was the answer you gave me 18 some time ago when I asked that same question of you. 19 MR. OLVERA: Well, and Andy and Kim, I 20 would like to see the specific statute that they're 21 relying on in making that representation. 22 MR. CLOWE: In regard to your statement, 23 Andy, that California -- or maybe, Reagan, it was yours, 24 I'm not sure who said it, that they want to join us in our 25 status, what would be the advantage to them of changing 0073 1 that law and coming into this status? 2 MR. GREER: The marketing opportunities for 3 letting the player know exactly what they're going to win 4 at the lower prize tier levels. Right now that guarantee 5 is not out there. Specifically for us as we look back at 6 our 101 winners at the second tier level, it's been 7 comforting to a player to know they have a potential of 8 winning a certain amount. And so I think it's from a 9 marketing perspective. And in reference to the California 10 law, and obviously we'll be happy to provide that, when we 11 initially, we the directors of Mega Millions initially 12 discussed California, and we also talked about Florida at 13 that time, coming into the game to keep the freshness and 14 the newness and the population and the jackpot levels 15 increasing, they were up-front right from the beginning 16 about that the way their law was structured. So this was 17 not a surprise at the end. As we moved through the 18 process with them, we knew that it was going to be an 19 issue that we were going to have to address. It wasn't 20 until they made the decision which game they were going to 21 join because they were looking at Power Ball and Mega 22 Millions just like we did, that we move to the next level 23 on this and then realized what it was going to create as 24 far as changes in the document. 25 But, you know, I'm confident we could look up on 0074 1 the web site and get that for you before, you know, we 2 move too much further down the road on this discussion. 3 But I'm confident that California would not have stepped 4 forward if there was not a legal status. 5 MR. COX: And, Reagan, just take a minute 6 for my education here. In Lotto Texas, are the second 7 through X tier prizes pari-mutuel? 8 MR. GREER: They are. 9 MR. COX: Not all of them? 10 MR. GREER: But not all of them. Robert, 11 help me with -- 12 MR. COX: Which ones are and which ones 13 aren't? 14 MR. TIRLONI: Commissioner, the bottom 15 three levels on Lotto Texas are guaranteed prizes. All 16 the rest are pari-mutuel. 17 MR. COX: So Mega Millions is different 18 from Lotto Texas in that the higher tier prizes below the 19 jackpot are guaranteed amounts, whereas in Lotto Texas 20 they're pari-mutuel? 21 MR. TIRLONI: Mega Millions is different in 22 that prizes two through nine are all guaranteed prize 23 amounts, that's correct. And in Lotto Texas, just the 24 bottom three are guaranteed, and that's $3 prize and two 25 $5 prizes, respectively, three, five and five on lotto. 0075 1 MR. COX: Thank you. 2 MR. MARKER: And, Commissioner, I would add 3 with regard to Mega Millions that there in the current 4 finance procedures a provision with regard to liability 5 cap, so that if the liability cap is triggered, then Prize 6 Levels 2 through 5 become pari-mutuel. But that's based 7 on two -- two factors. One would be if sales exceeded 8 300 percent of the jackpot or -- there are two -- two 9 triggering mechanisms currently in the agreement that 10 would result in pari-mutuel payout on Prize Levels 2 11 through 5. 12 MR. COX: Okay. 13 MR. CLOWE: And, Reagan, if you know, what 14 is California's intent relative to the lower tier aspects 15 of the game? 16 MR. GREER: They, in fact, were before 17 their senate finance committee last week rolling out the 18 opportunities that Mega Millions was going to bring into 19 their state as far as additional revenue to their lottery 20 bottom line numbers. And it was brought up in that 21 committee hearing, from my understanding, in that Buddy 22 Roogow, the Director of the Maryland lottery was out 23 there, and they do have interest from a marketing 24 perspective in pursuing that. But in any legislative 25 scenario, it's got to work through the process, and we'll 0076 1 just continue to monitor how they deal with that. 2 MR. MARKER: Commissioners, with your 3 pleasure, I will continue to walk you through these 4 documents and just hitting the high points. No other real 5 substantive changes to the multistate agreement. I'll now 6 direct your attention to the finance operations 7 procedures. 8 MR. GREER: Andy, before you do that, I did 9 want to draw attention to a point that I made earlier 10 which is at the bottom of Page 5, No. 11, it talks about 11 audits. And it talks about the effect of the agreed upon 12 procedures by an independent auditor according to agreed 13 upon at-the-station standards established by the American 14 Institute of Certified Public Accountants. I think that 15 language was positive and brought into context what I 16 discussed earlier and wanted to point that out to you. 17 MR. CLOWE: And that's new language? 18 MR. GREER: Yes, sir. 19 MR. CLOWE: That's never been done before? 20 MR. GREER: There was a vagueness to the 21 way that the language was structured was my understanding 22 from Katherine, and that was brought forward and came out. 23 MR. CLOWE: So it's never been done in the 24 past? 25 MR. GREER: Yes, sir. My hesitancy is 0077 1 because I don't know exactly off the top of my head what 2 that language was before. It was just vague and they 3 wanted to clean the language up to add the at-the-station 4 and the certified public accountant words. 5 MR. CLOWE: I guess the question I'm trying 6 to ask is has there been an audit, and if so, by whom? 7 MR. GREER: No. The specific aspect that 8 that's looking at is each state is required to do an audit 9 and submit their audited figures, but not all states' 10 audit was the same, and so where there was no specific 11 measurement that we felt was justified across the board. 12 MR. COX: And one of the other concerns 13 that I think Katherine had, or maybe it was me, was that 14 there was no particular deadline. It said they would have 15 them, but it didn't say when they would turn them in. 16 MR. GREER: Right. 17 MR. COX: And some folks weren't turning 18 them in apparently. This doesn't seem to address that. 19 MR. GREER: I have a vague recollection of 20 that also. 21 Greg, do you have any recollection of that 22 conversation? It was before you. We'll look into that, 23 Commissioner, and follow up on that, and that will be 24 something back to our issues that we continue to look for 25 opportunities to make it better, maybe we can add that 0078 1 into the document when we get the directors back together 2 at a Mega Millions meeting. 3 MR. CLOWE: It's an important point. 4 MR. GREER: It may be addressed in the 5 document at another location, but I'll research that and 6 follow up on that. 7 MR. CLOWE: Good. 8 MR. MARKER: Commissioners, now turning to 9 the finance operations procedures. What you'll find is 10 the additional language in Section 1.2 of the audit 11 requirements. This is in Section 1.2 titled Audit 12 Requirements. 13 Commissioner Clowe, to your point, there is an 14 audit provision in the current agreement, the changes that 15 have been made to both the multistate agreement and to the 16 finance procedures. Previously audits were required to be 17 performed based on agreed upon procedures. That language 18 has been replaced with, "Based upon the agreed upon 19 at-the-station standards established by the American 20 Institute of Certified Public Accountants." That language 21 was added to try to provide more professional standards or 22 guidelines to ensure that all party lotteries are 23 performing audits but using the same standards. 24 Commissioner Cox, on your point, there is no 25 deadline for submission. It simply says that the audits 0079 1 will be performed annually. There is no deadline for when 2 those are to be provided. That is something, I believe, 3 the finance committee has discussed and that different 4 states have different fiscal years, but the finance 5 committee will continue to review that. 6 Again, you'll find in the finance operations 7 procedures in Section 8 language talking about since the 8 California State Lottery is prohibited by state law to pay 9 fixed prizes and participate in liability calculation 10 Prize Levels 2 through 9. It goes on to say that the 11 California State Lottery shall be solely responsible for 12 its own prize liability for Prize Levels 2 through 9. And 13 also there are other changes in the finance procedures to 14 make clear that the California lottery will not 15 participate in the shared prize liability at the lower 16 tier levels. Normal -- yes? 17 MR. COX: Andy, I'm looking still at Audit 18 Requirements. I don't see here a requirement that they 19 send it in ever. It just says they will have one done. 20 MR. MARKER: If you refer back to the 21 multistate agreement, Page 6 of that agreement, 22 Section 11, it says, "Results shall be shared among all 23 the party lotteries in a manner agreed to by the 24 directors." And that is in the provision titled Audits. 25 MR. COX: Where? Help me -- 0080 1 MR. MARKER: At the top of Page 6, four 2 lines down. It says -- this is in the audit section. The 3 sentence beginning, "Results shall be shared among all the 4 party lotteries in the manner agreed to by the directors." 5 MR. COX: What's that mean? 6 MR. MARKER: Well, if you read that -- if 7 you go back to the bottom of Page 5, it talks about 8 requires the party lotteries to perform audits. And I 9 would leave it to the party lottery director to decide on 10 a schedule for when those have to be submitted. I'm not 11 sure if that's tied to the Mega Millions fiscal year or 12 just provided upon completion. 13 MR. COX: Okay. So I guess the directors 14 could agree to say, I had one done and it came out fine, 15 and that would be the end of it. 16 MR. MARKER: I don't know. I think that 17 was one of the reasons that Texas wished to have an audit 18 -- separate audit committee to address some of those 19 issues. There was a concern that there are these 20 reporting requirements, but it's unclear if those results 21 are being shared or how often they're being shared. 22 MR. COX: Okay. So now what we are looking 23 at here is, this much is the agreement (Indicating). Then 24 the rest of it are procedures. Now, how do they relate to 25 the agreement? 0081 1 MR. MARKER: Well, the way the agreement is 2 structured is that what you have in front of you is the 3 entire agreement. The multistate agreement specifically 4 incorporates and includes by reference what you have 5 attached there, which is the finance operation procedures, 6 the official game rules and also the on-line drawing 7 procedures. So those actually make up the contract 8 document itself. 9 MR. COX: Wouldn't the procedures tend to 10 be more detailed than the agreement? 11 MR. MARKER: Yes. But again, the 12 procedures are specifically made part of the agreement. 13 MR. COX: And yet here, the requirement 14 that the reports be shared is in the agreement, not in the 15 procedures. 16 MR. MARKER: Right. But again, those 17 procedures are part of what's called the Mega Millions 18 agreement. It's simply -- the amended -- the title, 19 Amended Multistate Agreement, simply refers to one section 20 or one part of the four documents that make up the Mega 21 Millions agreement. 22 MR. COX: Okay. Thank you. 23 MR. MARKER: And then just to follow up, 24 California will not participate in the shared prize 25 liability for low tier prizes, nor will California be 0082 1 entitled to return unclaimed prize monies at those prize 2 tiers. The language I had mentioned about the trigger 3 tied to -- in case sales come up more than $12 million 4 below the advertised jackpot, is found in Section 14.1.1. 5 And two examples that are included show that in the event 6 sales come up at least $12 million below the advertised 7 jackpot and the resulting jackpot to be paid would be the 8 highest fully funded million plus $12 million for the 9 advertised jackpot, whichever is lower. However, in no 10 event would a jackpot be less than the advertised jackpot 11 of the immediately prior drawing. 12 Next I would direct your attention -- 13 MR. COX: Andy, now you've got me reading 14 things here. 15 MR. MARKER: Okay. And again, this was 16 offered because the finance committee, I believe it was 17 last summer, maybe last spring, had proposed disaster 18 liability language following the brownout along the East 19 Coast back in the summer of 2000. 20 MR. COX: If the sales for a jackpot that 21 exceeds 12 million lower than the advertised jackpot, the 22 resulting jackpot to be paid will be the highest fully 23 funded million plus 12 million for the advertised jackpot, 24 whichever is lower. What does that mean? I see the 25 examples down here. So what that has the effect of doing 0083 1 is saying that if the immediately prior jackpot is 2 100 million, that means that one was funded. 3 MR. MARKER: Yes, that's correct. 4 MR. COX: Okay. And the current advertised 5 jackpot is 115 and sales only support 102, then 114 is the 6 resulting jackpot. So what we are saying is we are only 7 going to put 12 million at risk in the event of the 8 advertised jackpot getting out of whack for whatever 9 reason? 10 MR. MARKER: Correct. And that 12 million 11 will be shared by the party lotteries. 12 MR. COX: Okay. Now, is this agreement 13 somehow binding on anybody who buys a Mega Millions 14 ticket? 15 MR. MARKER: Yes. And I'll let Ms. Kiplin 16 address that. 17 MS. KIPLIN: Commissioner Cox, yes. 18 MR. COX: So there's something on the back 19 of the ticket that says if you had an inclination, here's 20 the rules, you can go to the Texas Lottery and read them, 21 but you probably wouldn't want to. 22 MS. KIPLIN: I'll defer to Mr. Tirloni on 23 what's on the back of the ticket. I will tell you that 24 it's clear that the official game rule and the Texas game 25 rule makes it clear the player abides -- agrees to abide, 0084 1 just like it is in the statute, by the rules in the 2 agreement. 3 MR. TIRLONI: Both of our -- both on-line 4 tickets, Commissioner Cox, and instant tickets do have a 5 stipulation that by making a purchase, the player abides 6 to agree by all of the Commission's rules, regulations, 7 policies, procedures, et cetera. 8 MR. COX: Has anybody ever asked for those? 9 MR. TIRLONI: Not to my knowledge. 10 MR. MARKER: Any other questions with 11 regard to the finance procedures before I move on to game 12 rule? 13 MR. GREER: One of the points that -- 14 Sorry. One of the points I made a minute ago was in 15 reference to ticket validation, and that is Item 15. And 16 you can see there, A, B, C through E are the five 17 different methods. And you have the main three of those 18 five, and we are looking at and have referred that issue 19 to the finance committee to relate that to specific areas. 20 MR. MARKER: And just to follow up with 21 what Reagan had just mentioned, there was discussion 22 during negotiation of this agreement to refer that matter 23 to the operations committee since it was more of an 24 operations issue. And I believe Texas' concern was that 25 some of the validation requirements may not be current. 0085 1 And so it requires the Texas Lottery to perform additional 2 validations on top of our current validation process. And 3 I think it has to do more with what version of particular 4 software that is referenced here. 5 MR. CLOWE: And I get the sense then, 6 Reagan, that the Texas Lottery Commission feels that two 7 are adequate and that's going to be adequate safeguards? 8 MR. GREER: Yes, sir. From the perspective 9 that Mike Anger's been working on this, that we do have 10 technologies that are available that are a little more 11 advanced, and it would just save us time. But, you know, 12 you've got to look at all the states, 11, potentially 12, 13 and they're not all as advanced technologically as we are, 14 so we're just going to try to work with them and see how 15 we can all come to a consensus. 16 MR. MARKER: Mr. Chairman, what I would 17 add, it's not so much the number, whether it's three or 18 two, it's the actual validation process that's required. 19 Because you'll find that even in the finance procedures of 20 the five that are listed, not all are actual validation 21 requirements, some of them are reporting requirements. 22 MR. CLOWE: And it certainly must be which 23 of the two are more difficult and more telling if some are 24 not current. 25 MR. MARKER: And I think probably what 0086 1 Texas would propose after listening to the operations 2 committee and party lottery directors is to move away from 3 set numbers and instead have minimum requirements. And 4 then I would next direct your attention to the official 5 game rules. You'll note that the effective date of these 6 game rules states that the game rules would be effective 7 as of the first sales date of the new matrix, which is 8 anticipated to be sometime in June. And then you'll find 9 the new matrix in Section 1.2 and the matrix would be 10 changed to 5 of 56 and one in 46. And then you'll also 11 find in Section 7 the changes that have been discussed in 12 terms of increasing the minimum jackpot from ten to 13 $12 million and then increasing the second and third 14 prizes to $250,000 and $10,000, respectively. And again, 15 you'll also find in Section 7.3.2 language that requires 16 California to assume its own low tier prize liability. 17 MR. COX: Now, Andy, what's the present 18 matrix, or Robert? 19 MR. TIRLONI: The current matrix is five of 20 52, one of 52. 21 MR. COX: So we are taking away six lucky 22 numbers in the second pool? 23 MR. TIRLONI: The second field is 24 decreasing. 25 MR. COX: So somebody who always bets 50 in 0087 1 the second pool is going to quit playing the game, unless 2 they're willing to adapt? 3 MR. TIRLONI: Unless they're willing to 4 adapt, that's correct, or play Quick Pick. 5 MR. CLOWE: We are going to have the same 6 reaction from those players that we had when we changed 7 the matrix in Lotto Texas is you've taken away my lucky 8 numbers. 9 MR. COX: Yep. 10 MR. CLOWE: And if we ask you the same 11 questions we asked you on the 28th regarding player 12 satisfaction and dissatisfaction, your answers would be 13 the same? 14 MR. TIRLONI: They would be, Mr. Chairman. 15 You know, I think we -- I think looking at the 15 or 16 16 months' experience we have had in the game, you know, it's 17 a cliche, but the players vote with their spending and 18 with their pocket books, and what we have seen is that as 19 the jackpot goes up, the spending goes up. And it's 20 drastically increased when we are at triple-digit levels 21 and, you know, goes up a notch as we get to different 22 milestones, so to speak. So when we get up above 100, we 23 see a drastic increase in spending. And the one time that 24 we did get up into the $200 million range, we saw another 25 significant increase in spending. So, you know, I think 0088 1 what's driving the spend on this game in players' minds in 2 the state of Texas is the triple-digit jackpots. 3 MR. GREER: And we did take that point in 4 consideration, cost benefit analysis and utilized a 5 decrease because we know that change is hard. We've seen 6 that in our other experiences with changes that have been 7 made in other games. And just to reinforce Robert's 8 point, when you look at the overall perspective of our 9 experience in Mega Millions, we feel like because there 10 will be more triple-digit jackpots, that those players 11 will come back to take a shot at a dream basically. 12 MR. COX: Reagan, you mentioned a cost 13 benefit analysis. Are we going to see that? 14 MR. GREER: We went through that in detail 15 at the last Commission meeting, but would be more than 16 happy to bring that slide back up. 17 MR. COX: If we have already done it, I'm 18 sorry I don't remember. 19 MR. GREER: We did that on the 28th. 20 MR. CLOWE: We did it and it was fine. 21 MR. COX: Yes. So the cost was measured 22 by -- I guess our choices were stay in or get out? 23 MR. GREER: Yes, sir. 24 MR. COX: Pretty easy to do. 25 That one didn't take you long did it, Lee? 0089 1 MR. DEVINEY: No, sir. 2 MR. CLOWE: And we had, if you remember, I 3 think, a good full discussion about the change in the 4 matrix. And that's why I asked Robert if there had been 5 any new information that had come to light. I think that 6 my sense is that among our Texas players there's no 7 loyalty to this game. I'm seeing the attraction here 8 being the jackpot, period. My sense is there is a loyalty 9 to Lotto Texas. And in my discussions with players, I 10 hear, you know, I really like the game and I'd like to 11 stay with it. And we have seen that, I think, proven by 12 the lower migration away from Lotto Texas. 13 MR. TIRLONI: I would agree with all your 14 comments about the loyalty to the in-state game and what 15 some people would refer to as the jackpot chasers on Mega 16 Millions. 17 MR. CLOWE: Jackpot chaser is a good term, 18 I think. I think the thing that's been hurting us with 19 Lotto Texas more recently is the small amount of the 20 rolls. And we have discussed that and continue to focus 21 on it. You know, it -- it enjoys the loyalty, but it 22 needs the jackpot, as well. 23 MR. TIRLONI: Absolutely. You know, the 24 loyalty is very important and then I think there is a 25 great deal of loyalty to Lotto Texas just because for -- 0090 1 you know, lotto started in November of '92. And up until 2 December of 2003, if you wanted to play for a multimillion 3 dollar jackpot in Texas, you played Lotto Texas. And I 4 think we have developed very strong loyalty and a very 5 strong brand behind the Lotto Texas product. But going to 6 your point, while there is that loyalty, you know, players 7 do play jackpot games for sizable jackpots. So while you 8 do have loyalty, you still have to get the jackpot up to a 9 level that is attractive for players, even on your 10 in-state game. 11 MR. CLOWE: And the return to the school 12 children of Texas of these games is higher than the 13 scratch off tickets. 14 MR. TIRLONI: That is correct. The prize 15 payout on the on-line products is lower than the prize 16 payout on the scratch off products. 17 MR. CLOWE: Which we discovered in the 18 February the 28th meeting is where we have been putting a 19 great amount of marketing focus for a lesser return to the 20 school children. And so we want to be mindful of all of 21 these products that we have out there and what we are ever 22 going to decide are the terms, the net revenue to the 23 state are, the FSS -- FSF is, and that's what I think we 24 should be focused on. Just like in bingo we ought to be 25 focused on the payment to the charities. 0091 1 MR. TIRLONI: Yes, sir. 2 MR. CLOWE: That's the bottom line. 3 MR. TIRLONI: Yes, sir. 4 MR. GREER: Mr. Chairman, we have talked 5 about this before, but just to reinforce, because I'm out 6 speaking to people. That's one thing that there's a 7 perception because it's an out-of-state oriented game that 8 we, the State of Texas, are not receiving much of a 9 benefit. And the reality is that we get 38 cents 10 approximately on the dollar on a Mega Millions ticket and 11 46 cents on the dollar on a Megaplier ticket, which is a 12 very positive thing, which is a result of 136 million in 13 revenue that you see. So it was a good opportunity for us 14 to offer players higher jackpots, as well as increasing 15 revenue to the State. And certainly the amount that we 16 are receiving back has been a positive impact. 17 MR. CLOWE: And, Reagan, I think that's 18 right. I really believe we are talking about two things 19 here at one time. One is what the State benefits from it. 20 And that's been positive. 21 MR. GREER: Yes, sir. 22 MR. CLOWE: And we haven't been hurt in 23 Lotto Texas as badly as we thought we would. 24 MR. GREER: Yes, sir. 25 MR. CLOWE: So in balance, we are better 0092 1 off having gone into Mega Millions. And that's the 2 analysis that you commented on, you know, you get in or 3 get out. 4 MR. COX: (Nods head.) 5 MR. CLOWE: The other subject I think we 6 are discussing is how it's run and whether or not we like 7 the rules. And we went in fully aware we weren't going to 8 run it like we run the Texas Lottery. 9 MR. GREER: Yes, sir. 10 MR. CLOWE: And we want to keep trying to 11 do things like good business practice, governance, and 12 open records, which bring it to a standard that the people 13 of Texas have grown accustomed to. But that's a -- that's 14 a -- sort of a tolerance on our part. And we have to make 15 up our mind are we comfortable with what we have got for 16 what we are getting? That's my view of what we are 17 talking about. 18 MR. GREER: I totally agree. And in our 19 prior conversation when we got into Mega Millions, and 20 this reinforces it, is the balance and the risks and 21 looking at, you know, the potential positive outcome, 22 which is why we bring this whole scenario up today. And, 23 you know, I wanted to reinforce -- and I appreciate the 24 fact that you called this additional meeting, because 25 California entering the Mega Millions game is a benefit to 0093 1 our State from a monetary perspective in revenue based on 2 the cost benefit analysis, the marketing, and all the 3 other things that we talked about. And they potentially 4 want to try to enter the game at the end of June. And so 5 for us to stay on track with the things that are required 6 in our statute, timeliness-wise, as far as things that Kim 7 is going to mention on the rule and opportunity for people 8 to give feedback, et cetera, that's why it is significant 9 that we are discussing this at this juncture today. 10 MR. CLOWE: And it's your representation to 11 us that based on our history with Mega Millions and all 12 the work your staff and the attorneys have done is there's 13 nothing illegal, immoral, or improper that you've seen and 14 that your expectation is it will continue to improve as we 15 look at continuing to be a part of Mega Millions with the 16 -- what's the correct term, the amended agreement -- 17 MR. GREER: Yes, sir. 18 MR. CLOWE: -- with Mega Millions? 19 MR. GREER: And the fact that California is 20 coming in, you know, from my perspective, also it has a 21 positive impact on the chance that we have to build a 22 stronger relationship with that state, which is very 23 similar to ours in population and some of the ways that 24 their lottery operates. I think we can learn from each 25 other. There has been a great value in my position to 0094 1 being able to have an open and frank discussion with other 2 lottery directors about some of their successes and 3 failures, and I think that we can benefit from that also. 4 MR. CLOWE: Well, I still think that we are 5 going to have more change ahead of us. And I don't see 6 any of these games remaining static for a long period of 7 time. And to that end, you know, I will not be surprised 8 if some day somebody doesn't seriously suggest that Power 9 Ball and Mega Millions merge. 10 MR. GREER: Yes, sir. 11 MR. CLOWE: And we have what would 12 constitute -- how many states would that be? 13 MR. GREER: There's 34 in Power Ball and -- 14 we'd have 12 with California. Isn't that right, Robert, 15 or is there 26? 16 MR. TIRLONI: I think there's about 20 -- I 17 want to say approximately 27 or 28 in Power Ball and then 18 11 in the current Mega Millions game. 19 MR. CLOWE: And that would almost be a 20 national lottery. And if I understand correctly, what 21 they have in England and Mexico and countries of that 22 nature, they have a national lottery -- 23 MR. GREER: Yes, sir. 24 MR. CLOWE: -- that has a great appeal. 25 MR. GREER: El Gordo is the one I've heard 0095 1 a lot, in Spain. And certainly it gets these huge jackpot 2 levels that we have never seen here. But that has been 3 discussed in the industry for a while. And all the 4 lotteries are looking at right now, which we are 5 addressing, as well, the on-line situations within their 6 states and the fact that you've constantly got to be 7 looking for ways to upgrade the game or players lose 8 interest. And essentially, we see this as an upgrade to 9 the game and players will welcome and that's why we are 10 bringing it up today. 11 MR. OLVERA: What about an upgrade with 12 respect to Texas Lotto? 13 MR. GREER: That is something that we are 14 looking into. Gary and I have been spending a lot of time 15 on examining our current scenario, sales and things that 16 go with that. And we'll be bringing you a report on that 17 in the coming months. 18 MR. OLVERA: Okay. 19 MR. CLOWE: Okay. Andy, we didn't mean to 20 take you off track. 21 MR. MARKER: That's all right. The only 22 thing I would add, Commissioners, is you also have in 23 front of you the on-line drawing procedure. There were no 24 substantive changes. The only changes were made to 25 accommodate the new matrix. Drawings would continue to be 0096 1 conducted by the Georgia lottery. There is some 2 discussion to -- in the past, I guess, year-and-a-half 3 that Texas has been part of Mega Millions, there have been 4 two occasions drawings have been held by the New York 5 Lottery when jackpot amounts have gotten up above 6 $200 million. I believe the party lottery directors have 7 asked either the finance committee or operations committee 8 to come up with some language or procedure to specify when 9 drawings would actually move. And if that $200 million 10 level is the trigger, actually write that into the 11 procedures. And so I think the lotteries will continue to 12 focus on that. 13 MR. CLOWE: And I believe I saw in here 14 that you certify to the Virginia lottery? 15 MR. MARKER: Right. The Virginia lottery 16 is the lead in terms of financial reporting, and then 17 Illinois lottery then serves as a back-up to the Virginia 18 lottery in terms of jackpot reporting and settlement 19 reports and new reports. 20 MR. CLOWE: And are we satisfied with that 21 on a historical basis as far as how it's working? 22 MR. GREER: Yes, sir. To date, and I'll 23 let Lee identify any issues, but to date it's worked fine. 24 MR. DEVINEY: No issues. 25 MR. CLOWE: Does that complete your 0097 1 presentation? 2 MR. MARKER: Yes, Commissioners. I'd be 3 glad to answer any questions you might have. 4 MR. CLOWE: Robert, are you complete? 5 MR. TIRLONI: Yes, sir, I am. 6 MR. CLOWE: Reagan, do you have anything 7 else to add? 8 MR. GREER: Yes, sir. The significant 9 aspect of the agreement is that the feedback and the 10 comfort level that you have in reference to the documents 11 that we have just gone through is what I'm seeking today 12 because obviously I'll have to take action by signing 13 these agreements and making them a part of what we utilize 14 as Mega Millions here in our state. And if your comfort 15 level is positive in that vein, then Kim is going to walk 16 through a potential rule change that would be necessary to 17 accommodate that. 18 Going back to the prior conversation that we had 19 in reference to the California law, I'm just going to go 20 on what has been identified in the past. We talked about 21 this at a former Mega Millions meeting when California 22 initially got in. They identified right up front that 23 based on the legal system in California that is what 24 they've been directed to do and that's what we put into 25 the document. I don't know how else to answer that at 0098 1 this point except that I can get our legal team to work 2 with their legal team to help, you know, give you a higher 3 level of comfort there. I'm going on the fact that we as 4 an organization of Mega Millions states and directors took 5 California at face value when they made that decision to 6 come forward and have no reason to doubt that. And that's 7 why we went ahead and put the documents in that format. 8 MR. CLOWE: Well, you've represented to us 9 that that is the fact and the judge has said he'd like to 10 see the statute. 11 MR. GREER: Yes, sir. 12 MR. CLOWE: So I think we are going forward 13 in this discussion based on the idea that what you're 14 representing to us is correct, but the judge wants to see 15 the law. 16 MR. OLVERA: Just a simple request. 17 MR. GREER: And I will accommodate that, 18 absolutely. 19 MR. CLOWE: And if the judge isn't 20 satisfied with the law, I think the Commissioners are 21 going to revisit whatever, if any, action is taken today. 22 MR. GREER: I agree. 23 MR. CLOWE: Commissioners, there are two 24 individuals who have asked to give testimony on this 25 subject. Are there any questions for these individuals at 0099 1 this time or shall we hear public -- 2 MR. COX: Good presentation. 3 MR. TIRLONI: Thank you, sir. 4 MR. CLOWE: Then let's just take a 5 ten-minute break before we begin another part of this. 6 It's 11:02 a.m. and we'll just adjourn -- or recess for 7 about ten minutes, please. 8 (Short recess.) 9 MR. CLOWE: All right. We'll come back to 10 order now. And in the order that they have been handed to 11 me, first Ms. Dawn Nettles wishes to give testimony on 12 Item No. IV. 13 Good morning, Ms. Nettles. 14 MS. NETTLES: Good morning, Commissioner 15 Clowe. For the record, my name is Dawn Nettles, and I'm 16 the publisher of the Lotto Report and I'm from Dallas. 17 Can you hear me? 18 COURT REPORTER: If you could speak louder. 19 I don't think you -- 20 MS. NETTLES: It looks like it's on. Okay. 21 Thank you, Commissioners, for giving me the opportunity to 22 speak to you all about the Mega Millions game. It seems 23 like there's two issues at hand here which is, one, your 24 agreement with the party states, and two, a proposed rule 25 with regard to Mega Millions. I guess I'll say just for 0100 1 the record to start it out that, needless to say, I am 2 definitely opposed to a matrix change on the game, as I 3 believe that the rest of the Texas folks will be opposed 4 to it too. But putting that aside, before I go into some 5 of that, those issues -- what I'd really like to cover is 6 some things that I would like or hope that you all would 7 take care of with regard to Mega Millions before you make 8 any changes. 9 One of -- one major issue for the people of 10 Texas with regard to Mega Millions and Megaplier is the 11 Megaplier, if they draw a number four, that prize on the 12 low end is $600. For a $600 prize for the people of 13 Texas, they are forced to go to a claim center to collect 14 that prize. They cannot collect anything over 599 at the 15 retail location. As a result of that, they get a 1099 at 16 the end of the year and they have to pay taxes on it. And 17 so the Megaplier idea, either you need to up the amount 18 that can be collected in the store to at least save the 19 people those taxes and the drive, especially as you closed 20 all the claims centers. That is a serious problem for the 21 people of Texas. That's one thing that drives them away, 22 is why play it because you've got to go to a claim center 23 to collect your money. 24 The Texas Lottery is a growing studio -- 25 MR. COX: Ms. Nettles, on that point, let 0101 1 me be sure I understand. $600 or more must be collected 2 at a claim center, rather than at the store where the 3 ticket was sold? 4 MS. NETTLES: That's correct. 5 MR. COX: Is that a federal law? 6 MS. NETTLES: It's y'alls law. 7 MR. COX: There must be some federal 8 threshold that requires the generation of a 1099 which 9 isn't going to be done at 17,000 locations. 10 MR. GRIEF: You could ask Michael Anger to 11 come forward, Commissioners. 12 MS. KIPLIN: Well, while he's coming 13 forward, I'll direct your attention to Section 466.402 of 14 the State Lottery Act in which it says the payment made of 15 a prize in the amount of 600 or more may be made only by 16 the director, and so it has to be by the Lottery 17 Commission, as we understand it. And I believe it is 18 because of federal income taxes. So it's statutorily 19 driven. It's not -- it's not rule driven. 20 MR. ANGER: Commissioners, for the record, 21 my name is Michael Anger, and I'm the Lottery Operations 22 Director. That is indeed correct. The tolerance that's 23 set is based on federal guidelines for tax reporting. 24 There's a requirement upon us that when we pay out 25 winnings from lottery prizes of $600 or more that we file 0102 1 a report with the IRS to notify them of who we paid that 2 to and provide Social Security number information and the 3 amount of that payment for their records for reconciling 4 tax returns filed by individuals or entities who may have 5 claimed lottery prizes. So that is -- that is by federal 6 requirement. 7 MR. COX: So it looks like the Legislature 8 was driven by the federal requirement. But even if they 9 weren't, what Ms. Kiplin just read me gives us no 10 discretion. The director must pay according to the Texas 11 Lottery Act, so that's a closed case, it sounds like to 12 me. 13 MS. KIPLIN: Subsection C also says, "The 14 director may authorize the sales agent party to pay a 15 prize in an amount less than 600 after performing 16 procedures to validate the winning ticket as required by 17 the director." 18 MR. CLOWE: Thank you, Michael. 19 MR. ANGER: Thank you. 20 MS. NETTLES: If by chance, and apparently 21 they are probably correct on the federal law, if that is 22 the case, then may I suggest that you do something to 23 where people don't have to go to a claim center, 24 especially since they've all closed, on lowering that 25 prize to 599, which would go hand in hand with a 0103 1 suggestion or a request that I have with regard to the 2 proposed rule. But the $600 prize, when there are so many 3 of them at that level, is terribly unfair in light of the 4 fact that all the claim centers are closed. Okay? So 5 you're -- you're putting the burden on the people for 6 having to go so far. If they mail it in, there's a lot of 7 lost mail apparently coming to this Commission because 8 I've heard about it. But something needs to be done with 9 regard to this. And this is an issue that I've had on my 10 mind for a long time, because it keeps coming into me, 11 complaints from the people that I get from the web site. 12 The next item -- and I -- well, I'm going to 13 come back to the 600 in a little bit in a different area. 14 This Commission on Tuesday and Friday nights in the 15 drawing studio, they watch the Mega Millions drawings live 16 at 10:00 p.m. It's up on the big TV screen. But the 17 Texas Lottery, when they send out their drawing results to 18 the media, oftentimes those results are not included on 19 that, on that sheet, that press release. Additionally, 20 those drawings, the drawing results aren't even posted on 21 the TLC web site until long after the other drawings, the 22 Cash 5 and the Pick 3 numbers are posted, which I have 23 never understood why such a delay when those drawings take 24 place at 10:00 p.m. and the others take place at 10:12. 25 The Megaplier results are not available to the people at 0104 1 all. They are not in the lottery terminals. People are 2 calling me all the time saying, well, how can I find out 3 how many people won the Megaplier. I don't understand how 4 you all can sell a game and not tell the people what the 5 results are via the terminals at the stores. I've never 6 understood that. The first time I asked it, I was told, 7 there's not enough room on the tickets. Well, Megaplier 8 is a totally different game. It ought to have it's own 9 ticket. It doesn't have to be included on the one slip 10 that shows all states versus just Texas winners. So I 11 really hope that you'll do something about being more 12 up-front in providing that information to the people. 13 With regard to Mega Millions and how well it's 14 doing, I have here the cost benefit analysis that was done 15 originally on the game. Now, this cost benefit analysis, 16 I believe it was four or five weeks it considered sales 17 that was included with the game was four or five weeks 18 late in starting. But the bottom line on it is that for 19 the fiscal years '04 and '05, just going hard numbers on 20 this report, it showed that projected sales was supposed 21 to be $588.6 million. As we just saw a few minutes ago, 22 sales, actual sales have come in at $278.3 million. 23 They're short by $310 million on that game. They talk 24 about bringing in lots of money or high sales on 25 triple-digit jackpots. I took the liberty last night of 0105 1 going and only comparing the triple digit, which meant 2 that it started at $100 million or whatever was the 3 lowest, and I would like to share with you all my 4 findings. December 23rd, '03 -- and there's not very 5 many. December 23rd, '03, there was a $100 million 6 jackpot, Mega Millions, sales were $3.6 million. February 7 the 4th of '04, there was $102 million jackpot and sales 8 came down to 3.3 million. On April the 9th of '04, it was 9 $105 million, sales came down to 2.9 million. Now, on 10 6-15-04, there was a $100 million Mega Millions jackpot 11 and sales jumped way up to 3.8 million. I looked at that 12 and I thought, gee, what was going on there. Well, it 13 turns out that was the same time that Texas had the $145 14 million jackpot or around it, it was growing, so people 15 were coming in from all over the country on that. October 16 1 of '04, there was a $101 million jackpot, sales were 17 back down to 2.9 million. November the 12th of '04, it 18 was 106, and sales came down again to 2.7 million. On 19 January the 14th of '05, it was a $111 million jackpot, 20 and they were still at 2.7 million. And just this past 21 week, on March the 1st, it was 112 million and sales were 22 down to 2.6 million. Mega Millions has only been played 23 in Texas for a year and two or three months. And these 24 are triple-digit jackpots. If you take these sales 25 figures and compare them to Lotto Texas going back to 1992 0106 1 or even through today, they're nothing compared to Lotto 2 Texas. For the big spike in sales that you all keep 3 referring to for this triple-digit jackpot, on January the 4 -- or I'm sorry, July the 2nd of '04 is when we had the 5 $290 million jackpot. Texas only sold 12.6 million 6 tickets. We had a $85 million jackpot in April of 2002, I 7 believe, or '01, I forget the year, and they sold 8 52 million. People want a fair game. And the sad thing 9 is is this money is coming basically from the poor folks, 10 and I really hate that. So I'm not in favor of these 11 triple digit half billion dollar jackpots that's going to 12 be generated by causing all these losers. I'm just really 13 opposed to it. And as far as the sales, this Commission 14 knows that the game did not produce what it wanted. 15 As for the -- I don't understand how to approach 16 this one. If you all sign the agreement, the proposed 17 agreement, party states agreement, that automatically 18 means to me, I think, that you have to agree to make those 19 changes. So I don't understand why you're proposing a 20 rule if you sign that. Have I misunderstood something? 21 Would you all tell me what that means? 22 MR. CLOWE: Ms. Kiplin, would you like to 23 elaborate on that? 24 MS. KIPLIN: There are two things that must 25 be accomplished by, I guess, all states that have the same 0107 1 issues that we do; one is the rule-making and one is the 2 agreement. It seems that before you would begin to 3 propose amendments for public comment -- of course, public 4 comment is to receive amendments, you would need to have 5 an agreement in place because that triggers the 6 rule-making. If at the end of the day the Commission, I 7 guess, listens to the comment and doesn't believe that it 8 wants to pursue the matrix, then at that point you'd have 9 to take out what you'd want to do with the agreement that 10 you signed. And we'd be prepared to provide legal advice 11 to you, if you would like, either in the open or the 12 executive session, on the impact of that. But what 13 really -- I think in staff's mind what's really triggering 14 the need to propose amendments to the rule is the fact 15 that there is an amended agreement which brings California 16 and does contemplate this matrix change. So I think what 17 Ms. Nettles is alluding to, not to put words in her mouth, 18 is what comes first, public comment, where it might be 19 perceived that the Commission is going forward regardless 20 of the public comment aspect of the rule-making; and 21 therefore, would be considered to be nonsensical. I think 22 the point of the public comment is to determine whether 23 you want to proceed to adopt the rule or if you don't want 24 to proceed to adopt the rule. And I think it would 25 trigger what Texas wants to do about getting out of the 0108 1 game. 2 MR. CLOWE: Thank you. 3 MS. NETTLES: I'm still confused. Are you 4 going to have to sign the agreement, the proposed party 5 states agreement today? Is that what has been put before 6 you all? 7 MR. CLOWE: The Commission, if it acts 8 today, would be -- the action would be to authorize the 9 executive director to sign the agreement. And that would 10 trigger then the need for new rules. And if the 11 Commission does that, it may choose to publish rules for 12 comment. Then it would go through the commentary period 13 and then the Commission would take some action at the end 14 of that commentary period. 15 MS. NETTLES: Okay. The proposed party 16 agreement, doesn't the game rules specify the matrix? I 17 know the first one did. 18 MR. CLOWE: Yes. The matrix is specified 19 in the agreement. 20 MS. NETTLES: Okay. Then I can only -- 21 since I don't know if you're going to sign it, which I 22 tend to believe you are, I don't understand what the 23 purpose is in bothering to make any comment with regard to 24 a rule, because if you sign the agreement then that means 25 you've signed to a new matrix change irregardless of what 0109 1 the people say; however -- 2 MR. CLOWE: Let me try to explain it to you 3 so you understand it, Ms. Nettles. The question before 4 the Commission as presented by the Executive Director is 5 do we want to authorize him to sign the agreement as it is 6 being modified by the 11 states that are part of Mega 7 Millions. The trigger that causes that change is the 8 enlarging of the group from 11 to 12, bringing California 9 in. Part of that agreement that is being considered by 10 then the 12 states is to change the matrix. That's part 11 of the presentation that the Commission heard on February 12 the 28th. It's heard it again today. If the Commission 13 considers this item today and if it votes affirmatively, 14 if it does vote, then a rule change is necessary because 15 the rules are not appropriate for the new agreement that 16 it would have authorized, the Commission would have 17 authorized the Executive Director to be a party to. Then 18 if the Commission were to adopt for consideration or 19 publish for consideration rules that were apropos to the 20 new agreement, it would by law go through the comment 21 period and then review that and just make a decision at 22 that point in time whether to go forward, not to go 23 forward, or make some other decision. Does that help you? 24 MR. COX: Mr. Chairman, may I ask a 25 question? 0110 1 MR. CLOWE: Yes, sir. 2 MR. COX: So does that say then that we 3 might authorize Reagan to sign this subject to there being 4 a rule change? 5 MR. CLOWE: That's correct. And if we do 6 not adopt rules that support the agreement, then we are 7 out, the way I understand the agreement is. We must adopt 8 what is set forth in the agreement in our rules, but 9 Reagan does not control the rules. The Commission -- the 10 Board controls the rules. And what Ms. Kiplin has 11 explained, I think properly, is it would be improper -- 12 and I guess I'm saying this now as much for everybody's 13 benefit as Ms. Nettles'. It would be improper for the 14 Commission to propose rule changes without authorizing the 15 Executive Director to enter into the agreement. We have 16 to have a reason, and that's the sequence that we are 17 involved in in answering Ms. Nettles' questions. 18 Clarification? 19 MS. KIPLIN: Commissioners, perhaps then 20 the issue is, once again, what is the sequence of events 21 and whether the public comment period, if you will, would 22 be -- would be nothing but, quote, "a sham" in people's 23 eyes because you've already made a decision and you 24 haven't received public comment. It -- it's -- it goes to 25 the sequence of events where in my sense it would be that 0111 1 you would authorize the Executive Director to enter into 2 the agreement, but it's subject to the final outcome of 3 the rule-making. Because you may very well get public 4 comment during that comment period that leads the 5 Commission to, and we have done this in the past, as you 6 know, pull down the rule where you have not proceeded 7 because of the public comment that you've received. And 8 in that event, then the Commission is faced with the issue 9 of what to do with remaining in the Mega Millions game 10 when you have 11 jurisdictions who are wanting to pursue 11 that. 12 MR. CLOWE: And I think you've made that 13 clear prior to that statement, but that statement 14 continues to clarify it. And I think Commissioner Cox 15 said it earlier, the decision in regard to this new 16 agreement, assuming that there are 11 out of the proposed 17 12 states that ratify this agreement, for Texas is we are 18 either in or we are out. Now, if -- and we haven't asked 19 this question of Reagan. If three states out of the 11 20 ratify it and eight don't, we have a different issue 21 than -- 22 MR. GREER: Right. 23 MR. CLOWE: -- we are thinking we have. We 24 are thinking -- I would say I'm thinking probably that the 25 Executive Directors of these lotteries have gotten 0112 1 together with their staffs and they've worked together and 2 the agreement you're bringing us for consideration today 3 is a product of that effort. 4 MR. GREER: Yes, sir, that's true. 5 MR. CLOWE: And my assumption as a 6 Commissioner is that there is a sense of approval coming 7 from the noncommission level in these 11 states that are 8 working together. 9 MR. GREER: Yes, sir. 10 MR. CLOWE: And based on that assumption, 11 that may help you understand where I think I am on this 12 issue. 13 MS. NETTLES: Well, it would make more 14 sense to me if Reagan or legal came to you all and said 15 California is joining -- or wants to join, we have to 16 amend our contracts, needless to say, but we need to find 17 out if -- before you sign a legal, binding contract, I 18 would think that not just Texas but every state would 19 consider their people's comments before any state signed 20 that type of an agreement. But be that as it may, in my 21 opinion, it's a done deal. And I don't see a purpose 22 until I see your contract that you would have there and -- 23 and all. It just -- no, I'm -- I'm totally baffled by 24 this, but of course you're in a unique situation that you 25 do have 11 other states, so I understand that. 0113 1 MR. CLOWE: I've tried to explain it to you 2 as best I can, Ms. Nettles. 3 MS. NETTLES: I know and that's fine. 4 Okay. I don't have a problem with that. 5 Okay, Judge. He called you judge, so I will 6 too. I did see the law in California. A reporter of the 7 Los Angeles Times provided it to me. I'm not a lawyer, of 8 course, but I really did see the statute. And it really 9 is in the statute that all California games must be 10 pari-mutuel. They cannot have any set prizes on any 11 games. And it was very clear in plain old English, so I 12 understood it. So I just wanted you to know I did see it. 13 MR. OLVERA: And, Ms. Nettles, let me 14 clarify that. I don't question California's position or 15 statement. Just for educational purposes and comparison 16 purposes with Texas law, I'd like to see that. 17 MS. NETTLES: Okay. 18 MR. OLVERA: Obviously neither this 19 Commission nor the courts of Texas nor the Legislature are 20 bound by the interpretation of the California legislature 21 or California courts. 22 MS. NETTLES: I understand that. I just 23 want -- 24 MR. OLVERA: I don't want my request for 25 that statute or court opinion or whatever it may be to in 0114 1 any way imply that I'm against California joining this 2 Mega Millions game. 3 MS. NETTLES: Oh, I didn't interpret that 4 at all. 5 MR. OLVERA: All right. 6 MS. NETTLES: I just wanted you to know 7 that I did in fact see the statute. And it goes to their 8 AG too as far as a ruling that was a little over my head 9 legally, but at any rate... 10 MR. OLVERA: Well, you can provide me a 11 copy, as well. 12 MS. NETTLES: I can, but I don't have it 13 with me here. 14 Okay. With regard to these rules and the fact 15 that if you do sign that agreement with California, what I 16 -- one of the things that I opposed on joining Mega 17 Millions was the fact that they were all fixed prizes. 18 All of them were guaranteed amounts. And in Texas, I'm 19 pushing very heavily for everything -- I wish we did have 20 a law that said everything had to be pari-mutuel. Okay? 21 To give you an example, Lotto Texas, those guaranteed 22 prizes and the 52 percent that's supposed to be returned 23 to the people -- in the first place, the people don't see 24 52 percent, never have and they still don't. Currently, 25 you've got $7.7 million of that 52 percent that the 0115 1 players have never seen that. That is a result of the 2 reserve and over-allocating the low fixed prizes. If 3 California can join Mega Millions and demand and get all 4 pari-mutuel prizes except for the jackpot, which I wish 5 the jackpot were pari-mutuel too, then I think Texas has 6 that right, too. And we don't -- as it stands, I forget 7 the figure, but I too track how much money in excess there 8 is that Texas either has to send out of state or whatever 9 they do, they're settling, and it's -- it's greater than 10 the amount needed to pay the prizes. So either Texas is 11 having to send money out of state to fund other states 12 that may have more low tier, you know, to cover their 13 costs. If California can have pari-mutuel prizes, then 14 Texas needs to have pari-mutuel prizes, too. And so I 15 wish you all would consider that. That is not in this 16 draft rule. This draft rule is still calling for all set 17 prizes in Texas. If you want to be fair to the people, 18 you all need to pay them a percentage of sales and divide 19 it down to the penny of all prizes. And Lotto Texas needs 20 to be changed too, because right now the people have been 21 shorted out of 7.7 million just since May of '03. And 22 until I hear what y'all have to say with regard to Mega 23 Millions, that's the end of my comment. I do have other 24 comments on other subjects, but I'll wait until the end of 25 the meeting to do that. 0116 1 MR. CLOWE: Thank you, Ms. Nettles. 2 And now Mr. Gerald -- Dr. Gerald Busald, please. 3 Good morning. 4 DR. BUSALD: Morning. Good morning, 5 Commissioners. Good morning, Reagan. I haven't seen you 6 in some time. 7 MR. GREER: Morning. 8 DR. BUSALD: For the record, my name is 9 Professor Gerald Busald. I'm a professor of mathematics 10 at San Antonio College. Actually, I have two sets of 11 comments, one is some of the things my students did and 12 then my own comments. I want to separate those, because I 13 am not one who preaches to my students in class. About 14 the 175,711,536 what we are going to on the probability or 15 the odds of winning that game, we did a little research. 16 We asked for different ideas. And we found out that if 17 you stacked up 175 million play slips, the stack would be 18 over 11 million -- over 11 miles high. So that's a pretty 19 substantial stack. If you took 175 million seconds, it's 20 over five-and-a-half years. If you took 175 million 21 dollar bills and put them end to end, it would stretch 22 over 17,000 miles, which is about two-thirds of the 23 circumference of the earth. And there are only 145 24 million ounces of gold in Fort Knox. So kind of a comment 25 that I once read in -- a comment that came up in one of 0117 1 the previous Commission meetings was about where did this 2 idea of unwinnable games come from, and I think that in 3 some sense speaks to that. So these were just a few of 4 the things my students did. Now -- 5 MR. CLOWE: And how does that speak to 6 that? 7 DR. BUSALD: How does that speak -- I'm 8 sorry? 9 MR. CLOWE: How does that speak to that 10 comment? 11 DR. BUSALD: To the comment about 12 unwinnable games? 13 MR. CLOWE: Yes. 14 DR. BUSALD: Well, it becomes more and more 15 unwinnable. We are moving toward more and more unwinnable 16 games. 17 MR. CLOWE: It certainly is more difficult 18 as the odds go up. 19 DR. BUSALD: Correct. 20 MR. CLOWE: But it's been won consistently, 21 hasn't it? 22 DR. BUSALD: Yes. Unwinnable is a relative 23 term. 24 MR. CLOWE: It's an absolute term. 25 DR. BUSALD: Unwinnable is an absolute. 0118 1 Almost unwinnable is a relative term. 2 MR. CLOWE: But that's one of the comments? 3 DR. BUSALD: No. Okay. I'll take back the 4 comment and say -- I just noticed that that comment did 5 come up. 6 MR. CLOWE: And I'm just trying to 7 understand what your statistics -- did those come from you 8 or your students? 9 DR. BUSALD: No, my -- we did it in class. 10 MR. CLOWE: And that's very interesting and 11 is informative, but the fact is and what the Commission is 12 considering here today, increasing the odds makes for 13 higher jackpots, which it's been represented to us is what 14 the players are attracted by, and those jackpots are won 15 from time to time. 16 DR. BUSALD: Correct. 17 MR. CLOWE: Never been a jackpot yet, to my 18 knowledge, in Mega Millions or Lotto Texas that hasn't 19 been won. 20 DR. BUSALD: That's correct. 21 MR. CLOWE: So I would disagree with your 22 comment about not only it's unwinnable, but I would 23 disagree that it's almost unwinnable. I would say as the 24 odds go up, it is more difficult to win, but every 25 jackpot, to my knowledge, has been won. 0119 1 DR. BUSALD: Well, there are levels of 2 difficulty obviously. 3 MR. CLOWE: And we are dealing with a 4 higher degree of difficulty, aren't we? 5 DR. BUSALD: Absolutely. 6 MR. CLOWE: Great. Thank you. 7 DR. BUSALD: Could I -- my comments now are 8 about the social responsibility of this. As we move 9 toward the area of possibly $400 million jackpots, 10 advertised $400 million jackpots, one of the issues of 11 social responsibility is that we know that when we 12 advertise a $400 million jackpot, that is the payout and 13 not the cash value option. The State of Ohio always 14 advertises, as well, the estimated cash value payout. And 15 it might even behoove the Commission to do that, because 16 right now the payout is approximately 60 percent or a 17 little bit more than 60 percent of the advertised jackpot 18 amount, if you take the cash value option. The perception 19 of the press, the perception of the people of Texas is 20 probably that it's 50 percent. So in some sense, they're 21 underestimating what the jackpot is for the cash value 22 option. 23 Now, obviously that's tied in interest rates and 24 that may change in the past, but that is something that 25 some other states do and I believe it's socially 0120 1 responsible to say that. That's my opinion, has nothing 2 to do with my students. 3 MR. CLOWE: And, Professor -- 4 DR. BUSALD: Uh-huh. 5 MR. CLOWE: -- my recollection of the 6 calculation of that actual cash value is it is determined 7 on the day that the prize is claimed and the election of 8 the option of the recipient when he becomes -- he or she 9 becomes a winner as opposed to a claimant. And how does 10 the State of Ohio then advertise that? Do they say an 11 estimated? 12 DR. BUSALD: Yes, they do say estimated. 13 It's on their web site. 14 MR. CLOWE: Great. Thank you. 15 MR. COX: May I ask a question? 16 MR. CLOWE: Sure. 17 MR. COX: Professor, I heard you say moving 18 toward $400 million jackpots. 19 DR. BUSALD: Yes. 20 MR. COX: Where do you see a move toward 21 $400 million jackpots? 22 DR. BUSALD: In some of the writings out of 23 California. Some of the press releases, some of the 24 stories out of California that their statisticians have 25 looked at the game. We have had a $290 million jackpot 0121 1 with the current matrix. And obviously, as it becomes 2 more difficult to win, the probability there won't be a 3 winner increases and so the jackpots will roll. We will 4 have higher jackpots. There's no doubt. 5 MR. COX: Let me see if I understand 6 something here, Reagan or Gary. My understanding was that 7 the matrix change was not made in this case to generate 8 higher jackpots. Some matrix changes are made for that 9 purpose. It was made to keep things in equillibrium 10 considering that 35 million new people were coming into 11 the game. Was that -- 12 MR. GREER: That's a part of the 13 consideration, yes, sir. When the population increases -- 14 you know, what we did when we did the cost benefit 15 analysis is look at what would happen if we didn't change 16 the matrix and what would happen if we did. And the 17 recommendation is to change the matrix because of the 18 potential that we see for the overall game to succeed with 19 more rolls. 20 MR. COX: Thank you. 21 MR. CLOWE: And you triggered now something 22 in my mind. Didn't the odds go down? 23 MR. GREER: The overall odds of winning in 24 this new matrix go down. Overall odds. 25 MR. CLOWE: Overall? 0122 1 MR. GREER: To one in 40 from one in 43. 2 MR. CLOWE: I seem to remember that. Thank 3 you. 4 DR. BUSALD: The other comment, I guess, I 5 have is if we do indeed reach these high jackpot levels, 6 which we have, the one thing that I have not seen, and we 7 didn't see it when we had the $290 million jackpot was any 8 advertising at all by the Commission other than the fact 9 that there's a $200 million jackpot out there. And so it 10 seems to me that there would be some social responsibility 11 to advertise through what -- not just play response -- 12 responsibly on the back of a ticket, but there needs to be 13 some real marketing effort, because we know this is going 14 to happen, for people to play responsibly. We don't want 15 to have people spending $10,000 on tickets. Or I hate to 16 see the idea of people spending $10,000 on a $400 million 17 jackpot, pursuit of that. That -- you know, you're 18 starting to reach a level of social responsibility in my 19 opinion, and that's all it is, for what it's worth. 20 The other comment, I guess, is that even though 21 it's not illegal, I think the jackpot levels can reach, in 22 my opinion, an immoral level. And you just need to 23 consider the case of the $200 million jackpot winner and 24 read Rich Man Poor Man, which was done in the Washington 25 Post just recently about the trials and tribulations of 0123 1 the gentleman who did win that jackpot. And we change 2 lives so drastically that I -- you know, everyone thinks 3 they can handle that, but they can't. And that's the 4 reality that we really, you know -- we make it very hard 5 to win. And then by making those amounts so great, we 6 really get an amount of money that most people cannot 7 handle responsibly. And that's just my opinion, for 8 whatever it's worth. And that's all I have in comments. 9 MR. CLOWE: Professor, I thank you. I want 10 to comment in two areas. One is that I share your 11 feelings of concern about people who perhaps go overboard 12 and play a gaming opportunity to excess. The Commission 13 has been very active in trying to determine how to get 14 that message across and continues to be active in that. 15 The Legislature took away funding for a program that we 16 were part of and we have continued to be a part of an 17 effort as best we can to encourage people to play 18 responsibly and we want to make the games attractive and 19 make them interesting with good balance and in an 20 even-handed manner so that people do not go to excess. 21 And we will continue that effort. 22 On the levels of the jackpots, the Commission is 23 mandated by the Legislature to do what it does. 24 DR. BUSALD: Yes. 25 MR. CLOWE: And the Legislature enacted a 0124 1 law that enabled this Commission to join a multistate 2 game. And it was the sense of the Legislature that it 3 would be something that they wanted Texas to be involved 4 in under the policy direction of this Board and at this 5 Commission. And so that's why we are here and that's what 6 we are about. The issue of whether we ought to cap it at 7 a $200 million level, I think that does fall within the 8 law and the Commission has that authority and that 9 responsibility. And I appreciate you bringing that up, 10 but I did want to remind you that this Commission only can 11 act within the statute that the Legislature has enacted. 12 DR. BUSALD: Yes. Yes, I just wanted to 13 point out some issues you might not have thought of. 14 MR. CLOWE: Well, I can tell you, for three 15 board members that don't get paid a dime, we spend a lot 16 of time thinking about these jobs and we are very 17 concerned about the issues that you have raised. 18 DR. BUSALD: Thank you. 19 MR. CLOWE: It's always a pleasure to have 20 you come up from San Antonio, and we appreciate you being 21 here. And we are mindful of the comments you made at our 22 February the 28th meeting. That's not on the agenda, so I 23 can't comment on it at this time, but I want to thank you 24 again for those comments. 25 DR. BUSALD: Thank you. 0125 1 MR. CLOWE: Thank you. 2 Commissioners, that concludes the presentations 3 that we have had from staff and from the public witnesses. 4 At this time I'd like to ask you if you have any further 5 questions or comments? 6 MR. COX: No, sir. 7 MR. CLOWE: I think it would be appropriate 8 for the Commission to consider a motion at this time and 9 make a determination of where we are on this issue. 10 Counselor, would you give us what the correct motion would 11 be? 12 MS. KIPLIN: If I could ask Mr. Marker to 13 join me because he keeps me on my toes. 14 Commissioners, right now, I don't think you've 15 heard the staff actually go through the draft proposed 16 rule. I'd be happy to take you through that and talk to 17 you about what we are recommending -- 18 MR. CLOWE: And is it appropriate to do 19 that prior to consideration of this motion? 20 MS. KIPLIN: Or we can wait and have you 21 consider the agreement that's before you. There is that 22 intricacy or the intertwineness between the agreement and 23 the rule and, you know, what comes first. And I'd like to 24 talk to Mr. Marker about that and have him address that 25 issue. 0126 1 MR. CLOWE: Let's have that issue 2 discussed, because I think it's important for everyone to 3 have a clear understanding of it. 4 MR. MARKER: Commissioners, the agreement 5 itself actually drives the rule. And without the amended 6 and restated agreement, then there would be no basis for 7 the rule. 8 MR. CLOWE: That was my sense on it. If 9 the Commissioners' pleasure is not to authorize the 10 Executive Director to enter into an agreement, then the 11 rules are superfluous. 12 MS. KIPLIN: But then at the same time, 13 there is a requirement for a public comment period under 14 the proposed rule-making where the Commission will receive 15 comment and consider the comment and summarize the comment 16 and explain a -- required whether they explain their 17 reasons why they disagree and so -- 18 MR. CLOWE: So it's not a done deal? 19 MS. KIPLIN: So you're left with the -- 20 just hypothetically, let's assume for the same sake of 21 discussion the Commission does vote today to authorize Mr. 22 Greer to proceed to enter into these agreements to begin 23 the -- begin the change to the -- to the agreement, and 24 you get comment during the course of the rule-making where 25 you, as a Commission, the policy making body, reconsiders 0127 1 and says, you know, we hadn't thought of that and we are 2 not prepared to proceed. Then the issue is what remedies 3 are available before you under the terms of the agreement 4 if you decide to not proceed on the rule-making with the 5 agreement. I don't know if you want to seek legal advice 6 in the executive session or proceed now? 7 MR. CLOWE: Well, I will just tell you that 8 my assumption is if the Commission determined it did not 9 wish to go forward, then we would withdraw from Mega 10 Millions. I don't think I need legal advice on that. 11 MS. KIPLIN: That's fine. 12 MR. CLOWE: And I think Commissioner Cox so 13 eloquently stated it earlier, we are either in or out. 14 All the parties either agree to it or they get out. 15 There's no place else to go. 16 MR. GREER: That's true. 17 MR. COX: Andy, is that -- are those the 18 only two options before us? 19 MR. MARKER: That is correct. There is a 20 provision in the multistate agreement that provides for 21 withdrawal, and that withdrawal can be by operation of 22 law. So if the Commission were not to adopt the proposed 23 rule accepting the new matrix, then by operation of law, 24 Texas can withdraw immediately from the game effective 25 upon the start of sales for any new matrix. 0128 1 MR. COX: So I have also heard that there 2 is a provision that certain actions cannot be taken 3 without unanimous agreement. 4 MR. MARKER: There is a provision in the 5 agreement that says that any changes to the documents that 6 make up the agreement, that is the finance procedures, 7 multistate agreement, draw procedure and the official game 8 rule, that is -- must require unanimous approval and must 9 be signed by all party lotteries. There are other aspects 10 of the game that do not go to the heart of the game, for 11 example, deciding when the directors will meet, approving 12 the operating budget, those can be done by vote of 13 majority. Also an invitation can be extended to a party 14 lottery based on two-thirds approval. 15 MR. COX: An invitation can be extended 16 based on two-thirds approval. So that says that there is 17 not the option for one state to say California can't come 18 and maintain the status quo? 19 MR. MARKER: Well, that's true to an 20 extent. It would still -- even thought the invitation can 21 be extended, it would still require a unanimous approval 22 to amend the agreement. In this case, all party lotteries 23 are being asked to sign this new agreement. 24 MR. COX: So there is, at least 25 theoretically, the possibility of one state saying no 0129 1 California and there's no California? 2 MR. MARKER: Under the terms of the 3 agreement, that would be correct. If one state refused to 4 sign the agreement, then the current agreement would 5 continue. 6 MR. COX: Thank you. 7 MR. CLOWE: I'm not comfortable with the 8 theoretic comment and I'm not sure that it's understood. 9 And I have a misunderstanding about that, because the 10 Executive Director has said to me that he is in a position 11 where he believes it's either a get in or get out 12 situation. I don't think we can bring down California is 13 what I'm trying to say by saying we don't agree to have 14 California coming in. Am I clear on that? 15 MR. COX: I wasn't suggesting that we would 16 even consider that. 17 MR. CLOWE: Oh, okay. 18 MR. COX: I was suggesting that there is a 19 possibility that a state, I think was the way I put it, 20 could do that at least in theory. As a practical matter, 21 I think the choices are as you put them, we are either in 22 or we are out. 23 MR. CLOWE: That's why I hesitated. I 24 didn't know whether I ought to get into it. I didn't know 25 where you were. And I didn't want to get into it if it 0130 1 wasn't necessary, but I think this has been helpful to 2 have you clarify, so thank you. 3 Back to, then, your question, Ms. Kiplin, my 4 thinking is the Commission needs to express its will 5 before we discuss any proposed rules. 6 MS. KIPLIN: Yes, sir. I don't disagree. 7 I'm -- I guess I'm looking further to the future, because 8 I am aware of changes that were proposed to the game, in 9 particular -- not this game, but in particular Lotto 10 Texas, sometime ago where a proposed, I think, a matrix 11 change, and the Commission, based on public comment, did 12 withdraw that rule. So I wanted to make it clear that the 13 public comment is a meaningful comment period. You may 14 very well get comment that -- you know, you're proposing 15 it for public comment on these amendments, and you may get 16 public comment that leads the Commission to decide to 17 cancel or withdraw that rule-making or amend the 18 rule-making in some capacity. 19 MR. CLOWE: And I thank you for that and I 20 think it's a very valid comment to make that we have had 21 one public witness here who's testified against being a 22 part of the Mega Millions as it is today with 11 states or 23 as it would be with 12 states. And I think that comment 24 is valuable and it's the kind of thing that we want to 25 hear. But I think by proper operation of the 0131 1 Administrative Practices Act, we need to take these steps 2 to go through the practice correctly. So I think I'll go 3 back to where I was when I asked you the question. If 4 it's the Commission's will to make a determination on 5 this, what would the correct motion be? 6 MS. KIPLIN: Well, I would put this out for 7 consideration and, Mr. Marker, you can take a hit on it if 8 you want. But I think consistent with where you all were 9 when we first joined the game, you would vote to authorize 10 the Executive Director to enter into the amended game 11 agreements regarding Mega Millions game. 12 MR. CLOWE: Commissioners, are there any 13 questions or any discussion? And I'll make that motion to 14 put it on the table for consideration. And before I ask 15 for a second, I'll give anyone an opportunity to comment 16 on it or make any questions that they'd like or modify it 17 in any way. 18 Not you, Ms. Nettles. 19 MR. OLVERA: Mr. Chairman -- Mr. Chairman, 20 I agree in the sense that -- and I don't mean this 21 disrespectfully or jokingly. I don't want to contradict 22 what we just said 30 minutes ago to Ms. Nettles. I think 23 Step 1 is going forward with the agreement, and then Step 24 2, modifying the rules as may be dictated pursuant to that 25 agreement, otherwise it's moot. And so I'd agree, I think 0132 1 we need to go forward with the agreement first and then 2 respectively change the rules afterwards. And there's no 3 reason to go to Step 2 before we finalize Step 1. 4 MR. CLOWE: And, Ms. Nettles, I want to 5 clarify for the record. You raised your hand. You've had 6 your opportunity to testify and the Commissioners now are 7 deliberating, and you're not properly included in this 8 deliberation. Thank you. 9 Any questions or comments? 10 MR. COX: No. I'm prepared to second the 11 motion. 12 MR. CLOWE: The motion is made and 13 seconded. All in favor please say aye. 14 (Unanimous aye.) 15 MR. CLOWE: Opposed, no. The vote is 3/0 16 in favor. 17 Now, Ms. Kiplin, if the staff would like to 18 cover the rules, I think that would be appropriate. 19 MS. KIPLIN: Thank you, Commissioners. 20 What you've had provided to you is a draft rule-making in 21 which the staff is recommending that the Commission vote 22 to propose amendments to 16 Texas Administrative Code 23 Section 401.315 relating to the Mega Millions on-line 24 game. The proposed amendments change the game matrix from 25 five of 52 and one of 52 to five of 56 and one of 56. 0133 1 Pardon me, 46. The proposed amendments change the minimum 2 grand jackpot amount from 10 million to 12 million and 3 also change the second prize level from 175,000 to 4 250,000, third prize level from 5,000 to $10,000, 5 respectively. 6 Additionally, the odds of winning for each prize 7 category, as well as the overall odds of winning, change 8 by virtue of these proposed amendments. They also change 9 provisions throughout the rule that will refer to the 10 number of numbers and either field of those numbers, 11 referring back to the one of 56 and the one of 46. There 12 is language that is also added that provides that if the 13 sales supported jackpot is at least $12 million lower than 14 the advertised jackpot, the resulting jackpot to be paid 15 will be the highest fully funded million, plus $12 million 16 over the advertised jackpot, whichever is lower. However, 17 in no event shall the jackpot be paid -- be less than the 18 advertised jackpot immediately prior to drawing. 19 Commissioners these proposed amendments do go 20 along with the game agreement amendments and they are 21 consistently -- they are consistent documents. So with 22 that, the staff would like to have the Commission consider 23 a vote to publish these rule amendments for public comment 24 for a period of 30 days. Staff is also requesting your 25 permission to notice a rule-making comment hearing and we 0134 1 are looking at that being April 7th where those that would 2 like to provide oral comment can come forward and do so 3 here at the Lottery Commission headquarters. Then 4 obviously we will do our best to compile all the summary 5 of the comments, make those available to each of you as we 6 have in the past on game rule changes and you can come in 7 and go through the comment that we have received and bring 8 back a rule for your consideration at a later time. 9 MR. CLOWE: Thank you. Are there any 10 questions? 11 MR. COX: No, sir. 12 MR. OLVERA: No, sir. 13 MR. CLOWE: Is there a motion? 14 MR. OLVERA: So moved. 15 MR. COX: Second. 16 MR. CLOWE: All in favor, please say aye. 17 (Unanimous aye.) 18 MR. CLOWE: Opposed, no? The vote is 3/0 19 in favor. 20 Thank you. Next we'll move to Item V, Report, 21 possible discussion and/or action on the 79th Legislature. 22 Good morning. 23 MS. TREVINO: Good afternoon, 24 Commissioners. I think it's afternoon already. 25 MR. CLOWE: Oh, my goodness. 0135 1 MS. TREVINO: Good afternoon, 2 Commissioners. For the record, I'm Nelda Trevino and I'm 3 the Director of Governmental Affairs. In regards to 4 report to you to date on the 79th Legislature, more than 5 4600 bills have been filed thus far during this 6 Legislative session. I will point out that the bill 7 filing deadline is today, March the 11th, and we 8 anticipate many, many more bills to be filed by the end of 9 the day. 10 We are currently tracking and monitoring 11 approximately 100 bills for possible impact to our agency. 12 Because the status of bills change daily, I have provided 13 each of you with an updated tracking report to replace the 14 one in your notebook. 15 Bills which have been filed since the 16 February 28th Commission meeting report with direct impact 17 on the State Lottery Act or the Bingo Enabling Act include 18 the following: 19 House Bill 10 by Representative Jim Pitts make 20 supplemental appropriations and reductions to 21 appropriations for several state agencies. The bill 22 includes a provision that would reduce the Lottery 23 Commission's budget in this current fiscal year by 24 $1.7 million. 25 House Bill 1711 by Representative Roberto Alonzo 0136 1 relating to dedicating 5 percent of the lottery revenue to 2 economic development and job training in certain border 3 counties. The remainder of 95 percent would remain 4 allocated to the Foundation School Fund. 5 House Bill 2038 and HJR 63 by Representative Ray 6 Allen would authorize video lottery terminals at licensed 7 Texas racetracks. 8 House Bill 2715 by Representative Jose Menendez 9 would authorize licensed bingo organizations to conduct 10 charitable poker games. 11 House Bill 2797 by Representative Norma Chavez 12 would authorize federally recognized Indian tribes along 13 the Texas/Mexico border to engage in bingo without state 14 licensing. 15 Senate Bill 1097 and SJR 29 by Senator Royce 16 West would authorize video lottery terminals in counties 17 and municipalities in which the voters have approved their 18 operation. 19 Senate Bill 1289 by Senator Jeff Wentworth would 20 authorize certain state universities to conduct a one-time 21 lottery and award one or more motor vehicles as prizes. 22 The Lottery Commission would be directed to provide 23 technical assistance to these universities operating a 24 lottery as provided by this bill. 25 Yesterday, Senator Ken Armbrister filed several 0137 1 bills relating to the authorization of video lottery 2 terminals. Senate Bill 1326 would authorize the creation 3 of counting gaming districts to regulate local option 4 video lottery gaming. Senate Bill 1327 provides for 5 establishment, oversight, and operation of video lottery 6 terminals owned by Indian tribes on Indian lands and the 7 operation would be regulated by the comptroller's office. 8 And the last bill that Senator Armbrister filed with 9 regards to video lottery is Senate Bill 1403 which would 10 authorize video lottery terminals at racetracks and on 11 tribal lands. 12 We have been in communication with several of 13 these bill authors and provided them information at their 14 request and continue to work with some of these offices, 15 again, upon their request for some information. 16 In addition to the Bills that I have mentioned, 17 there are two additional proposals to amend the 18 Constitution to authorize casino gaming. And these are 19 HJR 76 by Representative Geren and SJR 18 by Senator 20 Rodney Ellis. 21 The agency's Sunset Bill, Senate Bill 405 by 22 Senator Mike Jackson, is scheduled to be heard on Monday, 23 March the 14th, in the senate government organization 24 committee. And Reagan and Billy will be in attendance to 25 serve as resource witnesses to the committee at their 0138 1 hearing. 2 As it was reported earlier, House Bill 1138 by 3 Representative Kino Flores relating to the operation and 4 regulation of charitable bingo was considered by the House 5 Licensing and Administrative Procedures Committee on March 6 the 2nd and the committee substitute was voted favorably 7 from the committee. And Billy Atkins was in attendance at 8 the hearing to serve as a resource to that committee. 9 The appropriation bills, House Bill 1 and Senate 10 Bill 1, continue to move through the House Appropriations 11 Committee and Senate Finance Committee processes and the 12 agency continues to respond to requests for information 13 concerning the agency's budget request for members of the 14 committee and for the legislative budget. 15 This concludes my report, and I'll be happy to 16 answer any questions. 17 MR. CLOWE: Are there any questions? 18 Thank you, ma'am. 19 MR. OLVERA: Well, and Mr. Chairman, I have 20 no questions. I just want to make a comment. Ms. Trevino 21 was very helpful in the interviews that I had with 22 senators prior to my Senate confirmation, and I just want 23 to relate to the Commission that every senator was very 24 complimentary of Ms. Trevino and her work and she received 25 high praise everywhere we went. So thank you for your 0139 1 quality of work, Ms. Trevino. 2 MS. TREVINO: Thank you, Commissioner 3 Olvera. I appreciate that. And congratulations again on 4 your confirmation to the Commission. 5 MR. OLVERA: Thank you, ma'am. 6 MR. CLOWE: Thank you, Commissioner. 7 Next is Item VII. I will move to sign the 8 certificate of recognition for the 20 years of service to 9 the State of Texas by William L. Atkins. Is there a 10 second? 11 MR. OLVERA: Second. 12 MR. CLOWE: All in favor please say aye. 13 (Unanimous aye.) 14 MR. CLOWE: Opposed, no? The vote is 3/0. 15 Commissioners, we will sign this certificate now and we 16 will go into executive session, if it is your pleasure. 17 MS. KIPLIN: Commissioners, would you like 18 to take -- I think we do have a couple of contested case 19 proceedings. Would you entertain a request by the staff 20 to take those up before going into executive session? 21 MR. CLOWE: If it suits the Commissioners, 22 that's fine with me. Would you like to do that right now? 23 That would be Item No. IX, Consideration of the status and 24 possible entry of orders in docket numbers represented by 25 the letters A through G. 0140 1 Mr. White, would you like to make those 2 presentations, please? 3 MR. WHITE: Yes, sir. Thank you, 4 Commissioners. Good morning. For the record, my name is 5 Steven White. I'm Chief Enforcement, Legal Services 6 Division. You have six proposals for decisions and one 7 agreed order before you behind Tab 9. The six PFDs all 8 involve lotto retailers sales agents. In all six cases, 9 the Administrative Law Judge has recommended revoking the 10 license of the sales agents. In all six cases it was 11 because of failure to maintain adequate funds in their 12 accounts to pay for lottery tickets sold. You have one 13 agreed order involving a lottery retail sales agent. That 14 agreed order lists a summary suspension that's currently 15 in place. The agent's license was summary suspended for 16 several concerns. He had a sudden increase in his 17 inventory level, a dramatic increase. It was -- we looked 18 at his validating procedures. It turns out he was -- they 19 were validating the winning sales tickets, a large number 20 within seconds of each other. Weren't quite sure what was 21 going on. He said what he was doing, he was paying out 22 winning tickets, not validating them at the time he made 23 the payments, saving them up for the weekend when times 24 were slower and then validating them at that time. 25 Assuming that's the truth, that is a violation of the 0141 1 rules, so the judge went ahead and upheld this summary 2 suspension based on that. Through negotiations, he agreed 3 to keep his inventory levels down to a reasonable level 4 and agreed to comply with the rules and validate the 5 tickets at the time he pays the winning tickets. And 6 based on that, we agreed to suspend the -- revoke -- 7 MR. CLOWE: That is the case represented by 8 letter G? 9 MR. WHITE: It's the Lotto Food Mart. 10 MR. CLOWE: Yes, it is. Any questions, 11 Commissioners? 12 MR. COX: No. 13 MR. CLOWE: What's your motion, Mr. White? 14 MR. WHITE: I'm sorry. I recommend -- 15 staff recommends that you adopt the proposal for decisions 16 in the six cases and adopt the agreed order. 17 MR. CLOWE: So moved. 18 MR. COX: Second. 19 MR. CLOWE: All in favor, please say aye. 20 (Unanimous aye.) 21 MR. CLOWE: Opposed, no? The vote is 3/0 22 in favor. 23 We'll sign those orders. And at the same time, 24 as soon as we are completed with that, I will move to go 25 into executive session, if it suits the Commissioners' 0142 1 pleasure. And prior to physically moving in there, Billy 2 if you'll stand by, please. 3 At this time I move the Texas Lottery Commission 4 go into executive session to deliberate the duties and 5 evaluation of the Executive Director and/or Deputy 6 Executive Director, Internal Audit Director and Charitable 7 Bingo Operations Director pursuant to Section 551.074 of 8 the Texas Government Code, to deliberate the duties of the 9 General Counsel pursuant to Section 551.074 of the Texas 10 Government Code, to receive legal advice regarding pending 11 or contemplative litigation and/or to receive legal advice 12 pursuant to Section 551.071(1)(A) or (B) of the Texas 13 Government code and/or to receive legal advice pursuant to 14 Section 551.071(B) of the Texas Government Code, including 15 but not limited to Patsy Henry versus Texas Lottery 16 Commission, Sandy Surber et al versus GTECH Corporation, 17 Linda Cloud versus Mike McKinney, et al, James T. 18 Jongebloed versus Texas Lottery Commission, Russell 19 Vierney v. Carol Keeton Strayhorn, Greg Abbott, and Reagan 20 E. Greer, in their individual and official capacities, 21 employment law, personnel law, procurement law, contract 22 law, evidentiary and procedural law, and general 23 government law. Mega -- no need to include any advice on 24 Mega Millions, I don't believe, but I'll include it in 25 case we want to receive that. And it would include Mega 0143 1 Millions agreement and/or game. Is there a second? 2 MR. COX: Second. 3 MR. CLOWE: All in favor, please say aye. 4 (Unanimous aye.) 5 MR. CLOWE: Opposed? The vote is 3/0 in 6 favor. 7 The Texas Lottery Commission will go into 8 executive session. The time is 12:18 p.m. The day is 9 March the 11th, 2005. 10 (Executive session.) 11 MR. CLOWE: The Texas Lottery Commission is 12 out of executive session. The time is 1:00 p.m. Is there 13 any action to be taken as a result of the executive 14 session? If not, let's move to the next item on the 15 agenda and that is public comment, I believe. No, I stand 16 corrected. It is the report by the Executive Director or 17 possible discussion and/or action on the agency's 18 operational status, FTE status and retailer forums. 19 Mr. Greer. 20 MR. GREER: Thank you, Mr. Chairman. I did 21 have a few things I wanted to bring up. First is the 22 follow-up to Commissioner Olvera's topic earlier, as well 23 as Commissioner Cox, I think, brought up the Lotto Texas 24 scenario. And I know, Mr. Chairman, you and I have 25 discussed it. I just wanted to reinforce to each of you 0144 1 that we continue to look at that issue very seriously. 2 Commissioner Cox has been working with us in reference to 3 that situation, and we will be bringing you a report in 4 the near future on some elements of Lotto Texas that we 5 think need to be addressed. 6 MR. COX: One thing I might add to that, 7 Reagan, because of the timing, the anticipated timing for 8 the changes in Mega Millions, there really isn't the 9 ability to move the Lotto Texas, any changes will not be 10 made up -- might be made far up in the time frame because 11 the staff doesn't think it would be a good idea to change 12 both of them in the same general time frame. So I think 13 things are on track for timely consideration of the 14 change. 15 MR. OLVERA: Okay. 16 MR. GREER: It continues to be something we 17 are monitoring closely with our current $19 million 18 jackpot and the rolls we have had, which are affecting -- 19 affected by the sales, as well as the interest rate. We 20 are just going to continue to monitor that, but we do feel 21 like that there will be a need to have a further 22 discussion on that topic soon. We are working toward that 23 with that time frame that the Commissioner mentioned. 24 Mega Millions is now at 20 million. It will 25 roll, if there is no winner tonight, to 27 million. We 0145 1 discussed early that we have had a claimant step forward. 2 We are currently working with them in reference to the 3 possible cash value option of a little over $68 million on 4 that Mega Millions jackpot ticket that was sold in Rowlett 5 a few weeks ago. 6 I also wanted to mention, which I'm very proud 7 of, I have to say, we received, at our staff meeting the 8 other day, an award from the State Employee SECC campaign 9 that was involving charitable contributions. And our 10 agency received the highest percentage of participation 11 award of all State agencies in our category. And we have 12 the trophy out in our lobby that I'd like to draw your 13 attention to before you leave. That was a big deal and I 14 personally think it sends a great message that we are a 15 caring organization and that we do take part in what goes 16 on in the community and that that's a positive for the 17 agency as a whole. Our theme this month is how does your 18 garden grow. And I'm bringing that around your goals, how 19 are your goals doing and are you cultivating them and are 20 you looking at having a good harvest. 21 MR. CLOWE: And it's spring. It's planting 22 time. 23 MR. GREER: It's right out there. That's 24 right. We had a good discussion on that the other day, 25 and I just want to keep you apprised of what we're talking 0146 1 about as far as our monthly themes are concerned. As a 2 whole, we'll continue to work with legal on Mega Millions. 3 And again, I appreciate the opportunity to bring that 4 information before you today and thank you for calling 5 this meeting. 6 MR. CLOWE: Any questions? 7 MR. COX: No, sir. 8 MR. CLOWE: Next Item No. XI, Mr. Atkins, 9 the recipient of the 20-year award, do you have anything 10 for us as Charitable Bingo Operations Director, including 11 a possible discussion and/or action on the Charitable 12 Bingo Operations Division's activities? 13 MR. ATKINS: The only thing I wanted to add 14 to my report, Commissioners, was to let you know we have 15 issued a press release with the assistance of the media 16 relations division. It went out March 1st. I believe I 17 mentioned it at the last meeting. This one highlights the 18 allocations that the division made to local jurisdictions. 19 Allocations were higher this quarter, about 1 percent 20 higher, so we have sent that press release out. I believe 21 we have received one or two -- three responses to that, so 22 we are getting some recognition for it. 23 MR. CLOWE: Very good. Thank you very 24 much. 25 Next Item No. XII, public comment. Is there 0147 1 anyone wishing to make a comment to the Commission? If 2 not, is there anything else? Thank you all. We stand 3 adjourned. The time is 1:06 p.m. 4 (Meeting adjourned.) 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0148 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, STEFFANIE L. DECKER, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify that 8 the above-captioned matter came on for hearing before the 9 TEXAS LOTTERY COMMISSION as hereinafter set out, that I 10 did, in shorthand, report said proceedings, and that the 11 above and foregoing typewritten pages contain a full, 12 true, and correct computer-aided transcription of my 13 shorthand notes taken on said occasion. 14 Witness my hand on this _______ the day of 15 March, 2005. 16 17 18 19 __________________________________ 20 STEFFANIE L. DECKER, CSR Texas CSR No. 3926 21 Expiration Date: 12-31-06 WRIGHT WATSON STEN-TEL 22 Registration No. 225 1801 North Lamar, Mezzanine Level 23 Austin, Texas 78701 (512) 474-4363 24 JOB NO. 050311SLD 25