0001 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 FEBRUARY 27, 2006 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 BE IT REMEMBERED that the TEXAS LOTTERY 18 COMMISSION meeting was held on the 27TH of FEBRUARY, 19 2006, from 8:30 a.m. to 4:35 p.m., before Brenda J. 20 Wright, RPR, CSR in and for the State of Texas, 21 reported by machine shorthand, at the Offices of the 22 Texas Lottery Commission, 611 East Sixth Street, 23 Austin, Texas, whereupon the following proceedings 24 were had: 25 0002 1 APPEARANCES 2 Chairman: Mr. C. Tom Clowe, Jr. 3 Commissioners: 4 Mr. James A. Cox, Jr. 5 General Counsel: Ms. Kimberly L. Kiplin 6 Acting Executive Director: 7 Mr. Anthony J. Sadberry 8 Charitable Bingo Executive Director: Mr. Billy Atkins 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX - February 27, 2006 2 PAGE Appearances.................................... 2 3 AGENDA ITEMS 4 Item Number I.................................. 6 The Texas Lottery Commission will call the 5 meeting to order 6 Item Number II................................. 6 Report by the Bingo Advisory Committee Chairman, 7 possible discussion and/or action regarding the Bingo Advisory Committee's activities, including 8 the February 15, 2006 Committee meeting 9 Item Number III................................ 179 Report, possible discussion and/or 10 action on lottery sales and revenue, game performance, instant game closures, new game 11 opportunities, including Powerball, Pick 3 issues, and trends 12 Item Number IV................................. 214 13 Report, possible discussion and/or action on the agency's financial status 14 Item Number V.................................. 15 15 Consideration or and possible discussion and/or action, including adoption or withdrawal, on 16 amendments to 16 TAC 401.301 relating to General Definitions and/or on amendments, new rule, and/or 17 repeal on 16 TAC 401.304 relating to On-Line Game Rules (General) 18 Item Number VI................................. 15 19 Consideration of and possible discussion and/or action, including adoption or withdrawal, on repeal 20 of 16 TAC 401.305, 401.307, 401.308, 401.312, and/or 401.315 relating to Lotto Texas, Pick 3, 21 Cash Five, Texas Two Step, and Mega Millions on-line game rules, respectively 22 Item Number VII................................ 22, 23 Consideration of and possible discussion and/or 158 action, including adoption, on new rule 16 TAC 24 401.305 relating to Lotto Texas on-line game 25 0004 1 INDEX - CONTINUED - February 27, 2006 2 PAGE 3 Item Number VIII............................... 216 Report, possible discussion and/or action on the 4 procurement of advertising services and/or extension of the existing contract 5 Item Number IX................................. 220 6 Report, possible discussion and/or action on the Mega Millions game and/or contract 7 Item Number X.................................. 143 8 Report, possible discussion and/or action on GTECH Corporation 9 Item Number XI................................. 222 10 Report, possible discussion and/or action on the lottery advertising and promotions 11 Item Number XII................................ 227 12 Report, possible discussion and/or action on HUB and/or minority business participation, including 13 the agency's Mentor/Protege program and/or approval of the agency's FY 2006 Minority Business 14 Participation Report 15 Item Number XIII............................... 230 Report, possible discussion and/or action on the 16 agency's contracts 17 Item Number XIV................................ 231 Report, possible discussion and/or action on the 18 79th Legislature 19 Item Number XV................................. 232 Report, possible discussion and/or action on the 20 agency's Strategic Plan for 2007-2011 21 Item Number XVI................................ 236 Consideration of and possible discussion and/or 22 action on external and internal audits and/or reviews relating to the Texas Lottery Commission 23 and/or on the Internal Audit Department's activities 24 Item Number XVII............................... 237 Consideration of and possible discussion and/or 25 action on Texas Lottery Commission meetings 0005 1 INDEX - CONTINUED - February 27, 2006 2 Item Number XVIII.............................. 264 Consideration of and possible discussion and/or 3 action on the appointment and employment of an Executive Director 4 Item Number XIX................................ 156 5 Commission may meet in Executive Session 6 Item Number XX................................. 158 Return to open session for further deliberation and 7 possible action on any matter discussed in Executive Session 8 Item Number XXI................................ 152, 9 Consideration of the status and possible entry 264 of orders in Dockets A through P 10 Item Number XXII............................... 267 11 Report by the Acting Executive Director and/or possible discussion and/or action on the agency's 12 operational status, and FTE status 13 Item Number XXIII.............................. 268 Report by the Charitable Bingo Operations Director 14 and possible discussion and/or action on the Charitable Bingo Operations Division's activities 15 Item Number XXIV............................... 269 16 Public comment 17 Item Number XXV................................ 269 Adjournment 18 19 Reporter's Certificate......................... 270 20 21 22 23 24 25 0006 1 FEBRUARY 27, 2006 2 CHAIRMAN CLOWE: Okay. If everyone 3 will be seated, we'll come to order. 4 The time is 8:30 a.m. Today is 5 February the 27th, 2006. Commissioner Cox is here. I 6 am Tom Clowe. We'll call this meeting of the Texas 7 Lottery Commission to order. 8 Commissioner Cox, with your permission, 9 we might take items two, five, and six, and seven out 10 of order since those are items we have people here to 11 comment on. 12 COMMISSIONER COX: Sure. 13 CHAIRMAN CLOWE: And then we'll take a 14 settlement case, which I think we have some people 15 here to comment on as well, following that. 16 I'll call item number two on the 17 agenda, report by the Bingo Advisory Committee 18 Chairman, possible discussion and/or action regarding 19 the Bingo Advisory Committee's activities, including 20 February the 15th, 2006, Committee meeting. 21 Ms. Suzanne Taylor. Good morning. 22 MS. TAYLOR: Good morning, 23 Commissioners. I have given you the report already, 24 but I will go ahead and read it into the record. 25 Number one. The Bingo Advisory 0007 1 Committee to the Texas Lottery Commission met on 2 February 15th, 2006, in Austin, at 10:05 a.m. All 3 members were in attendance. The BAC members welcomed 4 Commissioner Clowe and Anthony Sadberry to the 5 meeting. 6 Two. It was moved, seconded, and 7 unanimously approved -- passed to approve the 8 November 2nd, 2005, Bingo Advisory Committee meeting 9 minutes as posted on-line, with no changes. 10 Three. Sandy Joseph gave committee 11 members a brief summary of the background pertaining 12 to the development of the proposed amendments to 16 13 TAC 402.600, pertaining to bingo records. The 14 proposed amendment would have less rigorous 15 requirements for certain licensees with regard to 16 payment of prize fees or tax due and the addition of 17 recording requirements for certain licensees. It was 18 moved, seconded, and unanimously passed that the BAC 19 endorses the proposed amendments to 16 TAC 402.600 20 pertaining to Bingo Reports. 21 Items number four and five were 22 combined. Sandy Joseph gave BAC members an update of 23 the activities of the Progressive Bingo Workgroup. 24 The Workgroup is currently looking at rules in other 25 states and is working on a draft rule for progressive 0008 1 bingo in Texas, which would focus on progressive bingo 2 games within current statutes. It was agreed to 3 combine the Progressive Bingo Workgroup and the 4 Alternative Styles of Play Workgroup. The workgroup 5 will be composed of Mario, Danny, Kim, Rosie and 6 public members Shayne Woodard, Jamie McNally, and 7 Glenn Goulet. 8 Item number six. Sandy Joseph updated 9 BAC members with the activities of the Price Fixing 10 Workgroup. Public member Jane Thompson has withdrawn 11 from the committee. Committee members are Rosie, 12 Danny, and public members Steve Bresnen, Steve 13 Fenoglio, Tres Grey, and Jamie McNally. Jamie is 14 currently working on a draft rule. Steve advised that 15 it is important the rule doesn't drive prices up. He 16 is working on language that would facilitate 17 competitive pricing and told BAC members the 18 Commission needs to act against predatory pricing. 19 Steve Fenoglio handed out his proposed draft rule and 20 advised BAC members the Workgroup should have 21 information on the relevant points of the TLC 22 investigation into price fixing by GameTech if they 23 are to make any informed recommendations and to 24 intelligently comment on the matters at issue during 25 the Workgroup meetings. 0009 1 Item seven. Billy Atkins reviewed the 2 Third Quarter 2005 bingo statistics with BAC members. 3 He noted the continued decline in attendance, number 4 of bingo occasions, and organizations conducting 5 bingo. The BAC was requested to formulate a response 6 to Commissioner Cox's question at the September 28, 7 2005, Commission meeting as to the reaction of the 8 industry, what concerns the industry has over the 9 continued decline, and what plans were being 10 formulated to address these concerns. 11 Commissioner Clowe left during this 12 discussion, and the BAC welcomed Commissioner Cox. It 13 was the consensus of the BAC that the decline in 14 attendance has been caused because bingo has increased 15 competition from other gaming, such as the lottery, 16 on-line gaming, gaming ships, Indian casinos, and 17 gambling in neighboring states and from lack of 18 advertising. In order to remain somewhat competitive, 19 the cost of operating bingo games has increased by 20 using electronics and event tabs with higher payouts. 21 Progressive bingo would help by allowing prizes to 22 accumulate into larger and more impressive jackpots 23 that would be more interesting to the average player, 24 who is now used to lottery jackpots that exceed 150 25 million dollars. Bingo games that cap at 750 dollars 0010 1 do not draw many new players to the game. Bingo needs 2 legislative relief that would give organizations 3 operating bingo games the tools that would allow them 4 to remain competitive and innovative. Barring 5 legislative relief, there are not many changes that 6 can be made. Phil Sanderson noted the numbers from 7 the Fourth Quarter 2005 would be available February 8 22nd. 9 Item eight. The Nomination Workgroup 10 reported to the committee they were recommending 11 Knowles Cornwell to replace Danny in the Distributor 12 position and Markey Weaver to replace Mario Manio in 13 the Commercial Lessor position. It was noted that 14 Suzanne Taylor has agreed to continue for another term 15 if there are no applicants for her position, and the 16 Workgroup recommends her continuance on the BAC. It 17 was moved, seconded, and unanimously passed the BAC 18 would accept the recommendations of the Workgroup and 19 forward them to the Commissioners for their 20 consideration. 21 Item nine. The public service 22 announcements will be available by the first or second 23 week of March for distribution. 24 Ten. The Caller of -- Bingo Caller of 25 the Year Workgroup made a presentation to BAC members, 0011 1 including proposed contest guidelines, marketing, 2 prizes, and budget. BAC members made additional 3 recommendations, and the Workgroup will continue to 4 work on this item. 5 11. Kim and Suzanne reviewed the 6 additional item number five, Bingo Net Proceeds and 7 Expenses, that had been requested to be added to the 8 2004 Bingo Advisory Committee Annual Report. The BAC 9 was requested that future reports show a chart with 10 the number of -- starting after prizes, i.e., net 11 receipts would be gross less prizes. It was moved, 12 seconded, and unanimously passed the 2004 BAC Annual 13 Report would be presented to the Commissioners. 14 Item 12. The Workgroup for the 2005 15 Bingo Advisory Committee Annual Report was selected. 16 Workgroup members will be Suzanne, Kimberly, Mario, 17 and Larry. Suzanne is to ask Commissioners if there 18 are additional items they would like to see on the 19 report. 20 13. BAC members developed the 2006 21 Bingo Advisory Committee Work Plan for approval by the 22 Commissioners. 23 Item number 14. Billy Atkins advised 24 committee members that the BAC notebook was now 25 available on the Web site. Press releases had been 0012 1 distributed, announcing pull-tab sales were over 220 2 million, the highest ever, and total charitable 3 distributions are over 800 million. Two additional 4 items are being added to the Web site, allocations to 5 local jurisdictions, and active licensees that are on 6 administrative hold. 7 15. Public Comment: Carol Lauder 8 advised committee members the December 2004 minutes 9 had some good discussion on the decline of bingo and 10 congratulated members for a good discussion. 11 16. Items for the BAC meeting 12 tentatively scheduled for May 17th at 10:00 a.m. were 13 discussed. 14 And 18. The Meeting was adjourned at 15 1:25 p.m. 16 I did -- I did not know for sure if you 17 wanted to discuss the Workplan, the 2006 Workplan, at 18 this time -- I'm sorry -- yeah, 2006 Workplan, but I 19 did bring a draft Workplan that the committee had 20 looked at. I also brought you along today the 2004 21 annual report. And Commissioner Cox, I did go ahead 22 and add the net, and I gave you a page that has the -- 23 the chart that you actually requested. It'll be 24 separate by itself. 25 COMMISSIONER COX: Very good. 0013 1 MS. TAYLOR: It wasn't actually part of 2 what the committee looked at, but it is the report 3 that you had requested. 4 COMMISSIONER COX: Thank you, Suzanne. 5 CHAIRMAN CLOWE: Any questions? 6 COMMISSIONER COX: No, sir. And I -- I 7 certainly at some point would like to talk about the 8 Workplan, but I haven't read it. And I would prefer, 9 I think, if we maybe do that at the next meeting. 10 CHAIRMAN CLOWE: I think that would be 11 fine. 12 Suzanne, would you be ready to discuss 13 it at that time? 14 MS. TAYLOR: Yes, sir. 15 CHAIRMAN CLOWE: At our March meeting? 16 MS. TAYLOR: Yes, sir. 17 CHAIRMAN CLOWE: Very good. Then there 18 are no questions. Thank you very much. 19 MR. ATKINS: Commissioners? 20 CHAIRMAN CLOWE: Billy. 21 MR. ATKINS: If I could just point out 22 one thing. The press releases Suzanne referred to 23 under item 14, relating to the pull-tab sales and 24 total charitable distributions, those have not been 25 issued yet. They're part of our upcoming plan for 0014 1 press releases to include fourth quarter report for 2 2005, as well as total 2005 figures. 3 CHAIRMAN CLOWE: Very good. Thank you, 4 Suzanne. 5 MS. TAYLOR: Thank you. 6 MR. ATKINS: Thank you, Commissioners. 7 CHAIRMAN CLOWE: Mr. Sadberry, I want 8 to welcome you on behalf of Commissioner Cox and 9 myself. I see your smiling face there in that chair 10 for the first time and not sitting over here on my 11 right, where you have been and I have been in the 12 past. Do you have any comments at this time? 13 MR. SADBERRY: Good morning, 14 Mr. Chairman and Commissioner. I will just say that I 15 am pleased to be here. And we've been busy in the six 16 weeks that I have been on board. It's a new capacity, 17 but consistent with the role that I have previously 18 served, it's for the benefit of the agency and for the 19 State that I seek to serve. And I'll have comments 20 for you with regard to some specific items as they are 21 brought on in today's meeting. But I'll again say, 22 good morning, and -- and -- my pleasure is that I 23 serve at your pleasure, and I seek to do the work of 24 this agency to the best of my ability, as I have 25 stated to you I would do in the January meeting. 0015 1 CHAIRMAN CLOWE: For the record, we're 2 very happy to have former Commissioner and Chairman of 3 the Lottery Commission, Anthony Sadberry, as the 4 Acting Executive Director. His photograph is on the 5 wall behind us there as the first one, and he served 6 with distinction for -- what was it? About eight 7 years? 8 MR. SADBERRY: It was about eight 9 years. 10 CHAIRMAN CLOWE: And has now been the 11 Acting Executive Director, I think, for more than a 12 month, and we're very happy to have you at this table 13 and look forward to working with you. 14 MR. SADBERRY: Thank you, sir. 15 CHAIRMAN CLOWE: Next, we'll call items 16 number five and six on our agenda, consideration of 17 and possible discussion and/or action, including 18 adoption or withdrawal, on amendments to 16 TAC 19 401.301 relating to General Definitions and/or on 20 amendments, new rule, and/or repeal on 16 TAC 401.304 21 relating to On-line Game Rules (General). 22 Consideration of and possible 23 discussion and/or action, including adoption or 24 withdrawal, on repeal of 16 TAC 401.305, 401.307, 25 401.308, 401.312, and/or 401.315, relating to Lotto 0016 1 Texas, Pick 3, Cash Five, Texas Two Step, and Mega 2 Millions on-line game rules, respectively. 3 MS. WOELK: Thank you, Chairman Clowe. 4 I'm Sarah Woelk, Assistant General -- Assistant 5 General Counsel. 6 Agenda items five and six have to do 7 with the rules that you proposed at your meeting on 8 October 31st, 2005, and these rules are all part of a 9 package that would have moved the Commission away from 10 setting out specific details of on-line games. In a 11 rule adopted under the Administrative Procedure Act, 12 it would have allowed you to operate by having either 13 the Commissioners' staff determine those features 14 through -- through procedures. The package also 15 included a number of changes to definitions. Some of 16 those were part of the larger package. A lot of them 17 were simply efforts to -- to polish language. 18 These proposed rules were published in 19 the Texas Register on December 9th, 2005. We got 20 quite a bit of public comment, generally negative. 21 And I think at this point, Chairman 22 Clowe, you had some things to say. 23 CHAIRMAN CLOWE: Commissioner Cox, I 24 think, in regard to this issue and these two items on 25 the agenda, the staff was trying to be responsive to 0017 1 comments that you and I have -- I think I had a lot 2 more to say about it -- in trying to motivate them to 3 create some ability to make the on-line games -- and I 4 we think we were particularly focused on 5 Lotto Texas -- more attractive to the players, 6 somewhat similar to what can be done in regard to 7 Scratch Off tickets. 8 Our sales of Lotto Texas have been 9 reduced. It's eight percent of our sales. And I 10 think there is a general concern about what can be 11 done to make that game, as well as the other on-line 12 games, most attractive to the players. However, when 13 we got into this rule being published, there was a 14 reaction of various interests about this, and it was 15 interpreted in a number of different ways that I -- I 16 know the staff never expected or intended, nor, I 17 think, did either you or I intend, and that was, it 18 was viewed in a light of expansion of gaming and other 19 activities that was never, as I say, intended. 20 My sense is that I would like to make a 21 motion to withdraw these rules, depending on your 22 pleasure. Would you guide me in that? 23 COMMISSIONER COX: Well, I was 24 certainly totally in support of the idea. And my 25 frustration was with spending -- working with staff 0018 1 for two years trying to get an amendment to the Lotto 2 Texas rule, and trying to work every variable possible 3 because we knew we weren't going to have another bite 4 at the apple for a long time. And it's really hard to 5 position a product in today's marketplace when it 6 takes a year to be able to change something that the 7 public reacts negatively to. So I thought this was a 8 way to address those kinds of needs, and given that I 9 believe that this agency is a responsible agency, 10 given that I know that we cannot do things by rule or 11 by policy and procedure that are prohibited by law, 12 and knowing that we have no intent to even try, I felt 13 that this was a good way to give staff and this 14 Commission more flexibility to respond to the needs of 15 the marketplace. 16 Now, I intend to second your motion. I 17 hope that we can, with that motion, however, ask staff 18 to continue to study this concept and to see if there 19 is a way -- maybe not this way, but some way like 20 this -- to give us more flexibility in making mid 21 course changes to -- to games so that we can respond 22 to what the players want. 23 CHAIRMAN CLOWE: I think you're right 24 on target. And I think I can restate, with your 25 backing, that it has never been the intent of this 0019 1 Commission, the agency, board members or the staff to 2 participate in any way in the expansion of gaming in 3 this state, but to simply function within the statute 4 as provided by the legislature in regard to the 5 lottery and the Bingo Enabling Act, as it relates to 6 bingo activities. Furthermore -- 7 COMMISSIONER COX: And may I add to 8 that, Mr. Chairman, that I think our record is that we 9 have not aggressively worked the edges of the envelope 10 of the existing statutes. 11 CHAIRMAN CLOWE: That's right. That's 12 exactly right. And we meet ourselves in that role 13 coming when we are asked, why is the revenue not more, 14 why is the return to the State not greater, and it is 15 an interesting conflict of interest to find yourself 16 working in and trying to balance. For example, Acting 17 Executive Director Sadberry and Deputy Executive 18 Director Grief appeared before the House Licensing 19 Committee in Fort Worth on -- was it February the 20 16th? And in response to Chairman Flores' request, 21 Deputy Executive Director Grief made comments about 22 sales of lottery tickets in places of business that 23 sell alcohol and restaurants and kino. And Chairman 24 Geren was very specific about asking him, well, what 25 was the purpose of these remarks. And Deputy 0020 1 Executive Director Grief made it very clear that he 2 was responding to Chairman Flores' request for that 3 kind of information. He was not proposing that 4 activity within the state. And Chairman Geren then 5 asked him if a constitutional amendment was required 6 for either one or both of those activities, which Gary 7 was unable to answer at that time and said he would 8 come back with an answer. Since that time, I think 9 the answer is that the sale of the lottery tickets in 10 establishments licensed to sell alcohol does not 11 require a constitutional amendment, but the question 12 of kino is unanswered and under research at this time. 13 But it's to the point of people who are interested in 14 generating revenue for the State are looking for 15 opportunities; people who are opposed to gaming in the 16 state are concerned about any issue that services, and 17 this rule certainly drew interest and criticism. And 18 it was never the intent of the staff, I -- I know, 19 and -- and of either yourself or myself to expand 20 gaming through the use of these rules. 21 I agree with what you said about 22 pursuing that which is possible within the statute. 23 It's a challenge. And I think it's important that we 24 recognize the issues that are raised here and the 25 forces that are at play, and my sense is that the 0021 1 wiser thing at this point in time to do is to withdraw 2 this issue and -- and go on in another way. 3 Anything further. 4 COMMISSIONER COX: No, sir. 5 CHAIRMAN CLOWE: Then at this time, I 6 move the withdrawal of the proposed amendments to 7 16 TAC 401.301, relating to General Definitions, the 8 proposed new rule and/or the repeal of 16 TAC 401.304, 9 relating to On-Line Game Rules (General), and the 10 proposed repeal of 16 TAC 401.305, 401.307, 401.308, 11 401.312, and/or 401.315, relating to Lotto Texas, 12 Pick 3, Cash Five, Texas Two Step, and Mega Millions 13 on-line game rules, respectively. 14 And, Commissioner, before I ask if 15 you'll second that, let me ask the General Counsel if 16 I have made my motion correctly so that it goes into 17 the record doing what I intend for it to do. 18 MS. KIPLIN: Well, my -- my 19 understanding was that as it related -- any action as 20 it related to Lotto Texas, there was an interest in 21 taking it up with the proposed new rule Lotto Texas. 22 And so you may wish to carve that out. But I -- 23 CHAIRMAN CLOWE: I -- I think -- I 24 understand what you're saying. I think we want to 25 deal with Lotto Texas separately, but as it relates to 0022 1 the application of these new rules, the Lotto Texas, I 2 want that withdrawn. 3 MS. KIPLIN: But if you decide you want 4 to -- to move forward on the new rule Lotto Texas, you 5 would need to move forward on the repeal of the old 6 Lotto Texas. 7 CHAIRMAN CLOWE: Okay. So should I 8 exclude 401.305 from this motion? 9 MS. KIPLIN: Yes, sir, I think you 10 should. 11 CHAIRMAN CLOWE: Okay. Then I will 12 amend my motion to remove, in my recitation, rule 13 number 401.305. And that makes it a correct motion? 14 MS. KIPLIN: Yes, sir. It does, sir. 15 CHAIRMAN CLOWE: Is there a second? 16 COMMISSIONER COX: Second. 17 CHAIRMAN CLOWE: All in favor, please 18 say aye. Opposed, no. The vote is two-zero. 19 Then, Commissioner Cox, let's move on 20 to item number seven, consideration of and possible 21 discussion and/or action, including adoption, on new 22 Rule 16 TAC 401.305, relating to Lotto Texas on-line 23 game. Ms. Woelk. 24 MS. WOELK: Thank you, Chairman. 25 This item has to do with a proposed new 0023 1 Lotto Texas rule. You proposed it on November 18th, 2 2005. It was published on December 9th, 2005. The 3 main proposed changes would be to eliminate the 4 separate bonus ball matrix and return to a game with a 5 single six-of-54 matrix. The -- the rule would also 6 change the structure so that a portion of sales were 7 no longer designated on a ledger as -- as belonging to 8 something called a Lotto Texas Prize Reserve Fund. 9 And we'll talk about that a little. And then, 10 finally, we tried to draft the rule in a way that was 11 a little easier to understand for someone new to the 12 concept, just getting to the rule and reading through 13 it and understanding how the game was set up. 14 We are recommending that if you adopt 15 the -- the new -- a new rule today, that you make 16 three minor changes to the proposed text. One would 17 be a change to subsection (c)(3), to be very precise 18 about the use of the words play board and play, which 19 were -- which were used somewhat imprecisely 20 originally. 21 And the other two changes have to do 22 with the fate of -- of what has been called the Lotto 23 Texas Prize Reserve Fund. This whole issue has caused 24 some confusion, so I -- I would like to just clarify 25 what is going on here. In earlier versions of the 0024 1 Lotto Texas rule, a portion of the ticket sales was 2 labeled as belonging to a Lotto Texas Prize Reserve 3 Fund. It -- it wasn't a separate account. It was 4 part of the State Lottery Act, but the Lotto prize 5 payments were limited to that piece of the State -- 6 State Lottery Account. So the rule had the effect of 7 not allowing the Commission to draw on the whole State 8 Lottery Account to pay prizes, which the law 9 specifically allows, but we had actually limited 10 ourselves in this rule. 11 Commissioner Cox has -- we've had a lot 12 of discussions with him about this accounting 13 practice, and it was important to him that it be clear 14 to players that the -- the Commission be able to draw 15 on the entire Lotto Texas Prize Reserve Fund to -- to 16 pay prizes. So we've changed the allocation so that 17 there is no label applied to any portion of the funds, 18 but it doesn't change really where funds go. Funds go 19 into the State Lottery Account, there is just no 20 longer a special name for some of those funds. There 21 is no longer a limitation on where you can go to -- to 22 get payment for a Lotto Texas prize, should, for some 23 reason, a prize payout exceed what we anticipate it to 24 be. 25 Specifically, to address those -- some 0025 1 of the confusion, though, staff proposed adding a 2 section (f)(8) to clarify that there will be no 3 further designations of money to a Lotto Texas Prize 4 Reserve Fund, but that the current amount that is 5 labeled as Lotto Texas Prize Fund will be drawn down 6 on until it -- it disappears from our ledgers. And we 7 also clarified section (f)(4) capital B to make clear 8 that it paid the -- the three-of-six prize. The Lotto 9 Texas prize reserve amount would be depleted before we 10 drew on -- on the unlabeled portions of the State 11 Lottery Act. 12 After this rule was proposed, we -- we 13 placed it on our Web and created a link so that people 14 could -- could comment on -- on-line. On December 15 19th, there was a public comment hearing. Ms. Dawn 16 Nettles was the only member of the public in 17 attendance. The essence of her comments were -- was 18 that the proposed rule was certain to fail, 19 particularly because of insufficient prize allocations 20 to -- to prizes -- or sales allocations to prizes 21 below the -- the jackpot level. And she pointed out 22 that she hadn't liked six-of-54 in the past, and this 23 version was -- was even less appealing to her than the 24 previous versions. She spoke at some length and, as 25 you know, a transcript of -- of the hearing is 0026 1 available on our Web site. Also, she subsequently 2 summarized her objections to the proposed rule. I'm 3 told that she posted it on her Web site, and a -- a 4 number of people responded in her poll and -- and 5 agreed with many of her objections. So most of her 6 objections -- I'll cover just the general comments 7 about the rule. One thing I did want to point out 8 that at the public comment hearing, she -- she brought 9 our attention to some technical problems with getting 10 on-line, looking at the rules. And there were 11 problems. We fixed those. And we know now how to 12 make it work for all time, hopefully. And she also 13 pointed out that we hadn't really explained the rule, 14 we just posted the rule. And we thought that was a -- 15 a good comment, and we went back and posted like a 16 chart to try to explain what the new game looked like, 17 and -- and after we did that, we did start to get a 18 lot of comments on our Web site. So that was -- those 19 were very helpful comments about our Web site, and I 20 think we now have some good ideas about how to do a 21 better job about posting information about rules. 22 Through our Web site we -- we got 23 almost 500 comments, and Ms. Nettles faxed to us 24 almost a thousand responses that she received to her 25 poll by -- by the public comment filing deadline. 0027 1 She -- she let people mark agreement with her 2 objections, but she also created a text box where 3 people could add additional comments. Staff, me, I 4 read all these comments, along with several other 5 people. I met with each of you to talk about the 6 comments, to look through them, and to ask any 7 questions about my general sense of the comments. 8 And the -- a really positive thing 9 referred to in the comments is widespread agreement 10 that we should eliminate the bonus ball. There were 11 very few bonus ball defenders in the -- in the 12 comments we got. 13 There was, however, also very strong 14 sentiment that allocation to -- to prizes other than 15 the jackpot were too -- too low. People suggested 16 lots of matrixes, all more favorable to the players 17 than six-of-54. Ms. Nettles specifically asked about 18 six-of-54, six-of-52, and six-of-50. And of these 19 choices, six-of-50 was -- was clearly the favorite. 20 And that -- that was clearly a preferred matrix among 21 people who responded directly to us. 22 One objection that was a little 23 surprising was a lot of objection to rounding down the 24 pari-mutuel prizes. This, as far as Robert knows, has 25 always been part of the Lotto -- Lotto Texas rule. We 0028 1 had not addressed it. We were just carrying it 2 forward from previous rules, and -- and we hadn't 3 really considered it in the development process of 4 this rule. We -- we talked about it a whole lot in 5 the last few weeks, and one thing that is clear is 6 that -- that money that is rounded away is carried 7 forward from prizes, so it -- it gets used for prizes 8 eventually. But our real response is that we just 9 weren't thinking about this issue when we were looking 10 at this rule, and it's something the Commission might 11 want staff to -- to look into for purposes of -- of 12 other rulemaking proceedings. 13 There were a whole lot of suggestions 14 for lots of ways to change the game, and most of them 15 would, no doubt, be really attractive to players. And 16 some of them, in fact, are features of other on-line 17 games that we have. The challenge for Robert and his 18 staff, of course, is to come up with a combination of 19 attractive features that also earns revenue for the 20 State. And so I think questions about why staff 21 recommended this particular combination of features -- 22 I think Robert and perhaps Doctor Eubank can address 23 those questions. So that -- that's all I have to say. 24 COMMISSIONER COX: Mr. Chairman, I 25 received, and perhaps you did, too, a white paper from 0029 1 Ms. Nettles that had quite a commentary on her 2 concerns and a compilation of the public comment that 3 she received, and I found this very helpful. And 4 there are several points in here that I would like to 5 get clarification on. 6 CHAIRMAN CLOWE: Certainly. Do you 7 want Ms. Nettles to come up? 8 COMMISSIONER COX: No. I -- if you -- 9 if you think that would be good, sure. 10 CHAIRMAN CLOWE: It's up to you. 11 What -- whatever you'd like. 12 COMMISSIONER COX: Well, I think I -- 13 CHAIRMAN CLOWE: She is in the 14 audience. 15 COMMISSIONER COX: I understand her 16 concerns. 17 CHAIRMAN CLOWE: Okay. 18 COMMISSIONER COX: And fully understand 19 them. They are very well set out. And I just want to 20 be sure that -- that I understand what we thought 21 about on those, if we thought about anything, and what 22 we might do, other than what we've said we're going to 23 do so far. 24 CHAIRMAN CLOWE: Great. 25 COMMISSIONER COX: There is a -- a 0030 1 pervasive point here that we took the payback to 2 the -- to the players from 52 to 50 percent, but 3 didn't estimate that any additional revenue would 4 accrue to the State, and so there seems to be some 5 confusion about where that two percent went. 6 Now, Sarah, I think you addressed where 7 the two percent went in your earlier comments. That 8 two percent was the Prize Reserve Fund. And it didn't 9 go anywhere because the players never had that to 10 begin with, in reality. The prize pool was 52 minus 11 two, or 50, and now it's 50. In the old rule, the two 12 percent went into the State Lottery account in an 13 earmarked fund and then came out to pay prizes. Under 14 the present rule, as proposed, no two percent would go 15 in, but all the proceeds would go into the State 16 Lottery account, none of it into a designated account, 17 and it would come out, as needed, to pay prizes. So 18 in substance, there is absolutely no change. We 19 rewrote it because we believed that that two percent 20 was confusing -- I know it was to me -- and might have 21 created the illusion that the players were really 22 getting 52 percent when, in fact, they were only 23 getting 50. 24 MS. WOELK: I -- I -- that's how I 25 understood it, and I -- I spent a fair amount of time 0031 1 talking to Kathy Pyka, who is better at talking about 2 numbers than I am. But I think it was one of those 3 things that was very confusing to accountants, who it 4 made no sense to, whereas, it had some sort of -- I 5 think it did have a surface appeal to players, 6 perhaps, but your strong view, which I understand, is 7 that it was ultimately not to the players' advantage 8 to segregate it and limit ourselves. 9 COMMISSIONER COX: It was -- it was, in 10 effect, nothing. 11 MS. WOELK: Right. 12 COMMISSIONER COX: Now, the other side 13 of that is, why was there no additional revenue. And 14 that's an additional issue. Now, I have some comments 15 with Kathy's remarks in the preamble. And she says, 16 there is no measurable fiscal implication. Now, it 17 seems to me that on the one hand, when you say two 18 percent was taken away, well, there we're talking 19 about a percent of the prize pool and not an amount of 20 money. When we get over here on the fiscal 21 implication, we're talking about an amount of money. 22 And the comments that I wrote down from Kathy Pyka 23 were, no measurable fiscal implication. The positive 24 impact anticipated relates to limiting ongoing sales 25 decline, rather than increasing sales. 0032 1 We didn't have the hope that this was 2 going to make this game skyrocket. Our hope was that 3 we could hold it even, and the -- whatever effect 4 there might be on revenue was not quantifiable. So I 5 see a distinction between changing a percentage of the 6 prize pool, which is finite, although not transferable 7 to an amount, and being unable to estimate an impact 8 on revenue because we just don't know what it's going 9 to do directly. 10 And, Kathy, does that more or less 11 describe what you were saying? 12 MS. PYKA: Yes, sir, it does. 13 COMMISSIONER COX: The second item had 14 to do with the statement that this matrix would result 15 in prize amounts -- and I think it means percentages 16 there -- being roughly half the amounts they were when 17 the first matrix of six-of-54 was being played. 18 Now, I know that we've taken the 19 allocation to the jackpot up from maybe 37 percent to 20 maybe 40 percent, but it's not visible to me what the 21 percentages allocated to lower tiers was in the 22 previous rule. Do y'all have any information you can 23 provide on that? 24 MR. TIRLONI: Yes, sir, I do. For the 25 record, my name is Robert Tirloni. I am the Products 0033 1 Manager for the Commission. 2 And I do have a slide, Commissioners, 3 that I can show you. This is basically the proposed 4 matrix of the rule. Again, this is just showing prize 5 tiers and the odds. A slide or two back will give you 6 the actual comparison you're looking for. Again, this 7 is the proposed with the prize amounts and the sales 8 percentage allocations by tier. This is the previous 9 matrix. And let me jump to the last slide. We can 10 come back if you want, of course, but this will 11 actually give them to you side by side. The proposed 12 is on the left; the previous six-of-54 is on the 13 right. And for the six-of-six, as you just correctly 14 stated, Commissioner Cox, the previous matrix had 15 slightly over 37 and a half percent dedicated to the 16 jackpot tier. The proposed has 40.47 percent of sales 17 dedicated to that tier. And as you go down the -- as 18 you go down the columns, the proposed has 2.23 percent 19 of sales dedicated to the second tier. The previous 20 six-of-54 has 2.79. Four-of-six is 3.28 under the 21 current proposal. The previous had 6.88. And the 22 three-of-six under the proposed has slightly over four 23 percent of sales dedicated to that tier, and the 24 previous version of the six-of-54 had 6.7. 25 The disparity at the three-of-six looks 0034 1 large. One of the things that we have to remember is 2 the proposed has a guaranteed three-dollar prize. The 3 old version had a guaranteed five-dollar prize, and 4 because that's one of the easier prize levels to win 5 and you've got more winners at that level, you need to 6 dedicate more of your -- of your sales percentage to 7 that tier. 8 COMMISSIONER COX: So looking at those 9 numbers, I can see that what has come out of the top 10 tier is about three percentage points. 11 MR. TIRLONI: That would be correct, 12 yes. 13 COMMISSIONER COX: And yet it seems 14 that more than that has been added to the lower three 15 tiers. And I guess that's because that one was a 55 16 percent, two percent reserve payback, and this one is 17 a 50 percent payback? 18 MR. TIRLONI: That's correct. We have 19 to take all these different things into consideration. 20 You're absolutely correct. 21 COMMISSIONER COX: Okay. So the -- the 22 amounts allocated to lower tier prizes has reduced as 23 a function of two things: the increase in the amount 24 allocated to the top jackpot -- 25 MR. TIRLONI: Uh-huh. 0035 1 COMMISSIONER COX: -- and the decrease 2 in the prize payout percentage from 53, in effect, to 3 50? 4 MR. TIRLONI: Yes, sir. 5 COMMISSIONER COX: So what Ms. Nettles 6 states is -- is certainly true, that it is 7 significantly larger. I -- I'm getting one six or one 8 seven -- 1.6 or 1.7 times, which I would not quibble 9 with twice being the -- a way to characterize that. 10 So let's -- let's say that, yeah, it looks like that's 11 the case. 12 MR. TIRLONI: Yes. 13 COMMISSIONER COX: Okay. Now -- 14 CHAIRMAN CLOWE: Let -- let me ask a 15 question if I may. Get my history straight, Robert. 16 MR. TIRLONI: Yes, sir. 17 CHAIRMAN CLOWE: We started with 18 six-in-50. The previous six-in-54 was the first time 19 we changed the matrix. 20 MR. TIRLONI: That's correct. In June 21 of 2000 is when we went to the six-of-54. 22 CHAIRMAN CLOWE: And then we went from 23 there to the Powerball or the extra ball matrix. 24 MR. TIRLONI: Uh-huh. That's correct. 25 CHAIRMAN CLOWE: And now we're 0036 1 considering the proposed six-in-54. 2 MR. TIRLONI: Yes, sir. 3 CHAIRMAN CLOWE: Okay. Thank you. 4 MR. TIRLONI: And -- and the bonus ball 5 was May of 2003. That was when that game was 6 introduced. 7 CHAIRMAN CLOWE: Thank you. 8 COMMISSIONER COX: If we can turn the 9 lights back on, I can look at my notes here. 10 Okay. Ms. Nettles makes a point that 11 there is no guarantee that players will receive at 12 least 50 percent of sales, and she has two bullet 13 points under that, as I understand it. One is that, 14 because we round down, we're taking something out of 15 the prize pool. 16 Now, I -- Gary tells me we don't take 17 it out of the prize pool. We carry it forward. But I 18 think it would still be a valid point to say, why not 19 round up or down in a given draw and give it to the 20 person who won it, rather than keeping it in the pool 21 and giving it to someone else. 22 So now, Sarah, if we were to change 23 this, would we have to pull down the rule to change 24 it, or can -- is -- is that part of the rule, or is 25 that just part of our practice? 0037 1 MS. WOELK: No. No. It's -- it's in 2 the rule, and it's carried forward without change. 3 I -- I would think it would be something we could 4 change. These are always a fact question, but the -- 5 the group of people interested in this is Lotto Texas 6 players, and we've clearly identified them. And I 7 think the safest kind of change you can make without 8 republishing is one in response to actual comments. 9 So, obviously, if you made this change, you -- I think 10 you didn't fail to identify some larger group of the 11 public that would be interested, and I think that -- 12 that the most defensible kind of change is, yeah, we 13 got public comment and we -- we agreed and we 14 responded. And I do think that's generally 15 defensible, although it -- it's not a guarantee if 16 someone chose to challenge it. But if you also -- a 17 change that presumably the people having the rule are 18 in favor of, might -- it -- it is, I would say, 19 it's -- it's very defensible. 20 COMMISSIONER COX: So, Mr. Chairman, 21 subject to deliberating it with you, I think it's my 22 feeling that it would be more fair to round up or down 23 in a particular draw and give the money to the person 24 who actually won it. 25 Now, the second bullet point under the 0038 1 ten -- the prize pool not being paid out to players is 2 this fixed prize of three -- three dollars at the 3 lower tier -- lowest tier. And I understand, from 4 previous discussions on this point, that the reason 5 it's three dollars is because there are a lot of these 6 winners, and if we made it 3.16 one time and 2.84 the 7 next time, that the clerks who pay these things would 8 get confused, and it would be a lot more burden on our 9 retailers, who already don't think they get paid a 10 high enough percentage of sales, and that this is done 11 for the convenience of the retailer. 12 Now, I wonder about a couple of things 13 on this. One is, why couldn't we just round that up 14 or down to the nearest dollar? If it's two, it's two. 15 If it's $2.56, it's three. If it's $3.72, it's four. 16 And it might vary from one to the other. We wouldn't 17 have them paying odd amounts. Yes, it wouldn't always 18 be the same, but the other prizes aren't always the 19 same either. So that would be a way to fix that. But 20 the thing that I would be most concerned about if we 21 stayed with a fixed amount of three percent, or even 22 given that small amount and the fact that the breakage 23 would be a much larger percentage of the absolute 24 amount, that whatever we do is paying out that 25 percentage of the prize pool, that 4.02 percent, to 0039 1 the players ultimately, and preferably as to the 2 players who actually won it. So that's something, 3 Mr. Chairman, that I would like to deliberate as well 4 because I think what Ms. Nettles is proposing or is 5 asking is a good question, and I think we should 6 consider it. 7 CHAIRMAN CLOWE: Very good. 8 COMMISSIONER COX: There was one 9 comment that I wanted to address specifically, and 10 this is at the heart of an ongoing discussion we're 11 having with the lottery operator. One comment was, 12 the greater the sales, the greater the profits for the 13 State and all those involved. And I just wanted to 14 point out to that that the greater the sales is not 15 necessarily the profits. We could create a game that 16 paid back, say, 95 percent to the players. The sales 17 would be wonderful. The school children of Texas 18 wouldn't get much money. 19 CHAIRMAN CLOWE: Right. 20 COMMISSIONER COX: Now, the -- the 21 ultimate question, I think, here is, is six-of-54 the 22 right matrix and is this the right prize structure. 23 And with that, Mr. Chairman, I would like to hear your 24 thoughts. 25 CHAIRMAN CLOWE: I appreciate your 0040 1 comments, and I understand them, and I think they're 2 right to the point. 3 I would like to ask Mr. Sadberry if he 4 has any comments at this point. He was here at the 5 outset. 6 I can't recall whether you were here or 7 not when we first made this first matrix change. And 8 you, I know, have brought yourself up-to-date on the 9 history of it. I think you represent a lot of 10 institutional knowledge that we can benefit from, and 11 I -- I wonder what comments you might have. 12 MR. SADBERRY: Chairman, Commissioner 13 Cox, I was in fact here as one of the original 14 Commissioners at the inception of this agency as the 15 Lottery Commission. As you are aware, the lottery 16 itself was operated as a division of the Comptroller's 17 Office, prior to the creation of this agency, and we 18 did inherit some rules and the contract, et cetera, 19 including the -- the rule in question as it originally 20 existed. 21 I was here at the time of the first 22 matrix change, and I think that's what we referred in 23 the slide as the previous configuration. It's 24 actually the previous in connection with the six-of-54 25 matrix. It cannot, technically, the previous, but I 0041 1 understand the concept and agree with it as it's been 2 presented here. At that time, my -- my recollection, 3 and -- and having studied it as it's on today's 4 agenda, in preparation for the same, is the very -- 5 very fact that we had experienced a point of decreased 6 sales and we're looking at how to increase the sales 7 and -- and thereby also increase revenue. As 8 Commissioner Cox correctly points out, both factors 9 being fundamental to the success of the games, and -- 10 and also take into account the playing public's 11 interest with regard to playing the game and feeling a 12 fair return was being achieved. 13 We did have a public comment period. 14 I, along with, I understand, the other Commissioners 15 actually came into the agency and -- and read the 16 public comment materials here. I devoted the better 17 part of a day doing that, and I understand the other 18 Commissioners did as well. So we took into account 19 the public comment seriously, as -- as obviously, it's 20 been done with respect to the proposal that is before 21 you. 22 CHAIRMAN CLOWE: Commissioner -- or, 23 excuse me -- Mr. Director. Let me supplement your 24 recollection of the history with mine. We were 25 dealing with a game that was losing sales and return 0042 1 to the State, and we put up a proposed rule to change 2 it, if I recall correctly. You and Commissioner Miers 3 and I were on the Commission at that time. We held a 4 public hearing, as I recall, in Dallas, in the 5 Dallas/Fort Worth area, D/FW airport area, and there 6 was substantial negative commentary in that meeting at 7 that time, and we drew down the rule to change the 8 matrix, if I remember correctly. And then later we 9 put a rule up and went to the six-in-54, maybe a year 10 later. And I -- and I don't think the time is 11 important, but we were dealing with a game that was 12 losing popularity as far as the revenue indication. 13 And that was what moved us at that time. Am I correct 14 in my recollection on that? 15 MR. SADBERRY: You are correct, 16 Mr. Chairman. 17 CHAIRMAN CLOWE: Okay. 18 MR. SADBERRY: And this was our 19 flagship rule. This was a rule that we had had from 20 the outset, and so it was obviously of concern to us. 21 CHAIRMAN CLOWE: We didn't have Mega 22 Millions, and we did not have the current increase in 23 scratch offs that we have enjoyed as a 72 percent of 24 gross revenue currently. 25 MR. SADBERRY: That's correct. So it 0043 1 was obviously of significance to us to address this 2 rule directly and to come up with creative thinking, 3 which the staff certainly put in on the configuration 4 of the proposed change to the matrix. And we had to 5 get the game moving as best we could. And -- and my 6 recollection is that, for a period of time, we did 7 achieve an increase in the sales and, therefore, 8 increase in revenue. 9 At some point, I left the Commission, 10 and I was not here at the time the bonus ball was 11 placed in the matrix and would not have personal 12 knowledge or experience with regard to that 13 deliberation and process in the adoption of the matrix 14 change. However, as you have indicated, I have 15 studied it, and I have had the resource of a very 16 dedicated and capable staff analysis that have -- 17 those have combined to bring me up to speed on what 18 was the thinking at the time and what was the 19 objection with that particular matrix change. 20 Looking at where we are now, and I -- I 21 can assure you, as -- as you are aware, that staff and 22 I have spent a significant amount of time studying 23 this issue. And -- and as you point out, I have 24 attempted to supplement their data analysis with my 25 experience and my -- my thought process as -- as we 0044 1 have gone through these successive change 2 considerations. 3 The -- the -- and as Commissioner Cox 4 points out, we can achieve sales increase or a flat 5 line, or whatever a sales result might be, that might 6 not necessarily drive the goal of increased revenue to 7 the State and the Foundation School Fund. So there -- 8 from a -- we're stewards of the State's money in that 9 regard, and from a fiscal responsibility standpoint, 10 we must measure that -- that factor, which is an 11 important factor, in connection with the comments, the 12 various views that we have received, which I have 13 studied and staff has analyzed, and we have discussed 14 together in meetings rather extensively. We try to 15 strike -- we must strike a balance that addresses the 16 player concern and interests, which are varied and not 17 necessarily all consistent, for example, beginning 18 with the ten million dollar initial jackpot. But at 19 the same time, we cannot ignore a potential 20 consequence of decreased revenue, based upon what 21 might be the sales payout configuration. 22 And I think that's where it seems 23 the -- the body of concern that I have seen that's -- 24 appear to be reflected in these comments and that I 25 have heard staff address and I have asked to be 0045 1 addressed, and that is, if you were to proceed forward 2 with a matrix change that, as Sarah points out, 3 eliminates the bonus ball, which I think there is a 4 universal negative on that, but address a matrix 5 change that goes back to what now is being reflected 6 as the previous six-of-54, the question becomes, what 7 is the impact and what you might consider in your 8 deliberations on addressing the proposal that the 9 lower tier prize payout below the jackpot be increased 10 back to what is termed the previous allocation. My 11 understanding of that concept is, the way it is 12 proposed to you now achieves the objective of 13 increasing the jackpot so that it will not likely be 14 hit as frequently, and -- and the lower -- the fact 15 that you -- you have not allocated more to the lower 16 tier prizes will mean your jackpots will increase 17 faster and you will reach a point of increased revenue 18 sooner. And that is the objective of the on-line 19 game. The Lotto Texas on-line game, specifically, 20 is -- is driven by -- we understand, by the 21 anticipation of larger jackpots, which -- which will 22 usually drive sales higher. And with lower tier 23 payouts being lower, you will therefore increase 24 revenue. 25 That is what is the -- my understanding 0046 1 of the driving force behind the staff proposal that is 2 before you now. So it seems considerate that you 3 might deliberate, addressing the comments in specific 4 regard to going back to what is termed the previous 5 lower tier of prize payouts. My understanding is that 6 is before you as an appropriate consideration should 7 you wish to deliberate that, and that you may do so 8 within the context of the rule as published and 9 proposed if you were to accept these comments, in 10 whole or in part, with that concept. 11 So we believe -- staff believes that 12 it -- that would -- if you were to consider that, it 13 would have a definite probable financial impact to the 14 agency with regard to that particular game, in that 15 you likely would have a -- in practical terms, in real 16 terms, a higher percentage payout because you are 17 paying higher lower tier prizes, which are being won 18 more frequently, and your jackpot is not growing. And 19 we don't know what that might mean in terms of player 20 participation, which is why we think they play, 21 because the jackpots increase. We also feel that that 22 might have some impact, and probably would, with a 23 beginning jackpot and -- and rolling the jackpot with 24 the 1 million dollar increments. 25 These are things that, A, staff has 0047 1 addressed; B, staff is capable of addressing, since 2 you wish, but these I throw out and offer as relevant 3 considerations in your deliberation. 4 As -- as has been stated to you, the 5 prize reserve pool, if you were to adopt that 6 proposal, would no longer be in existence, and the 7 probability is that by adopting the prize reserve pool 8 as a concept, the Commission may have effectively 9 limited itself to that fund to make up any 10 differential between sales and the -- and the jackpot 11 amount. Now we believe we -- with the rule change, we 12 would be on solid ground to say that the general 13 lottery fund would be available to pay jackpots if, in 14 fact, you were paying jackpots in excess of the sales 15 that were generated to create the support for the 16 jackpot. So what you would be doing is assuming a 17 certain fiscal responsibility and potential risk if 18 you went to what is referred to as the previous matrix 19 lower tier payouts of what that would do in terms of 20 financial realization for the agency and, ultimately, 21 for generating revenue for the Foundation School Fund. 22 And going back to Commissioner Cox's 23 observation in that regard, what really I think you're 24 looking at is response to the player comments on the 25 lower tier payouts and seeing, if you were to adopt 0048 1 that, in whole or in part, what is the realization 2 of -- in the game's generation of revenue, ultimately, 3 and how you may be able to react to that by the 4 rulemaking process if it -- if you were to consider it 5 necessary to go to a different configuration of -- 6 take some other concept in mind in order to assure a 7 reasonable and reliable revenue return. 8 So I think what I would -- with that 9 preface and given my experience and my working with 10 staff -- and I know we have resources available to us 11 to address some of these points I may have raised -- 12 is, in your deliberation, I think it's a balancing of 13 addressing the concerns of the player public, a 14 portion of which is before you, not necessarily all of 15 which is before you, because we don't know how to 16 treat silence, if -- if that means for or against or 17 neutral, but we do know that this is not necessarily 18 all the players -- all the player public, not 19 necessarily even a significant portion in the 20 quantitative sense may be before you, but those who -- 21 who do not comment, obviously, had the opportunity to 22 comment. And so you have before you those who have 23 commented. Balancing that with our stewardship 24 obligations with respect to conducting all the games, 25 including this important game, like you say, eight 0049 1 percent of our revenue. 2 I would -- I would suggest -- 3 recommend, if it -- it's appropriate, Chairman and 4 Commissioner Cox, that it would be helpful to 5 deliberate that concept, and we have staff, I think, 6 who could assist you in doing so. And at the end of 7 the day, we have legal staff who can assist in 8 determining what can be done today, what is possible, 9 what may have to be possibly carried over to another 10 meeting, should you wish to go in a certain direction. 11 But I think it's timely to do so and, I think, 12 appropriate to do so, and we're here to assist in your 13 deliberations in any way you wish. 14 CHAIRMAN CLOWE: Well, did I 15 understand, then, that you favor deliberating the 16 previous six-in-54 matrix? 17 MR. SADBERRY: Yes, sir. 18 CHAIRMAN CLOWE: My recollection is 19 that we tried to change the matrix the first time to 20 make the game a higher jackpot. And we have been 21 committed to the idea that this is a game that's 22 jackpot driven. We lost sales when we made that 23 change. Then we adopted the bonus ball, and we really 24 lost sales. And then we took in Mega Millions, and we 25 had greater migration than we thought, not initially, 0050 1 but eventually. And so now we're dealing with a game 2 that is tired. It's been here for going on 14 years. 3 In the beginning, we didn't have VLTs. We didn't have 4 on-line gaming. We didn't have the casinos in the 5 state or in adjoining states that we have now. We 6 didn't have Powerball in every state surrounding this 7 state. 8 And, by the way, Robert, later in this 9 meeting, I'm going to ask you to give me an estimate 10 of what the State's revenue would have been if we had 11 been in Powerball when it went to 365 million. Okay? 12 And my hope is that it'll be a nice big fat juicy 13 number that will help us understand the benefit of 14 this state being in both Mega Millions and Powerball. 15 COMMISSIONER COX: If, in fact, that's 16 possible. 17 CHAIRMAN CLOWE: If, in fact, that's 18 possible. Right. But, you know, that was a missed 19 opportunity for this state, in my opinion, because 20 there were a lot of people in Texas that were going to 21 New Mexico, Oklahoma, and Louisiana, buying Powerball 22 tickets. Where we've seen it with buyers coming in, 23 they were going out. 24 But, clearly, all of those things have 25 eroded the discretionary dollar that is spent in this 0051 1 state within the statute that allows us to conduct 2 lottery operations. And every time we change this 3 matrix, we have lost sales. 4 Now, I am skeptical, quite frankly, of 5 another matrix change. I -- you know, I don't think 6 that in itself is going to be the magic turn that's 7 going to breathe life into this game. I am not 8 adverse to changing the matrix at all, but I think we 9 need to do something that strikes a balance between 10 what the players want -- because that's the driving 11 force about whether you sell these tickets or not -- 12 and the stewardship that Commissioner Cox and Director 13 Sadberry have properly commented on that we have for 14 the State to serve the needs of the Foundation School 15 Fund. So I would like to enter into this deliberation 16 with the idea of -- of returning to the original 17 six-in-50 matrix and deliberate that as part of these 18 considerations. 19 And, Robert, if you care to comment, 20 Mr. Eubank, if you would care to comment, and, 21 Commissioner Cox, with your permission, Ms. Nettles is 22 in the audience. I would like to hear from her. 23 COMMISSIONER COX: Sure. 24 CHAIRMAN CLOWE: Robert -- 25 MS. KIPLIN: Mr. Chairman, right now, 0052 1 I -- I probably do need to make a comment just to have 2 you thinking about that, and that is, the public 3 comment period is over, and what you're doing is 4 reaching out to your resources, your staff. If you 5 choose to take up public comment, and that certainly 6 is within the discretion of the Commission to do that, 7 so long as that comment is consistent with what has 8 already been brought into the record and summarized 9 and has an agency response, then -- then that's no 10 problem. But if it's new comment and the Commission 11 wishes to take action on this rulemaking item, then it 12 does pose a challenge to the staff to incorporate that 13 comment. 14 CHAIRMAN CLOWE: That's -- that's a 15 good comment. And, Commissioner Cox, with your 16 permission, I -- I think we need to hear from our 17 resources, but I would also like to hear from 18 Ms. Nettles. And, at our discretion, we can ask her 19 to comment on things within the record, and then when 20 it gets outside of the record, then General Counsel 21 can school us on it. But I think we really need to 22 have a good deliberation on this issue, and until we 23 vote and we feel comfortable with where we're headed, 24 I would like to get it as right as we can at this 25 time. 0053 1 Thank you, Counselor. 2 Robert. 3 MR. TIRLONI: Chairman, I -- I agree 4 with all of the comments you made about the changes 5 that have been made over time. Your comment about 6 going to the bonus ball matrix is correct. We were 7 trying to drive jackpots at that time due to the 8 decreasing sales and decreasing jackpots on the 9 previous six-of-54, as we're calling it. 10 One thing I'll point out, and we talked 11 about it under the previous item about the rules 12 versus procedures, because of the length of time that 13 it takes us to make these changes, when we were 14 contemplating and analyzing a Lotto matrix, we often 15 refer to the fact that that game started in May of 16 2003. Of course, the beginning part of that process 17 was probably in September or October of 2002. And as 18 you said, when those -- when those deliberations were 19 taking place and that analysis was taking place, 20 nobody could look into the future and know that a 21 month after the bonus ball Lotto Texas game started, 22 then multi-jurisdictional legislation would pass and 23 then we would be -- we would be looking at joining a 24 multi-state or a multi-jurisdictional game. So there 25 have been some factors that kind of crept up on us, so 0054 1 to speak, in terms of changes that have taken place 2 since we introduced the bonus ball matrix. And when 3 we went through this process, when we looked back, and 4 when we analyzed all of the data -- 5 CHAIRMAN CLOWE: That's right, Robert. 6 But in every case, you gave us a projection of revenue 7 as a result of the change which was never fulfilled. 8 MR. TIRLONI: That's correct. That is 9 correct. 10 CHAIRMAN CLOWE: And I -- I think it's 11 a fair comment that the game was changed after some of 12 the changes, but we have consistently been seeing a 13 reduction. And, you know, that's what everybody 14 focuses on. 15 I -- I had an outside person who is 16 pretty aware of gaming in this state come to see me 17 last week here at the Commission. And when I told him 18 that 72 percent of our sales were Scratch Off tickets, 19 he couldn't believe it. And -- and I don't think even 20 people who are conversant in gaming generally 21 understand what our mix is in this state. 22 MR. TIRLONI: And -- and you're 23 correct. As soon as we made the bonus ball change in 24 May of 2003, we saw immediate -- an immediate impact 25 on sales. 0055 1 CHAIRMAN CLOWE: Nobody liked it. 2 MR. TIRLONI: Nobody liked the bonus 3 ball matrix. Absolutely. 4 CHAIRMAN CLOWE: They tolerate it with 5 Mega Millions, but they don't like in Lotto Texas. 6 MR. TIRLONI: And I think they tolerate 7 it or they play Mega Millions because they realize 8 that the bonus ball in that game has the ability, plus 9 the -- the population and the size of the matrix, but 10 I -- I believe that they tolerate it, as you say, in 11 that game because -- the current -- the current Mega 12 Millions jackpot is -- is the good example -- is 13 because you have the ability or that game has the 14 ability to generate jackpots worth hundreds and 15 hundreds of millions of dollars. 16 So when we looked back, months back or, 17 as Commissioner Cox said, more than months back, 18 probably over the past year and a half, as we have 19 looked at this, the -- what we realized immediately 20 was, the problem was the bonus ball. And so what we 21 tried to do with this proposal was to take a step 22 backwards and to give the players two of the things 23 that they seemed to ask for the loudest, which was a 24 one-field matrix -- return to a one-field matrix, a 25 six-digit game, and get rid of the bonus ball. That 0056 1 was the main premise for going back to a six-of-54. 2 We also felt that stepping back to the six-of-54 would 3 give us the ability to actually collect some real data 4 in our -- in our real environment, not -- not going by 5 what was conveyed to us through research, but actually 6 taking that step back and being able to monitor the 7 sales to see if we could make up some of the lost 8 ground from the changes of the bonus ball. 9 Why we landed on the six-of-54 with the 10 lower tier prizes was basically a result of exercises 11 that Doctor Eubank did for us -- and that's why he is 12 here today, if you would like an explanation of 13 that -- exercises to determine what the real payout 14 would be over time on -- on these -- on these 15 matrices. And he looked at quite a few. He looked at 16 a six-of-50, six-of-52, six-of-54 as proposed, and 17 six-of-54 with the old prize amounts or, basically, 18 the previous prize amounts. And based on that data, 19 that's what led us to propose the game that we did. 20 Staff can develop any -- any matrix 21 that suits the Commission that you feel would be most 22 appropriate. We can certainly look at it further. We 23 could -- we can tweak these prize amounts. We can 24 change the lower tier prize amounts. As Director 25 Sadberry said, we can -- we can create any type of 0057 1 game. Our focus on this was trying to get back to 2 that six-digit game, get rid of the bonus ball, and at 3 the same time, be very conscious of the real payout 4 that the game would have over time. 5 CHAIRMAN CLOWE: Thank you. 6 Doctor Eubank, do you have a comment 7 for us? 8 DR. EUBANK: I would like to -- if -- 9 if you would like to hear it, I'll talk for a couple 10 of minutes about the revenue aspect of the different 11 choices that come up. 12 And this is -- for the record, my name 13 is Randy Eubank. I'm a professor of mathematics and 14 statistics at Arizona State University. 15 So -- why don't you go down to the -- 16 that right there. So I've looked at -- as Robert 17 said, I've looked at a number of these matrices, and 18 I -- I'm really going to sort of -- Director Sadberry 19 has already made some of the points that I -- I think 20 will come out of the things that I -- that I'm going 21 to say, but -- but let's just talk about these things 22 and sort of what makes up a matrix, and the issue of 23 50 percent payout, and what the actual payout is going 24 to be. 25 So this is the -- the -- one of the 0058 1 case in points here of the six-of-54 game. The -- 2 there is really two things that drive one of these 3 matrices, the percentage of sales as allocated to each 4 one of the different tiers, and the probability 5 structure that goes along with how many balls you've 6 got and how many you choose. So once you say you're 7 going to have six-of-54, then all the odds that are up 8 there are fixed immediately for every single tier -- 9 six, five, four, three, two, one, and zero -- 10 everything automatically is fixed. The only thing 11 that you actually can -- can work with, then, beyond 12 that, is how much of the different percentages that 13 you move into the different tiers. 14 Now, there is no free lunch here. 15 These percentages have to add to -- assuming that you 16 want the game to -- in -- to -- to return a nominal 50 17 percent to the players, those numbers have to add to 18 50 percent. 19 So there are some things that can't be 20 done. You cannot have a 10,000 dollar match three 21 prize, for example, because that's going to return 22 more than 50 percent to the players. Okay? You can't 23 put a 50,000 dollar five-of-six prize, and so on. 24 There are some choices that you really can't make. 25 There are some choices that you can 0059 1 make. You can put 2500 or 3,000 for the five-of-six 2 prize, but you -- when you move money into there, you 3 move money out of someplace else, and usually the way 4 it gets done here is it gets moved out of the jackpot 5 tier. So putting a 5,000 dollar match five prize, a 6 hundred dollar match four prize, a five dollar match 7 three prize, that all moves money down out of the 8 jackpot tier. And as Director Sadberry said, what 9 that does is it makes sales accumulate slower so that 10 it takes longer to support the jackpots that are 11 advertised. And then when you get hit at those 12 levels, you wind up having to pull money out of this 13 50 percent fund that you have allocated for the 14 players. So it's deficit spending in the sense that 15 you're using more than 50 percent of the funds that 16 you've received. 17 The next slide. Now, so what does this 18 50 percent really mean? And so this -- in some ways I 19 got ahead of myself for a second, but -- but here is 20 the -- the goal is -- the way the -- this -- this game 21 matrix is set up, the goal is to return 50 percent to 22 the players. Well, that 50 percent is an idealized 23 sum in that, this is -- its return is exactly 50 24 percent, assuming that you can set the jackpot at 25 exactly the level that is supported by sales. Now, 0060 1 what does that mean? That means that the jackpot has 2 to be -- so on Wednesday night or Wednesday afternoon, 3 you figure out what the sales is on Saturday. You 4 call up your -- your favorite oracle, and the oracle 5 tells you what the sales are going to be on the coming 6 Saturday. And then you multiply that by the jackpot 7 sales allocation and multiply by an annuity factor, 8 and that tells you what you can advertise for the 9 jackpot. 10 Now, of course, there are three 11 problems with that. The first is that you don't know 12 what the sales is going to be on Saturday, so that has 13 to be an estimate. The second problem is that 14 jackpots start at four million. And as you know, 15 currently, a four million dollar jackpot is not going 16 to be supported by the sales that you get. And the 17 third problem is that the rolls are always in 18 increments of one million. All right. So that 19 precludes actually using this formula in a practical 20 sense. 21 Now, you can make up for that. You can 22 make up for some of these shortfalls that are going to 23 happen at the -- at the lower tiers if, when you get 24 up to a higher sales rate where you can actually 25 support the jackpot, you can make up for the deficit 0061 1 beyond 50 percent, you can make up for it if you 2 retain the overage of sales beyond what is needed to 3 support the jackpot. But the lottery has not done 4 that, and the current rule says that -- well, for the 5 current rule, as I understand it, says that it will 6 pay -- that the lottery will pay the maximum of the 7 advertised jackpot or the jackpot that is supported by 8 sales. So there is no way to make up for the deficit 9 beyond 50 percent spending that you're going to have 10 at the lower tiers until you get to the point where 11 you can actually have sales that support the 12 advertised jackpot. So -- 13 CHAIRMAN CLOWE: Let me ask you a 14 question at this point. 15 DR. EUBANK: Yes, sir. 16 CHAIRMAN CLOWE: And maybe Robert could 17 answer this. 18 Refresh my memory, Robert. Is the four 19 million dollar beginning number and the one million 20 dollar rolls a matter of the rule or is it policy? 21 MR. TIRLONI: That's policy, sir. 22 CHAIRMAN CLOWE: So it's not in the 23 rule? 24 MR. TIRLONI: No, not in the rule at 25 all. 0062 1 CHAIRMAN CLOWE: Thank you. 2 DR. EUBANK: So with -- with that as a 3 background, let me now talk about some of the things 4 that I've done on the revenue side. So what I've 5 looked at is, using fairly conservative -- actually, 6 conservative sales figures of around -- about 3.6 7 million per week, I have worked my way through some 8 possible roll scenarios, with -- starting at four 9 million, rolling in one million dollar increments. 10 And I've looked at this for the various game -- a 11 number of game scenarios. Once I know sales, then it 12 is possible to figure out the -- using something 13 called the negative binomial distribution, it's 14 possible to figure out the probability of getting hit 15 at each one of the different jackpot levels. And so 16 that allows me to figure out an expected overage or 17 underage, in terms of the amount of funding that 18 you've got for a jackpot. So that allows me to figure 19 out the expected loss or deficit spending beyond 50 20 percent. And that's what I've done for the different 21 games. 22 So in terms of the six-of-54 game that 23 I had up on the -- the screen a minute ago, my 24 calculations suggest that even though this has a 25 theoretical payout of 50 percent, in practice, because 0063 1 of the way the -- the fact that you can't actually set 2 the jackpot at exactly what is supported by sales and 3 the fact that you're paying the maximum of advertised 4 jackpot or jackpot supported by sales, in fact, what 5 you're going to be paying out is something like 53 6 percent. Now -- 7 COMMISSIONER COX: Doctor Eubank? 8 DR. EUBANK: Yes, sir. 9 COMMISSIONER COX: A question at this 10 point. If we were to say to you, tell us what 11 starting -- say, six-of-54, with 40.47 jackpot 12 allocation and 50 percent nominal return, if we were 13 to say to you, tell us what starting jackpot and what 14 progression from that would give us 50 percent, is 15 that a computation you could back into? 16 DR. EUBANK: Yes, sir. Yeah, that -- 17 that can be done. I mean, I -- it's -- it's -- and my 18 guess is it's something along our line of about two 19 million dollars. That's just off the top of my head. 20 Robert may actually know better than me. 21 MR. TIRLONI: What -- what we were just 22 discussing is, we don't know what the sales impact 23 would be from doing that, so -- and that's one of 24 the -- once I give Doctor Eubank our matrix to look 25 at, the first question, whenever I asked him to do 0064 1 analysis is -- his first question is, what do you 2 anticipate the sales are going to be for this matrix. 3 So for him to do the analysis that you just asked, we 4 would have to try to come up with what sales would be 5 if we did decrease the starting jackpot. 6 COMMISSIONER COX: So this is an 7 iterative process. 8 DR. EUBANK: So if you tell me -- 9 COMMISSIONER COX: What would sales be. 10 What would jackpot be. Well, if that jackpot, what 11 would sales be, and et cetera. 12 MR. TIRLONI: Right. 13 DR. EUBANK: Exactly. So -- so if you 14 tell me that it's going to be -- that you're going to 15 have three point million -- 3.8 million, 3.6 million 16 per week, then my off-the-top -- if you take -- what's 17 it about -- so two-thirds of that, or something, about 18 what it takes to -- to actually -- that's what the -- 19 and then you have to put in the prize percentage or 20 the -- the percentage that goes into -- something 21 maybe along the lines of about a two million dollar 22 jackpot from that. But the question is, will you get 23 3.8 million if you drop the starting jackpot from four 24 to two. Is that what -- 25 COMMISSIONER COX: And we -- and we 0065 1 know it would not. 2 DR. EUBANK: Fine. 3 MR. TIRLONI: I don't believe we would. 4 DR. EUBANK: So -- so it's a -- it's 5 definitely a -- a dog chasing its tail. 6 COMMISSIONER COX: Okay. Thank you. 7 DR. EUBANK: So if -- if you'd like, 8 I'll go ahead. 9 The -- one of the other options that I 10 looked at was the six-of-52. And so what happens here 11 now is if you go to six-of-52, then that changes the 12 probability structure, and it makes it easier to win 13 not only the jackpot, but it also makes it easier to 14 win the -- the lower tier prizes. And so the money 15 has to -- if you stay at the same level, 2000, 50, and 16 three, then some of the money gets shifted out of the 17 jackpot pool, as you can see the 39 percent. And when 18 that happens, the jackpot doesn't grow as quickly, you 19 get hit more often at the lower levels, and so you pay 20 a price for that in the sense that now the -- the 21 payout goes up to 54 and a half percent from the 53 22 percent before. 23 Six-of-54 with the old prizes, well, 24 now you have moved a lot of money down into the -- the 25 lower tier prizes. That's pushed the jackpot tier 0066 1 allocation down. The jackpots don't grow as quickly, 2 and you get hit more often at the lower levels. And 3 the payout there is around 56 percent, or that appears 4 to be the right -- the case. 5 Six-of-50, it's easier to win at the -- 6 at the -- just like the six-of-52 case. It's easier 7 to win at the lower tiers. Money gets moved down 8 there, and the jackpots don't grow as quickly. You 9 get hit more often at the lower level because the game 10 is easier to win, and you're running about a 58 or 59 11 percent payout. 12 So that's -- that's at least some of 13 the -- the scenario -- scenarios that I looked -- I've 14 looked at, and maybe that tests it somehow. 15 CHAIRMAN CLOWE: And, Doctor Eubank, 16 that last one that you gave us, six-of-50, with a 58.6 17 percent payout, was the matrix that we started with 18 and carried on for a number of years. 19 DR. EUBANK: Yes, sir. 20 CHAIRMAN CLOWE: And were successful, 21 to a certain extent. 22 COMMISSIONER COX: Doctor Eubank, it -- 23 when we were operating with six-of-50 and were 24 successful to some extent, of course, we weren't 25 competing against Mega Millions. We weren't competing 0067 1 against casinos. We weren't competing against 2 millions of eight-liners. We weren't competing 3 against all kinds of things that are out there today. 4 CHAIRMAN CLOWE: And it was a new, 5 fresh game. 6 COMMISSIONER COX: And it was a new, 7 fresh game. 8 The 58.6 percent payout leaves 41.4 9 percent if I correct -- correctly did the math for the 10 prize -- for us, and then we take away from that our 11 expenses, et cetera, and so we get down to something 12 like -- what, Robert? 25 percent? 13 MR. TIRLONI: We take out the -- well, 14 we pay the retailer five cents or five percent and 15 then the seven percent allocation for the -- for the 16 Commission -- for the Lottery. 17 COMMISSIONER COX: So it would be 18 under -- under 30 percent. And we learned with the 19 six-of-50, several years ago, that it wasn't 20 generating jackpots big enough to really bring the 21 players out in numbers. 22 MR. TIRLONI: We had -- we had frequent 23 hits. The whole reason for going to the first 24 six-of-54 change was because of frequent hits at the 25 lower levels, mainly, the four million, the starting 0068 1 jackpot amount. We had frequent hits, and sometimes 2 those hits were actually consecutive, where you had 3 four or five instances in a row where the jackpot was 4 hit on the -- on the starting amount. And that had 5 a -- that was detrimental to sales at that time. 6 COMMISSIONER COX: And, Doctor Eubank's 7 58.6 percent does not assume we get hit, at four 8 million, five times in a row. That number goes way 9 down if we get, at hit four million, five times in a 10 row. 11 DR. EUBANK: One thing I would just 12 comment on here -- 13 CHAIRMAN CLOWE: And that happened to 14 us. 15 COMMISSIONER COX: It did. 16 CHAIRMAN CLOWE: If I recall correctly. 17 COMMISSIONER COX: It did. And we -- 18 go ahead. 19 DR. EUBANK: That -- that -- I'm sorry. 20 The 58.6 percent. So if -- if we go back to the -- to 21 the beginning, the -- in those days -- so the real 22 difference between when this was successful and -- and 23 now is that, in those days, even the beginning four 24 million jackpot was being supported by sales. There 25 was -- there was over four million dollars -- there 0069 1 might have been even six million dollars or something 2 like that of revenue on a given night -- I mean, of -- 3 of sales on a given night. 4 COMMISSIONER COX: That's what four 5 million would bring out. 6 And what does four million bring out 7 now, Robert? 8 MR. TIRLONI: A four million dollar 9 jackpot now is approximately, I believe, about 1.7 to 10 1.8 million dollars in sales. 11 COMMISSIONER COX: So a third or less 12 of what it was bringing out originally. 13 MR. TIRLONI: And, you know, I think a 14 big part of that has to do with -- and, you know, this 15 term is used frequently in the industry, but it -- it 16 is a major impact -- is the jackpot fatigue. When the 17 six-of-50 started in '92, there had never been a 18 lottery in Texas. The game started, and four million 19 dollar was considered a lot of money and a great 20 prize. Tomorrow night we're advertising 256 million 21 dollars for Mega Millions. In the players' minds, 22 four million is not that big of a deal anymore. 23 And -- and that's a challenge that not only we face 24 but the industry faces, is how to -- how to keep 25 interest in these jackpot games because of the huge 0070 1 jackpots that have been generated over time by the 2 multi-state games. 3 COMMISSIONER COX: And one of the 4 things that I recall, Mr. Chairman -- I was on this 5 board when we changed from six-of-54 to the current 6 matrix -- we were getting bombed at six-of-54 in the 7 early round. We were getting hit with six and eight 8 percent coverage, and it was killing us. 9 CHAIRMAN CLOWE: That's right. 10 COMMISSIONER COX: So I have a concern 11 that we will go back to six-of-54, and we'll get 12 bombed at that level. 13 CHAIRMAN CLOWE: That's well-founded, I 14 think. 15 MS. WOELK: Can I throw just a couple 16 of little legal points. You know, Doctor Eubank, 17 pointed out that we gave him the proposition that we 18 want to return 50 percent to the players, and I think 19 sometimes it might pop into your mind, why don't we 20 offer it on kind of the high volume Wal-Mart theory of 21 really high payout would generate really high volume. 22 And there is a legal catch there, in that we have a 23 provision that once our payouts exceed 52 percent, and 24 that's across all games, we start losing money for 25 advertising. So there is a little room in there to 0071 1 play with payout, but if you exceed 52 percent in all 2 our games, and we're clearly exceeding that in 3 instants, overall, you're -- you're going to start 4 taking away money from advertising, which I think we 5 do believe can have a meaningful effect. If -- if we 6 couldn't -- no matter how good our games were, we 7 couldn't advertise them. So I -- I just wanted to 8 clarify. There is no -- there is no requirement 9 anywhere in the law that Lotto Texas have at least a 10 50 percent payout. But because we've got some other 11 games out there paying off quite well, somewhere there 12 has got to be the offsets in -- in the payoffs. So 13 that's an important issue. 14 Another -- this legal point I wanted to 15 make is that the -- the starting jackpot and the -- 16 the increment of the rolls is not established by rule 17 or -- or set by a policy that the Commission has 18 adopted. It's been the practice, based on what the 19 products people believe is necessary to keep people in 20 the games. So I just wanted to clarify the -- the 21 legal context in which you're making decisions about 22 the game. 23 COMMISSIONER COX: So, Robert, I think 24 we've had discussions -- I know we've had discussions 25 about what would happen if we made this game 0072 1 pari-mutuel from the start. And I think that your 2 estimates were that it might pay a 600,000, 800,000 3 jackpot if you're going to hit on the first roll. And 4 I think I remember someone, probably Gary, saying, 5 then you don't have a Lotto game anymore, you have 6 something else. 7 MR. TIRLONI: You don't have what? 8 COMMISSIONER COX: A Lotto game 9 anymore. You've got something else. 10 MR. TIRLONI: Yeah. Yes. Yes, sir. 11 That -- that is accurate. Based on the 1.7, 1.8 12 million in sales for a drawing, if, you know, to -- to 13 do the quick calculation, you -- you take 14 approximately 50 percent of that, and then you take 15 the 40 -- 40 percent of that towards the jackpot 16 allocation, you would be looking at somewhere around a 17 million dollars for a starting jackpot. And, you 18 know, if you go much less than that, you basically 19 have our Texas Two Step game, in my mind. Texas Two 20 Step starts at 200,000 dollars and rolls from there. 21 But, yeah, I think for the Lotto Texas game, the -- 22 the public has an idea as to jackpots that they expect 23 for that game. And I -- I don't believe that the 24 jackpot that the public perceives as a valuable 25 jackpot prize would -- would be in that range if it 0073 1 were totally pari-mutuel from the outset. 2 COMMISSIONER COX: So you believe that 3 what we would be doing there is blurring our price 4 points? 5 MR. TIRLONI: Oh, absolutely. 6 Absolutely. 7 CHAIRMAN CLOWE: Did you have something 8 further, Doctor Eubank? 9 Commissioner, I guess at this point I 10 would like to call on Ms. Nettles -- 11 COMMISSIONER COX: Sure. 12 CHAIRMAN CLOWE: -- if we may. 13 Ms. Nettles, would you come up, please? 14 You have filled out a witness affirmation form, and 15 we're glad that you are here and we want to hear from 16 you. Let me see if I can establish ground rules that 17 we need to follow on what we're going to be talking 18 about with you. 19 We have asked you to appear here, and 20 you are free to comment on things that have been in 21 the commentary that you have presented. And the 22 General Counsel will help us be guided, or, Sarah, 23 you'll help us. The Commissioners may want to ask 24 questions of you that take us outside of the record. 25 That is our prerogative. And if we do, then we have 0074 1 negated the ability to act in -- in this session 2 without republishing. 3 Am I understanding it correctly? 4 MS. KIPLIN: Yes. I think to the 5 extent that you are now hearing new comment, that 6 comment will need to be summarized. 7 CHAIRMAN CLOWE: So we need to give the 8 public an opportunity to comment on the new comment? 9 MS. KIPLIN: No, you don't need to give 10 the public an opportunity, but I -- but the comment 11 will need to be summarized, and then an agency 12 response will need to be fashioned for that. So what 13 it is is a drafting issue. 14 CHAIRMAN CLOWE: Okay. So let's try to 15 stay within the comments that you have filed, if we 16 can, so the Commission is able to act if it wants to 17 today. 18 MS. NETTLES: Commissioner Clowe. 19 CHAIRMAN CLOWE: Now -- just a minute. 20 Before you start, Commissioner Cox, do 21 you have a question or two you want to direct to her, 22 or do you want to hear from her? 23 COMMISSIONER COX: I would say she has 24 got some things on her mind. Let's hear them and go 25 from there. 0075 1 CHAIRMAN CLOWE: Okay. 2 MS. NETTLES: Okay. For the record, my 3 name is Dawn Nettles, and I'm with the Lotto Report 4 out of Dallas. And I would truly like to thank you 5 for giving me the opportunity to speak to you all 6 today. This is a pleasant change and surprise for me 7 at this point in the rule change. So I'm -- really 8 am -- I truly do appreciate that. I am not going to 9 make any comments that you all have to summarize 10 because they are not going to be anything different 11 than what I've already said. I -- I do have several 12 things that I do want to say. 13 When y'all first started talking and 14 you were talking about the two percent that -- that 15 was brought up -- and it's funny, too, because I 16 understand that two percent. When -- I want to go 17 back -- I'm trying to figure out the best way to say 18 this to you-all, is what I'm trying to do. 19 Since you-all have covered from 20 inception in Lotto Texas, when Lotto Texas first 21 started, it was -- 32 percent was allocated to the 22 six-of-six prize. And the jackpot started at two 23 million, not four. Okay? When it increased to 24 six-in-54, it went to 37 percent. When it went to 25 five-in-44, it went to 39 percent to the jackpot 0076 1 prize. And now it's being proposed at 40 percent, 2 just rounded off. As you see with each matrix change, 3 they have increased the amount going to the jackpot 4 prize, and that is all for the purpose of getting more 5 money for the jackpot, period. Okay? And, of course, 6 they have to lessen the amount for the other low tier 7 prizes in order to inflate the other one. 8 And going back to the first six-in-50 9 game, it -- what's important for you to understand is 10 that the -- the prize pool was 50 percent of sales. 11 The percentages added did not equal 100 percent, it 12 equaled 48 percent, because two percent was kept in 13 reserve. The players in the first matrix never did 14 receive 50 percent of sales. So when I look up there 15 and I see that 58.6 percent, you know, paying more, it 16 doesn't jibe with me because if you'll remember, this 17 Commission even had to turn over money from the 18 reserve fund to the -- to the legislature because they 19 had too much money in reserve. And they said, hey, 20 you've got too much money, give it -- give it to us. 21 Well, at that time, really and truly, the first game 22 really just paid 48 percent. But, of course, the 23 Commission then started guaranteeing the jackpot 24 between -- getting closer to 1996, 1997, they started 25 guaranteeing the jackpot. It wasn't in the rule, but 0077 1 they -- they still did it. So, therefore, what they 2 were doing was taking monies that weren't allocated, 3 extra monies -- a million, two million dollars per 4 win, 400,000, 500,000 -- and paying a winner when they 5 won. Well, if they had stuck with the 32 percent and 6 not guaranteed the jackpot, we wouldn't have had that 7 problem. Okay? And I am all for paying just exactly 8 what you have, a percentage. 9 Now, I understand that staff has to 10 take what sales are currently to try to figure out 11 what sales will be. When Doctor Eubank was saying, 12 3.5 million a week or three million a week, well, I 13 understand you're -- you're going on what you have now 14 and what you've dropped down to, but your sales are 15 going to jump up, because Lotto Texas is Texas's game. 16 It is your premier game. It is like Powerball is 17 America's game. Well, Lotto Texas -- that's how the 18 players feel about Lotto Texas. It's their game. 19 It's the game they want. But they don't want the 20 prizes and the odds that they've been given. And you 21 have really turned them off. It's really not that you 22 have casinos in New Mexico, and Louisiana, and all of 23 those -- all on the border states, and it's really not 24 Mega Millions that has hurt Lotto Texas. People want 25 Lotto Texas. They want their own in-state game. Your 0078 1 sales are going to increase, providing, of course, you 2 give the people of Texas the game that they want to 3 play and decent prizes. 4 CHAIRMAN CLOWE: Now, Ms. Nettles, let 5 me ask you a question at this point. I went through 6 all of the submission that you gave the Commission, 7 and so much of it was, I don't want this. Within your 8 comments, what is your opinion of what the players 9 said they wanted? Can you state that for us 10 succinctly? 11 MS. NETTLES: Are you talking about in 12 their additional remarks? 13 CHAIRMAN CLOWE: In the compilation of 14 all the remarks. 15 MS. NETTLES: Of all the remarks. 16 CHAIRMAN CLOWE: Yes, ma'am. 17 MS. NETTLES: Okay. 18 COMMISSIONER COX: Mr. Chairman, if I 19 could ask a question at this point. 20 CHAIRMAN CLOWE: Yes, sir. 21 COMMISSIONER COX: Ms. Nettles, I 22 wasn't clear whether you reviewed the 973 comments 23 that came to you, or whether you reviewed the whole 24 nearly 1500 comments. 25 MS. NETTLES: No, sir. This report 0079 1 that I sent to you-all has to do only with the 973, 2 because it was very specific in what the people said. 3 I did receive copies of y'all's comment, your 470 4 some-odd, but they are not in this at all. 5 COMMISSIONER COX: Okay. But you did 6 read them? 7 MS. NETTLES: I -- no, sir. I've got 8 to tell you the truth. This right here ate my lunch. 9 COMMISSIONER COX: Okay. 10 MS. NETTLES: Okay? And I may -- 11 COMMISSIONER COX: I can see why. It's 12 very thorough. 13 MS. NETTLES: And I -- I glanced at 14 them. I did glance at them, but I did not sit down 15 and read them as thoroughly as I did these. But I was 16 out for very specifics. On -- on my survey, I wanted 17 to know, cut and dried, what did the people want, and 18 I found out, cut and dried, what the people want. 19 CHAIRMAN CLOWE: And give us that 20 answer. 21 MS. NETTLES: Well, that answer is 22 actually on the -- 23 CHAIRMAN CLOWE: In your opinion. 24 MS. NETTLES: Huh? 25 CHAIRMAN CLOWE: In your opinion. 0080 1 MS. NETTLES: In my opinion, they want 2 the six-in-50 matrix, back. They want the old game 3 back. They don't really understand that they only saw 4 48 percent of sales on that game. Okay? But, in a 5 nutshell, for the matrix, they want that. They don't 6 want the rounding down. They want to receive their 7 share of sales, and they want a guarantee of that. 8 They want a guarantee of sales, no rounding down, and 9 they want a -- they want a game that they can win, a 10 six-in-50 matrix. 11 When you were talking while ago 12 about -- I want to get back to that two percent. 13 CHAIRMAN CLOWE: And just a minute. 14 Are you comfortable with that answer? 15 COMMISSIONER COX: That's her answer. 16 CHAIRMAN CLOWE: Yeah. 17 MS. NETTLES: They also want the rule 18 to be specific -- 19 CHAIRMAN CLOWE: And that's the 20 question I asked. It leads to the impact of that. 21 COMMISSIONER COX: Now, I -- 22 Mr. Chairman, I -- I know that even with 23 questionnaires that are designed by people who do that 24 for a living, that you can get feedback that misleads 25 you. And I won't call this anecdotal, but it's closer 0081 1 to anecdotal than scientific. And I'm concerned about 2 where we get -- how far we can go with it. 3 CHAIRMAN CLOWE: Right. 4 Thank you, Ms. Nettles. Proceed, 5 please. 6 MS. NETTLES: Okay. The rule, as it 7 states right now, the proposed rule, it doesn't have 8 that 50 percent of sales is allocated -- the prize 9 pool is 50 percent. Okay? It does not state that. 10 It -- its allocations add up to 50 -- to 100 percent, 11 which is 50 percent of sales. Okay? And you were 12 talking about the two percent that was held, and, of 13 course, it's in the State funds to be used if 14 necessary. Well, I understand that. But, ironically, 15 you turned around as soon as you said that a while 16 ago, Commissioner Cox, and then you -- and then in 17 a -- in a few sentences later -- and you can read this 18 in the transcript -- you said, well, we were paying 19 back 55 percent, and then we were paying back 52 20 percent. Well, that's exactly what the Commission has 21 always said. When they went to six-in-54, their sales 22 pitch was, we are increasing the pool of -- the prize 23 pool of 50 for five percent of sales. We are 24 returning 55 percent to the players. Well, that was 25 never true. 0082 1 COMMISSIONER COX: No, it wasn't. 2 MS. NETTLES: It wasn't. They were 3 only returning 53. 4 COMMISSIONER COX: It was 53. 5 MS. NETTLES: It was 53. 6 COMMISSIONER COX: And when we were 7 saying it was 52, it was really 50. 8 MS. NETTLES: Exactly. And I knew 9 that. Okay? 10 COMMISSIONER COX: And I knew that, 11 too. 12 MS. NETTLES: All right. And I knew 13 that it was also true on six-in-50. You said you were 14 giving back 50 percent of sales, but the people never 15 saw 50 percent of sales unless you add in the money 16 that was overpaid to the jackpot winners -- that I 17 consider was overpaid to the jackpot winners. Okay? 18 Because that equals a hundred million dollars. Now, 19 there was more than that in reserve. There was 20 actually monies left. And I even remember the 21 Commission meetings when they were talking about 22 switching to the bonus ball, and they'd say, well, I 23 sure will be glad when we can quit dipping into our 24 reserves. And I was sitting out there having a cow 25 because I was saying, hey, that's the players' money, 0083 1 you know. But I didn't really want it to go to the 2 jackpot winner. 3 So I think that if you want to get 4 sales up, I believe with all my heart that you can get 5 it up -- and I know I'm not on staff and I know I 6 don't work here at the Lottery -- but you will get 7 sales up if you will simply give the players decent 8 prizes in the low tier end. You don't have to pay 9 more than what you have out. We're not expecting 10 that. We want a 50 percent return of money guaranteed 11 to the player each and every draw. They'll get more 12 than three dollars on the low -- on the -- the 13 matching three numbers because your sales are going to 14 increase. And as far as getting hit all the time, you 15 didn't get hit all the time. Yeah, you had a bad 16 roll, and Doctor Eubank even came up here and said, 17 hey, it's just a roll of the luck. It'll happen to 18 you once or twice a year. 19 Do you remember that. 20 DR. EUBANK: Yes, I do. 21 MS. NETTLES: Okay. You don't get hit. 22 You might. So what? That's what is going to get your 23 sales up is for you to have winners. 24 What do the people want? They want 25 clear, clean-cut, up front, honest rules in a fair 0084 1 game. You want your sales up? You have nothing to 2 lose and everything to gain by going to the six-in-50 3 matrix and stopping your rounding down. 4 What you didn't see was comments that I 5 got, aside from what -- what came in, the reaction of 6 people when they found out about how you rounded 7 down -- if it was 56.99, that you only paid 56, not 8 57. You should have seen my e-mail and taken the 9 phone calls that I took when they found out that Texas 10 was doing that. Now, you can have a reserve fund if 11 you want. You want to set aside 52 percent and 12 guarantee 50 so that you can keep your advertised 13 jackpot guarantee. I wouldn't do that. I would lower 14 it to two million. Your sales are going to increase. 15 And I know you don't believe that, but they will. 16 Guarantee that they will increase. And I say that 17 because I'm a salesman, and I know how to sell a 18 product. 19 From the survey, sir, it was done by an 20 expert. I'm not the expert, but I had expert 21 assistance on it. Okay? 22 COMMISSIONER COX: I -- I said, people 23 who do it all the time. I didn't say -- I didn't say 24 you weren't an expert. 25 MS. NETTLES: Well, companies -- well, 0085 1 no, I'm not an expert. I've got to tell you. This 2 really did -- this was the hardest job I think I've 3 ever done. 4 So those questions were up front. What 5 do you want. Y'all wanted to know, what do you people 6 want. Well, I asked them, what do you want, 7 six-in-50, six-in-52? Do you want six-in-54? What do 8 you want? Tell us what you want. And they did. And 9 I have well over 2,000 comments, sir. I only got 10 those 973 in a ten-day period. But I let it roll, and 11 I even posted that there was a deadline cutoff, but 12 they just kept on coming anyway. So I have a survey 13 for you-all. Y'all have a magic number of 1800 for 14 comments? Would you like to have a survey of 1800? 15 Well, I've got you well over 2,000 right now. And, 16 no, I haven't computed them, but they all seem to be 17 exactly in line with what I faxed up here. 18 So I wish y'all would have a positive 19 attitude to this matrix change and give the people 20 back what they want. You can increase your sales. I 21 don't care -- you've got Mega Millions, Powerball, and 22 casinos. This is Texas's game. They love this game. 23 This is the game they want. They don't believe you 24 need to win 10 and 20 and 50 million dollars. That 25 was very obvious in the comments that they submitted. 0086 1 To them, two million or five million is plenty. But 2 y'all have this saying that you have got to have a 3 hundred million dollar jackpot. Well, sir, no 4 offense, but you had it, and your sales were terrible. 5 It's because the odds of the game are too high. 6 I beg you. Please change it. Don't 7 adopt what you have. And please change it. And I 8 hope you can change it and propose it today legally. 9 I -- I just -- I want to see it forthright. I -- I -- 10 we need to guarantee the people a 50 percent return 11 for each and every draw. And I don't think that's 12 asking for too much. The rule needs to be -- be laid 13 out for exactly what is going on up here, and it's 14 not. There is -- there is hidden things that is not 15 fair. 16 Now I'll answer any of your questions. 17 COMMISSIONER COX: Ms. Nettles, would 18 you elaborate for us on what are the hidden things 19 that are not fair? 20 MS. NETTLES: Things that are not fair? 21 COMMISSIONER COX: Yes, the hidden 22 things that are not fair, you said. 23 MS. NETTLES: We return 50 percent of 24 sales. There's 50 percent of sales on the prize pool, 25 when the truth is, it's 48. 64 percent -- I mean, you 0087 1 asked me -- 2 COMMISSIONER COX: What brought it to 3 48? 4 MS. NETTLES: The two percent in 5 reserve. 6 COMMISSIONER COX: We -- we eliminated 7 the reserve. 8 MS. NETTLES: Well, no. You asked me 9 what was not fair. I thought you were asking me for 10 examples of -- 11 COMMISSIONER COX: I thought you were 12 talking about things in this rule that were hidden -- 13 MS. NETTLES: Oh, the rounding down -- 14 rounding down prizes. 15 COMMISSIONER COX: I'm with you on 16 that. 17 MS. NETTLES: Okay. The fact that it 18 does not tell you how to calculate the jackpot prize 19 amount. That needs to be in the rule, not policies 20 and procedures. And I have in my car all your 21 different policies and procedures that have changed 22 over time in how to calculate that. It shouldn't -- 23 he had it right up there on the screen exactly how to 24 calculate the jackpot. 25 COMMISSIONER COX: Well, doesn't -- 0088 1 40.47 isn't the right number? 2 MS. NETTLES: No, I'm not talking about 3 that, sir. I'm talking about, if you win the lottery, 4 how do you -- how do you arrive at the sum to pay the 5 winner. And Doctor Eubank had it right there on the 6 screen while ago. 7 COMMISSIONER COX: And we're not doing 8 it the way Doctor Eubank says? 9 MS. NETTLES: That's not in the rule, 10 no, sir. It's in policies and procedures. 11 MS. WOELK: This was one of the 12 objections that Ms. Nettles had on her poll. I was 13 actually a little confused by it, too, because, 14 clearly, the rule does say that you will pay either 15 the greater of -- of sales or advertised. And there 16 is always -- I think what -- when we talked, you want 17 more detail, like who does what, who calls up who and 18 finds out what, and that -- a greater level of detail 19 about how the process works once someone has won. Is 20 that an accurate -- 21 MS. NETTLES: Sort of. It doesn't have 22 to be quite that detailed. But you just take sales 23 and you multiply -- I hope it's not 40 percent. They 24 don't need 40 percent of sales going to the 25 six-of-six. Okay? I hope you don't adopt that. But 0089 1 whatever the percentage is, total sales times 32 2 percent, and that tells you how much the jackpot 3 winner has coming and how much they'll invest. 4 COMMISSIONER COX: What would the 32 5 percent come from? 6 MS. NETTLES: Well, the 32 percent 7 would be owed -- 8 COMMISSIONER COX: Well, let's -- can 9 we call it 40.47 for this discussion? 10 MS. NETTLES: Okay. 11 COMMISSIONER COX: Doesn't the rule say 12 that we will multiply sales by 40.47 and pay that to 13 the winner? 14 MS. WOELK: Yes, but the -- the rule 15 says the jackpot prize for a drawing, the greater of 16 44 -- 40.47 percent of sales from the proceeds from 17 Lotto ticket sales for all drawings in the roll cycle 18 and any investment on all or part of the proceeds from 19 ticket sales paid in 25 annual installments. That's 20 the 25 annual installment payment, or the amount 21 advertised in accordance with subsection E, paid in 25 22 annual installments. 23 So that is where I think it's really a 24 question of detail as opposed to the basic formula not 25 being in the rule. So I think the issue is what -- 0090 1 what specific details are not there as far as you 2 would like to see them? 3 MS. NETTLES: I think the people ought 4 to be told up front how the Texas Lottery arrives at 5 the prize amounts, for -- for all of them, which is a 6 percentage of sales of the amount allocated, which in 7 this case is 40 percent of sales. And that's how much 8 they will -- they can invest if it's an annual pay, or 9 that's how much the cash value option is, because 10 that's the truth of the matter. 11 COMMISSIONER COX: And it does -- it 12 seems to me to say that. 13 MS. NETTLES: No, sir, it really 14 doesn't. 15 COMMISSIONER COX: Can you help Sarah 16 with what exact words would get us there? 17 MS. NETTLES: It's in your policies and 18 procedures, sir. 19 COMMISSIONER COX: I don't know those 20 by heart. 21 MS. NETTLES: Well, you -- you probably 22 don't, but it's -- 23 MS. WOELK: I think this is just an 24 issue where we -- we could never quite get together. 25 MS. NETTLES: I will work with her. I 0091 1 have the papers in the car, because I have -- I had a 2 need to bring them to Austin with me today. But I do 3 happen to have everything on me. And I will get with 4 her on it, but I think that the rule -- you need to 5 tell the people precisely how this agency calculates 6 the prizes, because that's where we have our problems, 7 in -- in that it's not stated in the policies and 8 procedures, and it has changed. 9 COMMISSIONER COX: Well, as to, we 10 should tell the people exactly how they are paid, I 11 totally agree with you. As to whether we are or not, 12 I just don't -- 13 MS. NETTLES: I understand. I 14 understand. 15 MS. WOELK: I -- I do think probably 16 one thing I -- I believe it is all there in the rule. 17 It's probably not there in a way that the average 18 person on the street would easily see it. My belief 19 is, once you try to put things in that kind of 20 language in a rule, you lose the precision necessary 21 to -- to make the rule absolutely clear. So I think 22 what we might be having is a problem between lawyers 23 and lay people. It's with my -- my sense is, the rule 24 needs to be very precise, but that does take away, to 25 some extent, from the ability to just say, oh, I see 0092 1 what they do. They do this. So we can work on that. 2 COMMISSIONER COX: And one thing I know 3 that you have done, Sarah, is work very hard to make 4 this rule easier to understand. You have eliminated 5 that convoluted direct and indirect business and have 6 made a number of other changes that I believe we can 7 all agree have made the rule easier to understand. 8 But if we can improve it even more, we should. 9 MS. WOELK: Well, I -- and I think 10 there are some ways that are where precision makes it 11 harder to understand in a layperson sense, but 12 protects you better when you've got tough, detailed 13 questions involved within the rules. 14 So I think -- I think we're -- we all 15 agree that it ought to be really precise and clear, 16 and I think we can maybe work on language to achieve 17 those and keep the rule precise, but it also -- for a 18 person who is just looking at it, to understand, okay, 19 how do they get there. 20 MS. NETTLES: Is this the actual rule 21 that you-all are talking about adopting today? 22 MS. WOELK: Yes. 23 MS. NETTLES: This -- this -- the -- I 24 mean, I just picked it up. 25 MS. WOELK: Yeah. 0093 1 MS. NETTLES: I haven't read any of 2 this yet. Is this exactly what you had proposed, or 3 are there changes to this? 4 MS. WOELK: No, it's -- but they're 5 minor changes, and they're described at the beginning 6 of the preamble. There's a few word changes, but 7 nothing that really -- that would impact your general 8 reaction. 9 MS. NETTLES: So it does not contain, 10 instead of the prize pool, 50 percent? And you took 11 all of the rollover language out of there? Is that 12 correct? 13 MS. WOELK: The -- the rollover 14 language is there. I've eliminated the terms -- some 15 of these terms, breakage and things, but the language 16 is still there that -- for the pari-mutuel prize, but 17 also the jackpot levels, to the extent those 18 allocations are not paid out, they'd carry forward to 19 the next drawing. 20 MS. NETTLES: Okay. So rollover is in 21 here. Okay. 22 MS. WOELK: But it's not called 23 rollover anymore, and that's the -- the distinction I 24 tried to describe precisely what was happening, as 25 opposed to using words that become terms of art to 0094 1 insiders, but don't necessarily describe to a new 2 person looking at the rule -- 3 MS. NETTLES: It's monies carried 4 forward that weren't paid out for the last drawing. 5 MS. WOELK: So now it says, carried 6 forward, as opposed to rollover. 7 MS. NETTLES: Well, without having read 8 this, I can't very possibly even comment, you know, on 9 this, which I can't do anyway because it's not a part 10 of it. But I -- I don't know what you're -- what this 11 says or what the changes are, but, again, I -- I hope 12 you all will believe me. You haven't in the past, and 13 I haven't ever been wrong. I've hit the nail on the 14 head every time. And when you changed to six-in-54, 15 it was never successful. Not from the day one. The 16 first year -- I forget the numbers, and I didn't come 17 prepared with that -- but for the first year, you did 18 not have an increase. You had a decrease in sales. 19 That -- the only thing I remember for sure was a 75 20 million dollar jackpot under the six-in-50 that 21 actually brought in 51 million, and you had an 85 22 million dollar jackpot under six-in-54, and it only 23 brought in 50 million. But you haven't seen that kind 24 of sales in a long time. And it's simply because you 25 have taken away the game that the people wanted. Give 0095 1 it back to them, and you will increase your sales. 2 And I'd bet money on it. 3 CHAIRMAN CLOWE: Sarah, I think, in the 4 exchange that you and Ms. Nettles and Commissioner Cox 5 had, you came up with a fair statement of the lack of 6 understanding that exists regarding clarity on this 7 issue. And I know that it's important to have the 8 legal correctness, and at the same time, I think we 9 want to strive for the understanding that we want to 10 achieve in these issues. 11 And, Ms. Nettles, I want to thank you 12 for being here today. I want to -- I want to, with 13 respect, comment on some of the things that you've 14 said. My recollection is that you have been generally 15 against everything that the Commission has done, and 16 my recollection is that you haven't been a hundred 17 percent right at all. And I think it's easy to be 18 against things and not really understand or take the 19 responsibility for the outcome of them, and that's 20 where this Commission is, relative to this game. We 21 cannot adopt something that pleases all the players 22 and makes them really happy and is unfair to the State 23 of Texas. And I -- I would like for you to have that 24 in your consideration. I think it will make your 25 comments better balanced to us. And -- and I would 0096 1 appreciate that. 2 I -- I am somewhat skeptical of your 3 assurance that if we get hit often and frequently, 4 that will increase our sales. I -- my experience on 5 this board, going on eight years now, is that when we 6 get hit at four million and we struggle and -- that 7 does not cause sales to peak. 8 I am concerned about dropping the 9 minimum to two million dollars. I am also concerned 10 about the idea of having it less than one million in 11 the roll. 12 But I am ready, Commissioner Cox, to 13 leave the -- the Powerball or the extra ball. I'm 14 ready to go back to six and something. And I am 15 searching now for what is the right matrix to go to. 16 And I -- I am puzzled by that, and I'm hopeful that 17 you and I can deliberate in the public and arrive at 18 some mutual understanding, with the benefit of the 19 staff and -- and Ms. Nettles' comments, a change that 20 will take us away from the matrix we have now to 21 something that will be more beneficial. 22 Have you a thought on that? 23 COMMISSIONER COX: I have a thought. 24 It's probably just a question, and that is, what 25 matrices and prize payout structures and initial 0097 1 jackpots and jackpot progressions have you studied 2 sufficiently to tell us what you believe the revenue 3 generated by them will be? Because what we're looking 4 at here, I believe, is how much revenue we could 5 generate for the school children of Texas. And I 6 believe that, unless we have a number that looks like 7 that -- and I know that Kathy said in her fiscal note 8 that we don't have anything certain enough to put in 9 as an estimate of incremental or decremental 10 revenue -- but what do we know about the expected 11 revenue that will come from any matrix with any prize 12 structure and any starting jackpot and progression? 13 MR. TIRLONI: Commissioner, our focus 14 has been on -- based on the analysis that 15 Doctor Eubank has done, our focus has been on the 16 six-of-54, because -- because of the payouts that you 17 see on the screen, that those matrices would have 18 generated the most revenue just based on what the 19 payout would be. And as you said, in terms of -- 20 COMMISSIONER COX: So your -- you would 21 assume, then, that all would generate the same amount 22 of sales, and the one that -- that had the highest 23 payout would generate the most revenue for the State? 24 And you base that on the idea that six-of -- what do 25 you base that on? 0098 1 MR. TIRLONI: Well -- 2 MR. GRIEF: Commissioner, could I come 3 forward? 4 COMMISSIONER COX: Please, Gary. 5 CHAIRMAN CLOWE: Yeah. Absolutely. 6 MR. GRIEF: For the record, my name is 7 Gary Grief, Deputy Executive Director. You're 8 welcome, Robert. 9 I can tell you the only thing I'm 10 certain of and that is that revenue from Lotto Texas 11 is going to continue to decline. That -- that is what 12 I'm sure of. That's the only thing I can tell you 13 today. 14 COMMISSIONER COX: So Kathy could have 15 put in a fiscal note that said, it's going to go down 16 but I don't know by how much? 17 MR. GRIEF: That's correct. 18 COMMISSIONER COX: And that she kind of 19 did, really. 20 MR. GRIEF: That's correct. And we -- 21 depending on what point of view one would like to take 22 on a Lotto game, you can go out to a particular state 23 or a jurisdiction and support your theory or discredit 24 whatever theory you want to discredit. Different 25 states have taken different approaches. They've made 0099 1 it harder to win. They've made it easier to win. I 2 think, if you put all of those charts and graphs up on 3 the screen and you superimpose them all together, at 4 the end of the day, what you see is a continual slow, 5 steady -- 6 COMMISSIONER COX: Maybe a tiny bleep 7 upward in some cases, but always the same general 8 secular trends? 9 MR. GRIEF: Because of the newness of a 10 particular change, for example, you might see a spike 11 in interest. Ninety-nine times out of a hundred, it 12 settles back into that downward trend. 13 COMMISSIONER COX: And I've been with 14 you when we've seen those charts, and -- 15 MR. GRIEF: Yes, sir, you have. 16 What we had talked about in doing this 17 particular matrix change -- if you recall, 18 Commissioner Cox, you were there when we had these 19 discussions. What we also know for certain is when we 20 made the last change, and we could say, well, it may 21 have continued to drop even more, but when we did make 22 the last change, we lost a pretty good percentage of 23 revenue -- 24 CHAIRMAN CLOWE: That's 30 percent. 25 MR. GRIEF: Our thinking was, let's go 0100 1 back to where we were. We know it's not the greatest 2 matrix in the world. It's not the greatest Lotto game 3 in the world. But it's a place to go back and gather 4 data and see, first of all, what, if any, percentage 5 of those players who quit playing when we put the 6 bonus ball in might come back to the game and start 7 playing. We know people play at 100 million, 150 8 million, but what percentage of people are going to 9 play at the lower levels, the regular, steady players 10 that -- that we want to have for this particular game. 11 That's what we're trying to do today, 12 and I've heard the Commission talk about, perhaps, if 13 we truly want to do that, then you might want to 14 deliberate putting back in the same percentage 15 allocated to the lower level prizes as well. 16 CHAIRMAN CLOWE: Which would be the 17 previous six-in-54. 18 MR. GRIEF: Correct. 19 COMMISSIONER COX: Well, now, when you 20 say that, Gary, are you suggesting going back to the 21 53 percent payback to the players along with that? 22 MR. GRIEF: That would be where I would 23 want to stay to what -- to what has been recommended 24 in the new rule. Rather than make it -- 25 COMMISSIONER COX: So you want to go 0101 1 back to the same proportions, but proportioned off of 2 50 percent rather than 53? 3 MR. GRIEF: Well said. That's exactly 4 what I would recommend. 5 COMMISSIONER COX: And that -- you said 6 that if we wanted to make a change? 7 MR. GRIEF: Yes, sir. I hope that's 8 helpful. 9 CHAIRMAN CLOWE: And, you know, I woke 10 up in the middle of the night thinking about 11 Ms. Nettles and six-out-of-50, and I thought, you 12 know, maybe I ought to believe. Maybe I ought to just 13 suggest that we do what she says and -- and see what 14 happens. And I am kind of wanting to believe, but 15 I -- you know, my institutional knowledge says, 16 everything points the other way. And -- and you 17 disagree with what Ms. Nettles has assured us that she 18 thinks will happen? 19 MR. GRIEF: I don't know what will 20 happen, but I do know if we go back to the six-of-54, 21 we'll have a period of time where we can get real 22 spending information. And then, Mr. Chairman, maybe 23 down the road, we do want to take a shot at six-of-50 24 or six-of-52. That's where we take the advice from 25 the Commission seriously and that you want us to be 0102 1 creative and you want us to try to think outside the 2 box and come up with new and interesting ways to 3 present this game to our players. 4 COMMISSIONER COX: Mr. Chairman, we've 5 got some, I think, real expertise in this room, 6 obviously. Gary is certainly at the head of that 7 list. We've also got GTECH, the lottery operator. 8 And what would you think about asking Gary and Ramon 9 to give their thoughts on what Ms. Nettles 10 recommended? 11 CHAIRMAN CLOWE: I think that's a great 12 idea. Could we have a break first? 13 COMMISSIONER COX: Yes, sir. 14 MS. NETTLES: May I say just one thing, 15 first? 16 CHAIRMAN CLOWE: No, let's take a 17 break, and then we'll hear from you. 18 (RECESS.) 19 CHAIRMAN CLOWE: We'll come back to 20 order then, please. 21 I believe Commissioner Cox has asked 22 for an estimate from Gary and Robert or Doctor Eubank, 23 and Ms. Nettles has asked to make a comment. 24 COMMISSIONER COX: And Ramon. 25 CHAIRMAN CLOWE: I beg your pardon? 0103 1 COMMISSIONER COX: Ramon. 2 CHAIRMAN CLOWE: And Ramon. Sorry. 3 And, Ramon, you come up and sit with Gary. 4 But before we do that, Ms. Kiplin, did 5 you have something that you wanted to get on the 6 record? 7 MS. KIPLIN: I did. I appreciate the 8 opportunity to put it on the record, and if I could 9 get Ms. Woelk and Ms. Pyka up. This had to do with 10 fiscal note, and it could very well be that I 11 didn't -- I didn't hear the testimony that was 12 provided, but I want to make sure that what was 13 proposed as part of the -- of the rule, the preamble, 14 with regard to the fiscal note, is an accurate 15 reflection. 16 MS. PYKA: Yes, Ms. Kiplin, I do 17 believe it's an accurate reflection of the proposed 18 rule. 19 MS. KIPLIN: Thanks. 20 CHAIRMAN CLOWE: Is that sufficient? 21 MS. KIPLIN: Yes. 22 CHAIRMAN CLOWE: All right. 23 Ms. Nettles, did you have a following 24 comment you wanted to make? 25 MS. NETTLES: Yes, sir, I did. I'm -- 0104 1 I'm sorry. With regard to what Gary said -- with 2 regard to what Gary said, I -- I am compelled, I have 3 to say this. I understand why he tells you what he 4 does. I understand that fully. He is basing his 5 information on data of things that have happened in 6 other states, and he is 100 percent right. No state 7 has ever seen an increase in sales when they went back 8 to their original game. However, every one of those 9 states increased the amount of money going to the 10 six-of-six winner and decreased the low tier prizes. 11 Now, that turns people off. They don't play these 12 games for pocket change. It's not worth it. And I 13 say that as a player. 14 Also, one other thing I have to come 15 back on, and that is that this -- the State of 16 Texas -- I am for what is best for the players, but I 17 also care about the State and its -- and its revenues. 18 This lottery should never do anything that jeopardizes 19 or puts the State in a liability position. And this 20 rule and your current rule, where they guarantee the 21 amount advertised, places the State in a terrible 22 liability situation. These games should take in so 23 much money, give 50 percent back to the people, 50 24 percent to the State, across the board. Whatever that 25 is, everybody needs to accept it and live with it 0105 1 because that's the way it is. Irregardless of whether 2 you bring in one million dollars or ten million 3 dollars in sales, that is the way that the lottery 4 should be run. And this way, nobody loses. 5 CHAIRMAN CLOWE: Thank you, 6 Ms. Nettles. I -- I understand that you're passionate 7 about your beliefs, and I think the same level of 8 commitment and passion applies to every member of the 9 staff. And we're grateful for all of the input. The 10 Commissioners have to make the decision, and we'll 11 make the best decision, hopefully, by having 12 everyone's input. And we want to keep it, as I have 13 said so often, as factual as possible. It's up to us 14 to determine what the balance is, and that's why we 15 get paid so much money. 16 MS. NETTLES: Me, too, Commissioner 17 Clowe. Me, too. 18 CHAIRMAN CLOWE: Okay. Now I think 19 we're back to Commissioner Cox's suggestion, Ramon, to 20 you and Gary. 21 Do you want to refresh your charge to 22 them? 23 COMMISSIONER COX: Ms. Nettles has 24 proposed -- and you might want to ask her to bring 25 into sharp focus for you precisely what she has 0106 1 proposed, because I -- I'm not totally clear. I'm -- 2 I understand the general concept, but as to whether 3 it's really totally pari-mutuel or whether it's 4 starting at an artificial two million dollar level, I 5 don't know. But what experience do you have with 6 things like she suggested that would cause you to make 7 a fearless prediction about how successful that might 8 be? 9 MR. GRIEF: Commissioner Cox, I 10 wouldn't -- I -- I don't have it clear in my mind 11 exactly what Ms. Nettles has proposed. 12 COMMISSIONER COX: Could I ask 13 Ms. Nettles to clarify for me what she proposed? 14 CHAIRMAN CLOWE: Sure. Sure. 15 Ms. Nettles, would you come up and -- 16 and see if you can help in a definition of your 17 proposal? 18 MR. GRIEF: Mr. Chairman, would it be 19 helpful -- could I ask Ms. Nettles some questions to 20 try to get it clear on -- 21 CHAIRMAN CLOWE: Yes. 22 Ms. Nettles, are you agreeable to that? 23 MS. NETTLES: Yes, sir, except I was 24 talking to Sarah, and I didn't hear anything that 25 y'all said. 0107 1 CHAIRMAN CLOWE: All right. Now, Gary, 2 we're going to try to stay in the record. If we get 3 outside of the record, then we have no action 4 opportunity today. 5 MR. GRIEF: Then I'll -- I'll couch all 6 of my questions -- 7 CHAIRMAN CLOWE: In regard to the 8 comments she filed. 9 MR. GRIEF: As regarding the -- what 10 your sense is of the comments that were filed. 11 What matrix is it that the players, in 12 your mind, the commentors wanted? 13 MS. NETTLES: The commentors, the 14 people of Texas, want a six-in-50 matrix on behalf of 15 the State and in the better interest of the State in 16 trying to accomplish what y'all are trying to do. You 17 did have enough people say and agree that six-of-52 18 would be acceptable to them. I don't think it will -- 19 based on those comments, they really are opposed to 20 six-in-52. Some of them -- I mean, many of them are 21 very adamant, give us our original game back. 22 MR. GRIEF: And what was your sense of 23 the prize payout percentage? 24 MS. NETTLES: I'm sorry. Say that 25 again. 0108 1 MR. GRIEF: What was your sense of the 2 commentors as to what prize payout percentage they 3 wanted? 4 MS. NETTLES: The people of Texas want 5 a 50 percent payout. As a matter of fact, I learned 6 from them that that was the impression that they were 7 led to believe when the lottery was -- was legalized, 8 when they brought in the lottery. 9 MR. GRIEF: And what percentage of 10 sales should be allocated to the top prize? 11 MS. NETTLES: I'm not prepared to 12 answer that question, Gary, without thinking, but if 13 you go back to six-in-52, I would -- your three-dollar 14 prize back -- I mean, six-in-50 -- your three-dollar 15 prize was not enough. You had far more money to pay 16 on that one than what you did, and that's how the 17 reserve fund got to be so high. So I can't tell you 18 about the percentages. I can only -- I haven't 19 studied it that far. That's not my job. 20 MR. GRIEF: So no -- no percentage of 21 the top prize? You don't have a number for that? 22 MS. NETTLES: Well, if you go back to 23 six-in-50 and use the same structure, that would be 32 24 percent. 25 MR. GRIEF: Starting jackpot amount? 0109 1 MS. NETTLES: I would recommend that 2 you lower it to two million. 3 MR. GRIEF: Okay. That -- I want to 4 clarify. I thought I heard you summarize earlier that 5 you were for pure pari-mutuel. 6 MS. NETTLES: I am. 7 MR. GRIEF: A two million dollar 8 starting jackpot prize would not be pari-mutuel. 9 MS. NETTLES: You -- okay. Let me 10 reclarify that, Gary. The -- the amount that you put 11 on the billboard needs to say, estimated two million 12 dollars. Now, if your sales does not justify two 13 million dollars, which currently they do not, then I 14 would say, estimated one million, if you had to. Of 15 course, you know that's only going to happen for one 16 draw. 17 MR. GRIEF: So the commentors, in your 18 opinion, were advocating estimated jackpot amount, but 19 not a guaranteed structure where we will guarantee 20 what is advertised? 21 MS. NETTLES: I think the people of 22 Texas are opposed to any guaranteed prizes, including 23 myself, because that -- that's not fair to either the 24 players or the State of Texas. 25 MR. GRIEF: And incremental roll 0110 1 amounts? 2 MS. NETTLES: As sales call for it. 3 Y'all are the ones who come up with the, we must 4 increase by one million and we must start at four 5 million. The lottery started out at two million, and 6 it didn't take them long to increase it to three 7 million, and then they eventually went to four. And 8 now y'all have this hang-up that unless we put four 9 million dollars, our sales are going to decline. 10 Well, that's not true, and that's already been proven 11 to you because you saw when you left it at four 12 million. 13 MR. GRIEF: But your sense of the 14 commentors was that, generally, they prefer jackpots 15 to roll how? 16 MS. NETTLES: Oh, you see all kinds of 17 ridiculous things that you know the people don't 18 understand how this really works. I see them say, 19 start it out at ten million. And I understand you 20 can't do that. Let's be real here, and let's really 21 think what can -- is feasible to be done on behalf of 22 what the people say. 23 MR. GRIEF: All right. Based upon 24 Ms. Nettles' comments, I really can't form an opinion 25 on her concept of the game. There is -- in my 0111 1 opinion, there -- there is too many unknowns to 2 actually say, that's the way we ought to go, or that's 3 the way we ought not to go, and give you a revenue 4 estimate. 5 COMMISSIONER COX: I agree. 6 CHAIRMAN CLOWE: I agree, too. 7 I -- I think, Ms. Nettles -- 8 COMMISSIONER COX: May -- may I? 9 CHAIRMAN CLOWE: Yes. 10 COMMISSIONER COX: Ramon, are you any 11 more daring? 12 MR. RIVERA: Good morning, Commissioner 13 Cox. For the record, Ramon Rivera, Account General 14 Manager for GTECH. 15 No, sir. In fact, I am less daring. 16 What -- what we face in Texas today, and we have 17 worked in concert with your marketing staff for about 18 two years now, really laboring over this decision as 19 to what to do with this particular game. From an 20 industry perspective, in-state Lotto games similar to 21 what we have today have been suffering and have been 22 suffering for a while. The -- the two notable 23 exceptions until last year were New York and Florida. 24 The difference there is that Florida does not have a 25 multi-state game, as New York and Texas does. What we 0112 1 know is that the in-state lottery game in New York is 2 declining in sales, and we're starting to notice a 3 decline in sales and, therefore, revenue to the state 4 in -- in the Florida lottery. And my understanding is 5 that they are today looking for a solution to that 6 situation and -- and examining alternatives to that 7 situation. 8 What I am willing to say is that if we 9 do nothing, we can continue to expect the same 10 performance out of our in-state games that we 11 currently have. And I believe, off the top of my 12 head, we have suffered about a 26 percent decline in 13 that game over the last fiscal year, compared fiscal 14 year to fiscal year. So the -- the one thing that is 15 certain is that we -- we are pretty clear as to what 16 no action would result in. 17 The -- the six-of-54 matrix was 18 something that we worked with your -- "we" meaning 19 GTECH and our marketing staff -- worked in concert 20 with your -- your marketing staff to come up with. 21 And we are -- we were in -- we are in agreement with 22 your staff in their -- in their proposed 23 recommendation. It's -- it's very difficult to design 24 a game that has low odds and high payout, but that is 25 the -- that is the -- that is the Holy Grail. And -- 0113 1 and I don't think many of us can come up with that -- 2 with that sort of recommendation. 3 So we believe that the six-of-54 in -- 4 in the proposal that is before the Commission today, 5 out of all of the options that are available to the 6 Commission, is the best alternative, recognizing that 7 we are in uncharted territory and that, to some 8 extent, if the Texas Lottery were to do this, the 9 Commission would be on the leading edge of -- of a new 10 approach to in-state Lotto games. 11 There was one jurisdiction, Washington 12 state, which attempted to do something similar to what 13 we were doing; that is, they went to a bonus ball -- 14 changed their in-state game, went to a bonus ball 15 style format, implemented Mega Millions almost 16 immediately after they changed their matrix, and 17 discovered that their in-state game suffered 18 dramatically, and decided to go back to their 19 original -- in -- in their case they called it Classic 20 Lotto -- and noticed a sales spike, which declined 21 over time. 22 So the -- the experience in this sort 23 of thing, from -- from a historical perspective, 24 indicates that we have an opportunity here to do maybe 25 a couple of things. One is to give the players of 0114 1 Texas, as Ms. Nettles has recognized and I believe 2 other comment has -- has been forthcoming, that the 3 players of Texas do not like the bonus ball format. 4 So it gives us an opportunity to do that. It also 5 gives us an opportunity to -- to remarket the game and 6 repackage it for the -- for the players of Texas. 7 So I -- those are the -- those are the 8 two salient points that I would like to make to you. 9 The -- the other thing, and -- and just one final 10 point to closing, is, as -- as we look at the payouts 11 as Doctor Eubank has described here, with six-of-50 12 providing a 58.6 percent effective payout, the 13 question then becomes, how much in incremental sales 14 are we going to have to generate to break even off of 15 the six-of-54. And that falls squarely to your 16 fiduciary responsibility as trustees of your 17 contributions to the Foundation School Fund. And 18 some -- that -- that increase, just off the top of my 19 head -- and I may be off -- would be somewhere around 20 five percent, five or six percent, to break even. 21 COMMISSIONER COX: Up. 22 MR. RIVERA: Up. And -- and I'm not -- 23 I'm not willing to guarantee that a six-of-50 is going 24 to give you a five or six percent increase because 25 I -- I could not do that. 0115 1 COMMISSIONER COX: And I see 2 Doctor Eubank shaking his head that he is kind of 3 roughly agreeing with that computation. 4 MR. RIVERA: Yes, sir. 5 COMMISSIONER COX: Ramon, we discussed 6 the idea of, if not being pari-mutuel all the way 7 across the board, a much lower starting jackpot. And 8 do I recall that another state, maybe Illinois, tried 9 that? 10 MR. RIVERA: Yes, sir. And I -- I am 11 just going to go off of memory here. I can certainly 12 provide the Commission with some -- with detailed 13 information, but my recollection is that -- that there 14 was another jurisdiction -- I don't recall, 15 Commissioner, if it was Illinois -- did lower their 16 starting jackpot and did suffer a sales decline as a 17 consequence. 18 COMMISSIONER COX: And one of the 19 things, I guess, Mr. Chairman, that we're going to 20 have to face is if this game is a tired game and it's 21 on the down slope of its product life cycle, and there 22 are indications that that is the case, there is going 23 to come a time that when we're going to have to do 24 that. Staff isn't recommending it now, or at least 25 they were not initially recommending that, but I think 0116 1 that's inevitable, and it's a question, I guess, of 2 when. And is it going to be after we have guaranteed 3 a jackpot and found that we didn't make as much money 4 because the sales weren't what we hoped they were? 5 Probably would be. Is this the time? We don't know. 6 CHAIRMAN CLOWE: I want to come back to 7 you, Ms. Nettles, and I want to ask this question 8 gently of you and with respect. But here is your 9 opportunity now, and -- and I want to come back to the 10 questions that Gary was asking you. Don't say what 11 you don't like or talk about him being hung up on a 12 million dollars, what is it that you're advocating, if 13 you know? And if you don't know, just say you don't, 14 and -- and maybe we might give you some time to put 15 that together. But if you are advocating, based on 16 the results of your survey, what you feel the players 17 of Texas want, that you have said earlier will 18 revitalize the game, that's the input that I would 19 like to hear from you. 20 MS. NETTLES: Okay. 21 CHAIRMAN CLOWE: And I'll give you time 22 on that. 23 MS. NETTLES: Okay. Can I ask one 24 question first? 25 CHAIRMAN CLOWE: Certainly. 0117 1 MS. NETTLES: Would somebody please 2 tell me how the chart up there says six-of-50 with 3 32.5 jackpot allocation would be a 58.6 percent 4 payout? Would somebody please explain that to me? 5 COMMISSIONER COX: That's a 6 Doctor Eubank question. 7 DR. EUBANK: All right. So -- 8 MR. RIVERA: Thank you very much. 9 DR. EUBANK: So the way this works is 10 that if you start at four million dollars, you cannot 11 support the jackpot at four million dollars with the 12 sales -- I mean, at four million dollars at the -- the 13 amount of sales at that level currently does not 14 support a starting jackpot of four million. It does 15 not support rolls of one million dollar increments, 16 actually, for quite a while, well into the teens and 17 possibly into the 20s. I don't remember exactly the 18 details. If you get hit at any of those levels, then 19 you are paying out more than 50 percent of sales. 20 Now, there is no guarantee you will get hit at any of 21 those levels, but you will, in the long haul, get hit 22 at those levels. And with six-of-50, you have a 23 higher probability of getting hit at those levels and, 24 because the way the prizes shift, get a lower jackpot 25 allocation, which means that the jackpot is not 0118 1 building as fast. And so you don't -- that is why it 2 takes more rolls to get to the point to where you 3 actually can support it. So that's why the -- you 4 don't have -- at the other end, you do not have -- 5 because you always pay the maximum of advertised 6 jackpot or jackpot supported by sales, you don't have 7 the -- the ability to recoup the losses or the 8 below -- the beyond 50 percent payout that you would 9 have at -- would get at the lower tiers. So there 10 is -- there is no way to compensate for what happens 11 at the lower tiers when you get hit, and you wind up 12 with this, something like about 58, 59 percent payout. 13 Those -- those hits at the lower tiers are the ones 14 that -- that require deficit spending beyond 50 15 percent, and that's where you get the -- the 58 16 percent from. That's what that eight percent is 17 covering, hits at the four, five, six million dollar 18 jackpot, where sales doesn't support it. 19 MS. NETTLES: So, in other words, you 20 are saying that if they guaranteed the amount 21 advertised -- 22 DR. EUBANK: If they -- if they 23 guarantee the amount that's advertised. 24 MS. NETTLES: But they would not pay 25 58.6 percent if they paid only based on sales? 0119 1 DR. EUBANK: If they paid completely 2 pari-mutuel, then it's exactly a 50 percent payout. 3 MS. NETTLES: Thank you. That's my 4 point. 5 CHAIRMAN CLOWE: Does -- does that 6 answer your question, Ms. Nettles? 7 MS. NETTLES: Oh, yes, sir. That's -- 8 I wanted to make for sure that that 58 percent is 9 based on the fact that you are guaranteeing the 10 jackpot amount, which is what I advocate against on 11 behalf of the State and the people. 12 CHAIRMAN CLOWE: Good. Then can you 13 answer Commissioner Cox's question? 14 MS. NETTLES: Yes. 15 CHAIRMAN CLOWE: Good. 16 MS. NETTLES: Okay. The people want a 17 six-in-50 matrix. Okay? 18 COMMISSIONER COX: Okay. 19 CHAIRMAN CLOWE: Now, Gary, write this 20 down. We're starting all over. 21 MS. NETTLES: Well, I'm going to give 22 you -- I'm going to tell you what I would do if I 23 were -- 24 CHAIRMAN CLOWE: No. No. No. Tell us 25 what the consensus of the people who responded to your 0120 1 questionnaire is. 2 MS. NETTLES: Okay. 3 CHAIRMAN CLOWE: And that's the sense 4 that you get from the players of Texas, is it not? 5 MS. NETTLES: Yes, sir. 6 CHAIRMAN CLOWE: Okay. 7 MS. NETTLES: But you're also asking 8 me -- and I notice when Gary wrapped up, he says, 9 well, she doesn't know what she would allocate a 10 percentage for. No, sir. I'm not going into the 11 allocations. Okay? I mean, I never was asked to. 12 CHAIRMAN CLOWE: Okay. 13 MS. NETTLES: But I will be more than 14 happy to answer his questions now that I see where he 15 was going with that. 16 CHAIRMAN CLOWE: All right. See, what 17 we're trying to do is get from you what we get from 18 the staff when we say to the staff, give us your 19 recommendation. 20 MS. NETTLES: Okay. 21 CHAIRMAN CLOWE: And if we can ask that 22 of you, that's where you're coming. 23 MS. NETTLES: I'm going to give you my 24 recommendation of what I would do. 25 CHAIRMAN CLOWE: Okay. Give it to us. 0121 1 MS. NETTLES: Okay? I would go 2 six-in-50. I would increase the jackpot prize pool to 3 53 percent, the same as what it was under six-in-54. 4 And I would give the allocation of 37 percent to the 5 jackpot win. I would use the same allocations that 6 were used on the others. I can't recall what they 7 were. However, I would not give a guaranteed 8 five-dollar prize. I would make that a pari-mutuel 9 prize. And I might even go so far as to change the 10 rule to do exactly like the Cash Five, where you -- 11 you want to guarantee -- if this staff is hell-bent to 12 give a five-dollar guaranteed prize or a three-dollar 13 guaranteed prize and take it straight off the prize 14 pool and then divvy up the rest. But I would see to 15 it that the people got a minimum of 50 percent of 16 sales. And in this case you can give back 53, which 17 is what the intent -- the people were led to believe 18 in the first place. 19 As for your getting hit at four 20 million, you had 200, 300 -- and I've forgotten how 21 many rolls you've had under six-in-50 -- 22 CHAIRMAN CLOWE: Just give us your 23 recommendation. 24 MS. NETTLES: That's my recommendation. 25 CHAIRMAN CLOWE: Have four million or 0122 1 two million? 2 MS. NETTLES: Oh, were -- you didn't 3 ask me where to start. I would start at two million. 4 CHAIRMAN CLOWE: At two million? 5 MS. NETTLES: Uh-huh. 6 CHAIRMAN CLOWE: And do you have a 7 recommendation on the amount of the roll? 8 MS. NETTLES: If it can't support -- if 9 you start it at two and it can't grow to three, I 10 would leave it there, or I would make it two and a 11 half. You know, you're asking me questions that I 12 know these -- I know the numbers, but I don't have 13 them in front of me to look to be able to answer you. 14 CHAIRMAN CLOWE: That's fine. 15 MS. NETTLES: Okay? 16 CHAIRMAN CLOWE: But, see, this all 17 goes into the formula. 18 MS. NETTLES: I understand it does, and 19 I understand the formula. 20 CHAIRMAN CLOWE: Okay. 21 MS. NETTLES: You know, I understand 22 that -- and I understand that you all are here to make 23 money for the State. You're here to make 50 percent 24 of sales, though. So -- 25 CHAIRMAN CLOWE: And did you say 0123 1 whether you recommended, based on the players' 2 responses, that it would be in the advertised jackpot 3 or the sales supported jackpot? 4 MS. NETTLES: I would do it sales 5 supported jackpot. I would never guarantee anything 6 if I were a lottery. 7 CHAIRMAN CLOWE: Okay. 8 COMMISSIONER COX: Ms. Nettles, I -- I 9 heard you say, I would recommend 53 percent payback. 10 The people of Texas -- then I heard you say, the 11 people of Texas want a 50 percent payback. 12 MS. NETTLES: I know it, and I knew 13 that confused you. What I did -- you asked me for my 14 recommendation. I'd take a matrix -- 15 COMMISSIONER COX: I think -- pardon 16 me, but I think Chairman Clowe asked you what the 17 people of Texas wanted. 18 MS. NETTLES: Well, then I got confused 19 because he turned around and says, what are your 20 recommendations. 21 CHAIRMAN CLOWE: Based on what the 22 people that responded to your questionnaire who are 23 the players of Texas want. That's -- it's not your 24 personal preference. It's what the players say that 25 I'm asking for. 0124 1 MS. NETTLES: Okay. Well, surely you 2 all know and understand that I do not take this kind 3 of detail to the people because they don't truly 4 understand the games. And so I didn't ask the people 5 what percentage they wanted. They very truly said 6 they want at least what they had in the 60 -- 7 six-in-54 prizes, pay at least that much. 8 CHAIRMAN CLOWE: You see, you're -- 9 you're facing the dilemma that we face. And what you 10 just said right then is where the Commission is. When 11 you say to us, the players want this or that, we're 12 trying to understand what the players want, and then 13 you say, they don't understand. 14 MS. NETTLES: No, but -- 15 CHAIRMAN CLOWE: And I have to 16 determine what is good for them. Do you understand 17 that problem, Ms. Nettles? 18 MS. NETTLES: Yes, sir. Yes, sir, 19 Commissioner Clowe, I do. 20 I don't ask the people and nor has this 21 Commission ever asked the people to tell us, how do 22 you want us to allocate this, what percentages do you 23 want to give. I am not asking that, and I'm not going 24 to. Or I guess I could, but God only knows what their 25 answers would be. And even taking that as it was, 0125 1 that would be fine, because a lot of people don't 2 understand it. You're trying to revise a game here. 3 And I'm just -- the people of Texas have asked you for 4 fair games, fair payouts, and a guarantee of 50 5 percent of sales to pay back for each and every 6 drawing. 7 CHAIRMAN CLOWE: But the devil is in 8 the details, and -- and to change one of these games, 9 you have to have all of the things that Gary has asked 10 you -- 11 MS. NETTLES: I understand. 12 CHAIRMAN CLOWE: -- filled in. 13 MS. NETTLES: I understand -- 14 CHAIRMAN CLOWE: Otherwise, you can't 15 turn to Ramon, GTECH, and say, give us the estimate -- 16 MS. NETTLES: Okay. 17 CHAIRMAN CLOWE: -- or Doctor Eubank. 18 And -- and that's where the Commission is struggling 19 to take your input and be able to determine where that 20 leads us. 21 MS. NETTLES: Right. Commissioner 22 Clowe, I understand that, but you-all say, what do I 23 recommend or what do the people by way of my survey -- 24 CHAIRMAN CLOWE: The survey response is 25 what we're asking. 0126 1 MS. NETTLES: The survey response was 2 that they wanted the six-in-50 matrix, and they want 3 lower -- the low tier prizes not cut in half. Okay? 4 Now, that's the response, because that's all I asked 5 them. Okay? And that's -- that's -- 6 CHAIRMAN CLOWE: That's all -- 7 MS. NETTLES: They don't want any more 8 rounding down, and they want a guarantee. And they 9 want straight pari-mutuel prizes. That's come out 10 before. 11 CHAIRMAN CLOWE: Okay. 12 MS. NETTLES: And that's best. Okay? 13 My recommendations -- if I were in your shoes, you all 14 have already said -- 15 CHAIRMAN CLOWE: Now, wait a minute. 16 Is that -- is that in the record? 17 MS. KIPLIN: I would have to defer 18 to -- to Sarah Woelk on what is and what is not in the 19 record. 20 CHAIRMAN CLOWE: Would that be covered 21 by the document she sent us? 22 MS. NETTLES: Yes. 23 MS. WOELK: Yeah. But the thing that 24 we've gone off the record on is the starting jackpot, 25 and -- and the rules. If -- if you want to act today, 0127 1 to fix up the -- the order, but that -- that is the 2 only thing we're -- 3 CHAIRMAN CLOWE: Okay. Okay. Okay. 4 Go ahead, Ms. Nettles. 5 MR. GRIEF: Isn't that just policy 6 anyway, Sarah? Not part of the rule? 7 MS. WOELK: I think, though, that we 8 would need to -- what I have summarized here is there 9 are people who recommended increasing the starting 10 jackpot. We certainly didn't get any written comment, 11 anyone suggesting we lower the starting jackpot. So I 12 would like to add that to the laundry list. 13 CHAIRMAN CLOWE: I think we're at 14 liberty to take your recommendation. Go ahead. 15 MS. NETTLES: And you know what else? 16 I can do me another survey, and I can have you these 17 answers real quick. It might take me a while to 18 compile them, but I can have these answers real quick 19 if you really want to know specifics like this. But 20 I've not ever drawn for that, but I can get that 21 information. 22 COMMISSIONER COX: Okay. May I, 23 Mr. Chairman? 24 CHAIRMAN CLOWE: Certainly. 25 COMMISSIONER COX: Gary, I have read in 0128 1 the proposed order that you and your staff did 2 extensive marketing research about what the people 3 would play. Not necessarily what they want, because I 4 want a Rolls Royce, and I want to pay a Kia price, but 5 I'm not going to get that. So what we have to talk 6 about is what they want, balanced with what we can 7 give them and still serve the school children of 8 Texas. Now, what did you learn when you took that 9 survey? 10 MR. GRIEF: I would ask Mr. Tirloni to 11 come forward to talk about that. 12 COMMISSIONER COX: And, Robert, if you 13 would, talk about who helped us design that survey, if 14 it was Ipsos Reid or someone else; how extensive was 15 the survey; how many people were tested; what were the 16 scientific testing methods that you used; what was 17 conclusive; what wasn't; et cetera. 18 MR. TIRLONI: Actually, I have a 19 presentation -- I've got some information that I can 20 call up that I used back in October. That will be 21 helpful in this discussion. 22 The player research that we did was 23 conducted through our research vendor, Ipsos Reid. We 24 did quantitative and qualitative, as we always do when 25 we are considering game changes. This was done in May 0129 1 of 2005 in three cities around Texas -- McAllen -- 2 McAllen, Dallas, and Houston. In order to give 3 everybody a fair chance to participate, we also did 4 research via our Web site. So when you clicked up to 5 the home page, you did have an example -- you did have 6 an opportunity to click through to a survey. And it 7 was the same survey that the people who were in the 8 actual groups in these cities, it was the same exact 9 survey. 10 COMMISSIONER COX: So anybody in the 11 world, I guess, could have responded to this. 12 MR. TIRLONI: If you came to our Web 13 site in May of 2005 or around this time when this 14 research was taking place, there was a link that would 15 take you to the survey. 16 COMMISSIONER COX: And how many 17 responses did you get at -- on-site and through the 18 Web site? Do you recall that? 19 MR. TIRLONI: Let me see if I have 20 that. I don't have the number. I'll tell you that 21 the -- typically, for the quantitative research, I can 22 tell you typically what we do. When we go to a city, 23 we usually have two groups each night, and for 24 quantitative, you're looking at about 50 some-odd -- 25 50 some-odd people per group for the quantitative. 0130 1 And that's actually pencil and paper, being asked 2 questions, being asked spending habits, being asked 3 preferences. So I would give you a rough estimate, 4 for quantitative, it was probably 300 people in the 5 cities. Then what happens with the qualitative is, a 6 group of those people in each city stay after the 7 quantitative portion, where they're actually taken 8 into a room with a much smaller setting, maybe 10 to 9 12, and there is open discussion with a moderator 10 leading that discussion. 11 COMMISSIONER COX: Okay. And these 12 people are selected from public at large players? 13 MR. TIRLONI: Uh-huh. There is a 14 screening that takes place. 15 COMMISSIONER COX: So we're making sure 16 that we're getting players? 17 MR. TIRLONI: Absolutely. Absolutely. 18 When we do -- when we do the quantitative and 19 qualitative research, we define parameters for and 20 with Ipsos Reid, and those parameters get communicated 21 to the locations that are actually doing the screening 22 to get participants to attend the groups. 23 COMMISSIONER COX: Okay. And are these 24 sample sizes such that Ipsos Reid can give us a 25 competence level with respect to results? 0131 1 MR. TIRLONI: That question I would 2 have to pose to Doctor Sizemore. 3 DR. SIZEMORE: Usually that small of a 4 sample -- 5 CHAIRMAN CLOWE: Come up on the 6 microphone, please, sir. 7 DR. SIZEMORE: Smaller samples like 8 that don't necessarily generate a good confidence 9 level. It's usually when you move up to a thousand, 10 700, and so on, then you can start talking about 11 confidence levels and -- and the extent to which it's 12 reliable to generalize about the public. 13 CHAIRMAN CLOWE: And give your name for 14 the record. 15 DR. SIZEMORE: I'm David Sizemore, 16 Research Coordinator for the Texas Lottery. 17 CHAIRMAN CLOWE: Thank you. 18 MR. TIRLONI: So at the time -- 19 COMMISSIONER COX: Robert, is this work 20 that Ipsos Reid does -- and I know we paid a lot of 21 money for that work, and I know they're a high quality 22 outfit -- is it intended to provide us with 23 statistically reliable or at least information 24 reliable to give a competence level, or is it intended 25 to provide us with anecdotal, empirical information? 0132 1 MR. TIRLONI: The quantitative provides 2 us with more empirical information. The -- the 3 qualitative focus group is more anecdotal information. 4 But I -- my gist of it is is that -- and it comes back 5 to the discussion that we just had. You're talking 6 one-on-one with players who may not understand all 7 aspects of designing a lottery game. So, for me, it's 8 directional in purpose to give staff ideas and for 9 staff to be able to listen to what players are saying. 10 Again, as we have just discussed, I've been to many 11 focus groups where players say, the bottom prize 12 should be at least a hundred dollars and the jackpot 13 should start at ten, and it should roll in five 14 million dollar increments. So, again, you can listen 15 to what the public is saying or to what these players 16 are saying in these groups, but the caveat is, in your 17 mind, as the product person or as the expert, 18 supposedly, with game -- in game design, you've got to 19 know what you can take from that and what you can 20 actually do in reality. 21 COMMISSIONER COX: Do you have any 22 interaction with them to say, you know, we would love 23 to do that, but we can't do that and make any money. 24 Do you have any other ideas? 25 MR. TIRLONI: We don't do that 0133 1 during -- no, we don't do that during the groups. 2 COMMISSIONER COX: Okay. So you just 3 take it for what it's worth and recognize that here is 4 a person who doesn't understand the product? 5 MR. TIRLONI: Yes, sir. 6 CHAIRMAN CLOWE: And that's exactly 7 what Ms. Nettles just said. 8 MR. TIRLONI: That's exactly right. 9 MR. GRIEF: And, Commissioner, could I 10 add something to that? 11 CHAIRMAN CLOWE: Please. 12 MR. GRIEF: After being here 14 years, 13 I can tell you, this is the same type of focus groups 14 we did when we changed to the bonus ball. There is 15 something about people's responses when it comes to 16 gambling questions. And you and I talked about this, 17 Commissioner Cox. Some people will tell you one thing 18 when they're posed a question, but when it comes time 19 to put their money out and play, many times their 20 spending habits are opposite or vastly different than 21 what their responses are to certain type questions. 22 COMMISSIONER COX: And there have been 23 books -- in fact, there are two by the same name, 24 called The Psychology of Gambling, and that's just 25 exactly what they say, that because of the stigma that 0134 1 some people might attach to it, because of the macho 2 nature on the other end that others might attach to 3 it, that their responses are not going to be reliable. 4 MR. GRIEF: So my point is, we do the 5 best we can with the information that we receive from 6 this, understanding that variable that you just 7 mentioned. 8 MR. TIRLONI: And that's why I made the 9 comment. I did that -- I -- to me, in my mind, it's 10 directional. For staff it's directional. Basically, 11 what we tested at that time was a six-of-59 versus 12 what we currently have in place, the bonus ball. And 13 when we -- when we talked about this back in October, 14 I pointed out that a majority prefer the six-of-59, 15 but, as you can see, it wasn't overwhelming. 47 16 percent indicated that they preferred the -- the 17 current bonus ball or they -- or that they didn't even 18 have a preference. 19 COMMISSIONER COX: And are the odds on 20 six-of-59 versus five-in-54 -- and 54 about the same? 21 MR. TIRLONI: Yeah. That is correct. 22 That's correct. 23 And then I talked about what happens in 24 the quantitative portion of the research, and that's 25 where the spending exercises come in, and those were 0135 1 actually inconclusive. So basically, what people told 2 us was, they didn't like the bonus ball, which we've 3 all acknowledged. They wanted a six-digit game. They 4 thought it was simpler to play and easier to 5 understand. But when pushed in terms of spending 6 exercises and asked, how much are you going to spend 7 on this game? Are you going to spend more? That was 8 inconclusive. So, again, the -- the directional gist 9 of that was, I may not spend more, or I can't tell you 10 I'm going to spend more now, but I don't like the 11 bonus ball, and I would prefer to play a six-digit 12 game. 13 This goes back to the point that Gary 14 made a few -- a few moments ago, and this is what 15 we've learned, that they don't like the bonus ball; 16 they want to pick numbers from one field of numbers; 17 they like the chances of winning better under that 18 system of selecting numbers; and, as I said, it's 19 simpler and easier to play and understand. Going to 20 what Gary said, when we looked at all of this and then 21 we compared it to all of the presentations and all of 22 the information we saw from GTECH, it was very 23 difficult to come up with a conclusion. Inconclusive 24 in terms of spending, but knowing what players 25 expressed in terms of their preference didn't leave us 0136 1 a lot of room or a lot of places to go or avenues to 2 pursue. And as Gary said, you could look at all these 3 different states and see changes that they've made. 4 And as Ramon referenced, you could look at states like 5 Washington, who had very similar product changes on 6 their Lotto game as we did. When we looked at all of 7 that, we realized what we basically knew was, we made 8 a change to a bonus ball; players didn't embrace it; 9 they didn't like that feature of the game; and sales 10 declined by approximately 30 percent very soon after 11 that change. And as I said earlier this morning, that 12 was our rationale for the proposed rule that we 13 brought to you the Commissioners, to take one step 14 backwards, to go to a six-of-54. It was not the exact 15 previous six-of-54, but it was the same play style, so 16 that we could take a step back and see what we could 17 gain by addressing the two most prominent points that 18 came across in the research, the no bonus ball and the 19 six-digit game. 20 COMMISSIONER COX: So we have not done 21 market research directly with players regarding 22 six-of-54, six-of-52, or six-of-50? 23 MR. TIRLONI: No, not specifically with 24 those matrices. 25 COMMISSIONER COX: So we concluded that 0137 1 enough people disliked the bonus ball that if they 2 came in kind of a dead heat at six-of-59 and that at 3 six-of-54, the kill the bonus ball would easily win. 4 MR. TIRLONI: Because it was going back 5 to a -- a previous game, we thought there was 6 marketing opportunity to be able to say that we were 7 going back to the traditional play style of playing, 8 picking six numbers. And we also felt that since the 9 spend analysis was inconclusive, we felt that we 10 needed to choose what we -- what we thought was the 11 best matrix. And we thought that we -- we didn't 12 think -- we know that we have real sales data from a 13 six-of-54 matrix in Texas, and we thought taking that 14 step back and reintroducing it would give us an 15 opportunity to get that data and compare it to see if 16 we can make up any ground on that 30 percent that we 17 lost. 18 CHAIRMAN CLOWE: Let's see. Where we 19 ended up was trying to get a best estimate from Gary 20 and Ramon, based on Ms. Nettles' reporting of the 21 results of her survey. And have we got enough there, 22 Gary, now to run an estimate or not? 23 MR. GRIEF: I'm still confused, 24 Chairman, on the -- I'm still confused. Ms. Nettles, 25 as I heard her say, she is against any guaranteed 0138 1 prizes. Did I hear that correctly? 2 MS. NETTLES: Yes, you did. 3 MR. GRIEF: But then I heard her say 4 she recommends a two million dollar starting jackpot. 5 I can't reconcile the two of those. 6 COMMISSIONER COX: Let me just ask a 7 question, Gary. If we were to do what Ms. Nettles 8 proposed, how in the world would we know what to 9 advertise? We're starting a brand new game that we've 10 done no market research on. 11 CHAIRMAN CLOWE: Well, that's back to 12 the comments you made earlier, that if you go strictly 13 pari-mutuel, you have done away with Lotto Texas. 14 COMMISSIONER COX: I think so. 15 CHAIRMAN CLOWE: It's a new game. 16 MS. NETTLES: Well, in their opinion. 17 CHAIRMAN CLOWE: In their opinion. 18 Okay. 19 MS. NETTLES: In advertising Lotto, the 20 Texas Lottery Commission made it very clear when the 21 lottery first started that the number that you see on 22 the billboard was the estimated number that -- that's 23 what you were projecting a person would get. It was 24 an estimated amount. 25 CHAIRMAN CLOWE: So on every billboard 0139 1 all over the state. 2 MS. NETTLES: Or that's the way it 3 was -- and that's -- that was stressed here at this 4 Commission all the way from the very beginning. This 5 Commission decided on its own to start guaranteeing 6 the amount, and I believe it was because of the rolls, 7 and then somebody won the lottery and there wasn't 8 enough money -- 9 CHAIRMAN CLOWE: But your comment was, 10 it's estimated on the billboards, if -- if I 11 understood your comment. 12 MS. NETTLES: No, that's what the 13 meaning was. It doesn't say estimated -- or maybe it 14 did. I don't know. 15 CHAIRMAN CLOWE: Ms. Nettles, it says 16 estimated jackpot. 17 MS. NETTLES: Good. Good. Okay. 18 Estimated. 19 CHAIRMAN CLOWE: I will tell you. I 20 testified before the House Licensing Committee to 21 that. 22 MS. NETTLES: Okay. Good. 23 CHAIRMAN CLOWE: I checked it very 24 carefully. 25 MS. NETTLES: Well, that's what it 0140 1 needs to say. 2 CHAIRMAN CLOWE: I know what it says. 3 MS. NETTLES: It also needs to say, if 4 paid over 25 years, you know. Okay. Good. I'm glad 5 it says estimated. 6 CHAIRMAN CLOWE: Well, Commissioner, 7 this has been very helpful. 8 COMMISSIONER COX: It has been. 9 MS. NETTLES: May I make the 10 suggestions that you asked me to take -- 11 CHAIRMAN CLOWE: Sure. 12 MS. NETTLES: Can I finally do that, 13 just what I would suggest a solution for all of this 14 is? 15 CHAIRMAN CLOWE: Is it in the record 16 for her to do that, Counsel? 17 MS. NETTLES: That's what Gary asked 18 me. 19 CHAIRMAN CLOWE: Or Sarah, whoever is 20 the proper person to respond? 21 MS. KIPLIN: I guess, the -- the first 22 thing I would ask Ms. Nettles, because I don't know 23 what she is going to say is, are the comments that you 24 are planning on putting on the record comments you 25 have previously submitted within the comment period? 0141 1 MS. NETTLES: More or less, yes. 2 MS. KIPLIN: Well, it's the less part 3 that -- that troubles me. 4 MS. NETTLES: You want me to summarize 5 it, Kim? 6 MS. KIPLIN: It's the less part -- 7 MS. NETTLES: The Commissioners want to 8 get an answer. Okay? And I would like to answer 9 Gary, now that I know what he was going for while ago. 10 MS. KIPLIN: Mr. Chairman, it is the -- 11 the more part where she says that it is, but the less 12 part does give me cause for concern. And I -- I know 13 that we're being humorous about it, but I'm trying to 14 protect a rulemaking process in a record. It's 15 your -- y'all's choice if you want to bring it in, and 16 then we can, you know, come back at a future meeting. 17 CHAIRMAN CLOWE: Yeah, I think we're to 18 that point. I think, Commissioner, you and I need to 19 determine if we're at a point of action-taking today 20 or if we're not. How do you feel about all of this? 21 COMMISSIONER COX: Well, I feel that my 22 comfort zone for taking action today doesn't extend 23 beyond something that staff and Doctor Eubank have 24 researched, and Ipsos Reid. So if -- and we might ask 25 Director Sadberry at this point, having heard all of 0142 1 this, does he have a recommendation. And if we 2 believe that -- with counsel's advice -- that it is 3 within the ballpark, that staff has researched and 4 comment was obtained upon, perhaps we might. If not, 5 then perhaps we need to go back. And perhaps we need 6 to go back to staff, if it's within this far, say, but 7 we may need to go back to the public if it's this far 8 out. Certainly, if we were to do anything like 9 Ms. Nettles proposes, I wouldn't -- I think that's 10 such a drastic change that that just takes this one 11 down and starts us all over. And I would further add 12 to that that if -- we would be back to square one, 13 because a concept that drastically different, I would 14 never be comfortable with implementing without full 15 market research by Ipsos Reid and staff analysis and 16 analysis by the lottery operator. 17 CHAIRMAN CLOWE: I think that's exactly 18 right, and I totally agree with your thoughts. And 19 what I would suggest is we ask Mr. Sadberry and the 20 staff to take this issue, while it's on our agenda 21 today, and consult with each other, perhaps over a 22 period of time when we go into executive session, to 23 consider other measures. I wouldn't want him to have 24 to respond right at this point in time. I would like 25 for him to get his head together with others, and you 0143 1 may call on Ms. Nettles or Ramon Rivera. You can call 2 on people who have participated in this discussion. 3 And then maybe after we deal with some other issues on 4 the agenda and we go into executive session, ask him 5 to come back with what he might bring to us as a 6 recommendation. Very good. 7 We'll then move on to item number ten, 8 report, possible discussion and/or action on GTECH 9 Corporation. 10 Commissioner Cox, this is the ongoing 11 determination of suitability of the GTECH Corporation 12 being acquired by a firm known as Lottomatica. And we 13 have Mr. David Mattax from the Attorney General's 14 Office here. And who else do we have, Counselor, on 15 this subject? 16 MS. KIPLIN: You have Mr. Rod Edens and 17 Mr. Patrick Thompson with the outside counsel, and 18 they're -- they're here -- 19 CHAIRMAN CLOWE: They're here as well. 20 I see them now. 21 MS. KIPLIN: They're here to offer 22 whatever public comment, but also here to provide 23 legal advice in executive session if that's the desire 24 of the Commission. 25 CHAIRMAN CLOWE: Now, Commissioner Cox, 0144 1 in regard to this issue, we can talk with these 2 gentlemen in the public forum and hear from them, or 3 we can go into executive session, depending on what 4 your pleasure is. How do you feel about it? 5 COMMISSIONER COX: Well, Mr. Chairman, 6 my pleasure is that we hear everything that we can 7 hear that doesn't blow the confidential privilege in 8 this open session, and if there is something that 9 needs -- the privilege needs to be maintained on, we 10 take that in closed session. 11 CHAIRMAN CLOWE: I totally agree. 12 So, gentlemen, will you come forward 13 and -- what is this, a progress report? 14 MR. MATTAX: Yes, Chairman. 15 CHAIRMAN CLOWE: Good. We -- we 16 appreciate you three gentlemen being here. We 17 apologize for the delay in calling on you, but we want 18 to assure you that we have been -- we have not been 19 outside smoking cigarettes and staring at the sky. 20 MR. MATTAX: Let me start off. For the 21 record, my name is David Mattax. I'm Chief of the 22 Financial Litigation Division, and I'm an attorney 23 with the Attorney General's Office for the Commission. 24 Commissioners, I would want to briefly 25 give you an overview of the situation, let my 0145 1 co-panelists chime in at any time they would like, and 2 if there is any issues that I think do involve giving 3 attorney-client information or confidential 4 information, then I won't mention those now, and we 5 can discuss those later in executive session. 6 Essentially, what we have here is 7 GTECH, which is the vendor for the Commission, has 8 been proposed to be acquired by a group in Italy. 9 It's ultimately the De Agostini Group, which is the 10 controlling shareholder in a company called 11 Lottomatica. And basically, it would be a situation 12 where ultimately the shares of GTECH would be 13 purchased and GTECH would cease to be a 14 publicly-traded American company, and ultimately 15 Lottomatica will be rolled into GTECH, and that would 16 become a company traded on the Milan Stock Exchange in 17 Italy. 18 What we are doing is three-fold. 19 First, we're looking at the transactions, and I'll 20 defer to outside counsel in more detail on that. 21 Secondly, we're working with the Department of Public 22 Safety to conduct suitability reviews with respect to 23 the officers, directors and shareholders of 24 Lottomatica and the various affiliated companies. And 25 the third thing we've done is, we have met with 0146 1 representatives of GTECH and Lottomatica with regards 2 to the transaction. 3 Now, this was very preliminary. It was 4 basically to get an overview with respect to the 5 meeting with us. We asked them some questions with 6 respect to that. And where Lottomatica is, is they're 7 trying to plan on closing this transaction in the 8 summertime. And, basically, part of the documents 9 that are part of the merger agreement have requested 10 or have a provision for the Texas Lottery Commission 11 to provide some sort of reassurance that the mere fact 12 of the transaction, the merger of Lottomatica into 13 GTECH, that that fact standing alone would not result 14 in the Commission terminating the contract with GTECH. 15 Now, we've made it abundantly clear to 16 them and they recognize that other provisions with the 17 GTECH contract as it currently stands would remain in 18 full force and effect, that provision notably being 19 that we do have the right, upon 30 days notice, you 20 know, to terminate that contract if a need arises. 21 I'm not suggesting at this time that there is any such 22 need, but the reassurance that would be required or 23 has been requested by Lottomatica would not change 24 that at all. It would simply be that this transaction 25 standing alone would not result in any action on the 0147 1 Commission's part with respect to GTECH. 2 That said, I would stand ready to 3 answer any questions on the general, where we stand 4 right now. Or I can pass it over if there is any 5 other comments from any of my colleagues. 6 CHAIRMAN CLOWE: Could I ask a question 7 for clarification? At this point in time, my 8 understanding of the contractual obligation the 9 Lottery Commission has is to determine the suitability 10 as a corporation of the acquiring entity and the 11 suitability of principals within that corporation. 12 MR. MATTAX: Yes, I believe that's the 13 Commission's responsibility to make sure that when the 14 original contract was let to GTECH that the 15 corporation itself is suitable and, therefore, whoever 16 takes this company over, Lottomatica, is suitable. So 17 I think you have a corporate suitability in the sense 18 of, are they financially adequate, do they bring the 19 expertise that's necessary to fulfill the contract. 20 And then the secondary question is the actual 21 principals of Lottomatica. You know, is there 22 anything in their background that would cause the 23 Commission to have pause. So both of those inquiries 24 are necessary and I believe they are distinct 25 inquiries. 0148 1 CHAIRMAN CLOWE: And that's a classic 2 change of control which allows us to take a fresh look 3 at the new ownership. 4 MR. MATTAX: Correct. 5 CHAIRMAN CLOWE: Great. 6 MR. THOMPSON: Commissioner, Patrick 7 Thompson here with Graves, Dougherty, Hearon & Moody 8 here in Austin. 9 And the only thing that I would add to 10 Mr. Mattax's report is that just in -- at our firm we 11 have been reviewing the documents both that GTECH has 12 released and Lottomatica has released regarding the 13 proposed transaction, as well as other financial 14 reports that are being prepared by the investment 15 community and others who are following this 16 transaction. And we participated in the preparation 17 by your staff of a request for information directed to 18 GTECH. I believe that at the present time we're 19 hoping to see responses to that request by March 13th. 20 And so we'll be reviewing that information as well 21 with respect to questions brought by counsel regarding 22 the proposed transaction. 23 COMMISSIONER COX: Director Sadberry, 24 do you have a comment at this time? 25 MR. SADBERRY: Yes, sir. Chairman, 0149 1 Commissioner, I fully concur in the statements that 2 have been made to you. I would add -- or emphasize 3 that as part of the background check that is being 4 conducted, we are requesting the assistance of the 5 Department of Public Safety. And they have agreed and 6 have participated with us and continue to participate 7 with us in this process, which we think is very 8 helpful to the process itself. We have an estimate on 9 the agency contract, we have a contract with GTECH 10 regarding its financial participation in the 11 background check that has occurred, not only in the 12 general contract, but by specific agreement with them. 13 We have met last week, in fact, with 14 what we have termed as a business person to business 15 person meeting, with the two persons who we believe to 16 be associated with the current GTECH management as 17 well as the proposed Lottomatica management, and that 18 is -- is the persons of Mr. Bruce Turner, who is 19 currently the Chief Executive Officer of GTECH and 20 will become the CEO of Lottomatica as per the proposed 21 terms of the contract position, and also Mr. Lorenzo 22 Pellicioli, who is with the De Agostini Group in 23 Italy, and they're the parent company and will be a 24 shareholder of major proportion in the new business 25 organization and will have some involvement in the 0150 1 management of the companies by virtue of a board of 2 directors complement, which is to some extent 3 established and to some extent will be in the 4 formative stages now. We believe the -- certainly 5 agree and concur that there is no commitment time-wise 6 and that this Commission may express or not express 7 any views regarding this matter. We will proceed with 8 due diligence, and I believe that process is 9 proceeding. I am actively involved to a large extent 10 and participated in these meetings last week and will 11 continue to either be directly involved or will be 12 advised and updated, so that we are assured that it 13 proceeds on a regular basis. And so far I would 14 concur that it is proceeding. 15 CHAIRMAN CLOWE: And I would like to 16 add for the record that last Thursday, I met with 17 those same two individuals, with you present. 18 MR. SADBERRY: Yes. 19 CHAIRMAN CLOWE: And they made a 20 general presentation of the deal that they're trying 21 to put together. We did not discuss any suitability 22 issues, and I made clear to them at the beginning of 23 my meeting with them that I was there to make their 24 acquaintance and have them ask me any questions about 25 the Texas Lottery Commission that they had. I had 0151 1 some questions about their business structure, but I 2 made it very clear that I was reserving my 3 determination as to their suitability until the 4 completion of the project and the report that would be 5 coming as a result of your investigative work. So it 6 was just a meet and greet meeting, but I would like 7 for it to be on the record that as of Thursday last 8 week, I did meet, with Director Sadberry, those two 9 individuals. 10 And Commissioner Cox, do you want to 11 make a comment on the record? 12 COMMISSIONER COX: Sure. I had a 13 similar meeting, and at the outset, Director Sadberry 14 set out the same ground rules for the game and they 15 were complied with. 16 CHAIRMAN CLOWE: Very good. 17 Gentlemen, are there any issues that 18 come under the privilege that you would want to advise 19 this Commission of relative to legal advice in 20 executive session? 21 MR. MATTAX: Yes. 22 CHAIRMAN CLOWE: Very good. If you 23 will stand by for just one minute, we will go into 24 executive session and call on you, but there is one 25 other item, before we go into executive session, that 0152 1 we can deal with that I would like to proceed to at 2 this time. 3 Commissioner Cox, with your permission, 4 under item 19 -- I'm sorry. I misspoke. Under item 5 21, docket number 362-03-0248.B (Consolidated), 6 represent by the letter O, In the Matter of the Denial 7 by the Texas Lottery Commission of the Application for 8 Bingo License by Red Men Council 12 White Mountain. 9 This docket is consolidated and relates to the denial 10 by the Texas Lottery Commission of the applications by 11 Red Men Council 5 Ramona, Red Men Council 12 White 12 Mountain, Red Men Council 13 Nacoma, Red Men Council 13 14 Cheyenne, Red Men Tribe 13 Buffalo, Red Men 14 Tribe 16 Black Crow, Red Men Tribe 17 War Eagle, and 15 Red Men Tribe 25, Omaha. 16 And is this consolidated, Counselor, 17 with the case following, represented by the letter P, 18 Docket Number 362-05.5184.B, Charles Isbell? 19 MS. KIPLIN: Yes, I think it would be 20 appropriate for both of these matters to come to y'all 21 at the same time, just if for no other reason that 22 time efficiency. 23 CHAIRMAN CLOWE: I thought as much, and 24 I'll call those items now and ask Mr. White, the 25 Enforcement Department Chief, to come forward and 0153 1 present those cases to us. 2 MR. WHITE: Yes, sir. Good morning. 3 For the record, my name is Stephen White. I'm the 4 Chief of Enforcement. With me is Phil Sanderson, the 5 Deputy Director of the Charitable Bingo Division. 6 The first case -- there are actually 7 two separate cases, the case of the consolidated 8 Red Men, and the second case, Charles Isbell. They 9 are related cases, but two distinct cases. The 10 Red Men, this is an agreed order, settling the Red Men 11 cases which have been previously before you. The 12 administrative law judge in this matter issued a 13 proposal for decision finding that the eight Red Men 14 organizations did improperly disburse bingo funds for 15 noncharitable purposes and failed to maintain adequate 16 records. The administrative law judge recommended, in 17 his PFD, that the organizations pay back the amounts 18 of wrongfully disbursed money and that they be 19 monitored closely. 20 At the December board meeting, the ALJ 21 proposal was presented to you. At that meeting, you 22 remanded the cases back to SOAH for further 23 proceedings in order to ascertain that the monetary 24 penalty was appropriate and for specific findings of 25 fact with regards to each of the organizations. Now, 0154 1 the case was remanded back to SOAH. The parties, 2 however, did continue settlement negotiations and have 3 reached a settlement, which the Commission believes is 4 a fair settlement. The terms of that settlement are: 5 The organizations have agreed to redeposit into their 6 bingo accounts approximately 47,000 dollars, in 70 7 days of entering the agreement; the organizations 8 agree to make additional charitable disbursements of 9 45,000 dollars within 70 days, these amounts broken 10 down proportionately for each organization based on 11 their share of the disallowed disbursements; the 12 organizations have also agreed to pay the Commission 13 60,000 dollars in two payments of 30,000 dollars each. 14 These payments will also be broken down 15 proportionately based on the share of disallowed 16 disbursements for each organization; the organizations 17 have acknowledged that they may not distribute 18 charitable proceeds to any member, officer, or 19 governing body of their organization except for 20 reasonable compensation for services rendered; the 21 organizations have agreed that within 30 days of 22 entering into the agreement, they shall make available 23 to the Commission checks -- all checks verifying 24 charitable disbursements they have made from 25 January 1st, 2001 to December 31st, 2005, which will 0155 1 be reviewed by the Commission; and the organizations 2 have agreed to dismiss, with prejudice, their lawsuit 3 against various Commission authorities. 4 I can go directly into the 5 Charles Isbell agreed order and discuss that or -- 6 CHAIRMAN CLOWE: If there are no 7 questions, go ahead. 8 MR. WHITE: Yes, sir. This is an 9 agreed settlement in a separate but related case, 10 related to the Red Men case. The allegations included 11 is incorrect information by Mr. Isbell related to his 12 commercial lessor's license for a number of years, 13 erroneously stating he was a sole proprietorship when, 14 in fact, he was a corporation. The settlement is, 15 basically, the corporation will make a 10,000 dollar 16 payment to the Commission, and will submit the 17 corrected information, correctly identifying the 18 corporation as a corporation, not a sole 19 proprietorship for the years that has been done. 20 That is all I have. 21 CHAIRMAN CLOWE: Are there any 22 questions? 23 COMMISSIONER COX: No. 24 CHAIRMAN CLOWE: I move the adoption of 25 the recommended orders. 0156 1 COMMISSIONER COX: Second. 2 CHAIRMAN CLOWE: All in favor, please 3 say aye. Opposed, no. The vote is two-zero in favor. 4 Thank you, Mr. White. We'll come back 5 to you later in the day. 6 We'll sign that order and then I'm 7 going to move that we go into executive session. 8 We'll return to the public agenda following that. 9 At this time, I move the Texas Lottery 10 Commission go into executive session: To deliberate 11 the appointment, employment, evaluation and/or duties 12 of the Executive Director, Acting Executive Director, 13 and/or Deputy Executive Director. 14 To deliberate the duties and evaluation 15 of the Charitable Bingo Operations Director and 16 Internal Audit Director, and to deliberate the duties 17 of the General Counsel, pursuant to section 18 Section 551.074 of the Texas Government Code. 19 To receive legal advice regarding 20 pending or contemplated litigation and/or to receive 21 legal advice pursuant to Section 551.071 (1)(A) or (B) 22 of the Texas Government Code and/or to receive legal 23 advice pursuant to Section 551.071 (2) of the Texas 24 Government Code, including but not limited to: 25 GameTech International, Inc. versus Greg Abbott, 0157 1 Attorney General of Texas, et al. 2 GameTech International, et al. versus Greg Abbott, et 3 al. 4 Charles Isbell versus Atkins, et al. 5 Red Men, et al. versus Gary Grief 6 Texas Lottery Commission versus Joel Bowen and 7 Associates, Inc. d/b/a JB & Associates 8 Cynthia Suarez versus Texas Lottery Commission 9 Shelton Charles versus Texas Lottery Commission and 10 Gary Grief 11 Employment law, personnel law, procurement and 12 contract law, evidentiary and procedural law, and 13 general government law 14 Lottery Operator contract 15 Mega Millions game and/or contract. 16 I don't need these last two. 17 CHAIRMAN CLOWE: Is there a second? 18 MS. KIPLIN: Mr. Chairman, there is one 19 at the very bottom. I don't know if you wanted to 20 bring it in or not. On-line game rules. 21 CHAIRMAN CLOWE: I do. Thank you for 22 pointing that out. 23 And before I ask for a second, I want 24 to include on-line game rules. Is there a second? 25 COMMISSIONER COX: Second. 0158 1 CHAIRMAN CLOWE: All in favor, please 2 say aye. Opposed, no. The vote is two-zero. 3 The Texas Lottery Commission will go 4 into executive session. The time is 11:52 a.m., today 5 is January 27th, 2006. 6 (OFF THE RECORD.) 7 CHAIRMAN CLOWE: Madam court reporter, 8 we're back on the record, and I have misspoke in 9 announcing the date. It is February 27th, 2006, 10 instead of January. If you would make that 11 correction. Thank you. 12 (EXECUTIVE SESSION.) 13 CHAIRMAN CLOWE: We'll come back to 14 order. The Texas Lottery Commission is out of 15 executive session. The time is 1:58 p.m. 16 Is there any action to be taken as a 17 result of executive session? If not, let's move back 18 to item number seven, consideration of and possible 19 discussion and/or action, including adoption, on new 20 Rule 16 TAC, 401.305, relating to Lotto Texas on-line 21 game. 22 Mr. Director, how do you come back to 23 us? 24 MR. SADBERRY: Mr. Chairman, we have 25 done what we understood you to request of us, and I 0159 1 think we have done that as you've suggested and 2 requested of us. And my perception, recommending to 3 you -- and I'll ask staff to speak in a minute -- my 4 perception is that you, first of all, have been very 5 open and inclusive in your considerations, your 6 deliberations, and receiving comments today. I'm 7 assured by staff and General Counsel have concluded 8 that you are in a position to take action today, 9 should you wish to do so, with the comments made 10 during the comment period as well as those received 11 today. So the floor is open in that respect, and, 12 again, sort of to supplement my preliminary comments, 13 as you asked, when you asked for my recommendation, 14 you did what I had in my mind from the beginning, and 15 that is, open the floor up to all considerations, not 16 just the specific recommendation as I made, and I 17 think you have done that. 18 You have heard practical, fiscal, 19 player input, fiscal projection input, player 20 perception issues, history, historical data on -- 21 across the gamut, and you have indicated by your 22 questions and comments, concerns that you understood 23 that exist with regard to this rule. 24 My recommendation to you is that the 25 rule must be changed. I think there are some elements 0160 1 of that that are without a question, such as the bonus 2 ball. My recommendation to you, further, is that if 3 you are comfortable with taking action today that 4 today would be the appropriate time to take action. 5 My further recommendation is that I 6 believe you have heard that there are some positive 7 aspects of the presentations and recommendations made 8 to you by Ms. Nettles on behalf of the survey 9 participants whom she represents here today, as well 10 as receiving her own views as she offered them. Staff 11 has met with Ms. Nettles, in conjunction with their 12 overall perception of what is in the best interests of 13 the agency moving forward, recognizing, of course, 14 that it is your ultimate decision. I think staff is 15 prepared now to give you, A, their recommendations, 16 having heard the proceedings this morning, as well as 17 given any alternatives they might see in their 18 recommendation that would take into account some or 19 all of Ms. Nettles' comments, which would leave you, 20 if you were to receive that, free to then deliberate 21 and determine, A, whether you wish to take action 22 today on staff recommendation, or staff recommendation 23 as modified, if any; or whether you wish to request 24 staff to discuss and study the matter further and come 25 back to you at some future time, taking into account 0161 1 additional data that may need to be developed, such as 2 fiscal projections where the matrix and prize payout 3 and other changes that are not subject to definite and 4 precise determination, to be desired by you for study 5 and consideration. Some of what has been proposed 6 today cannot be projected with sufficient precision or 7 accuracy on even a projected standpoint for you to 8 take action today, and I think you know those or had 9 them in this morning's session. 10 So, with that, if it pleases you, I 11 would ask that staff come forward and allow you to 12 have the benefit of their final recommendations, and 13 then we would be available, should you wish to 14 deliberate further and take action, to do so. 15 CHAIRMAN CLOWE: Good. Thank you. 16 MR. GRIEF: For the record, my name is 17 Gary Grief, Deputy Executive Director. 18 I appreciate all the comments that 19 Anthony has laid out for you. The staff did meet as a 20 group and we also had some time to spend with 21 Ms. Nettles, and staff recommends staying with the 22 Lotto Texas game design and payout percentages as they 23 are currently proposed. We have not heard anything 24 today that would cause us to change the basic 25 recommendation of eliminating the bonus ball and 0162 1 moving to a six-of-54 matrix. 2 Regarding either a six-of-50 or a 3 six-of-52 matrix, the staff believes that the 4 corresponding prize payout percentages and the lack of 5 opportunities for jackpot rolls, under either one of 6 those matrices, outweigh any potential benefits. Even 7 the preparation of a corresponding fiscal note, or a 8 revenue projection, related to a six-of-50 or a 9 six-of-52 matrix would be extremely challenging, if 10 not impossible, as it would require some level of 11 anticipated increase in gross sales just to outweigh 12 the excess payout percentage that would be going back 13 in the form of prizes. 14 Staff also believes that there is value 15 in keeping the match three prize a fixed amount. And 16 we base that recommendation on anecdotal information 17 that we've received from players, from retailers, and 18 from our lottery operator, in that it's important to 19 players that the predetermined win amount is known for 20 matching three out of six numbers. However, we do 21 recognize that there may be some value in allocating 22 the same percentage of sales to the nonjackpot prizes 23 as were allocated in the previous six-of-54 game. We 24 also ask that the Commission recognize that such a 25 change, while it might be perhaps pleasing to some 0163 1 number of our players, that would have an impact on 2 the overall prize payout percentage. And, in 3 addition, by inversely decreasing the sales allocated 4 to the jackpot prize from 40.47 percent to 33.63 5 percent, in order to keep the nonjackpot prize 6 allocations the same as from the previous six-of-54 7 game, the Commission will need to closely monitor the 8 game performance and make those policy decisions, if 9 they are needed, relating to either the starting 10 jackpot amount or the minimum incremental rolls, or 11 both. 12 Doctor Eubank has prepared information 13 regarding what the effective prize payout percentage 14 would be under that scenario, and that percentage is 15 between 56 and 57 percent, compared to an effective 16 payout percentage of about 53 percent under what is 17 currently proposed. 18 And regarding the rounding issue, as 19 long as our legal staff can make the appropriate 20 language changes in a timely manner, the staff has no 21 concerns about changing the rounding strategy to 22 rounding to the nearest dollar rather than rounding 23 down. 24 I would be happy to try and answer any 25 questions. 0164 1 COMMISSIONER COX: Gary, a couple of 2 things. You were concerned about going to six-of-52 3 and six-of-50, but I'll focus on six-of-52, because of 4 the concern that revenue would have to be up quite a 5 bit to even keep us even. 6 MR. GRIEF: Correct. 7 COMMISSIONER COX: Now, I just heard 8 you say that we could change the prize structure, but 9 Doctor Eubank's number for that, 56 or 57, matches my 10 recollection of what six-of-52 would be. 11 MR. GRIEF: And that's giving some -- 12 and that approach is giving some weight, credence, if 13 you will, to anticipated benefit and, therefore, 14 constant play by players who are interested in those 15 nonjackpot prizes that are just as large as they were 16 under the previous six-of-54 matrix. 17 COMMISSIONER COX: Well, I will tell 18 you that I'm going to ask you at the end to think 19 about picking your favorite, because I certainly don't 20 feel qualified, with the data that I have, to choose 21 between the two alternatives that you give me at this 22 point. The only thing I've really heard about that 23 revised one, I couldn't write it down as to that it 24 is, and then Doctor Eubank said 56 or 57, which means 25 he roughed it out. And I'm confident it would come 0165 1 into that range, but I want to see a comparison up 2 there, I think. 3 Now, the other thing I would ask you 4 is, I hear you on the three percent -- the 5 three-dollar prize. I understand the practical 6 reasons for doing that. And yet, I am very concerned 7 about paying out the prize pool to the winners and not 8 to somebody else at some future date, to the extent we 9 possibly can. Is it possible to make three-dollar 10 prize winners the three-dollar prize winners, and then 11 allocate what is left in the stated percentages or 12 proportions, and are there -- talk about that a little 13 bit for me. Are there pros and cons on doing that? 14 MR. GRIEF: I'm not quite following 15 you, Commissioner. 16 COMMISSIONER COX: Okay. Rather than 17 making it 4.01 percent, which is a guess of what those 18 three percents are, I would strike -- I would take 19 that out as a percentage, and I would strike 20 proportions on the remaining tiers, and I would say, 21 you pay the three-dollar guys, and you subtract that 22 from the pool and you apply those proportions to the 23 remaining prize pool. This was a suggestion 24 Ms. Nettles made. 25 MR. GRIEF: So you would have four and 0166 1 five matching prizes in that, by however many 2 three-dollar winners you end up having. 3 COMMISSIONER COX: That's the only way 4 I can see to pay out a hundred percent of the prize 5 pool to the winners of that draw. And maybe y'all 6 have another way of doing that, or maybe that's just a 7 goal that I would like to achieve but we're just not 8 going to be able to. 9 MR. GRIEF: That's certainly one 10 approach. And it's just thinking outside the box -- 11 COMMISSIONER COX: And it may be that 12 you don't have enough data to answer that question. 13 MR. GRIEF: I really don't, 14 Commissioner. 15 MR. TIRLONI: Commissioner, we do do 16 that on the Cash Five game, and that was because the 17 Cash Five game was strictly pari-mutuel from the match 18 five all the way down through all the different prize 19 levels. But we've never explored that in Lotto, and I 20 think Gary is right. I think we would need to -- we 21 would need to explore that with Doctor Eubank and see 22 how that would work out to see how those payments 23 would take place. 24 COMMISSIONER COX: That's all I have, 25 Mr. Chairman. 0167 1 CHAIRMAN CLOWE: I see that currently 2 on the percentage of year-to-date sales, instant 3 tickets is running 75.2 percent. Lotto Texas -- I've 4 used the percentage of eight percent earlier, now it's 5 down to 6.7. 6 I think it's important for people who 7 are lottery watchers to understand that Lotto Texas 8 isn't the only game we have and that they're missing 9 the ball if they focus on Lotto Texas as being the 10 result of how the Lottery is doing in this state and 11 don't understand that instant tickets have stepped so 12 far ahead that it's running the show now. As a matter 13 of fact, Pick 3 has moved ahead of Lotto Texas on a 14 year-to-date basis. We're dealing with a game, as 15 I've said before, that's our sweetheart, but it's an 16 old sweetheart. And, you know, that's okay with me, 17 because my sweetheart has been with me for 51 years 18 and she's still my sweetheart. But we're selling 19 something here, and I think it's important to 20 understand that it's not just the game, it's VLTs -- 21 or eight-liners, pardon me. VLTs. The casinos 22 outside of this state, Internet gaming, Powerball, 23 with the 365 million jackpot in every state on our 24 borders, and this is the way it's going. 25 I think that Ramon and Doctor Eubank 0168 1 have given us good advice, Mr. Rivera, that every 2 state is dealing with this problem. And you brought 3 up the Washington state situation. There is no magic 4 fix here, in my opinion. As much as I would like to 5 believe so much of what Ms. Nettles said, about going 6 back to the original game of six-in-50, I just don't 7 think that's going to discharge our fiscal 8 responsibility to the State of Texas. I just -- I 9 don't the take is going to be there. 10 I think we can do some cleaning up and 11 I think we need to get rid of the extra ball. If 12 anything is clear in my mind about the players not 13 liking what we do with Lotto Texas now, it's that 14 extra ball. We need to get back to the six numbers. 15 Commissioner, we can ask that this rule 16 be republished and we can go out for more comment. We 17 can commission more studies and do more Ipsos Reid 18 survey groups, but I think I'm ready today to vote to 19 go to the six-of-54 and watch it and see how it turns 20 out for a period of time. And then if we want to 21 change it again, do that. 22 Now, we can't do it other than this 23 long-term process, and that's okay, because we have 24 heard that that's the way people want us to do it, so 25 I'm okay with that. But rather than not take action 0169 1 today, I believe I am ready to move on this and make 2 the change, and to that end, let me ask some 3 questions. 4 If we adopt a rule today, when would 5 the effective date of the rule change and the game 6 change be? 7 MR. TIRLONI: Commissioners, we have to 8 do the multi-draw countdown on the existing game, so 9 I'm projecting sales would start on Sunday, April 10 23rd. 11 CHAIRMAN CLOWE: April 23rd? 12 MR. TIRLONI: Yes, sir. It takes -- 13 it's about a five-week countdown on the current 14 multi-draw wagers. 15 CHAIRMAN CLOWE: You haven't bought any 16 machines, have you? 17 MR. GRIEF: No, sir. 18 CHAIRMAN CLOWE: You've got machines 19 that are adequate, I suppose. 20 MR. GRIEF: Yes, sir. 21 CHAIRMAN CLOWE: And if we take no 22 action today and ask that a rule be republished, how 23 long would that take an effective date back? 24 MR. TIRLONI: Well, we'd propose -- we 25 could potentially propose a rule to you at the end of 0170 1 March or at the next -- at the March meeting. There 2 would start a 30-day public comment period, which 3 would take us into April. We would have to summarize 4 any comment received, like we've done today, and 5 present that to you, which would probably be in a May 6 meeting, and if something were adopted in May, I would 7 probably need another, roughly, eight weeks to be able 8 to get the necessary point of sale, play slips 9 printed, and execute that multi-draw countdown, so I 10 would say, probably late July. 11 COMMISSIONER COX: And, Mr. Chairman. 12 And Robert, if you were going to propose it at the 13 March meeting, you wouldn't have time to do much 14 additional research, so it probably wouldn't be much 15 different than what you have here. 16 MR. TIRLONI: That's absolutely 17 correct. If we would get a direction to pursue more 18 research, that would take us about five weeks to 19 actually put together, pick cities, recruit for the 20 focus groups for the quantitative and the qualitative 21 research, so you are absolutely right. March probably 22 would not even be doable in terms of proposing a new 23 rule to you all. Which would push everything back a 24 month, so my statement about late July would probably 25 become late August, possibly September. 0171 1 COMMISSIONER COX: So Mr. Chairman, if 2 I understood you, you're ready to move forward with 3 bullet number one? 4 CHAIRMAN CLOWE: Yes. That's the 5 original recommendation. And if I understood what 6 Gary told us, the staff, after their deliberation, is 7 sticking with that recommendation. 8 MR. GRIEF: Yes, sir. 9 CHAIRMAN CLOWE: You've cleaned it up a 10 little bit and made some additional housekeeping 11 changes, but basically, based on the data you have and 12 the work that you've done, the comments that we've had 13 from Ms. Nettles and some players, that's your best 14 case right now. 15 MR. GRIEF: Yes, sir. 16 CHAIRMAN CLOWE: Okay. I think 17 Commissioner Cox said he was going to ask you for your 18 number one recommendation, and I think I'm assuming 19 that's it. 20 MR. GRIEF: With all due respect, to 21 allocating the same percentage of sales to the 22 nonjackpot prize, the staff -- we just don't believe 23 the costs -- or the benefits outweigh the costs in 24 doing that. So, yes, we -- we as a staff are landing 25 on the matrix, the distribution of sales to the 0172 1 various prize levels, as proposed. 2 COMMISSIONER COX: Mr. Chairman, we've 3 had this problem for two years, we've been working it 4 for two years. We know that the bonus ball wasn't 5 well received to begin with, and then we brought in 6 Mega Millions with another bonus ball and a much 7 bigger jackpot. Now we took half of Lotto Texas' 8 billboards and gave them to Mega Millions, and we 9 don't have empirical evidence as to what is wrong with 10 this game, but this is staff's best estimate of what 11 we should do as our next step to try to stop the 12 bleeding and get it at least leveled off. And if we 13 wait until August, we -- it'll be another five months 14 before we even try. 15 CHAIRMAN CLOWE: And the thing that I 16 think there is uniform agreement on, from the work 17 that they've done, is that the thing that the players 18 dislike most is that extra ball. The -- the prize 19 payouts at the lower level is an issue, and there are 20 other issues; probably where we start, and how much we 21 roll with, how long we keep it at the start level. 22 But above everything else, that bonus ball is the 23 thing that Lotto Texas players say, we don't like. 24 MR. TIRLONI: Commissioners, as part of 25 this process and as Commissioner Cox just alluded, 0173 1 it's been a very long process of looking at this game 2 and all the game features and looking at what other 3 states have done. If adopted, the goal is to continue 4 to monitor this and make other changes. I know our 5 original goal was to do that via the procedure route, 6 and we've addressed that here today. We can still 7 make tweaks and changes and introduce new features, 8 and continue to do it through the rule proposal route, 9 as we've done for many years here. 10 CHAIRMAN CLOWE: And that's going to be 11 the practice, that's clear, with the withdrawal of the 12 other proposed rule. 13 MR. TIRLONI: Yes, sir. 14 CHAIRMAN CLOWE: The priorities, in my 15 mind, for this agency are the honesty and the 16 integrity of the games. And then right together come 17 the maintenance of the contribution to the Foundation 18 School Fund, and right with that, I'm not sure how far 19 behind it is, offering to those people who choose to 20 play the games, an attractive, enjoyable experience, 21 within the statute. It's difficult because of the 22 maturity of this game that everybody is focused on 23 since 1992, and I think to do nothing, as difficult as 24 these choices are, would be a mistake. 25 COMMISSIONER COX: I agree. 0174 1 CHAIRMAN CLOWE: And, you know, again, 2 if this were a business, and you look at one product 3 that is 75 percent of your sales, and you look at that 4 and you say, what am I doing right. Well, I can see 5 what we're doing right. It's being referred to in the 6 United States as -- as a state that's very progressive 7 in their instant ticket sales. And when Pick 3 passes 8 up Lotto Texas in a percentage basis, and that's just 9 on a current year-to-date basis, it's showing an 10 interesting trend and one that I think the handwriting 11 is on the wall. We've got to do what we can, but to 12 do nothing until the fall of this year, I don't think 13 is a good idea. 14 I had asked that the publishing of this 15 rule be extensively broadcast to the players so that 16 they could comment on it. And I followed what was 17 written in the media about it, and I am convinced that 18 a good job was done on that. I think that the media 19 got that word out to the people of the state, and 20 there was a broad awareness of the fact that we're 21 considering this change. And I want to thank the 22 members of the media who carry those stories, because 23 there is no way that I think we can spend the money to 24 get the story out, that we're considering a change, 25 through the Texas Register or those regulatory avenues 0175 1 like having news stories. And based on the input that 2 I have read from Ms. Nettles' survey and from those 3 who came in on our Web site, we will make a great 4 number of the players happy by eliminating that bonus 5 ball. We can't make everybody happy, but the thing 6 that I think the Commissioners have to protect is that 7 fiduciary responsibility to the State. If we don't do 8 that, that's part of the integrity that we have signed 9 on to discharge. 10 So after all of this discussion, who 11 can help me with a motion that would clearly delineate 12 what we're trying to do here this afternoon? 13 MR. GRIEF: Mr. Chairman, did the 14 Commission want to address the rounding issue in your 15 deliberation? 16 CHAIRMAN CLOWE: Yeah, that's part of 17 the motion, I think -- or is it? 18 Is that -- do you want to leave that to 19 policy and give direction? 20 COMMISSIONER COX: I would sure like to 21 address it, if that's -- that's the -- that we change 22 the rule to round either up or down at whichever is 23 closer. 24 MS. WOELK: The other thing I would 25 like to add to my prepared text is, you did, in 0176 1 effect, open up public comment, and both Ms. Nettles 2 and Mr. Rivera commented on starting jackpots and 3 increments of rules. I think I need to add just a 4 little paragraph noting that comment was opened and 5 there were a few additional comments. That will only 6 take a few minutes, and Gary had already discussed the 7 changes necessary on the rounding, so I think it can 8 be done quickly. But I think there is a little 9 housekeeping that needs to be done. 10 MS. KIPLIN: May I just ask a question? 11 So is staff saying that they could bring back an order 12 today addressing the issues and making the changes to 13 the text on the rounding down issue? 14 MS. WOELK: Yeah. 15 MS. KIPLIN: And incorporating what you 16 believe might be new comment and then fashioning a 17 Commission response to that? 18 MS. WOELK: Yes. 19 CHAIRMAN CLOWE: Is your point covered? 20 COMMISSIONER COX: I've got two points, 21 I think. One is, if we can address the rounding, to 22 make it up or down as is closer, and if there is any 23 way to embrace the concept -- and maybe this is a 24 separate idea or just a suggestion to Director 25 Sadberry -- that we make every effort, to the maximum 0177 1 extent practical, to distribute the total prize pool 2 to the winners of that particular draw rather than 3 taking it forward. And maybe that doesn't fit here, 4 and maybe that is just one Commissioner's view of how 5 we might look at this issue in the future. 6 CHAIRMAN CLOWE: I share in that. 7 I also want to say, while we're talking 8 about our feelings about this, you know, I understand 9 this issue of pari-mutuel, but to me, if we adopt that 10 in this game, it's just not the game any more. It's a 11 different thing. And I think, Commissioner Cox, you 12 said, you don't know how you would ever advertise the 13 jackpot if you did that. I just can't see Lotto Texas 14 ever being totally a pari-mutuel payout. It just -- 15 it won't be that game if it ever goes to that. We 16 might have another game that is -- well, Texas Two 17 Step. But while we're just sort of trying to answer 18 some of the things that the -- and this is -- has been 19 very helpful, and I'm very appreciative of Ms. Nettles 20 being here and offering her suggestions, and the 21 representation she gave us on the players that 22 answered her survey. Gary, the work you've done, 23 Robert, Sarah, everybody. Anthony. This may not be 24 the last time we do this, but at this point in time, I 25 think it's the best effort that we can make. And I 0178 1 would like to make the motion to move ahead today. 2 COMMISSIONER COX: I would, too. 3 MR. GRIEF: Mr. Chairman, as you heard 4 Robert say, we will be coming back to you in short 5 order with -- once we have data, on what the current 6 change does to the game, with other tweaks and 7 suggestions to improve the game. 8 Would it be all right with the 9 Commission if we considered your point, Commissioner 10 Cox, about the fixed prize, to consider as one of our 11 first tweaks to the game rather than try to burden our 12 legal staff with working that into the current rule? 13 COMMISSIONER COX: It has no practical 14 impact now. We're just talking about the spirit of 15 the future, not something we can do today. Sure, 16 that's fine Gary. 17 MR. GRIEF: Appreciate it. 18 CHAIRMAN CLOWE: Well, let's keep 19 working on this old sweetheart and bring her around if 20 we can. 21 Are you going to come back to us with 22 an order, Sarah? 23 MS. WOELK: Yes. 24 CHAIRMAN CLOWE: So a motion is not in 25 order right now. 0179 1 MS. KIPLIN: If y'all are okay, maybe 2 we should wait until we get the text. 3 CHAIRMAN CLOWE: I think we're okay. 4 How do we look? Do we look okay? 5 MS. KIPLIN: You look great. 6 CHAIRMAN CLOWE: Okay. We'll go back 7 to item number three, report, possible discussion 8 and/or action on lottery sales and revenue, game 9 performance, instant game closures, new game 10 opportunities, including Powerball, Pick 3 issues, and 11 trends. 12 MS. PYKA: Good afternoon, 13 Commissioners. For the record, my name is Kathy Pyka. 14 I'm the Controller for the Lottery Commission. 15 With me to my right are Robert Tirloni 16 and Doctor David Sizemore. 17 Our first chart is afternoon reflects 18 revenue from sales and net revenue to State through 19 the week ending February 11th, 2006. This report 20 reflects 24 weeks of fiscal year 2006 activity. Total 21 sales through this period amounting to 1.7 billion, 22 while estimate or net revenue to the State for this 23 period was 433.8 million. This is a 3.4 percent 24 increase over fiscal year 2005. 25 Our fiscal year 2006 -- excuse me. Our 0180 1 net revenue to the State reflects a 3.7 percent 2 increase in comparison to the 418.4 figure for the 3 same period of fiscal year 2005. So, again, the -- 4 the sales is a 3.4 percent gain and the net revenue is 5 a 3.7 percent gain. 6 Our prize expense as a percentage of 7 sales was 62.6 percent for the current time period, as 8 compared to 62.7 percent for fiscal year 2005. 9 COMMISSIONER COX: Kathy, is this the 10 first report you have given us that would have the -- 11 let's see if I'm reading it right. I'm used to the 12 current period being on the left-hand side and you've 13 got the current period on the right-hand side. So -- 14 no, our prize expense has gone down as a percentage of 15 sales. This is the first monthly report you've showed 16 us where that was the case. Right? 17 MS. PYKA: I'm not sure if this was our 18 first one. We may have had one last period as well. 19 COMMISSIONER COX: Robert is saying 20 yes. So early on this year, it was going the other 21 way. 22 MS. PYKA: Correct. 23 COMMISSIONER COX: What do you think is 24 afoot here? 25 MS. PYKA: And Ben is saying behind me, 0181 1 he is talking about sales and the growth in sales. I 2 mean, we are having a fantastic February. I really 3 wish that our February data was through this past 4 week, because our numbers even look better if you look 5 at the entire month of February. 6 COMMISSIONER COX: Okay. But looking 7 at this, I'm going to have to say that since -- if you 8 look up at the top, the sales contribution is also up. 9 It's not sales, it's margin. 10 MR. TIRLONI: Right. 11 COMMISSIONER CLOWE: So that must mean 12 the on-line games are a bigger mix in these last 13 couple of periods than they have been before. 14 MS. PYKA: And that is correct. If you 15 look at the Mega Millions sales increase, and we had 16 great Lotto sales for this time period. 17 COMMISSIONER COX: Okay. So what we 18 really need to keep that margin up there is on-line 19 revenues. 20 MS. PYKA: Correct. 21 CHAIRMAN CLOWE: Where you get the 22 biggest contribution. 23 COMMISSIONER COX: Yeah. 24 MS. PYKA: Our next slide includes a 25 fiscal year 2006 year-to-date sales by game. As shown 0182 1 on this slide and as y'all have been discussing this 2 morning, 75.2 percent is sales from instant tickets, 3 which is 1.3 billion. Our next leader is 7.6 percent 4 with Pick 3, or 129.8 million, followed by Lotto Texas 5 at 6.7 percent, or 115.2 million. 6 And then our next slide will be a 7 graphical presentation of the 1.7 billion in 8 year-to-date sales by game. And with that, we'll move 9 to Robert. 10 MR. TIRLONI: Commissioners, this is 11 the graphical representation of the 1.3 billion in 12 instant ticket sales broken down by instant ticket 13 price point. Not much change from what we've seen 14 over the past few monthly presentations. The 15 five-dollar price point continues to be the sales 16 leader, followed pretty closely by the two, and the 17 trend continues for the ten to be ranked third, 18 followed by the one. If you'll remember, we saw that 19 trend change probably about a month or so ago, 20 possibly in December, when we had some very strong 21 ten-dollar price points out. The one that comes to 22 mind is the ten-dollar World Poker Tour game is 23 performing very strongly right now, as is another one 24 of our ten-dollar price points, which is Set For Life, 25 which is an annuity style game. 0183 1 Chairman, a couple of meetings back we 2 had a discussion about instant game closings and zero 3 top prizes. You asked us to go out and see what we 4 could find out in terms of what other states were 5 doing. We have done that. Doctor Sizemore is here to 6 share those results, and before he does, I'm going to 7 briefly walk you through how we are currently closing 8 our instant games. 9 There are numerous factors that we 10 consider when we're evaluating the closing of a game, 11 and I'll run through those. This is all part of an 12 instant game closing analysis that we run before the 13 decision is actually made. The cost of printing the 14 game and the amount of prizes paid pretty much make up 15 our direct costs. The game sales are our benefits. 16 We look at the number of weeks the game has been in 17 market and the average game sales for a game with the 18 same price point and the same print quantity, so we're 19 doing a fair comparison or an apples to apples 20 comparison when we're evaluating these games. And 21 then we also consider the actual prize payout versus 22 the printed payout, or the payout that we expected 23 when we ordered the game. 24 COMMISSIONER COX: Robert. 25 MR. TIRLONI: Yes, sir. Do you want me 0184 1 to go back? 2 COMMISSIONER COX: Would you, please. 3 MR. TIRLONI: Sure. 4 COMMISSIONER COX: So the actual 5 payout, here is what our experience has been, 6 considering that tickets may not be redeemed, tickets 7 may have been lost, stolen, whatever, and here is the 8 theoretical payout. 9 MR. TIRLONI: That's correct. 10 So after we make the business decision 11 to close a game, there is a process that we do follow, 12 and we start by calling the game. When we call the 13 game, that starts a 60-day time period in which the 14 games are picked up from retail locations. That is 15 done by the GTECH sales force. 60 days after the game 16 is called is the actual close date. That notes the 17 end of the game, and games are no longer available for 18 sale after that date. And then 180 days from the 19 close is the actual end validation date. So between 20 the close -- after the close date, players that are 21 holding those tickets still have 180 days to actually 22 validate those tickets and be paid the prizes. 23 COMMISSIONER COX: So saying that it 24 takes a 60-day period to pick it up, is that just the 25 quickest it can be done, or are we trying to project 0185 1 out there so that we pick that thing up at pretty much 2 the optimum time rather than 60 days after the optimum 3 time? 4 MR. TIRLONI: 60 days is the amount of 5 time that we feel at this point it takes for GTECH to 6 get out there, let the retailers know that the game is 7 called, that they need to pick it up, and see all of 8 those retailers. Sometimes when the sales reps go 9 into different retail locations, tickets may be in the 10 safe, not everybody has access to the safe, so it 11 starts that process of letting those retailers know, 12 this game is being called, we need to pick it up. 13 We'll be back on our next scheduled visit, we're going 14 to need to pick those tickets up. 15 COMMISSIONER COX: So does GTECH begin 16 on day one of those 60 days picking up that game? 17 MR. TIRLONI: Yes. 18 COMMISSIONER COX: And so that means 19 that when you call it, you have a replacement for it? 20 MR. TIRLONI: Absolutely. 21 CHAIRMAN CLOWE: So the answer to your 22 question, I think, would be 60 days after the optimum 23 time. 24 COMMISSIONER COX: Well, they start 25 maybe on the optimum day -- I guess my question -- I 0186 1 didn't clarify. Is the D day minus 60 the optimal 2 date that you have tried to predict through an earlier 3 process, or is it, oh, by gosh, here we are, give them 4 notice? 5 MR. TIRLONI: The latter. We do the 6 analysis, and then we evaluate that analysis, make the 7 business decision, and then announce the game closed. 8 The 60-day time period is not factored into the 9 analysis. 10 COMMISSIONER COX: Okay. Are we 11 working toward getting it back further so that the 12 process is more predictive and less reactive? 13 MR. TIRLONI: Yes. We're working with 14 Kathy's staff on the whole game closing procedure and 15 process. 16 COMMISSIONER COX: Thank you. 17 MR. TIRLONI: Basically, we inform the 18 public about a game closing in a variety of ways. We 19 do place legal notices in newspapers, we provide 20 information through our Web site and in our retailer 21 and player publications, and we also produce 22 end-of-game flyers that are distributed to all Texas 23 lottery retailers. So that is how we get the word 24 out. 25 CHAIRMAN CLOWE: That's where I have 0187 1 heard criticism of those not being current, Robert. 2 Talk to us about that. 3 MR. TIRLONI: Is it those, Chairman, or 4 is it what we used to call winning tickets remaining? 5 CHAIRMAN CLOWE: That's what it is. 6 MR. TIRLONI: Yeah. The winning 7 ticket -- we used to call it winning tickets 8 remaining. Now we call that flyer, scratch off 9 prizes. 10 COMMISSIONER COX: What do we call it 11 now, Robert? 12 MR. TIRLONI: Scratch off prizes. 13 COMMISSIONER COX: Was there an 14 adjective before that or -- 15 MR. TIRLONI: No. Just -- it's -- the 16 flyer is called scratch off prizes. 17 COMMISSIONER COX: Oh, the flyer is 18 called scratch off prizes. 19 MR. TIRLONI: There was concern that 20 winning tickets remaining could be misconstrued. You 21 know, we've talked about theft or we've talked about 22 tickets being destroyed, and to say that there is an 23 actual ticket remaining based on a prize table, we 24 didn't feel was as accurate as it could be, so we 25 changed the name of that flyer to try to be as clear 0188 1 as possible. 2 COMMISSIONER COX: So what it is now, 3 and is -- it seems like it could be clearer that we're 4 talking about unredeemed prizes, not winners still out 5 there. That covers the category of stolen, lost -- 6 MR. TIRLONI: Destroyed. 7 COMMISSIONER COX: -- yet unscratched, 8 et cetera, as well as yet unsold. Which is what the 9 player wants it to be, but it isn't. 10 MR. TIRLONI: Correct. Correct. Yes. 11 Because we could identify -- we get prize tables from 12 GTECH, the Lottery operator, and it -- it'll tell us 13 we have ordered -- let's just say for example 14 purposes, we've ordered five -- or we've received five 15 prizes in a game, let's just say, and two of those 16 prizes could have been validated and paid, and so you 17 would think that there would be three remaining. 18 That's where the miss -- that's where the 19 misperception could come in, though, because some of 20 those tickets could have been destroyed in a fire in a 21 retail location, they could have been stolen, they 22 could be in the warehouse, so to say that they're 23 remaining, we felt, was not as accurate as we could 24 be, and that was why we changed that. 25 CHAIRMAN CLOWE: Now, how often do 0189 1 those go out and how current are we with the retailers 2 on those? 3 MR. TIRLONI: We've always been behind 4 on those flyers. On the printed flyers. We get those 5 prize tables, we update the flyer and on the Web site 6 every Monday. So that's updated every week. The 7 printed version that's actually distributed to the 8 retailers -- 9 CHAIRMAN CLOWE: That's what I'm asking 10 about. 11 MR. TIRLONI: That's every other week 12 that we actually receive the prize tables, mock up the 13 flyer, submit it to our graphics department, it gets 14 laid out, it gets printed, delivered to GTECH, and 15 then GTECH has to get that flyer to the 16,000-plus 16 retail locations. 17 CHAIRMAN CLOWE: So that could be three 18 or four weeks old. 19 MR. TIRLONI: Absolutely. And I'll 20 tell you that for all the years that I've been 21 involved in this process, that's always been a 22 challenge for us. We have -- you know, we've looked 23 at other ways of getting the information out there, 24 but with the size of the retailer base, it's a 25 challenge to print something, have it delivered, and 0190 1 then -- and get it to all of those locations timely. 2 CHAIRMAN CLOWE: Have you talked with 3 GTECH about states that do it better than we do it? 4 MR. TIRLONI: Over the years, I feel 5 that we have done that. And we've brainstormed about 6 ways that we could make it better. That's part of the 7 reason that we update the actual flyer, and it's 8 actually a -- the flyer that we print is actually the 9 flyer that's on the Web site. They look the same. 10 The difference is that the one on the Web site is just 11 obviously updated more frequently because that's much 12 easier for us to do and much more timely. But as of 13 yet, we have not figured out a way to be able to 14 distribute a hard copy flyer to all of those locations 15 in a shorter amount of time. 16 CHAIRMAN CLOWE: Does that concern you? 17 COMMISSIONER COX: It does. And I've 18 talked to a lot of staff, Mr. Chairman. I don't see a 19 solution. Now, you know, he -- how up to date is the 20 information on the Web site? 21 MR. TIRLONI: The information on the 22 Web site flyer is -- it'll be updated today. So it's 23 a couple of days old. 24 COMMISSIONER COX: So at the oldest, 25 it's a couple of days? 0191 1 MR. TIRLONI: Or a week. It could be a 2 week at the oldest. 3 COMMISSIONER COX: And some of the 4 things that we've talked about is, could GTECH do 5 something with this through the ISIS system, and the 6 answer to that is, it's too voluminous. 7 MR. TIRLONI: I don't believe the ISIS 8 system -- I don't believe there is functionality that 9 would allow us to send that type of information in a 10 flyer format. Now, we can send messages to retailers 11 through the ISIS terminal, and we do. But there is a 12 lot of -- we're updating quite a few games on that 13 flyer -- on that flyer and we are somewhat limited in 14 the amount of messaging space that we have through the 15 on-line terminal in the retail location. 16 COMMISSIONER COX: Do we still have the 17 requirement that GTECH visit all retailers the same 18 number of times or with the same regularity? 19 MR. TIRLONI: Yes. Twice -- twice a 20 month. 21 COMMISSIONER COX: And that's one that 22 I think is on the table. And if that is the -- if we 23 were to change that so that that could be prioritized 24 toward the higher volume retailers, then we at least 25 might be able to get more current information in the 0192 1 higher volume retailers, not all retailers. 2 MR. TIRLONI: That would definitely be 3 possible for the higher volume locations that would be 4 visited more frequently, under your example. 5 COMMISSIONER COX: Mr. Chairman, that's 6 the only thing that I know of we could do to get it to 7 more people more currently. 8 CHAIRMAN CLOWE: I agree. And it's a 9 concern for both of us. 10 Keep that on your list, Robert, and 11 keep brainstorming that. I think more people probably 12 look at that than really go to the Web site and look 13 it up. The folks that I see in the retail outlets are 14 not -- where I buy my gas anyway, not all computer 15 geeks, and they're working folks who go in and 16 probably look for the hard copy to see what the story 17 is. We ought to do everything we can to get them 18 current, best information. 19 MR. TIRLONI: I agree with you. And I 20 agree with you about the flyer. And I'll tell you, 21 over the years, I have been told that that's one of 22 the most popular pieces that we print. 23 CHAIRMAN CLOWE: Okay. 24 MR. TIRLONI: Retailers and players 25 have -- I have heard that message from both groups. 0193 1 CHAIRMAN CLOWE: Good. 2 MR. TIRLONI: And, Commissioners, I'm 3 going to turn the rest of this information -- or the 4 rest of this part of the presentation over to 5 Doctor Sizemore, who will share his research results 6 with you. 7 DR. SIZEMORE: Thank you, Robert. Good 8 afternoon, Commissioner, Chairman. I am David 9 Sizemore, Research Coordinator for the Texas Lottery 10 Commission. And I will present some research results 11 on a Commissioner-solicited request to examine how 12 other states handle instant ticket game closures, both 13 those states that actually close games and those that 14 keep games open after the last top prizes have been 15 claimed. 16 We carried out a brief survey of 41 17 lotteries and we received 21 -- or 27 completed 18 responses, about 67 percent. North Dakota was part of 19 the sample but they do not have instant games. 20 Generally, the intention was to determine if instant 21 lottery games ended once all top prizes were, in fact, 22 claimed, whether the payout percentages were 23 restricted legislatively, if an operating model was in 24 place to guide game closure decisions, and whether the 25 top -- the prize structure accounted for potential 0194 1 lost revenue associated with game closures for instant 2 games, and the extent to which game closures affected 3 prize payout percentages. And what I'll do today is 4 present, briefly, the survey results, which summarizes 5 essentially all of my findings. And each one of the 6 points that was just listed will be addressed as we go 7 along here. 8 20 of the 27 states that we received 9 survey responses from actually referenced closing 10 games once all the top prizes were, in fact, claimed, 11 about 74 percent of those states. These states 12 essentially talk -- in rough terms, they close the 13 games once that last top prize is claimed. 16 use 14 very clear, what we could argue, is unconditional 15 language, demonstrating that instant games are closed 16 after the elimination of the top prizes. That's about 17 60 percent of those states that we surveyed, and 18 they're highlighted in red on the chart at the bottom. 19 There is only California, Connecticut and Delaware, 20 through West Virginia. Four jurisdictions used 21 provisional or conditional language. Those are 22 highlighted in blue, Colorado, New Hampshire, Maryland 23 and Washington. What was meant by provisional or 24 conditional language is that these states tended to 25 argue that they closed the games when the top prize 0195 1 was eliminated, but demonstrated in some form of 2 language that they closed it, but they also attached 3 to that language part of conditional items that, for 4 example, if one thing occurs and the top prize -- top 5 prizes have been eliminated, then we'll close the 6 game. So it's a very conditional language that they 7 used. In that sense, it's often just one measure 8 that's used in the closure decision process. 9 Seven states did not close games after 10 the top prizes were removed: Florida, Kentucky, 11 Michigan, Montana, New Jersey, Texas, and Vermont. 12 COMMISSIONER COX: So let me ask a 13 question there. 14 DR. SIZEMORE: Yes, sir. 15 COMMISSIONER COX: Unconditional 16 language that they closed the game after the 17 elimination of the top prizes, is that the sole 18 criteria? 19 DR. SIZEMORE: That's the -- that's the 20 first measure for most of the states that are 21 highlighted in red. In other words, if that happens, 22 they are closing their games unconditionally. That's 23 sort of the guidepost. 24 COMMISSIONER COX: So that is -- 25 DR. SIZEMORE: That does not mean, 0196 1 however, that other conditions may not apply. 2 COMMISSIONER COX: Okay. 3 DR. SIZEMORE: Under different 4 circumstances. 5 COMMISSIONER COX: Is that necessary 6 and not sufficient, or what? 7 DR. SIZEMORE: The way the language was 8 expressed in the survey responses, it seemed that it 9 was a sufficient condition. Once that occurred -- 10 COMMISSIONER COX: So that's sufficient 11 but not necessary. They could close it earlier for 12 other reasons. 13 DR. SIZEMORE: No. For those states 14 that -- I may have misspoke -- it's a necessary 15 condition. They made it clear that that's the thing 16 that drives this. 17 COMMISSIONER COX: Okay. So you have 18 got a dog out there, half the winning tickets are in 19 the warehouse, you could never close it. 20 DR. SIZEMORE: Well, this is where we 21 got into a lot of linguistic problems. The way they 22 described this process, they lumped this top prize 23 issue in with any number of other conditions. So not 24 all states, for example, put an order of events, that 25 if this happened first, then we'll close it. So some 0197 1 states did, for example -- and this is why the blue 2 states, the conditional states are up there -- they 3 made it pretty clear that, well, sales might slow down 4 and we'll reconsider the game and whether we'll close 5 it. So other states used that kind of obscure 6 language as well, but they made it clear that if that 7 last top prize is gone, the game is closed. There is 8 no ifs, ands or buts. Does that mean if sales slow 9 down well before the last top prize is closed? That's 10 a tougher call to make. 11 COMMISSIONER COX: Or if one of them is 12 lost, it could never be closed. 13 DR. SIZEMORE: Right. 14 COMMISSIONER COX: Or stolen, it would 15 never be closed. Or somebody has one that they're 16 giving at Christmas, it would not be closed until 17 after Christmas. That's a pretty rough standard, 18 isn't it? 19 DR. SIZEMORE: Perhaps. 20 MR. TIRLONI: And if I could just add 21 one thing before we leave this slide. You know, from 22 reviewing the report that David put together, it's 23 really a mixed bag of information that you get from -- 24 from all of the different -- from all of the different 25 states. And I think as David goes on, you'll see that 0198 1 one of the things that was very interesting to me was 2 California, they state that they have, you know, 3 unconditional language indicating that they close 4 instant games after the elimination of the top prize. 5 But I read the information that they submitted as part 6 of their response, and they actually start game 7 closing processes when there is one top prize left in 8 the game, so -- 9 DR. SIZEMORE: They'll do essentially 10 what we do here. They start the procedure to close 11 the game, but at the same time they use language that 12 they will close the game. So it's a very -- it's 13 ambiguous language that surrounds this whole issue. 14 MR. TIRLONI: And quite a bit of 15 variation. I just want to point that out. 16 CHAIRMAN CLOWE: So California is a 17 blue state? 18 DR. SIZEMORE: Red state. 19 CHAIRMAN CLOWE: You say theirs is 20 unconditional? 21 DR. SIZEMORE: Right. They will use 22 language, but they'll also -- once there is one top 23 prize remaining, as Robert mentioned, they'll start 24 the closure process. But that does not mean 25 necessarily that the game is closed. So there is one 0199 1 top prize left, but it keeps going. 2 CHAIRMAN CLOWE: Would it be a 3 misinterpretation of what you're telling us to say 4 that we are in 25 percent of the 41 states that don't 5 close a game out, regardless of the language, until it 6 meets the criteria that Robert just gave us in the 7 prior slide? 8 DR. SIZEMORE: I think that would be a 9 fair assessment, yes. That -- 10 CHAIRMAN CLOWE: So are we then in the 11 25 percent of the states that are pushing the games 12 the hardest and not giving the player the break that 13 these other 75 percent are? 14 DR. SIZEMORE: Well, as we go along, 15 it's -- Robert mentioned it's a mixed bag of 16 responses. A lot of states seem to use this logic to 17 sort of cover their own tails, that there are legal 18 issues surrounding it, public relations issues 19 surround the whole issue. What was it, North -- 20 what's the legal battle going on right now? 21 MR. TIRLONI: North Carolina, and 22 possibly South Carolina, there are some legal issues 23 pertaining to zero top prizes right now. 24 CHAIRMAN CLOWE: Sorry. I didn't 25 understand what you said. 0200 1 DR. SIZEMORE: South Carolina is right 2 now engaged in a legal affair, that it's my 3 understanding that someone has brought a case or a 4 suit against them, if this is correct, about this 5 whole top prize issue, that they kept selling tickets 6 after the last prize was claimed. So states, in other 7 words, are trying to mitigate that problem, perhaps, 8 by closing games down quicker. 9 COMMISSIONER COX: Well, it looks to me 10 like there is two potential problems here. One is 11 closing the game -- not closing the game after all the 12 top prizes are claimed, I can see how somebody would 13 criticize them for that. But not closing them while 14 any top prize remains is also subject to criticism in 15 that you have got dead stock out there. 16 MR. TIRLONI: Correct. 17 COMMISSIONER COX: Now, what that says 18 about Texas is that we do not close games after top 19 prizes were removed. Do we ever close games before 20 they're all removed? 21 MR. TIRLONI: Yes, we do. 22 COMMISSIONER COX: Okay. Good. 23 MR. TIRLONI: Absolutely. 24 COMMISSIONER COX: Because you can't 25 let dogs sit out there forever. 0201 1 MR. TIRLONI: When we perform our 2 instant ticket game closing analysis, the number of 3 top prizes remaining, to use that word, is on the 4 analysis spreadsheet that we utilize. That does not 5 factor into our decision in terms of closing that game 6 or deciding to leave it out there longer. 7 COMMISSIONER COX: Good. 8 CHAIRMAN CLOWE: So we make -- I think 9 what you heard you say is, we make a business 10 decision. 11 MR. TIRLONI: Oh, absolutely. 12 CHAIRMAN CLOWE: Closing the game, but 13 I want to get back to the comment Commissioner Cox 14 made about the fairness issue. We close them in some 15 cases before they're sold, but we don't automatically 16 close them after they're sold. Are we treating the 17 players fairly in that sense, or are we subject to 18 criticism around that issue regarding fairness? 19 MR. TIRLONI: I'm sure, from some 20 people's view, they would find criticism of that. I 21 am sure some people would say that, yes. I believe 22 and I think staff believes that there are many 23 different prize levels and different prize tiers in 24 games, and just because the top prize may no longer be 25 available, that doesn't mean there aren't many -- and 0202 1 in some cases, hundreds of worthwhile prizes still in 2 the game. 3 COMMISSIONER COX: And given the game 4 structure, it could be that the winning percentage 5 left is greater than the theoretical winning 6 percentage to start with. 7 MR. TIRLONI: It could be. And in 8 some -- 9 COMMISSIONER COX: Depending on how 10 close together the prizes are. 11 MR. TIRLONI: Correct. And in some 12 games, you know, at some of these higher price points 13 you have two million dollar top prizes, we have a 14 30-dollar game coming out in a little bit that will 15 have a three million dollar top prize. The second 16 prize in that game could be a few hundred thousand 17 dollars. So just because the top prize may be gone, 18 that doesn't mean that there aren't still very 19 valuable prizes to play for in that game. 20 CHAIRMAN CLOWE: Okay. Are you 21 satisfied? 22 COMMISSIONER COX: Yes, sir. 23 CHAIRMAN CLOWE: Thank you. 24 DR. SIZEMORE: Most of the closures -- 25 and, again, you'll see how the ambiguous nature of all 0203 1 this plays out. Most of the closures are associated 2 with no top prizes remaining, but they are also 3 associated with decline in sales, reduction in 4 inventory, game inactivity, a marked sell-through 5 points. Some states reference 85 percent, others 6 reference 100 percent, meaning some kind of -- or 7 exceeding a minimum payout level, for example, 45 8 percent. 9 Some of the other issues that we 10 researched included legislative restrictions, 11 operating models. In terms of legislative 12 restrictions, only 12 states lacked restrictions on 13 prize payout percentages: California, Delaware, 14 Kansas, Maine, and Washington indicated that a minimum 15 amount of sales or revenue was appropriated for the 16 state and/or prizes. This is the kind of thing that 17 they were describing with reference to legislative 18 restriction. 19 With reference to operating models, 17 20 of the 25 lotteries that responded to this question 21 claimed that they had some form of an operating model 22 in place to guide game closure processes. This could 23 be formal or otherwise. Most procedures seemed to 24 involve public or retailer communication for setting 25 up points where a game was, in fact, discontinued. 0204 1 Colorado's game, as you'll note, Colorado's final game 2 closure decision was at the director's discretion. 3 Two more items included the prize 4 structure and lost revenue, and game removal and the 5 prize percentage. Now, the prize structure and lost 6 revenue responses are a question itself. Actually, to 7 get at Chairman Clowe's concern on whether early game 8 closures could be equated with lost sales for the 9 state. No states actually indicated that they had 10 some kind of instant game prize structure that was in 11 place to account for lost revenue resulting from early 12 game closures. Again, that's 27 of the states. 13 In terms of game removal and prize 14 percentage payout, nine of the 20 closure states 15 claimed that early game closing affected the prize 16 payout percentage, but no one described the extent to 17 which that took place. Delaware used the language 18 noted on the board, or on the overhead, all unsold and 19 unclaimed prizes revert to the general fund, according 20 to the model, reverting unsold and unclaimed prizes 21 has the effect of reducing actual payouts and expenses 22 and increasing general fund contributions or net 23 income. So you can see the relationship between 24 unsold and unclaimed prizes actually reverting back to 25 a general fund. 0205 1 What this really boils down to, 2 particularly with reference to the prize structure and 3 the lost revenue issue as presented by Chairman Clowe 4 is that there is no simple answer to the questions 5 that we've posed. States may be driven by, as I 6 mentioned, some kind of public relations mode or legal 7 concerns or offsetting -- using offsetting techniques 8 to essentially mitigate the problems associated with 9 any potential lost profit or revenue, as Robert 10 claimed -- or described California, for example, as an 11 unclaimed prize pool. 12 Finally, we asked states if there were 13 any other measures in place, and what we found is that 14 the survey -- essentially, other industry practices 15 were also utilized in some lottery jurisdictions, 16 relating to the mitigation of substantive prize payout 17 percentage changes as a result of those game closures. 18 Some of these practices included managing the 19 distribution of top prizes within a given print run, 20 and conducting second chance drawings for a final top 21 prize award. 22 Thank you. Are there any questions? 23 COMMISSIONER COX: No. It's helpful 24 data and I hope that y'all would use it to try to move 25 toward the best model that we can develop. 0206 1 DR. SIZEMORE: Yes, sir. 2 MR. TIRLONI: We'll do that. 3 Commissioner, as I said, we're working with Kathy's 4 staff and talking to her about making the process that 5 we're currently following even better. 6 CHAIRMAN CLOWE: Thank you. 7 DR. SIZEMORE: If I may note. No other 8 states had a model, a closure procedure model like 9 Texas. We -- I think Vermont was the only state that 10 had any kind of tabular or tabulated formula that they 11 use. So in a lot of ways this is one of the more 12 comprehensive methods. 13 COMMISSIONER COX: That's what I would 14 have expected. 15 MR. TIRLONI: Mr. Chairman, last month 16 you asked me to get information about a game that you 17 had read about in the paper where there were thousands 18 of winners in the once-a-year drawing, and that is the 19 El Gordo game that's conducted in Spain. So with the 20 help of David and the Internet, I have some slides to 21 respond to your request. 22 El Gordo is run by the Spanish National 23 Lottery. It started in 1812 and it's known as the 24 Christmas lottery -- or it became known as the 25 Christmas lottery, I should say, in 1892. It is a 0207 1 national game. The population of Spain is 40 million, 2 just to give you an idea of the population. It is 3 played once a year, and it's drawn every December 4 22nd. And the basic premise behind the game is quite 5 different from the mega games that we have here in the 6 United States. They -- they don't go in the direction 7 of the large Mega or Powerball jackpots. They prefer 8 a smaller top prize with a very heavy lower tier 9 prize, which they believe spreads the wealth through 10 society. 11 What we learned was El Gordo is part of 12 the Spanish culture. There is a lot of pool play that 13 takes place, co-workers, relatives, sports clubs pool 14 their money. A lot of the bars and restaurants, it 15 was interesting to find out that they purchase many of 16 the tickets and then they resell them to their 17 customers. The drawing takes three hours. It is 18 conducted before a live audience at the Spanish 19 National Lottery headquarters and school children 20 actually sing out the winning numbers. That's a 21 tradition dating back to 1812. I thought y'all would 22 find that interesting. 23 CHAIRMAN CLOWE: Thank you. Very 24 interesting. 25 MR. TIRLONI: The game is -- 0208 1 CHAIRMAN CLOWE: I don't think the 2 legislature would like that. 3 MR. TIRLONI: I don't think that they 4 would. 5 The game is pretty complicated, and 6 David and I spent one afternoon looking at it. I can 7 tell you that I don't know that we have a firm grasp 8 of it yet, but it is a complicated system of shared 9 numbers. It's five digits from all zeros to all 10 nines, and each of the numbers is repeated based on 11 the way the draw is designed, 1700 -- or 1900 times. 12 So I'm going to jump down a bullet. In December of 13 '05, the most recent El Gordo, there were 1700 first 14 prize tickets, and those were each worth 360,000 15 dollars. So back to my first point -- or my first 16 bullet, obviously, the shared numbers, the repeat was 17 at 1700. 18 The tickets are actually sold in books 19 with ten numbers. And the other interesting thing was 20 how those books were divvied up. For example, one 21 person might buy the book, but then they sell almost 22 what I would call shares or pieces of that book to 23 other people. So there really is a -- a large number 24 of people getting into the game. I read one article 25 that said three out of four people had tickets for the 0209 1 El Gordo drawing in December, or they had an interest 2 in a book of tickets for the El Gordo drawing. 3 CHAIRMAN CLOWE: Three out of four of 4 the people in Spain? 5 MR. TIRLONI: Yes. That's correct. 6 CHAIRMAN CLOWE: 75 percent 7 participation. 8 MR. TIRLONI: That's correct. 9 The prize is tax free. The government 10 does not tax winners. It takes 25 percent out of 11 ticket sales. 12 CHAIRMAN CLOWE: What is the gross? 13 MR. TIRLONI: The game does have a 14 payout of 70 percent. I'm sorry, sir? 15 CHAIRMAN CLOWE: Well, the payout was 16 2.4 billion. 17 MR. TIRLONI: Uh-huh. 18 CHAIRMAN CLOWE: What was the gross? 19 That plus another 25 percent? 20 MR. TIRLONI: Yeah. Roughly, yes. 21 CHAIRMAN CLOWE: See, if we can get 22 Mega Millions and Powerball to combine -- 23 MR. TIRLONI: I thought you may think 24 that after we saw these slides. 25 CHAIRMAN CLOWE: We could have our own 0210 1 El Gordo. 2 COMMISSIONER COX: Gordito. 3 CHAIRMAN CLOWE: Gordito. Without the 4 school children singing the numbers. 5 MR. TIRLONI: The odds of winning are 6 better than one in seven. We just talked about the 7 2.4 billion in prize money. I will tell you that 8 there is a summer El Gordo planned for July, and they 9 have numerous other games that the National Lottery 10 runs. 11 CHAIRMAN CLOWE: Very interesting. 12 Thank you for developing that information. 13 COMMISSIONER COX: Robert, when do the 14 tickets go on sale? 15 MR. TIRLONI: I believe that you can 16 buy tickets for -- I know they are selling tickets 17 right now for the summer El Gordo, which is in July. 18 And on the Internet site that I was on, I believe you 19 could buy your tickets now for the December one. So 20 they sell very far in advance. 21 COMMISSIONER COX: Early and often. 22 MR. TIRLONI: Yes. Yes. 23 COMMISSIONER COX: Did you see any 24 potential applications of this for the Texas Lottery? 25 MR. TIRLONI: Actually, some games that 0211 1 have been run recently in other jurisdictions reminded 2 me or I thought they were similar, and I would say 3 those would be the raffle style on-line games that 4 Pennsylvania has just recently run where they have 5 a -- they have a pool of tickets that they're going to 6 sell, say 500,000 tickets, and they are ten or 20 7 dollars a ticket, and once they sell through the pool, 8 the tickets are gone. And there is no duplication 9 amongst any of those tickets. There is no ticket 10 numbers that are duplicated, so you and I would never 11 be able to have the same number. And there are set 12 prize amounts. So they'll say right at the beginning 13 of the game that there are ten one million dollar 14 prizes, for example, and five 50,000 dollar prizes. 15 That was the most similar -- in the United States, 16 that was the most similar type of game that I could 17 see, currently. 18 COMMISSIONER COX: I think one thing 19 that would certainly indicate whether this would work 20 here is what kind of cultural differences do we see. 21 We started with a game like that, whoever was first, 22 New Hampshire or Vermont or Connecticut, whoever it 23 was, had a drawing that they sold tickets for six 24 months in advance and then they sold them all and then 25 they drew. And -- 0212 1 MR. TIRLONI: We've migrated from that. 2 COMMISSIONER COX: And we've gone from 3 that to twice a week, and anybody at three times a 4 week now, so we may not have the patience those people 5 have in that culture. 6 MR. TIRLONI: Good point. 7 This is one of my last items, 8 Commissioners. I've been asked to provide you with an 9 update on a situation involving the Pick 3 game on 10 Friday, January 20th. GTECH notified the Texas 11 Lottery of a printing problem on the Pick 3 game. 12 Pick 3 tickets for the January 20th day drawing may 13 have said, night drawing. GTECH fixed that problem in 14 their system, and they have agreed to pay all Pick 3 15 tickets that appear to be winners, but could not be 16 validated through the Texas Lottery's gaming 17 validation system. 18 Actually, I said that was my last item. 19 I did have one other item. I wanted to let you know 20 that we have recently launched an American Idol 21 scratch off game, and the reason I'm bringing this to 22 your attention is, we were the first jurisdiction in 23 the country to actually launch this game. We tried to 24 sync it up with the very popular TV show that is out 25 right now, and we're monitoring this game and we'll be 0213 1 providing you information about it at a future 2 meeting. 3 COMMISSIONER COX: Which vendor 4 produced this game? 5 MR. TIRLONI: Scientific Games. 6 That concludes our portion of the 7 report, but I have two slides that Acting 8 Director Sadberry is going to provide some information 9 on. 10 MR. SADBERRY: Commissioners, staff has 11 been sharing with you over the past few months data 12 that is collected by our research firm, Ipsos Reid, 13 relating to the public's perception of the Texas 14 Lottery. I also understand the staff provided the 15 Commission with a historical view of this information 16 at a recent Commission meeting. I have here this 17 afternoon the latest survey information from 18 Ipsos Reid relating to the public perception of the 19 Texas Lottery. This information was compiled in the 20 month of January. 21 The first slide before you now 22 addresses the question of, quote, how would you 23 describe your overall opinion of the Texas Lottery, 24 end quote. As shown, negative responses decreased 25 from 42 percent to 37 percent, from December to 0214 1 January, and positive responses increased from 40 2 percent to 43 percent over the same time period. 3 The second slide addresses the 4 statement, quote, the Texas Lottery is operated fairly 5 and honestly, end quote. From December to January, 6 the percentages of respondents who disagreed with this 7 statement increased slightly, from 35 percent to 36 8 percent, while those who agreed with the statement 9 also increased slightly, from 51 percent to 52 10 percent. Those neutral with the statement decreased 11 from 14 percent to 12 percent. 12 I will continue to provide you with 13 this information on a monthly basis, and staff or I 14 would be happy to answer any questions. 15 CHAIRMAN CLOWE: Thank you, sir. Is 16 that the information under this item? 17 MR. TIRLONI: Yes, sir, it is. 18 CHAIRMAN CLOWE: Then the next item is 19 number four, report, possible discussion and/or action 20 on the agency's financial status. Ms. Pyka. 21 MS. PYKA: Thank you again, 22 Commissioners. For the record, my name is Kathy Pyka. 23 I'm the Controller for the Texas Lottery Commission. 24 Tab four does include information on 25 our financial status. The first report in your 0215 1 notebook reflects transfers and allocations to the 2 Financial School Fund and the allocation of unclaimed 3 prizes as of February 2006. Total transfers to the 4 State for this period amounted to 418.8 million, and 5 this represents a two percent increase over the same 6 period in fiscal year 2005. 7 The second page of your notebook 8 reflects the detailed information for the monthly 9 transfers. Of the 418.8 million transferred, 404.8 10 was to the Foundation School Fund and 13.9 represented 11 the unclaimed prizes. 12 The next document is the simple 13 calculation of the transfer, and then the next 14 document provides you the cumulative information for 15 fiscal year 1992 to the present, with regard to the 16 transfers to the Foundation School Fund. This 17 document does note that in February, we did make our 18 transfer to the Foundation School Fund that reflects 19 now a cumulative balance of more than eight billion 20 dollars transferred to the Foundation School Fund. 21 The next tab in your notebook provides 22 you the Commission's operating budget activities, 23 beginning first with our method finance summary fund 24 and the lottery account fund, 5025. This budget with 25 the Commission is 182.3 million. Of this amount, we 0216 1 had expended 36.9 percent in the month of January. 2 And then second, our bingo operations division, funded 3 under the general revenue fund, has a budget of 13.5 4 million and has expended 28.1 percent through the 5 month of January. 6 This concludes my presentation. I'll 7 be happy to answer any questions. 8 COMMISSIONER COX: No questions. 9 CHAIRMAN CLOWE: Thank, you ma'am. 10 MS. PYKA: Thank you, Commissioners. 11 CHAIRMAN CLOWE: We'll take a short 12 break. 13 (RECESS.) 14 CHAIRMAN CLOWE: We'll come back to 15 order and go to item number eight, report, possible 16 discussion and/or action on the procurement of 17 advertising services and/or extension of the existing 18 contract. Mr. Anger. 19 MR. ANGER: Good afternoon, Chairman 20 and Commissioner. For the record, my name is 21 Michael Anger and I'm the Lottery Operations Director. 22 I would like to provide you with an 23 update of the agency's advertising services request 24 for proposals and the status of the current 25 advertising services contract. The agency issued a 0217 1 request for proposals or RFP for advertising services 2 on Thursday, February 16th. In October of last year, 3 the agency exercised an extension of its current 4 advertising services contract with DDB Dallas, the 5 agency's general market advertising vendor, extending 6 the term of that contract to April 30th, 2006. DDB 7 Dallas also agreed to assume the agency's needs in the 8 area of ethnic market advertising services following a 9 determination by The King Group not to enter into an 10 extension for the same term related to that contract. 11 At the time of the extension, staff anticipated that 12 the RFP drafting, review process, and subsequent 13 contract negotiations could be completed under that 14 time line. However, there was a need for more 15 significant changes than initially anticipated for the 16 new RFP, which included substantial revisions to the 17 compensation structure and other major components of 18 the RFP. Considerable time was also needed to draft 19 language to allow for bids containing various 20 operational models to ensure the greatest degree of 21 participation by proposers and the opportunity for the 22 agency to evaluate different models of operating 23 structure for advertising services. And new State 24 guidelines required that the RFP be submitted and 25 approved by the Texas Building and Procurement 0218 1 Commission prior to issuance. In short, the staff, 2 with input from the University of Texas advertising 3 consultant, has worked diligently to prepare an RFP 4 that reflects the agency's interest in a broad, 5 flexible, and diverse approach to the agency's 6 advertising service needs, but the completion of this 7 task has taken longer than anticipated. 8 The staff has evaluated the tentative 9 schedule of the events related to the RFP and is 10 recommending that the agency extend the current 11 advertising services contract with DDB Dallas through 12 August 31st of this year. Based on the current 13 schedule of events outlined in the RFP, that 14 anticipates the announcement of an apparent successful 15 proposer or proposers on June 30th. Staff believes 16 that this extension would allow adequate time for 17 transition to a new vendor for advertising services, 18 if appropriate, and ensure that there are no lapses in 19 the agency's advertising services in this area. 20 And that completes my report and I 21 would be happy to answer any questions that you have. 22 COMMISSIONER COX: Michael, just of 23 interest. Were we required by statute to go to the 24 Texas Building and Procurement Commission, or did you 25 just think that was a good idea? 0219 1 MR. ANGER: We're required by statute 2 to send that to them for their review and input, which 3 we did -- 4 COMMISSIONER COX: Was their input 5 helpful? 6 MR. ANGER: Yes, it was. 7 COMMISSIONER COX: Good. 8 Nothing else. 9 CHAIRMAN CLOWE: Did you have something 10 to say, Andy? 11 MR. MARKER: Good afternoon, 12 Commissioners. My name is Andy Marker, Deputy General 13 Counsel. 14 Commissioner Cox, to your question, 15 the -- there is a requirement under State law that a 16 contract stating -- State contracts over one million 17 dollars be submitted to a group called the Contract 18 Advisory Team, which is made up of representatives of 19 different State agencies, including the Texas Building 20 and Procurement Commission. So the proposal, the RFP 21 actually went to the contract advisory team. The 22 response came back from the Texas Building and 23 Procurement Commission, and we anticipate some contact 24 with the advisory team. Thank you. 25 CHAIRMAN CLOWE: And this item is for 0220 1 advice only. The Executive Director signs this 2 contract, doesn't he? 3 MR. ANGER: I believe that's correct, 4 Chairman. 5 CHAIRMAN CLOWE: Do you have anything 6 to add, Mr. Sadberry? 7 MR. SADBERRY: Chairman, I concur in 8 the comments made to you and we have the procurement 9 process in the works, and we are taking advantage of 10 the opportunities offered to us to use resources and 11 consultants that may be made available to ensure as 12 good a procurement process as we can. I understand 13 the first hurdle has been reached and then we have 14 proceeded past the first checkpoint without protest, 15 and that is a good sign. 16 CHAIRMAN CLOWE: Thank you. 17 All right. We'll go to item number 18 nine, possible discussion and/or action on the Mega 19 Millions game and or contract. Mr. Grief. 20 MR. GRIEF: Good afternoon. Once 21 again, for the record, my name is Gary Grief, Deputy 22 Executive Director of the Lottery Commission. 23 As I have previously reported to you, 24 on November 16th, I sent a letter to the Mega Millions 25 group regarding the interest of the Texas Lottery in 0221 1 Powerball. And last month, I received a response to 2 my letter from the group, which I forwarded to each 3 Commissioner individually, and a copy of this letter 4 has also been placed in your notebooks today. 5 Also, as I have previously reported, I 6 offered to the Mega Millions state lotteries to have 7 our legal team put together a position paper on Texas' 8 interpretation of Section 22 of the Mega Millions 9 agreement. And the Mega Millions group, in turn, 10 agreed to review this document, provide their own 11 legal analysis, and provide any specific concerns to 12 Texas about the existing contractual language. I 13 provided our position paper to the Mega Millions group 14 via e-mail on January 6th, and while I have seen some 15 e-mail exchanges between the member states regarding 16 this item, I am still awaiting a response from the 17 group on that matter. 18 That concludes my report. I would be 19 happy to answer any questions. 20 CHAIRMAN CLOWE: Thank you, Gary. 21 The next item, number ten, we have 22 covered that. Mr. Sadberry, did you have anything 23 further you wanted to add on that subject? 24 MR. SADBERRY: Not at this time, 25 Mr. Chairman, unless you have a question. 0222 1 CHAIRMAN CLOWE: I think we covered it 2 well and it was also covered in regard to legal advice 3 in the executive session. 4 Next, item 11, report, possible 5 discussion and/or action on the Lottery advertising 6 and promotions. Ms. McCullough. 7 MS. McCULLOUGH: Good afternoon, 8 Mr. Chairman, Commissioner. For the record, my name 9 is Chelsea McCullough. I'm the Creative Coordinator 10 for the Texas Lottery Commission. 11 With regard to upcoming advertising and 12 promotions, the next advertising campaign scheduled 13 was a winners campaign. That focuses on the on-line 14 product. Television will run in both the general 15 market and the ethnic market for three weeks beginning 16 March 6th, continuing through March 26th. This 17 campaign will be supported by radio and live reads 18 will run 100 percent Lotto Texas unless the Mega 19 Millions jackpot is more than 100 million. 20 In terms of promotions, there are a 21 variety of lottery races and selling events that are 22 mentioned in your memo. At this time I would like to 23 bring your attention to the updated logo to the 24 right -- to your right, excuse me, that refers to what 25 Kathy Pyka was mentioning in her report about the 0223 1 eight billion dollars contributed to education since 2 1997. This message has been included and updated on 3 our signage collateral as well as the Web site. 4 Finally, Commissioners, in the last 5 Commission meeting, you had asked that staff prepare 6 information with regard to advertising expenditures 7 for the instant versus the on-line games. We're 8 prepared to speak to that. Following is advertising 9 expenditures for FY '05 and FY '06 year to date. For 10 FY '05 you will see that there is a difference between 11 the FY '06 to date. We have a number of on-line 12 campaigns scheduled for FY '06 and we're believing 13 that the FY '06 total will look similar to FY '05, 14 which is about a 31/69 percent split between the 15 instant and on-line product. 16 That concludes my report and I'm happy 17 to answer any questions you may have. 18 COMMISSIONER COX: Is there something 19 more you can tell us about how the allocation of the 20 advertising dollars are almost the inverse of revenue? 21 We've got two-thirds of the advertising dollars is 22 going to the on-line game and which -- on-line games, 23 which produce under one-third of the revenue. How 24 does that -- how did we get there? 25 MR. ANGER: I might be able to respond 0224 1 to that, Commissioner. And you're absolutely correct. 2 It's a -- you know, basically, a two-to-one margin in 3 support of the on-line product in FY '05. Some of 4 that has to do with, the instant product has been 5 doing well over the last several years and continue to 6 increase in overall sales. And so part of it is a 7 philosophical approach. Part of it is trying to put 8 dollars behind the product line, if you will, that has 9 not performed as well, to try to help that product. 10 COMMISSIONER COX: So that's the, if it 11 ain't broke, don't fix it theory. Then there is the 12 other theory. 13 MR. ANGER: Well, and there is a -- and 14 the secondary piece of that is, also, there are 15 sometimes things in -- and last year was an example of 16 that -- there are things that are somewhat out of our 17 control. Being a member of Mega Millions, California 18 decided to join Mega Millions last year, which changed 19 the matrix for that game, which put us in a position 20 where we needed to go out and put new advertising 21 support behind that product to communicate to the 22 public about the changes to the game, and get the word 23 out there about changes to that game. And so that was 24 something that came up during the course of the year, 25 and so we had a large campaign associated with that 0225 1 that allocated dollars to the on-line side. Now, as 2 you'll see, the mix is roughly 50/50 right now. We 3 do, in looking at the remainder of the fiscal year, 4 have probably more of a plan weighting toward the 5 on-line product. We've seen a little of a weighting 6 toward the instant product in the first part of this 7 year. We had our holiday instant ticket scratch 8 campaign, which we showed to you in a prior Commission 9 meeting. I believe we showed you the television spots 10 relating to that. And that's something that we've 11 typically done in the past. And then we've also had 12 an advertising campaign for the World Poker Tour, 13 Texas Hold 'Em game. So that's also slated some 14 monies toward the instant products side here in the 15 first part of our year. 16 COMMISSIONER COX: Is our billboard 17 advertising exclusively for on-line games? 18 MR. ANGER: The jackpot boards, yes. 19 But we also do outdoor boards that are general in 20 nature, and we've been experimenting with some 21 strategies involving doing some outdoor support for 22 the instant product as well. So we did that for Texas 23 Hold 'Em, for instance. We did it for our holiday 24 advertising campaign as well. 25 COMMISSIONER COX: So we are looking to 0226 1 support the growing product line while not abandoning 2 the declining product line. 3 MR. ANGER: That's correct. 4 COMMISSIONER COX: And you think we've 5 got it pretty well balanced, Michael? 6 MR. ANGER: I do. And we adjust 7 according to what we're out there in the marketplace 8 doing with the products, and I think that's the 9 important thing. We plan in advance and we look at 10 the year, but we're also in a situation where we're 11 flexible enough to adjust if we decide to make 12 changes, for instance, to a particular on-line 13 product, we can adjust and move dollars as we need to, 14 as we did with Mega Millions. 15 COMMISSIONER COX: Thanks, 16 Mr. Chairman. 17 CHAIRMAN CLOWE: Michael, if you know, 18 and perhaps if you don't, Robert might. For the 75 19 percent of our sales that are instants, what is the 20 weighted average paid to the State? What percent? 21 MR. ANGER: I want to say -- I'm 22 looking behind me. I'm wanting to say, the overall 23 instant payout percentage is approximately 67 percent, 24 right now. 25 MR. TIRLONI: Overall prize payout. 0227 1 MR. ANGER: So it's 67 percent, with 2 seven percent to administration and five percent 3 commission to the retailers. That puts us at about 79 4 percent, so around 20, 21 percent in revenue to the 5 State on the instant product as a whole. 6 CHAIRMAN CLOWE: Okay. Thank you. 7 Thank you, Ms. McCullough. 8 Next is item number 12, report, 9 possible discussion and/or action on HUB and/or 10 minority business participation, including the 11 agency's Mentor Protege program and/or approval of the 12 agency's FY 2006 Minority Business Participation 13 Report. Mrs. Bertolacini. 14 MS. KIPLIN: Mr. Chairman, we've got a 15 notice issue on the last part of this -- Mr. Chairman, 16 we had a notice issue on the last part of this, where 17 it says, agency's fiscal year 2006 Minority Business 18 Participation Report. It really should say fiscal 19 year 2005. And in an abundance of caution, I talked 20 to the staff about whether it would pose an issue for 21 them timing-wise, if there are any deadlines, critical 22 deadlines, and I have been informed that there are 23 none. And so, with that, I would like to request that 24 we pass that item. It really should have said fiscal 25 year 2005. 0228 1 CHAIRMAN CLOWE: Joyce, we'll look 2 forward to hearing from you next month. 3 MS. BERTOLACINI: Okay. I will just go 4 ahead and cover the regular monthly report. 5 CHAIRMAN CLOWE: That's great. The HUB 6 participating and minority business. Great. 7 MS. BERTOLACINI: And for the record, 8 my name is Joyce Bertolacini, Coordinator the TLC's 9 Historically Underutilized Business program. 10 And included in your notebooks are two 11 reports, the December and January monthly HUB minority 12 contracting activity reports, which include all fiscal 13 year 2006 expenditures paid from September 1st, 2005, 14 through December 31st, 2005, and January 31st, 2006, 15 respectively. Our total qualifying expenditures as of 16 January 31st, 2006, were 57.3 million, and our 17 estimated HUB minority utilization was 15.9 million, 18 which equates to 27.81 million -- I'm sorry. Percent. 19 Whoa. 20 I don't have any updates at this point 21 about our mentor protege, but I do expect I will have 22 something for you next month. And I would be happy to 23 answer any questions that you have. 24 CHAIRMAN CLOWE: Do we continue to lead 25 that effort among State agencies? 0229 1 MS. BERTOLACINI: Well, I haven't 2 checked lately to see how many relationships other 3 agencies have. At this point we do have two, but we 4 will probably be having to regenerate the 5 relationships fairly quickly in order to stay at that 6 level. 7 CHAIRMAN CLOWE: The mentor protege. 8 MS. BERTOLACINI: Right. The 9 relationships. 10 CHAIRMAN CLOWE: That's great. That 11 takes a lot of work. You've got to spend some time on 12 that. And then how do we rank with other agencies in 13 regard to our HUB activity? 14 MS. BERTOLACINI: Right now, we will be 15 having the six-month report come out of the Texas 16 Building and Procurement Commission approximately 17 March 15th, so we're heading into the last few days of 18 the six-month period. And probably next month, 19 depending on the timing of the meeting, I may have a 20 preliminary report to give you at that time. 21 CHAIRMAN CLOWE: You don't have an idea 22 today? 23 MS. BERTOLACINI: Not for fiscal year 24 '06. Last year, I think we covered how we performed 25 in relation to the other agencies. And, again, it 0230 1 depends on where we fall with our total expenditures, 2 whether included in the top ten or whether we fall 3 below that. They do a list of the top 50 highest 4 spending agencies, and that's usually where we look to 5 see where we are. 6 CHAIRMAN CLOWE: All right. Well, we 7 are very interested in that and continue to be 8 supportive of that effort and want to stay abreast of 9 that issue, if you are able to give us that report. 10 MS. BERTOLACINI: I will definitely try 11 to bring something back in March, along with the FY 12 '05 minority business participation report. 13 Thank you. 14 CHAIRMAN CLOWE: Thank you. 15 Next, item 13, report, possible 16 discussion and/or action on the agency's contracts. 17 Mr. Jackson. 18 MR. JACKSON: Good afternoon, 19 Commissioners. For the record, my name is Tom 20 Jackson. I'm the Purchasing and Contracts Manager for 21 the agency. 22 In your notebooks under agenda item 23 number 13 is a report on the prime contract that has 24 been updated for your review. If you have any 25 questions, I would be happy to respond. 0231 1 CHAIRMAN CLOWE: Thank you, Tom. 2 Next, item 14, report, possible 3 discussion and/or action on the 79th legislature. 4 Ms. Trevino. 5 MS. TREVINO: Good afternoon, 6 Commissioners. For the record, I'm Nelda Trevino, the 7 Director of Governmental Affairs. 8 And I want to provide a very brief 9 update related to the House Licensing and 10 Administrative Procedures Committee. As you're aware, 11 the committee held a hearing in Fort Worth on February 12 the 16th, and a copy of the hearing agenda is included 13 in your notebook. In response to requests from 14 Chairman Kino Flores, both Anthony and Gary provided 15 updates on various items. Additionally, information 16 was provided related to the committee's interim charge 17 related to the lottery. 18 Also, on February the 3rd, Lieutenant 19 Governor Dewhurst issued interim charges to the Senate 20 committees. While there are some broad charges 21 applicable to all State agencies, there are no charges 22 specific to the Texas Lottery or the Charitable Bingo. 23 And this concludes my report and I'll 24 be happy to answer any questions. 25 CHAIRMAN CLOWE: Were you going to say 0232 1 anything about the appearance that Mr. Sadberry and 2 Mr. Grief made in Fort Worth on the 16th? 3 MS. TREVINO: Yes, sir. Chairman 4 Clowe, as I mentioned, as Chairman Flores had 5 requested some updates on a couple of matters, and so 6 Anthony and Gary addressed the committee on a variety 7 of issues that included the GTECH transaction that has 8 been discussed here at the Commission meeting; 9 consideration also on the Lotto matrix rule change 10 that has also been discussed today; just a very brief 11 update that was also provided regarding some of the 12 State Auditor's Office audits that are currently 13 underway here at the agency; and then again, specific 14 to the interim charge, that the -- that the committee 15 is undertaking, Gary did provide a report on a couple 16 of those revenue-enhancing opportunities. 17 CHAIRMAN CLOWE: Great. Thank you, 18 Nelda. 19 Next, item 15, report, possible 20 discussion and/or action on the agency's strategic 21 plan for 2007 through 2011. Mr. Grief. 22 MR. GRIEF: Good afternoon again 23 Commissioners. For the record, Gary Grief, Deputy 24 Executive Director. 25 Commissioners, State agencies are 0233 1 required to submit a strategic plan every two years, 2 and our next plan is due in June of 2006, and is going 3 to focus on fiscal years 2007 through 2011. The basic 4 format of that strategic plan is determined by the 5 Legislative Budget Board, but State agencies do have 6 quite a bit of leeway regarding the content and 7 presentation of the information. 8 I would like to introduce you today to 9 Mr. Robert Elrod, External Communications Specialist 10 in our Media Relations Division, who I have asked to 11 step up and serve as the project manager for the 12 development of our agency's strategic plan. Robert 13 has been and will be working very closely with the 14 management team as our plan comes together over the 15 next several months. 16 As we develop our new strategic plan, 17 we want to ensure that it complements our agency 18 business plan and that it's an accurate reflection of 19 where this agency wants to be and needs to be over the 20 next five years. We will once again be reviewing our 21 agency budget structure, and we will also be looking 22 at our agency performance measures to determine their 23 relevance and importance to our mission and our 24 vision, and we will make recommendations in that 25 regard if we find that there are opportunities for 0234 1 improvement. Although our previous submissions of 2 strategic plans have been deemed acceptable by the LBB 3 and the Governor's Office and, in many cases, 4 commended for their content, we always want to do 5 better. And we're going to use this exercise as an 6 opportunity to self examine. 7 As we move through the development of 8 the strategic plan, I'll be asking Robert to provide 9 the Commission with updates at each Commission 10 meeting, and Robert has his first update for you 11 today. 12 MR. ELROD: Good afternoon, 13 Commissioners. My name is Robert Elrod. I'm an 14 External Communications Specialist with the agency. 15 As Gary said, I'm here today to give 16 you a very quick update on the agency's fiscal 2007 to 17 2011 strategic plan, which is due to the LBB in June. 18 We formed a team and began work on this 19 project late last year. So far we've completed a 20 detailed project plan and time line. We're currently 21 drafting the external and internal assessments section 22 of the plan, and then the graphics department has 23 submitted a cover design for approval. 24 Meanwhile, Kathy Pyka and her staff 25 have been preparing the updates to the agency's budget 0235 1 structure performance measures. And we will keep you 2 updated on our progress as we move forward, and unless 3 you have any questions, that concludes my report. 4 COMMISSIONER COX: I don't have a 5 question on this, Mr. Chairman, but I do have a 6 question on a related subject for Gary, I guess. 7 CHAIRMAN CLOWE: Sure. 8 COMMISSIONER COX: Gary, I haven't 9 heard anything recently on the business plan, and 10 maybe I just forgot. Maybe I heard and forgot. I 11 remember we talked about putting the progress toward 12 the business plan on the Web site. And I thought I 13 remembered hearing someone assigned responsibility for 14 that, but I don't remember having any reports. 15 MR. GRIEF: Commissioner, you should 16 have seen from me, I am thinking it was in January, 17 perhaps December, a six-month update. I'm providing 18 the Commissioners with updates every six months as to 19 how we're progressing on the 23, I believe, action 20 plans in the business plan. I will be happy to -- 21 COMMISSIONER COX: Would that have been 22 a written thing that you sent in the weekly packet, 23 let's say? 24 MR. GRIEF: Probably -- I think I sent 25 that by e-mail perhaps, but I'll double check that -- 0236 1 COMMISSIONER COX: Would it be possible 2 at a future meeting, whichever one makes sense, to 3 give us a presentation on how that is going and how 4 we're keeping the plan up to date to deal with changes 5 and circumstances since it was prepared, how we're 6 monitoring progress for it, et cetera? 7 MR. GRIEF: Be glad to. 8 COMMISSIONER COX: Thank you. 9 Thank you, Mr. Chairman. 10 CHAIRMAN CLOWE: And thank you, Robert. 11 Your office is right next to Bobby Heith's. Right? 12 MR. ELROD: Yes, I'm afraid so. 13 CHAIRMAN CLOWE: Okay. We know how to 14 find you. 15 Thank you, Gary. 16 Next is item number 16, consideration 17 of, possible discussion and/or action on the external 18 and internal audits and/or reviews relating to the 19 Texas Lottery Commission and/or the Internal Audit 20 Department's activities. Ms. Melvin. 21 COMMISSIONER COX: Mr. Chairman, I am 22 afraid I sent Ms. Melvin home. She was not feeling 23 well, and one of the lawyers thought it would be a 24 good idea to get her out of here if she was 25 contagious. 0237 1 CHAIRMAN CLOWE: I think that's a great 2 idea. We'll pass on this item. We don't want any 3 contagion going on around here. And there is a lot of 4 that going on, so I'm glad you made that move. 5 Next is item number 17, consideration 6 of and possible discussion and/or action on the Texas 7 Lottery Commission meetings. I see 8 Director Sadberry's name and Ms. Kiplin's name there. 9 Are y'all going to lead this discussion? 10 MR. SADBERRY: It should be yours, 11 Mr. Chairman. We can make a preface, but in the 12 interest of time, it's up to you. It's actually a 13 comment and discussion item for the Commissioners. I 14 can lay out the preface for it for the record. 15 CHAIRMAN CLOWE: Sure. 16 MR. SADBERRY: Briefly. My name is 17 Anthony Sadberry, Acting Executive Director of the 18 Lottery Commission. 19 This agenda item, Commissioners, is 20 with regard to the possibility of changing the 21 frequency of Commission meetings. Currently the 22 Commission is meeting on an average of once every 23 month. However, due to the large number of agenda 24 items that are brought before the Commission, on some 25 occasions, or agenda items that may generate in-depth 0238 1 discussions, there have been instances where meetings 2 have taken the entire day. I know it's the intent and 3 desire of Commission staff members to make complete 4 and accurate presentations to the Commission on 5 subject matters that relate to the way this agency 6 conducts its business. There will be times that the 7 content of the presentation, the amount of information 8 being provided, or the discussion that the 9 presentation may initiate will lengthen the meeting 10 substantially. While we want to be considerate and 11 mindful of interested parties that are in attendance 12 at our meetings and offer the public testimony they 13 may have regarding certain agenda items, it is also 14 the desire that staff be allowed ample time to make 15 their presentations and allow time for discussion if 16 needed. 17 The Commission, as we all know, as 18 indicated by today's session, has always been 19 considerate of these interested parties and has tried 20 to accommodate them by discussing items of interest to 21 them early in the meeting. However, in some 22 instances, due to the number of items on the agenda, 23 it has not been possible to accommodate all interested 24 parties in attendance. Therefore, it might be of 25 interest to the Commission to discuss publicly the 0239 1 possibility of increasing the frequency of Commission 2 meetings. 3 I would be glad to answer any questions 4 or assist the Commissioners in their deliberation of 5 this matter. And Kim, of course, the General Counsel, 6 is available to address any legal questions you might 7 have. 8 CHAIRMAN CLOWE: If I may, Commissioner 9 Cox, and Director Sadberry, and anyone else who wants 10 to comment on this. When I came on the board, 11 Commissioner Sadberry and Commissioner Miers were on 12 the board. We used to have some marathon meetings, 13 and I think that prior to my coming on board, there 14 were longer meetings that you led through. Our 15 meetings have generally not run this late, but some 16 have. And there are a couple of issues that I wanted 17 to just throw out for discussion relating to the 18 staff's work and people who come here to appear before 19 the Commission. I wouldn't want to burden the staff 20 with preparation responsibilities beyond what I think 21 is the excellent job you do right now in presenting in 22 Commission meetings. My take is that the meetings are 23 well organized, they are crisp, they are informative, 24 and it's very seldom that the reports are not factual, 25 complete, very professional. 0240 1 As the day goes on, we do try to get to 2 those items earlier where people have come in from the 3 outside so as not to tie them up. But last month, 4 there was a lady who came on a contested case matter, 5 she did not announce herself as being here to appear 6 before the Commission, and we kept her waiting all 7 day, and then had to find against her, I think, about 8 4:00 or 4:30 in the afternoon. And I was really sorry 9 that that happened to a member of the public. I've 10 appeared as a citizen before boards and I appear 11 before the legislature, and you know when you sit in 12 an area waiting for a -- for an appearance for six or 13 eight hours, by the time you get there, you're worn 14 out. And today is a good example. We had weighty 15 issues this morning that required deliberation, and 16 now here we are at 4:00 o'clock and we haven't taken 17 up the contested cases. We haven't heard your report. 18 We haven't heard Billy's report. And I just think 19 it's human nature, by the time you get starting at 20 8:30 and you're intense -- we really don't take a 21 break. We eat in executive session and you all catch 22 lunch when you can. When it comes to this hour and 23 we're dealing with these contested cases, we're not 24 going to deal with them, I don't think, the way we 25 would if it was 8:30 in the morning. That's just a 0241 1 fact of life. 2 Now, we normally have three 3 Commissioners, and we're in a unique situation right 4 now that we have two. And Commissioner Cox, you live 5 here, and I am here frequently, but every time I'm 6 here, I see your car, so I know that you're here a 7 lot. I have the feeling that maybe meeting twice a 8 month would not be a burden on you like it would be a 9 Commissioner from out of town. And it wouldn't be a 10 burden on me, because I am here anyway. So we may be 11 in a period of time where we might experiment with 12 this a little bit and not cause any problems to a 13 Commissioner that might have to fly in and fly out, 14 like Commissioner Sadberry did when he was serving on 15 the board. 16 I'm not campaigning for this. I'm just 17 searching for a better while to do the business of the 18 agency, and I would really like to have an honest and 19 straightforward discussion of it with some comment 20 about whether it's a good idea or a bad idea, with no 21 pride of authorship on my part whatsoever. 22 And I also thought, if we moved in this 23 direction, we might say, unless otherwise noted, we 24 would meet on the first Wednesday and the third 25 Wednesday of every month, to give some orderliness to 0242 1 it, so that, particularly where we have deadlines on 2 rules and cases and that sort of thing, contracts, 3 presentations, the staff would have a target date and 4 could shoot for that, and it would be an accommodation 5 where you are time certain on some requirements. 6 Those are my thoughts, and I would 7 appreciate very much hearing your reaction. If you 8 think I'm crazy, I'll be happy if you tell me that. 9 COMMISSIONER COX: No, I don't think so 10 at all. I think that when I get to 4:00 o'clock, and 11 I got here at 8:30 and I usually don't sleep very well 12 before these meetings and -- and I'm not thinking as 13 clearly as I might. And particularly if you get to 14 something like the contested cases, we need to be 15 thinking clearly. 16 Did you have in mind that we might 17 split the standing items so that some of them, for 18 instance, the nonfinancial type items are addressed on 19 the first meeting, and then the financial type items 20 where Kathy has to get the books posted, et cetera, 21 would be at the second meeting of the month. And 22 maybe Ms. Kiplin and Director Sadberry and Gary and 23 Billy also has some ideas about how things might be 24 divided so that we had a procedure for some of them to 25 repeat, but maybe not all of them. 0243 1 CHAIRMAN CLOWE: I think that's a great 2 idea. And there are certain subjects that only need 3 to be dealt with once a month. And yet if there are 4 current happenings, anything could go on the agenda, 5 so it would be a broad notice so it could be a catch 6 early on instead of being smack up against the 7 deadline. And, you know, I'm not sure we could do 8 this. We've got normally three Commissioners who are 9 not full-time and, you know, when I was at the 10 Railroad Commission, we met every Monday, and that was 11 just regular as clockwork. And I'm not suggesting we 12 get anywhere near that. But I think we're in a golden 13 period right now where you and I are available, and if 14 it would be helpful to the staff and it would handle 15 the business expeditiously -- and I agree with your 16 comments about at the end of the day, you just really 17 probably perform a little less than you do at the 18 beginning of the day, and we want to give everything 19 good treatment. It's something we might look at. 20 COMMISSIONER COX: I'm available for it 21 if you and the staff think it would be a good thing. 22 CHAIRMAN CLOWE: What's your thought, 23 Director Sadberry? 24 MR. SADBERRY: Commissioners, the staff 25 has considered this matter in anticipation of your 0244 1 discussion of same. Staff is here to respond as the 2 Commissioners may prefer. I think the point you make 3 concerning having standing days of the month, by that 4 sequence within the week, like the first or second or 5 third day of a certain week is good, and I think would 6 be helpful to the staff getting to go to multiple 7 meetings per month. And also, that items that do not 8 need to recur, what the staff would like is to know 9 that you would or would not expect a report, if you 10 will, or some comment at each meeting if that's not 11 absolutely necessary, in order to make it clear that 12 they are not to prepare unnecessarily just to be 13 present and available to you at each meeting. But if 14 that be the case and they're needed, they're prepared, 15 we are prepared to do so. 16 I certainly recall the days when we met 17 into the night, many times. There were reasons for 18 needing to do that. There were back-to-back meetings 19 multiple days many times, and each day was a full day. 20 I think that's not optimum, and as we go down the 21 track, we probably want to modify to be in accord with 22 what is the best practice. And if you are willing and 23 if you desire this, from the staff's standpoint, it 24 can be done. I would certainly propose, if you 25 consider it, Mr. Chairman, as you said, perhaps take a 0245 1 look at it and see how it works. We probably can't 2 know fully, until we get into it, what it would do for 3 the Commissioners and the staff, whether it would be a 4 positive, a definite positive, or not. It sounds on 5 the surface that it would be a positive, particularly 6 as you indicate, contested cases and otherwise, and 7 interested members of the public, we might anticipate 8 that would decrease and if they were meeting into the 9 5:00 or 6:00 o'clock range, it might tend to do that 10 sufficient -- enough time to where avoiding it by 11 having some protocol that the public knows about and 12 can prepare for would be a positive thing and a move 13 in the right direction. I think, without question, 14 staff is here and available and ready and willing to 15 do that if that be your preference. 16 CHAIRMAN CLOWE: You know, I can recall 17 when Commissioner Olvera was serving, he had 18 transportation problems, and he would announce, in 19 many cases, that he had to depart by a certain time. 20 And Commissioner Whitaker had a flight to catch and, 21 you know, we would press to get things done. And I 22 can remember when you and Commissioner Miers and I 23 were serving together, we would have executive 24 sessions that would last for hours and hours, it 25 seemed. It was a learning experience for me. You had 0246 1 great stamina, and it just -- if we could spread it 2 out and, you know, as you say, in the agenda maybe we 3 could just say, no report, and that would be it. 4 Billy, what is your reaction? 5 MR. ATKINS: Mr. Chairman, when you 6 first raised this issue, we surveyed our 7 contemporaries throughout North America, and the model 8 that we found that we thought worked the best was the 9 state of Washington. And that was, particularly, if 10 you took into consideration the public and given the 11 size of Texas and travel requirements. The state of 12 Washington holds two regularly-scheduled meetings a 13 month that are back to back, and they break up the 14 meetings with certain items on a Thursday, the 15 remaining items on a Friday. The only issue that we 16 saw with the situation that you described, having a 17 meeting on the first Wednesday of the month and maybe 18 the third Wednesday of the month is, conceivably there 19 could be items that members of the public would need 20 to come to for both of those. And so depending on 21 where they were coming from, that would mean two 22 separate occasions for travel as opposed to traveling 23 at one time, maybe having to stay over a night, but 24 still minimizing their travel requirements. 25 Other than that, everything that, you 0247 1 know, Anthony said, I think would hold true for bingo 2 related matters. We can structure it any way that 3 it's the most convenient for the Commissioners and 4 makes it the most meaningful. I would just throw in 5 that one element as it relates to the public and their 6 potential travel requirements. 7 CHAIRMAN CLOWE: That's a good point. 8 And it's interesting that, you know, you look around 9 the room at this hour of the day, there is nobody 10 here, except Ramon, and he is sort of an insider. Who 11 else? 12 COMMISSIONER COX: And the press. 13 CHAIRMAN CLOWE: Oh, there is Liz. 14 Well, she working and he is too. 15 LIZ: As soon as you take that vote, 16 I'll leave. 17 CHAIRMAN CLOWE: What did she say? 18 COMMISSIONER COX: If we take that 19 vote, she'll leave. 20 CHAIRMAN CLOWE: We ought to 21 accommodate her. And you know, Billy, we try to 22 accommodate those people we know that are coming in 23 and are here for an issue by taking them out of order 24 in the morning. But when those issues -- and usually 25 they require a lot of discussion -- are lengthy, like 0248 1 we had last month, it throws all of the rest of our 2 business into the late afternoon. And it just seems 3 like we'll never be able to try it except, I think, 4 right now. I think if we have a Commissioner that 5 lives in El Paso or, you know, even Houston, certainly 6 the Valley, I don't think you could ask that 7 Commissioner to come twice a month. 8 COMMISSIONER COX: Unless it's the 9 standard when he comes on. 10 CHAIRMAN CLOWE: That's right. And, 11 you know, eventually we are going to get another 12 Commissioner, and they're going to run me off one of 13 these days. 14 COMMISSIONER COX: Let's hope not. 15 CHAIRMAN CLOWE: And I would hope that 16 you would be the chairman and that, you know, we would 17 have a different situation. 18 Gary, what are your thoughts? He 19 sprung up. 20 MR. GRIEF: Glad you asked. 21 I think if we're going to consider 22 this, now is a very opportune time. And we have 23 people like Kathy Pyka, who has just come in from the 24 Railroad Commission; Mike Fernandez, Workforce 25 Commission; Kim and Bobby Heith, also from the 0249 1 Railroad Commission. Staff behind the scenes have 2 done a wonderful job of adapting to the way we do 3 business with our Commission meeting scheduling, and 4 that is, we all wait and wonder, and when that day is 5 finally established, then we start building in our 6 time lines. I think if we did have some type of 7 organized approach to it, the second and fourth 8 Tuesday of the month, something along those lines, we 9 could -- it would be a lot more efficient process for 10 staff to develop the information that you see 11 presented at every Commission meeting, we could then 12 back up from those deadlines days in advance. 13 That being said, something that I think 14 you had said, Chairman Clowe, there are certain 15 reports that would obviously be better presented just 16 once a month. 17 CHAIRMAN CLOWE: Right. 18 MR. GRIEF: The sales, the financial 19 information, et cetera, I think it would be a burden 20 on staff if they were asked to produce those any more 21 frequently than that, so -- 22 CHAIRMAN CLOWE: Well, you know, for 23 maybe -- I would point out Nelda and Chelsea, you 24 know, once they make a report, and if there is nothing 25 in two weeks that they need to comment on, they just 0250 1 say, no report, on the agenda. But it could be on the 2 agenda -- and you could help on this Kim -- so that if 3 something came up, it could be noticed so that they 4 could get in there and make a report if they wanted 5 to. But the anticipation would be that they wouldn't 6 be up every two weeks. 7 MR. GRIEF: When this item was noticed 8 up, we do have staff like Kathy, Mike, who are anxious 9 to weigh in and suggest some things. It might be 10 helpful if you would direct staff to put together some 11 ideas on paper for you to consider. Or maybe come at 12 the next meeting with an agenda item that's more 13 detailed and a suggestion on how we might approach 14 that, if you think that would be helpful. 15 CHAIRMAN CLOWE: Okay. What do you 16 think, Kim? 17 MS. KIPLIN: Well, I echo everything 18 that Gary and Anthony have said. I think -- and, of 19 course, I'm coming from that world experience not only 20 at the Railroad Commission but at the State Board of 21 Insurance. And I think having scheduled meetings and 22 having more frequent meetings during the month really 23 does help move the business of the agency. I think 24 the critical key is actually having them scheduled so 25 that whatever -- you know, for example, you said the 0251 1 Railroad Commission, the first Monday of the month. 2 You knew it -- the Monday of each week. You knew it 3 and it was something that you could plan. 4 CHAIRMAN CLOWE: We're going to start 5 the week that way. 6 MS. KIPLIN: Yeah. It ruined my 7 weekend for three years, but I'm sure you wouldn't 8 necessarily -- 9 CHAIRMAN CLOWE: You knew Commissioner 10 Nugent would be there waiting for you. 11 MS. KIPLIN: That's right. It was the 12 particular Commissioner. And I think we all know 13 that. 14 But all kidding aside, I do think it's 15 helpful to have them scheduled, because I think there 16 is a better efficiency in planning towards those 17 Commission meetings. There are things that, you know, 18 just pop out of the blue that it also be helpful for, 19 and Anthony touched on one, in particular, with the 20 contested cases and receiving a motion for a hearing 21 and then having to counter out. And if you have a 22 Commission meeting at the beginning of one month, but 23 then you're moving towards the end of the second 24 month, that becomes a challenge in terms of making 25 sure things like that don't fall through the cracks. 0252 1 And one other that came to mind was the petition for 2 rulemaking, because we do have a 60-day clock on that, 3 and it would help to -- to know when those meetings 4 are scheduled. 5 I also do agree that there are certain 6 things that are standard reports that, going from one 7 report and then another report in two weeks, you're 8 not going to hear anything new. And it -- that is 9 something that I wouldn't -- I would not want us to 10 see the staff tasked with in terms of just preparing 11 something as a -- 12 CHAIRMAN CLOWE: Absolutely. 13 Absolutely. There is -- Commissioner Cox and I won't 14 tolerate that. We just won't sit still for that. So 15 I want to take that burden away. 16 MS. KIPLIN: We also have a court 17 reporter who comes once a month and so there are 18 contract costs, but I don't think that those are 19 something that would be so significant an increase 20 that it wouldn't be absorbed by our existing contract. 21 And I think what we would find is that the meetings, 22 in the beginning, may tend to go about the same length 23 of time, but then there will be more of a pattern that 24 will -- that will flesh out. 25 CHAIRMAN CLOWE: Mary Beth, what do you 0253 1 think? 2 MS. SIMPSON: My name is Mary Beth 3 Simpson. I'm one of the Executive Assistants in the 4 Executive Division. 5 And we put the notebooks together, and 6 as long as it's noticed up, we can count back from the 7 time line, that's not a problem. The directors give 8 us the information and we're able to produce the 9 notebook pretty much in a day once we get the stuff. 10 CHAIRMAN CLOWE: And I would think 11 maybe the book would be half this size, you know, if 12 we met twice a month. 13 MS. SIMPSON: Yes, sir. 14 CHAIRMAN CLOWE: And we would be 15 finished much earlier in the day, which I think would 16 be a good thing. We -- today, for example, this whole 17 day has been taken up in this meeting, plus all of the 18 preparation that those of you went through that were 19 going to make a presentation. 20 Is there anyone else, Bobby, Steve, 21 anybody else that -- Kathy, wants to comment? 22 Michael? 23 MS. KIPLIN: While they're thinking 24 about it, one other comment I would make is, if y'all 25 remember, at the Railroad Commission, there was a -- a 0254 1 rule that if you missed the -- and it was hard 2 deadline in terms of notebook material, but if you 3 missed that deadline, you missed that week. And that 4 is something that I know has been a challenge in terms 5 of scrambling to get documents from staff and get them 6 into the -- Mary Beth and Sheila to get them into the 7 notebook. And that would be one thing I would like to 8 see that it would just go to the next -- the next 9 meeting if it wasn't obviously earth-shattering or 10 house on fire kind of a deadline, because otherwise I 11 think we're still taxing the staff on the back end. 12 COMMISSIONER COX: Mr. Chairman, a 13 couple of thoughts. 14 CHAIRMAN CLOWE: Yes. 15 COMMISSIONER COX: I think that if 16 Mr. Sadberry and staff are going to relook -- going to 17 be looking at frequency of presentation, that is, once 18 or twice a month, it might be well that they start 19 with a blank sheet of paper. Maybe once a month is 20 too much. Maybe it's only needed quarterly or 21 semiannually. So I like to see that be considered. 22 I would like consideration to a process 23 whereby if you determined, as chairman, a week before 24 the meeting that there wasn't enough to meet for, 25 you'd just cancel the meeting. 0255 1 CHAIRMAN CLOWE: And that's great 2 comment, and I totally agree. 3 COMMISSIONER COX: And then the other 4 thought I had. I serve on another board that has what 5 is called a consent agenda. And the way we work it -- 6 I don't know if you're familiar with that concept, Kim 7 or Anthony -- but we take certain routine type items, 8 committee reports, financial statements, 9 organizational chart changes, et cetera, and put them 10 in a consent agenda. People are given those in 11 advance, they read those, somebody moves for approval 12 of the consent agenda, and we've just killed six items 13 with one motion with no discussion. So I don't know 14 whether you feel they need to be read into the record 15 or whether they can just be placed into the record, 16 but that's another possibility. 17 CHAIRMAN CLOWE: Good thoughts. And I 18 want to echo what you've said about it, if we don't 19 have the need for a meeting, we would not have one. 20 And I think that would be Director Sadberry's call to 21 communicate with the Commissioners and say, we don't 22 have an agenda, there is no need to have a meeting as 23 scheduled, and we just not post one. And that 24 decision would be made ten days prior to the meeting 25 date. 0256 1 I guess it could be -- can you cancel a 2 meeting without violating protocol once you publish an 3 agenda? 4 MS. KIPLIN: Sure. You can do that. 5 It would be optimum just not to -- to know beforehand 6 and not to post, because then you've got notice out 7 and you've got to try to get notice out that you've 8 canceled, and there is -- there is always people that 9 are -- there is a disconnect. 10 CHAIRMAN CLOWE: Well, I think this has 11 been very helpful. And what I would like to suggest, 12 Commissioners Cox, if it's agreeable with you, and I 13 think we really ought to have Director Sadberry decide 14 what he thinks he ought to do, is what is most 15 beneficial for the agency. And if you will come up 16 with what you think the protocol ought to be, I would 17 suggest you communicate with Commissioner Cox and with 18 myself, and let's go on it. And thank you, Gary, for 19 the suggestion you make a proposal at our March 20 meeting, but I think we're ready to get on with it. 21 MR. GRIEF: Great. 22 CHAIRMAN CLOWE: And why don't you all 23 just decide what you want to do and tell us, and 24 assuming that we're in agreement, we'll go forward and 25 start a new process. And we'll change it if we need 0257 1 to. 2 MR. SADBERRY: I'll be happy to do 3 that. 4 CHAIRMAN CLOWE: Is that okay with 5 everybody? Okay. Have you got the motion? Let's get 6 Ms. Austin taken care of it. She kind of took a swing 7 at me and I want to respond to that. 8 MS. KIPLIN: I would like to go ahead 9 and hand you documents. The first is an order 10 adopting a rule. You're going to see throughout, blue 11 ink marks, because what I'm trying to do is direct you 12 to the changes. And I also want to give you an order 13 adopting the repeal of the rule, which in your action, 14 you would want to do this first. And then the other 15 one. 16 The order adopting the repeal of the 17 rule is fairly self-evident. The one paragraph that 18 we have added is the second paragraph that makes it 19 clear that the repeal is being adopted concurrently 20 with the adoption of a new Lotto Texas on-line game 21 rule, so that when somebody looks at this, they're not 22 confused over, wait a second, you just got rid of the 23 Lotto Texas rule. 24 CHAIRMAN CLOWE: All right. Sarah, I 25 think you ought to go through this and give us the 0258 1 explanation in case we have questions, please. 2 MS. WOELK: Thank you. 3 This didn't require a whole lot of 4 changing because the only real substantive change was 5 changing the rounding up. After I came down with the 6 change, Ruth Pollan (phonetic), who I've discovered is 7 a very good proofreader, didn't like that we had said, 8 even dollar amount. She thought that could suggest 9 odd or even, so we've handwritten changed that 10 throughout to "whole amount." 11 On the first page of the order, we have 12 added a sentence, which is part of the summary of what 13 we've done, saying that we have changed the rounding 14 to round to the nearest whole dollar as opposed to 15 always rounding down. 16 On the third page, which is sort of the 17 next level of summary, we previously had said, as in 18 the current rule, prizes will be rounded down. We've 19 just changed it to say, prizes will be rounded to the 20 nearest dollar. 21 And we've said the same thing again on 22 page four. That's partly because it had to be plugged 23 into the general structure of the rule as it was laid 24 out. 25 And then when we're responding -- when 0259 1 you're providing your response to comments, we have 2 added the new paragraph, saying, some people stated 3 that the prize payment should not be rounded down to 4 the nearest whole dollar. And then there should be 5 either be no rounding or prizes should be rounded to 6 the nearest dollar, we now just say, the Commission 7 agrees with this comment and the rule is adopted to 8 provide for rounding to the nearest even dollar 9 amount. 10 On page -- at the bottom of page 13, we 11 added a paragraph to capture the additional public 12 comment. It just says that at this meeting you 13 solicited comment from Ms. Nettles and Mr. Rivera, and 14 that they mostly commented on issues that have been 15 previously discussed, but they also discussed the 16 issue of perhaps lower starting jackpots or rolling 17 the jackpot in smaller increments. And the response 18 is, the new proposed rule does not address either of 19 those issues, so no change was made. 20 And then, finally, at the very end, on 21 page 19, there is the text regarding the second prize, 22 and the text regarding the third prize. And I'll read 23 the one about the third prize; otherwise, they're 24 identical. A payment made to a person -- 25 CHAIRMAN CLOWE: Wait a minute, Sarah. 0260 1 What page and what -- 2 MS. WOELK: Page 19. 3 CHAIRMAN CLOWE: Okay. 4 MS. WOELK: And there is a -- there are 5 two different capital C's on that page, one at the 6 very top and one in the middle. The top one is the 7 second prize, the middle one is third prize. They 8 say, a payment made to a person for a share of the 9 third prize for the drawing shall be rounded to the 10 closest whole dollar amount. And Mike Anger made the 11 call on what you do with 50 cents. We're saying here 12 it goes up, so an amount of exactly 50 cents will be 13 rounded up to the nearest whole dollar amount. The 14 only thing that you hadn't actually discussed was the 15 50 cents issue. 16 COMMISSIONER COX: Which, actually, a 17 rounding program will round it down, but -- wouldn't 18 it, Kathy? But in the interest of fairness and 19 immateriality -- 20 MS. PYKA: I was voting for Mike. 21 MS. KIPLIN: Commissioners, what you 22 have on the hand corrections, there is also a typo 23 that I think Mr. Grief caught. And it wasn't 24 substantive, but we'll include it. The changes will 25 be made. What we're asking is that you go ahead and 0261 1 adopt and sign the order, but note that your signature 2 on the last page will not affect the formatting, 3 because I think these changes, even the whole and then 4 including that word, won't throw the pages off. 5 CHAIRMAN CLOWE: Okay. Now, Robert, 6 can you put your slide back up that shows us the 7 adoption of this rule and what the prize levels are so 8 that we can see that again? 9 MR. TIRLONI: Chairman, that should be 10 the -- that should be it, the proposed six-of-54. 11 COMMISSIONER COX: And if I remember 12 right, the actual payout percentage is estimated to be 13 53 percent. 14 MR. TIRLONI: 53 and change, that's 15 correct. Over time. 16 CHAIRMAN CLOWE: Any questions? 17 COMMISSIONER COX: No, sir. 18 CHAIRMAN CLOWE: Have you got a copy of 19 this for Ms. Bite -- or Ms. Austin? 20 MS. WOELK: Why don't you give me a 21 call (inaudible). 22 MS. KIPLIN: Sure. 23 CHAIRMAN CLOWE: Do you want to make 24 the motion? 25 COMMISSIONER COX: Kim, help me with 0262 1 forming the motion Chairman Clowe is asking for. 2 MS. KIPLIN: Can I ask you to make two 3 motions just to make sure it's clear for the record. 4 The first thing, the motion -- 5 CHAIRMAN CLOWE: This one is first, the 6 repeal of this -- 7 MS. KIPLIN: You're making a motion to 8 adopt the repeal of the Lotto Texas on-line game rule, 9 which is 16 Texas Administrative Code Section 401.305. 10 COMMISSIONER COX: Okay. And you want 11 me to make that as a separate motion? 12 MS. KIPLIN: Yes. 13 COMMISSIONER COX: Okay. Mr. Chairman, 14 I move the repeal of Rule 16 TAC, paragraph 401.305 15 related to the Texas -- Lotto Texas on-line rule. 16 CHAIRMAN CLOWE: I second the motion. 17 All in favor, please say aye. Opposed, no. The vote 18 is two-zero in favor. 19 And then the next one we want is the 20 adoption of the new rule. 21 COMMISSIONER COX: Okay. 22 MS. KIPLIN: And -- 23 COMMISSIONER COX: And, Mr. Chairman, I 24 move the adoption of the new Rule 16 TAC paragraph 25 401.305 related to the Lotto Texas on-line game. 0263 1 MS. KIPLIN: And in this one you're 2 making that motion to adopt this rule with changes to 3 the proposed text, as published in the December 9th, 4 2005 issue of the Texas Register. 5 COMMISSIONER COX: With changes as 6 presented in the December 9th, 2005, Texas Register. 7 MS. KIPLIN: Commissioners, staff is 8 recommending an effective date for the -- for this 9 rule be April -- 10 MR. TIRLONI: April 23rd. 11 MS. KIPLIN: So we want to make sure 12 you all are aware that it will be effective that date 13 versus the default, which would be 20 days from the 14 date of filing. 15 CHAIRMAN CLOWE: Very good. 16 Any further questions? 17 COMMISSIONER COX: I moved but I didn't 18 hear a second. 19 CHAIRMAN CLOWE: Oh, did I not second 20 that? 21 MS. KIPLIN: Well, let's do it just to 22 be on the safe side. 23 CHAIRMAN CLOWE: I second. All in 24 favor, please say aye. Opposed, no. The vote is 25 two-zero in favor. 0264 1 MS. KIPLIN: Along with the effective 2 date. 3 CHAIRMAN CLOWE: Say again? 4 MS. KIPLIN: Along with the -- 5 COMMISSIONER COX: Right. With an 6 effective date of April 23rd, 2006. 7 CHAIRMAN CLOWE: Very good. 8 Any further questions or comments? 9 Okay, Ramon. You've got to stay. 10 Next is item 18. I don't believe we 11 need to call that item. I don't think there is 12 anything that requires discussion there. That could 13 be a pass, can't it? 14 COMMISSIONER COX: I haven't seen 15 anything, Mr. Chairman. 16 CHAIRMAN CLOWE: Okay. Fine. 17 Then I think we're ready to go with 18 Mr. White to the item 21, consideration of the status 19 and possible entry of orders in dockets represented by 20 the letters A through N. We have acted on dockets 21 represented by the letters O and P. 22 MR. WHITE: Yes, sir. We have 11 23 lottery cases before you today, 11 proposals for 24 decision, all for failing to maintain adequate funds 25 in their accounts to pay for Lotto tickets sold. In 0265 1 all 11 cases, the administrative law judge recommended 2 revocation of their licenses and the staff recommends 3 that adopt those proposals for decision in all 11 4 cases. 5 CHAIRMAN CLOWE: Now, are those 6 represented by the letters A through K? 7 MR. WHITE: Let me double check that. 8 A through K, yes, sir. 9 MS. KIPLIN: I've got A through L. 10 CHAIRMAN CLOWE: It's going to be 12 if 11 it's L. 12 MR. WHITE: A through L. 13 CHAIRMAN CLOWE: So it's 12 cases. 14 MR. WHITE: 12, sir. I apologize. 15 CHAIRMAN CLOWE: I move the adoption of 16 the staff's recommendation to revoke the licenses. 17 COMMISSIONER COX: Second. 18 CHAIRMAN CLOWE: All in favor, please 19 say aye. Opposed, no. The vote is two-zero in favor. 20 MR. WHITE: And you have two bingo 21 cases, two proposed agreed orders. One, American 22 Legion Post 29, there was allegation of failing to 23 have the operator present during a bingo occasion. 24 The organization has acknowledged the violation and 25 agreed to a 230 dollar administrative penalty, and 0266 1 sending an officer to a bingo training. And the other 2 was Jewish Women's International 1045. There the 3 allegation was, they failed to have a properly 4 designated operator present during a bingo occasion. 5 And the organization has agreed to send all of its 6 operators who have not previously attended bingo 7 training to bingo training. 8 CHAIRMAN CLOWE: And that 9 administrative penalty was 230 dollars? 10 MR. WHITE: Yes, sir. Let me double 11 check on that. 12 Yes, sir. 230 dollars. 13 CHAIRMAN CLOWE: I move the adoption of 14 the staff recommendation in the cases represented by 15 the letters M and N. 16 COMMISSIONER COX: Second. 17 CHAIRMAN CLOWE: All in favor, please 18 say aye. Opposed, no. The vote is two-zero. Thank 19 you, Mr. White. 20 Mr. Sadberry, if you'll give us just a 21 minute, we'll sign these orders and then we'll be 22 ready to hear your report. 23 MR. SADBERRY: Yes, sir. 24 CHAIRMAN CLOWE: Kim, will you make 25 sure that we haven't missed any signatures, please, 0267 1 ma'am. 2 Mr. Sadberry, will you give us your 3 report, please. 4 MR. SADBERRY: Commissioners, good 5 afternoon. This is my second official report to you 6 as Acting Executive Director of the agency. 7 After six weeks of being here, there 8 are only a few items that stand out for me that I 9 would like to bring to your attention, and they're all 10 positive. At the beginning of the month, the agency 11 marked another very important milestone. The 12 cumulative amount that the Texas Lottery has sent to 13 the Foundation School Fund now totals more than eight 14 billion dollars, and 13 billion dollars in total to 15 the State. As you know, that doesn't happen by 16 itself. It truly takes a team effort to establish 17 these noteworthy benchmarks, and that's what I have 18 found to be the hallmark of staff efforts here, the 19 willingness to work as a team, to bring the expertise 20 of the different divisions into play when deciding an 21 issue. This, I think, brings a certain level of 22 fairness to all our proceedings here. In turn, this 23 translates into a greater level of professionalism 24 among all of the employees. 25 It's important for all of the lottery's 0268 1 employees to know that they work in an environment 2 that is fair and one in which they can expect to be 3 called upon to share their know-how. I value that 4 knowledge. Personally speaking, walking into this job 5 six weeks ago was made much easier by the support I 6 have received from the staff all across the board, but 7 I make especially a note of Gary Grief. And I thank 8 him and all agency staff for their good wishes and 9 their valuable help. 10 As you know, we have a special session 11 of the legislature coming around the corner in a 12 matter of weeks. To that end, I am in an ongoing 13 conversation with the governmental relations staff, 14 Nelda, Collin, and Melissa, not just about the issues 15 that affect the agency, but also those in which we can 16 serve as a resource to legislators. Slowly but 17 surely, I am making the rounds at the Capitol, meeting 18 with legislators and getting their thoughts on how 19 they believe the Texas Lottery can better serve the 20 State. Thank you. 21 CHAIRMAN CLOWE: Thank you, Mr. 22 Sadberry. We're very pleased that you are here. 23 COMMISSIONER COX: Yes, we are. 24 MR. SADBERRY: Thank you. 25 CHAIRMAN CLOWE: Next, item 23, report 0269 1 by the Charitable Bingo Operations Director, 2 Mr. Atkins. 3 MR. ATKINS: Commissioners, I don't 4 have anything to add to my report that is in your 5 notebook. I would be happy to answer any questions 6 you may have. 7 CHAIRMAN CLOWE: Thank you, Mr. Atkins. 8 Is there anyone wishing to make public 9 comment to the Commission at this time? 10 Is there any other business to come 11 before the Commission at this time? Thank you all 12 very much. We are adjourned at 4:33 p.m. 13 14 15 16 17 18 19 20 21 22 23 24 25 0270 1 REPORTER'S CERTIFICATION 2 3 STATE OF TEXAS ) 4 COUNTY OF TRAVIS ) 5 6 I, BRENDA J. WRIGHT, Certified Shorthand 7 Reporter for the State of Texas, do hereby certify 8 that the above-captioned matter came on for hearing 9 before the TEXAS LOTTERY COMMISSION as hereinafter set 10 out, that I did, in shorthand, report said 11 proceedings, and that the above and foregoing 12 typewritten pages contain a full, true, and correct 13 computer-aided transcription of my shorthand notes 14 taken on said occasion. 15 Witness my hand on this the 10TH day of 16 MARCH, 2006. 17 18 19 BRENDA J. WRIGHT, RPR, 20 Texas CSR No. 1780 Expiration Date: 12-31-06 21 WRIGHT WATSON & ASSOCIATES Registration No. 225 22 Expiration Date: 12-31-07 1801 N. Lamar Boulevard 23 Mezzanine Level Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 060227BJW