0001 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 APRIL 6, 2005 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 BE IT REMEMBERED that the TEXAS LOTTERY 18 COMMISSION meeting was held on the 6TH of APRIL, 2005, 19 from 8:30 a.m. to 3:25 p.m., before Brenda J. Wright, 20 RPR, CSR in and for the State of Texas, reported by 21 machine shorthand, at the Offices of the Texas Lottery 22 Commission, 611 East Sixth Street, Austin, Texas, 23 whereupon the following proceedings were had: 24 25 0002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Mr. Rolando Olvera Mr. James A. Cox, Jr. 6 General Counsel: 7 Ms. Kimberly L. Kiplin 8 Executive Director: Mr. Reagan E. Greer 9 Deputy Executive Director: 10 Mr. Gary Grief 11 Charitable Bingo Executive Director: Mr. Billy Atkins 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX 2 3 Appearances.................................... 2 4 AGENDA ITEMS 5 Item Number 1.................................. 4 6 Item Number 2.................................. 4 Item Number 3.................................. 12 7 Item Number 4.................................. 15 Item Number 5.................................. 28 8 Item Number 6.................................. 139 Item Number 7.................................. 145 9 Item Number 8.................................. 130 Item Number 9.................................. 162 10 Item Number 10................................. 171 Item Number 11................................. 173 11 Item Number 12................................. 175 Item Number 13................................. 178 12 Item Number 14................................. 189 Item Number 15................................. 194 13 Item Number 16................................. 195 Item Number 17................................. 198 14 Item Number 18................................. 199 Item Number 19................................. 200 15 Item Number 20................................. 215 Item Number 21................................. 139 16 Item Number 22................................. 139 Item Number 23................................. 221 17 Item Number 24................................. 226 Item Number 25................................. 229 18 Item Number 26................................. 232 Item Number 27................................. 232 19 20 Reporter's Certificate......................... 233 21 22 23 24 25 0004 1 CHAIRMAN CLOWE: Good morning. It is 2 8:00 a.m., April the 6th, 2005. Commissioner Cox is 3 here, Commission Olvera is here, and my name is 4 Tom Clowe. We have a full Commission and I'll call 5 the Lottery Commission meeting to order. 6 We'll begin with item two on the 7 agenda, Report by the Bingo Advisory Committee 8 Chairman, possible discussion and/or action regarding 9 the Bingo Advisory Committee's activities, including 10 the March 30th, 2005 committee meeting. 11 Good morning, Suzanne. 12 MS. TAYLOR: Good morning. 13 CHAIRMAN CLOWE: Good morning. 14 Thank you. 15 MS. TAYLOR: It's early. 16 I have given you the report to the 17 Commissioners, from March 30th. I would like to go 18 ahead and read this, but you have a copy so that if 19 you have any questions and want to stop me, that would 20 be great. 21 The Bingo Advisory Committee of the 22 Texas Lottery Commission met on March 30th, 2005, in 23 Austin at 10:00 a.m. All members were in attendance. 24 The meeting of the January 26th, 2005 meeting was 25 approved with no changes. Nelda Trevino reviewed two 0005 1 legislative tracking reports with committee members 2 and gave BAC members the addresses to the Capital, 3 House, and Senate websites. There was discussion 4 about the number of bills relating to the operation of 5 video lottery games. Billy Atkins told committee 6 members that it had been estimated that authorizing 7 video lottery terminals at race tracks and tribal 8 games could reduce bingo income as much as 43 percent. 9 The nomination workgroup discussed 10 their results from the interviews with the applicants 11 for the charity representative position on the BAC. 12 It was moved, seconded, and passed that the BAC would 13 recommend Rosalie Lopez to the Commissioners to fill 14 the charity representative position on the BAC. The 15 nomination workgroup had no recommendation for the 16 commercial lessor position. It was moved, seconded, 17 and passed that the BAC would recommend that the TLC 18 continue accepting applications for the commercial 19 lessor position on the BAC. 20 Marshall McDade reviewed the 21 Administrative Penalty Rule timeline. He told 22 committee members the staff had looked at 14 agreed 23 orders from last year in which the charities were 24 charged $882.26 for violations. These same 14 orders 25 would create a penalty amount of 9,800 dollars if 0006 1 these were all first violations under the proposed 2 Administrative Penalty Rules. The total last year for 3 first offenses would have been 270,000 dollars, which 4 the organizations would be required to pay from their 5 general accounts with non-bingo funds. Marshall told 6 members the Texas Lottery Commission can currently 7 fine organizations up to 1,000 dollars per violation 8 and the Administrative Penalty Rule will let charities 9 know what to expect. Phil Sanders told -- Sanderson 10 told the BAC that organizations had paid 75,000 11 dollars in penalties for not filing on time last year. 12 This rule would put organizations on notice to be in 13 compliance and operate as a business. Public comment 14 was received that, one, there had been no meaningful 15 answers provided for the questions that had been 16 asked; two, if the staff does not intend to let 17 violations cascade, then that should be put in the 18 rule; Three, if non-bingo funds must be used to pay 19 for the violations, then these must not be a 20 reasonable bingo expense because the Bingo Enabling 21 Act states, all bingo expenses must be paid from the 22 bingo account; and, four, the language and intent are 23 not the same, therefore, the rule is not ready for 24 public comment. Billy Atkins told the committee 25 and -- that the staff is going to recommend going 0007 1 forward for public comment with or without the BAC 2 support. It was moved, seconded, and passed the BAC 3 would recommend the Commissioners not vote to publish 4 the proposed Administrative Penalty Rules in the Texas 5 Register for public comment. 6 I had provided committee members with a 7 draft Annual Report prepared by the workgroup, which 8 still needs some work. The BAC will also ask the 9 Commissioners if there are any other areas they want 10 included with the annual report. The next meeting for 11 the group -- workgroup will be April 13th, at 10:00 12 a.m. The draft Workplan for the 2005 year was 13 presented for the -- to the BAC. It was moved, 14 seconded, and passed the BAC would present the draft 15 Workplan for 2005 to the Commissioners for approval. 16 Lee Deviney reviewed the statistical 17 information compiled by the Financial Administration 18 staff and presented to the Commission at the 19 February 28th, 2004 meeting. The presentation 20 included historical data relating to gross receipts, 21 net proceeds and charitable distributions. Lee told 22 the BAC the staff will build attendance into future 23 presentations. Betty Kirkpatrick told the committee 24 the staff is looking for things that cause a decrease 25 in bingo attendance. Public comment was received 0008 1 stating the undistributed proceeds at the beginning 2 and end of the year should be part of the report. 3 Terry Shankle reviewed the timeline for 4 the revised Quarterly Report with committee members. 5 Public comment was received stating the report was 6 great. 7 Billy Atkins reviewed the Charitable 8 Bingo Administrative Rule Re-organization presentation 9 in the BAC book. The re-organization became effective 10 March 21st and is posted on the agency website. 11 Members are requested to let the staff know if they 12 come across current forms with out of date citations. 13 Phil Sanderson reviewed the activities 14 of the Charitable Bingo Division, including press 15 release that had been sent out by the Texas Lottery 16 Commission. 17 We received public comment. The 18 committee members told staff that the book for this 19 meeting was great with lots of information and 20 statistics. Carol Lauder told members she could see 21 results of the hard work the committee had been doing 22 and encouraged more open discussion. 23 Items for future BAC meetings were 24 discussed, the next meeting was tentatively scheduled 25 for May 25th, 2005 at 10:00 a.m. And the meeting was 0009 1 adjourned at 1:20 p.m. 2 If you have any questions? 3 CHAIRMAN CLOWE: Are there any 4 questions? 5 Suzanne, are you going to be here for a 6 while? Are you going to stay with us during the 7 meeting? 8 MS. TAYLOR: As long as you need me. 9 CHAIRMAN CLOWE: We have some items 10 coming up that I would like perhaps to call on you to 11 come back and ask for comments from you at that time. 12 MS. TAYLOR: Be happy to. 13 CHAIRMAN CLOWE: Okay. Great. 14 MS. TAYLOR: Thank you. 15 CHAIRMAN CLOWE: Thank you. And before 16 you leave, Suzanne, did I understand you to say that 17 you were presenting the workplan for 2005 for approval 18 to the Commission? 19 MS. TAYLOR: Right. We are looking for 20 your approval. We know that you might not be able to 21 give it at this meeting because your notebook has 22 already been prepared. But this is the draft workplan 23 we would like you to look at, and if there is items 24 that you would like to add or, you know, get your 25 thoughts on it, but if not, we're -- this is what 0010 1 we're looking at for our workplan. 2 CHAIRMAN CLOWE: Okay. And while we're 3 there, Billy, do you have a comment on that? 4 MR. ATKINS: I don't have a specific 5 comment at this time on the workplan. I do have some 6 comments as it relates to the Advisory Committee 7 meeting. 8 CHAIRMAN CLOWE: Okay. This is not on 9 the agenda, Counselor, at this time, so I don't think 10 it's proper to deliberate the workplan. Am I correct 11 in that? 12 MS. KIPLIN: Well, the item two is 13 fairly broad. It does say possible discussion and/or 14 action regarding the Bingo Advisory Committee's 15 activities. You know, from a conservative 16 perspective, my preference would be to actually notice 17 up the workplan so that the public would have better 18 notice. I can't tell you that they don't, at this 19 point, have adequate notice. 20 CHAIRMAN CLOWE: Commissioners, I would 21 prefer that we notice this for the next meeting, and 22 that will give us an opportunity to deliberate it 23 individually, visit with Suzanne if we have questions 24 or comments, and converse with Billy. Okay? Then 25 we'll not attempt to discuss this, deliberate, or take 0011 1 action at this meeting, and Suzanne, we'll notice it 2 for the next meeting and hope to deal with it at that 3 time. 4 MS. TAYLOR: Okay. 5 CHAIRMAN CLOWE: Thank you very much. 6 MS. TAYLOR: Thank you. 7 CHAIRMAN CLOWE: Next we'll go to item 8 three, consideration -- 9 MR. ATKINS: Mr. Chairman? 10 CHAIRMAN CLOWE: Oh, I'm sorry, Billy. 11 You had comments. Please go ahead. 12 MR. ATKINS: Again, I just wanted to 13 touch on some of the things that Suzanne mentioned and 14 she, I think, has captured it in her report. The 15 staff took the joint meeting that the Commissioners 16 had with BAC in December very seriously, and a lot of 17 the goals that were identified at those, the staff has 18 begun a process to try and incorporate those. And 19 that's demonstrated by the items listed in her report, 20 items seven, eight, nine, ten. The financial report 21 that Lee Deviney and his staff prepared and gave to 22 the BAC was the same one that had been given to you. 23 Terry Shankle did a detailed report, as Suzanne 24 mentioned, on the revisions to the quarterly report 25 form and the numerous steps that had been taken by 0012 1 staff to inform the licensees of the revisions to that 2 form. We gave them a detailed presentation of the 3 rule re-organization. And on item number ten, I 4 actually gave that presentation on the activities of 5 the Bingo Advisory Committee, but those were some of 6 the things that were identified in that joint meeting 7 as goals for the staff in the coming year to work on 8 and to produce for the BAC. And I appreciate the 9 staff that did the work to prepare those reports, and 10 also, as Suzanne has mentioned in her report, I think 11 they were very well received by the BAC. 12 CHAIRMAN CLOWE: Very good. Any 13 questions of Billy? Thank you. 14 Then we will move on to item number 15 three, consideration, possible discussion and/or 16 action on appointment to the Bingo Advisory Committee. 17 And Billy, if you'll handle that item. 18 MR. ATKINS: Commissioners, also as 19 Suzanne mentioned in her report, the BAC did recommend 20 for your consideration, I believe, it's Rosalie Lopez, 21 for the position of a charity position. She would be 22 replacing Pete Pavlovsky, whose term expires 23 February 1st of this year. The packet that I gave you 24 this morning contains the interview sheets that the 25 nomination committee completed in their interviews 0013 1 with Ms. Lopez, as well as nomination forms, a resume, 2 and a recommendation letter that we had received for 3 Ms. Lopez. And just to confirm with the Commission 4 and their past practice, if it's your desire, we will 5 begin to schedule an opportunity for each of you to 6 individually meet with or talk to Ms. Lopez regarding 7 the Bingo Advisory Committee and your expectations of 8 her as a member. 9 CHAIRMAN CLOWE: And Billy, my 10 recollection is that this lady lives in Odessa. 11 MR. ATKINS: Yes, sir. 12 CHAIRMAN CLOWE: And what would you 13 propose? That she come to Austin and meet the 14 Commissioners individually here? 15 MR. ATKINS: I think we can do whatever 16 is most convenient for you. In the past, and I'm 17 thinking specifically of -- with Jack Dougherty, who 18 is here in Austin, Thomas Weekly, who I believe is 19 from McAllen, and Kimberly Rogers from San Antonio, 20 those individuals traveled to the office and we were 21 able to schedule meetings, Mr. Chairman, with you and 22 Commissioner Cox. You were able to actually come to 23 the office and meet with them personally. In the case 24 of Commissioner Olvera, we have been able to conduct 25 those interviews over the telephone. So if it is -- 0014 1 it turns out it's more convenient for the nominee or 2 if it fits better with your schedules, we would be 3 happy to arrange telephone interviews. 4 CHAIRMAN CLOWE: Very good. Well, 5 Commissioners, if that meets with your approval, we'll 6 move forward on that basis. 7 COMMISSIONER COX: With the gist of 8 that, Mr. Chairman, that we'll do telephone interviews 9 with her? 10 CHAIRMAN CLOWE: Well, I'm hopeful that 11 she can arrange at least to come to Austin, where we 12 might have the opportunity to have the Commissioners 13 that are available visit with her in person, and if 14 Commissioner Olvera is unable to come to Austin, he 15 could do a telephone interview while she is here in 16 Austin or in her home city of Odessa. But for one, I 17 would like to visit with her personally, if that's not 18 too much of an imposition to ask her to come to 19 Austin. 20 Is that all right with you? 21 COMMISSIONER COX: You bet. 22 CHAIRMAN CLOWE: Okay. So Billy, if 23 you'll proceed on that basis, and I'll ask you to 24 notice this item on our next month's meeting agenda as 25 well. 0015 1 MR. ATKINS: Thank you, Commissioners. 2 CHAIRMAN CLOWE: Anything further on 3 that? 4 MR. ATKINS: No, sir. 5 CHAIRMAN CLOWE: Next, we'll go item 6 four, report, possible discussion and/or action on 7 Bingo Enforcement Process Review. 8 Good morning, Ms. Joseph. 9 MS. JOSEPH: Thank you. Good morning. 10 CHAIRMAN CLOWE: Good Morning. 11 MS. JOSEPH: Can you hear me? Okay. 12 Good morning, Commissioners. I'm Sandra Joseph, 13 Assistant General Counsel, with the legal division. 14 With me is Phil Sanderson, Assistant Director Of 15 Charitable Bingo. I have prepared a slide 16 presentation; however, we're having technical 17 problems, so I'll -- you'll get it straight audio for 18 now. 19 CHAIRMAN CLOWE: Very good. 20 MS. JOSEPH: All right? What I'm here 21 to do at this -- for this item, is to provide you with 22 information and make you aware of a big project that 23 has gone on in the past year with -- among the bingo 24 staff, the legal staff, and the former security 25 division staff, as well as internal audit folks and a 0016 1 representative from lottery operations. What this 2 was, we called it the Charitable Bingo Enforcement 3 Process Review. And I'll -- the entire report of this 4 project is in your notebook, but I would like to give 5 you a summary today. 6 The project was first conceived of and 7 begun last spring. The purpose was to study the bingo 8 enforcement process and make recommendations for 9 changes to increase the effectiveness and the 10 efficiency of the bingo enforcement process. As I 11 said, planning began last spring. At that time, a 12 cross-divisional team was assembled and a basic 13 project plan was outlined. I would like to introduce 14 the team members. They came today for the 15 presentation. This was a big part of their lives last 16 year, and if it's all right with you, I would like to 17 ask them to stand. First of all, Raul Aguirre could 18 not be here today, but he did contribute highly and 19 was from the Lottery Operations Division. He provided 20 us with one of -- a look of an outsider to the bingo 21 enforcement process. He was a set of fresh eyes for 22 what we were trying to look at. 23 Debbie Cook -- is Debbie here? Okay. 24 I'm sorry. Deanna Farrish is one of our bingo audit, 25 Randall Hare, Marshall McDade, Bruce Miner, 0017 1 Stephen White, Phil Sanderson, Eric Williams. I can't 2 tell if -- these folks are not here. Brenda Winkler, 3 and also, Bobby Beck and Kevin Oldham, who are no 4 longer with the Commission, also contributed to this 5 effort. 6 What we did was, first of all, 7 developed some objectives. One of our objectives was 8 to encourage voluntary compliance and remedial action 9 with every enforcement process. We also developed a 10 mission that was to identify tools and practices to 11 increase the efficiency and effectiveness of the 12 Charitable Bingo enforcement process. What we did 13 next was to begin to try to take apart and examine 14 closely what was -- 15 CHAIRMAN CLOWE: Excuse me. 16 MS. JOSEPH: Yes. 17 CHAIRMAN CLOWE: Let me just interrupt 18 you for a minute. I think it's a little disruptive to 19 you trying to make this presentation to have Phil 20 working on a laptop there. Would you like to just 21 take a few minutes, Phil, and see if you can get that 22 functioning? 23 PHILIP: Yes, sir. 24 CHAIRMAN CLOWE: Let's just sit in 25 place for a minute here and we'll go off the record 0018 1 and give you a few minutes, Phil. I don't think 2 you're getting the best opportunity to make your 3 presentation. 4 MS. JOSEPH: Right. Okay. Thank you. 5 CHAIRMAN CLOWE: Let's just hold on a 6 second here and see if Phil can get his equipment 7 operating. 8 (OFF THE RECORD.) 9 CHAIRMAN CLOWE: Thank you. We've come 10 back on the record now. And please proceed, 11 Ms. Joseph. 12 MS. JOSEPH: All right. Thank you. 13 I believe this is where we left off. I 14 was about to describe to you what the team did. First 15 of all, we deconstructed the process. For the 16 constructed, we try to take it apart to see how it was 17 working. We reviewed the current enforcement process 18 by conducting internal and external interviews, 19 surveys and meetings. We reviewed rules and statutes, 20 both in Texas and other jurisdictions. And we spent a 21 lot of time mapping the process. And I would like to 22 have brought to you the map we did. I couldn't locate 23 it, but it covered two walls. It was a very 24 complicated process to map and to determine exactly 25 what happens when and to whom and by whom. 0019 1 During this process, the team asked 2 questions. The type of questions we asked are -- 3 these are examples -- what is each step in the process 4 from the beginning to the end. What is the purpose of 5 each step. Are there any activities that are 6 duplicated or unnecessary. Are there any bottlenecks. 7 Who is involved and what is their role. How much time 8 is taken for each step. What is the legal framework. 9 Is there relevant historical information about the 10 process? 11 Now, I would like to mention at this 12 point that what we were doing was looking at our 13 internal enforcement process, primarily. We were 14 trying to do see what we could do to make the 15 enforcement process and the efforts here within the 16 agency more effective and efficient. After reviewing 17 and interviewing and looking, we identified seven 18 major issues. First of all, efficiency, procedures 19 and guidelines, resources, knowledge and awareness, 20 the automated charitable bingo system, the legal 21 framework, and communication. These were all areas 22 where we identified issues that perhaps could use some 23 improvement, had some opportunity for improvement. So 24 we evaluated the process. We asked ourselves as we're 25 evaluating these questions, as well as others, does it 0020 1 make sense. Does it improve service. Does it reduce 2 work. Does it save or waste money. And does it help 3 our staff. 4 After evaluating, we attempted to 5 redesign the process. And we developed a list -- this 6 was informal, jotted down notes, compared notes of 7 qualities or standards that the ideal enforcement 8 process would have. And then we mapped the flow of 9 the ideal process, looking for steps that could be 10 eliminated, modified, whatever it would take to make 11 the process run more smoothly. 12 We developed recommendations, and we 13 developed these recommendations by considering 14 advantages and disadvantages of ideas that the team 15 members came up with through discussion and debate. 16 We reached consensus on 33 recommendations. During 17 the process review, the organization structure of the 18 agency did change. During this time period, we moved 19 from having a standalone security division into having 20 that enforcement function incorporated into legal. So 21 this changed our recommendations slightly, the wording 22 of them, so that was -- I just wanted to mention that 23 that did occur. And so we just incorporated and 24 applied the recommendations to the new organizational 25 structure. 0021 1 Now, the first recommendation or issue 2 was efficiency. We developed nine recommendations 3 under that topic. Rather than go through all 33 4 recommendations today, I wanted to give you just a 5 sample, in this summary presentation, of the type of 6 recommendations that we did come up with. 7 Under efficiency, our example is to 8 develop a new process to expedite settlement 9 agreements. 10 Under issue two, procedures and 11 guidelines, we had six recommendations. An example, 12 develop guidelines for coordination between the 13 Charitable Bingo Operations Division and the Legal 14 Division Enforcement Department. That recommendation 15 primarily related to our field staff and the 16 coordination of auditors and investigators. 17 The third issue, resources, we had two 18 recommendations, one of which was to create a 19 Compliance Specialist Position within the Charitable 20 Bingo Operations Division. There are certain duties 21 and functions that an administrative assistant is 22 currently doing. It was felt and observed that there 23 was enough work there for an additional position that 24 could focus on compliance activities. 25 The fourth issue, knowledge and 0022 1 awareness, we had six recommendations. An example, 2 provide operator training for bingo enforcement staff. 3 The idea behind this is that we need to be sure that 4 our own staff understands what training is being given 5 to the operators. With new employees from time to 6 time and changes at times, we need to be sure that we 7 understand what we're telling the operators. 8 The fifth issue relates to the 9 Automated Charitable Bingo System. I had to be sure I 10 got that right. We call it ACBS. This was a new 11 system that was developed for bingo, and we recognized 12 that at this point we need to develop standardized 13 procedures for data entry onto this system. Some of 14 these things you can see are very -- may appear to be 15 small or technical, but failure to have a standardized 16 entry system, for instance, can lead to a lot of 17 problems and miscommunications and perhaps basing 18 actions on inaccurate information. 19 The sixth issue was legal framework. 20 We had six recommendations, one of which was to 21 increase the use of show compliance letters to address 22 enforcement issues in a more timely manner. In the 23 past, when there was an enforcement concern or action, 24 most often, action was delayed on that particular 25 violation or problem until the licensee came up for a 0023 1 renewal of their application. This could often result 2 in a delay in enforcement time for several months. 3 And the team feels that it would be better to go 4 ahead, issue a show compliance letter and address the 5 possible violation more quickly. 6 On the seventh issue, communication, we 7 had one recommendation, which had some sub 8 recommendations. It was to improve enforcement 9 efforts through communication and information sharing. 10 An example of that is to provide wireless Internet 11 access for investigators and auditors in the field. 12 When an auditor is out in the field visiting with a 13 bingo conductor or operator, at times they need to 14 have up-to-date information accessible to them so that 15 they can have meaningful discussions and review of 16 what is happening. 17 After developing these recommendations, 18 the team submitted a written report to the general 19 counsel and to the director of the Charitable Bingo 20 Operations Division. We then met with them to discuss 21 the recommendations and respond to any questions they 22 had. As a result, Ms. Kiplin and Mr. Atkins approved 23 32 recommendations for implementation review. What 24 this means is, they have given their approval for us 25 to proceed to the next step of implementation. This 0024 1 does not mean that there will not be any changes at 2 all to these recommendations. The implementation 3 review period is meant to look at each of these 4 recommendations more closely, study the resources 5 available, determine what is feasible, when it's 6 feasible, and to move ahead with these 7 recommendations. 8 The anticipated impact of the 9 recommendations is, we expect more effective and 10 efficient enforcement that enhances the integrity of 11 charitable bingo. We expect increased compliance with 12 the Bingo Enabling Act and administrative rules, and 13 we expect resource savings for the agency. 14 Do you have any questions or comments? 15 We're not asking for any particular action. We wanted 16 to let you know about this project and take any input 17 from you that you would like to offer. 18 CHAIRMAN CLOWE: Commissioners, do you 19 have any questions or comments? 20 COMMISSIONER COX: Sandy, it looks like 21 y'all have undertaken a massive project here. And I'm 22 very impressed with what you have done. And it 23 certainly looks like your objectives were the 24 appropriate objectives and that you have made 25 recommendations that look like the appropriate kinds 0025 1 of recommendations. You did a great job. 2 MS. JOSEPH: Thank you. 3 CHAIRMAN CLOWE: Sandy, or Phil if you 4 can, could you go back to the beginning of the 5 presentation? It was the -- maybe the fourth or fifth 6 or sixth slide you put up there. You moved through it 7 pretty rapidly and there was considerations as you 8 approached just -- keep rolling through that if you 9 would. 10 MR. SANDERSON: Was it this one? 11 CHAIRMAN CLOWE: Yeah. That's it right 12 there. Thank you. You went right to it. Okay. 13 Sandy, I want to thank you and the 14 other team members for the work that you've done. I 15 agree with Commissioner Cox, that this is a 16 substantial project, and it looks like you have really 17 gone into it and done a great deal of work. And 18 progress has been good, and certainly I think all of 19 the Commissioners hope for a great success. 20 It came to my mind, on this slide, that 21 having been regulated more than I have been a 22 regulator, we need to take the client into 23 consideration and think about that individual. And I 24 suppose, does it improve service and does it make 25 sense, does that. But I want to just comment to you 0026 1 and the team members about my feeling in that regard. 2 There is a point of conflict here between the private 3 enterprise, as I see it, being regulated, and the 4 regulation and the enforcement thereof by the 5 division. At least a potential conflict. And the 6 more that this can be done in the open, with clarity 7 for all and a clear understanding of the rules, the 8 easier it'll be on both sides of that issue and the 9 less conflict there should be. And so often in my 10 role, when I was being regulated in my business by a 11 State agency, the problem with my business arose where 12 we thought something was one way, and we were told 13 that it was some other way. And I would just like to 14 make the point, as you move forward with this, that we 15 need to consider, are we communicating with the 16 entities that we are regulating, do they understand, 17 are we making a more than 50 percent effort to let 18 them know what the rules are. 19 I think the operator training program, 20 for example, is a great benefit in that direction. 21 But so often, there is a genuine and sometimes, I 22 guess, disingenuous response, well, I didn't know that 23 was the rule. And the more we can do as you move 24 forward with this project to eliminate that response, 25 then enforcement becomes easier for everybody. So 0027 1 what I would like to do is inject the observation as 2 you move forward with this, that the beneficiary of 3 all of this is the charity in the state of Texas. And 4 if we can make it easier on those people who are 5 operating for the benefit of the charities by letting 6 them know what the rules and regulations are, and 7 clearly they're going to be enforced, there is no 8 question about that, with fairness and correctness, 9 but give them the best information we can about what 10 the rules and what the enforcement is going to be, the 11 easier it'll be on everybody. 12 MS. JOSEPH: I appreciate that comment 13 and I totally agree, of course. During the 14 implementation phase, we certainly do plan to involve 15 the public, members of the industry, particularly in 16 those cases where a new rule may be called for or 17 where there is something that seems like it would 18 really have an impact on the industry. But we'll 19 certainly keep that in mind and make every effort to 20 do what you have asked us to do. 21 CHAIRMAN CLOWE: Well, and this is a 22 tough job and I'm appreciative, as I know the 23 Commissioners are, of the work that is going into 24 this. It's really a good thing for an agency to look 25 at itself and try to improve its service and put what 0028 1 it's doing to these tests. And I am really in favor 2 of what you're attempting to do here and I just want 3 to add that consideration about the customer, so to 4 speak, in the work that you're doing. 5 MS. JOSEPH: Thank you. 6 CHAIRMAN CLOWE: Okay. Commissioners, 7 anything further? I think that take us right into the 8 next item on the agenda, which is number five. And 9 Sandy, that's yours as well, consideration of and 10 possible discussion and/or action, including proposal, 11 on new Rule 16 TAC 402.706 and/or 402.707 relating to 12 Standard Administrative Penalty Guideline and 13 Expedited Administrative Penalty Guideline. 14 MS. JOSEPH: Thank you, Chairman Clowe. 15 Again, I'm Sandra Joseph, Assistant General Counsel. 16 I have with me Marshall McDade and Phil Sanderson from 17 the Bingo Division. 18 What we have before you for this item 19 is proposed draft Administrative Penalty Rules. There 20 are two rules that the staff has drafted and is 21 bringing for your consideration to initiate formal 22 rulemaking proceedings. The first one is 402.706, the 23 Standard Administrative Penalty Guideline; the second, 24 402.707, Expedited Administrative Penalty Guideline. 25 To give you some background on these 0029 1 rules, I wanted to mention a few things to you. First 2 of all, the staff has been considering for some time 3 the desirability for having some standard penalty 4 guidelines. The review of what other states, what 5 other agencies do, has shown that it is typical or 6 common for there to be guidelines for assessing 7 administrative penalties. In addition, our own agency 8 has guidelines for lottery penalties. They are not 9 identical to what we have proposed here, but there are 10 penalty guidelines. 11 And, in addition, Sunset 12 recommendations of 2002 and 2004, address penalty 13 guidelines and recommend that such guidelines be 14 adopted. However, I would like to point out that even 15 if Sunset had not made such recommendations, the staff 16 feels they would still be before you recommending that 17 we propose such guidelines, because we see great value 18 in them. 19 The objective of the penalty guidelines 20 are the following: First of all, to promote 21 consistent and fair assessment of administrative 22 sanctions; to inform licensees of compliance 23 requirements and potential sanctions for 24 noncompliance; to encourage compliance; to facilitate 25 timely resolution of cases; to encourage settlements. 0030 1 I do want to make a few points here and 2 point out that the proposed administrative penalty 3 rules do not create any new violations. We're not 4 creating any new violations. These guidelines simply 5 address what happens if a current statute or rule is 6 violated. In addition, the rule does not create any 7 new authority for imposing sanctions. We already have 8 the authority to impose these sanctions and these 9 penalties. And, finally, I wanted to point out that 10 the proposed penalty amounts are based on review of 11 other states's penalties and their perceived 12 deterrence effect. You may wonder, where did we get 13 these amounts. 14 Now, looking first at new proposed rule 15 of 402.706, what it is going to do is provide guidance 16 for administering an administrative penalty to persons 17 that violate the Bingo Enabling Act or the Charitable 18 Bingo Administrative Rules. It does not bind the 19 authority of the Commission to impose the penalty. 20 These are guidelines. The list of violations that is 21 included in the rule is not an exclusive list. It, as 22 proposed, does not cover every possible violation. 23 When the staff first began drafting this rule, there 24 was an attempt made to capture every possible 25 violation and include that. The idea being, we wanted 0031 1 to put the public on notice and to provide guidelines 2 for our own staff. However, that turned out to be a 3 very lengthy rule. So the rule was redrafted and cut 4 back to include those violations that are more 5 frequent and most significant. Also, the rule 6 provides and certainly does not prevent additional 7 remedies from being imposed, such as redeposit of 8 funds or revocation of license. The rules do contain 9 a look-back period of four years for repeat 10 violations. 11 Now, if you look at the chart included 12 in the rule, you'll see that there are guidelines for 13 first, second, third violations. Our look-back period 14 is four years. That is based on the record keeping 15 requirements that are currently in existence. 16 COMMISSIONER COX: Sandy, a question on 17 that slide. I didn't completely understand your 18 explanation of bullet one. Were you saying that it is 19 not an all-inclusive list? 20 MS. JOSEPH: That's correct. 21 COMMISSIONER COX: Okay. So there is 22 some violations for which we have not prescribed a 23 penalty? 24 MS. JOSEPH: That's right. We've 25 not -- 0032 1 COMMISSIONER COX: You'll get into why 2 are there are some of those, at some point? 3 MS. JOSEPH: Well, we've not prescribed 4 a guideline in this rule. Penalties already are 5 provided for in the statute. 6 COMMISSIONER COX: Okay. 7 MS. JOSEPH: We did not include those 8 because -- or some of them because we had comments 9 from BAC members that the rule was too lengthy. And 10 so we decided to shorten it by not including some of 11 the violations that are very infrequent. 12 COMMISSIONER COX: Okay. So we -- what 13 our effort here is to let people know the rules of the 14 game. We didn't let them know obscure rules. 15 MS. JOSEPH: That's correct. We're 16 trying to find the balance. We find a conflict 17 between people wanting to know exactly what is going 18 to happen on everything, and on the other hand, being 19 a burden by a lengthy rule. We heard competing 20 comments, so we tried to reach a balance. 21 COMMISSIONER COX: Okay. So you did 22 not include some of the violations that are infrequent 23 in occurrence. 24 Then on the second bullet, you're 25 saying that the listed remedy is not the total remedy, 0033 1 that additional remedies can be in imposed. Is there 2 some kind of general statement that says, this will 3 happen, but other things may happen as well? Is that 4 the way it's structured? 5 MS. JOSEPH: It's more a statement. In 6 paragraph I of the rule, it says, additional remedies 7 may be imposed along with or in lieu of an 8 administrative penalty. 9 COMMISSIONER COX: So that, to me, 10 tends to go against the purpose, which is to let 11 people know what the rules are. It tends to say to 12 me, there are other rules or there may be other rules 13 in particular circumstances. 14 MS. JOSEPH: These guidelines address 15 the monetary penalties. 16 COMMISSIONER COX: Okay. Only the 17 monetary penalties. 18 MS. JOSEPH: Yes. 19 COMMISSIONER COX: So there may be 20 other kinds of penalties, suspension, revocation, the 21 like, but they will not be additional monetary 22 penalties? 23 MS. JOSEPH: Yes. 24 COMMISSIONER COX: Okay. 25 CHAIRMAN CLOWE: Let me take a stab at 0034 1 that and say what I think you're telling us. The 2 speed limit is 70 miles an hour. If you go faster 3 than 70 miles an hour, you have broken the law. On 4 the back of the ticket, there is the breakdown of the 5 amount of the fine for various speeds above 70 miles 6 an hour. That is a guideline. When you appear before 7 the judge, the judge does not have to follow that 8 guideline, and I guess that doesn't even have to be 9 printed on the ticket. The judge makes the 10 determination of what the penalty is. And I think 11 what you're telling us is, the list of violations got 12 to be so lengthy and it got to be so involved beyond 13 maybe what is the normal violations that you decided, 14 well, we just won't publish that list. 15 MS. JOSEPH: That's correct. 16 CHAIRMAN CLOWE: So we're trying to 17 make clear in the rules that if you don't follow the 18 rules, there is a violation. We are not trying to 19 say, if you violate, this is exactly what is going to 20 happen to you. 21 MS. JOSEPH: That's correct. 22 CHAIRMAN CLOWE: Am I -- as a 23 layperson, am I getting the message there? 24 MS. JOSEPH: Yes. Yes, sir. 25 COMMISSIONER OLVERA: And Commissioner, 0035 1 if I may, I don't want to complicate things with legal 2 jargon, but I think it's interesting that within the 3 past six months the U.S. Supreme Court struck down the 4 federal sentencing guidelines, which is a different 5 issue, but basically, those guidelines forced judges, 6 federal judges, to stick to those rules and they had 7 to sentence criminal violations pursuant to those 8 guidelines with no leeway whatsoever, which caused 9 exceptions wherein it was unfair and what have you. I 10 think it was important in your comments that these are 11 just guidelines and that the enforcing authority, 12 vis-a-vis the Commissioners, would be free to look at 13 each case on a case-by-case basis and look at 14 exceptions to the rule. 15 MS. JOSEPH: Yes. 16 COMMISSIONER OLVERA: But the majority 17 of the time the penalties are going to be applicable, 18 but there are going to be instances where variables 19 will be considered and we will be free to go outside 20 those rules. Correct? 21 MS. JOSEPH: That's exactly correct. 22 COMMISSIONER OLVERA: All right. 23 CHAIRMAN CLOWE: Thank you, Judge. 24 MS. JOSEPH: Now, that leads right into 25 this slide, Commissioner Olvera. There are additional 0036 1 factors to be considered in applying these guidelines. 2 These might be termed mitigating or aggravating 3 factors. These would be considered: The seriousness 4 of the violation, history of previous violations, 5 deterrence of future violations, efforts to correct 6 the violation, the intent at the time. In other 7 words, was it knowing or was it an accident that this 8 violation occurred? Was it inadvertent? The 9 cooperation that we are seeing. License class. 10 Actual damages that might have resulted. Any risk to 11 the public or state. I have license class twice. The 12 cost of investigation or examination. Any other 13 matter that justice may require. So these factors 14 will certainly be considered in assessing any of these 15 penalties under the guidelines. 16 Now, moving to the second rule, 17 402.707, this is the Expedited Administrative Penalty 18 Guideline. This rule provides an alternative 19 disciplinary procedure for certain di minimus 20 violations, or smaller violations. And it will 21 facilitate expeditious resolution of these violations. 22 The rule provides for issuance of a notice of 23 administrative violation and settlement agreement, 24 upon agreement that a violation has occurred. Now, 25 let me explain for a minute more simply what -- how we 0037 1 envision this working. We envision that an inspection 2 might be done -- all right. I had to get my 3 understanding clear of what an A&A is. The auditors 4 do what they call A&As, assistance and assessment 5 inspections. These are not full audits. It's more a 6 visit to an organization. Sometimes when the auditor 7 stops by, they'll notice a violation. For instance, 8 it could be a very simple violation, such as, they not 9 have a sign posted that they're required to have 10 posted. The operator on duty may agree, you're right, 11 we don't have our sign up. At that point, if there is 12 agreement, the auditor could issue this notice, and it 13 would provide 20 days for the licensee to sign and 14 return, and there is a set penalty amount for these 15 violations. Now, as opposed to the earlier rule that 16 showed more of a range, in this rule, the amounts are 17 set. It's more like the traffic ticket situation 18 where, you know, you went over the speed limit or you 19 ran the stop sign, so on the back of the ticket, you 20 can see, it costs you X amount. 21 Now, this is just going to be an 22 option. It is not going to be required. If a 23 licensee does not agree, they certainly don't have to 24 go this route. But if they wish to, it can get 25 matters settled much more quickly and avoid perhaps 0038 1 expense, worry about dealing with a violation. 2 There will be 20 days allowed for the 3 licensee to accept, sign and return the notice. If 4 they change their mind during that 20-day time, they 5 haven't sign it, they can request a hearing. If they 6 don't return it, they just -- we don't hear from them, 7 then we will go ahead and push the normal enforcement 8 process, which will be to issue a show compliance 9 letter and then -- and also, a notice of hearing, if 10 it's not settled the traditional route. 11 Are there any questions about that at 12 this point, before I move ahead? All right. Okay. 13 All right. What I would like to do now 14 is go over the timeline. A lot of time has been spent 15 in developing these rules, both by the staff and by 16 members of the BAC workgroup. This rule was first 17 presented -- not a draft, but the idea for these rules 18 was first presented to the BAC on April 29th. At that 19 time, the staff advised BAC of the staff's work on 20 administrative penalty rule, which had begun a month 21 or so previously. The staff requested the appointment 22 of a workgroup to assist with the development of the 23 rule. On the August -- well, excuse me. After that 24 April 29th meeting, the staff continued to work on the 25 rule. At this point, staff was trying to come up with 0039 1 draft rules that it felt comfortable with. It was 2 examining further other states' rules, other agencies' 3 rules, and trying to come up with something they 4 thought even worthy to present to the workgroup. 5 On August 11th, staff updated the BAC 6 on the -- their work on the draft rules. However, at 7 this point, the staff still was not prepared to 8 provide drafts to the BAC. 9 On November 4th, 2004, the BAC 10 workgroup and TLC staff met to discuss the 11 Administrative Penalty and Expedited Administrative 12 Penalty Rule drafts. Drafts were provided to the 13 workgroup at that time, and drafts of the rules were 14 posted on our website for public comment. 15 On November 17 -- 16 CHAIRMAN CLOWE: Now, Sandy, let me ask 17 you. At that point, that was just the informal 18 posting for informal comment. That -- because the 19 Commission did not approve this for posting, that is 20 not the kind of public comment that you're asking for 21 approval of today. 22 MS. JOSEPH: That's right. The efforts 23 that I'm describing now are all in addition to what is 24 required by the law. 25 CHAIRMAN CLOWE: So this was an 0040 1 informal workgroup that was -- what kind of comment 2 did you get from the public as a result of posting 3 that on the website in that informal context? 4 MS. JOSEPH: We did not receive any 5 comments on the Web posting. 6 CHAIRMAN CLOWE: None at all? 7 MS. JOSEPH: None. 8 CHAIRMAN CLOWE: But you did work with 9 the BAC workgroup. 10 MS. JOSEPH: Yes, uh-huh. We did 11 receive comments in meetings with the BAC workgroup, 12 but received no other comments that appeared to be a 13 result of the posting on the Web. 14 COMMISSIONER COX: Well, Sandy, how 15 different is what we're seeing today from what you 16 posted on the Web, November 4th, 2004? 17 MS. JOSEPH: Well, I would probably 18 like to let Marshall address that, because he's worked 19 with the details much more -- 20 COMMISSIONER COX: And is it almost the 21 same or is it significantly different, totally 22 different? 23 MS. JOSEPH: Yeah. We made a number of 24 changes. I would like to let Marshall address that. 25 MR. McDADE: Marshall McDade, senior 0041 1 audit manager. 2 A number of changes were made from the 3 posting on the website to what we have before you 4 today, probably mostly to the format of the actual 5 penalty tables, were probably where the majority of 6 the changes have occurred. Expedited Penalty Rule 7 707, that changed from more of the -- to more the 8 ticket sort of format to where it is now. And with 9 the -- with the formal -- the standard rule, we 10 eliminated, as Sandy mentioned, all the penalty -- all 11 the violations that were -- didn't occur as often, 12 things that just weren't as significant. 13 CHAIRMAN CLOWE: Well, you've already 14 told us that you didn't create any new violations in 15 these proposed rules. And now you're telling us, I 16 think, that you just put in clearer focus the 17 violations. Is that correct? 18 MR. McDADE: That is correct. The 19 rules just sort of make available to the public all of 20 the violations that we historically discovered and 21 sets out a penalty amount for those. In the statute 22 right now, it just says that we can charge -- we can 23 assess a penalty of 1,000 dollars per violation, per 24 day. And this -- these rules just sort of provide 25 more detail as to what is a more reasonable penalty to 0042 1 be assessed for those violations, given just a wide 2 variety of the types of things that we come across. 3 CHAIRMAN CLOWE: And Marshall, while 4 you're there and talking to us, tell the Commission 5 what you are doing right now. Tell us what these 6 proposed rules constitute in the way of change from 7 what you're doing right now. 8 MR. McDADE: I think one of -- the one 9 thing that it does allow for us to do is, again, make 10 sure that the public is aware of what potential 11 sanction can be for particular violations. From a -- 12 how we apply penalties right now, it's not going to be 13 very much different. We've historically gone through 14 and looked at the violations in detail to come up with 15 a reasonable penalty amount when the penalties were 16 assessed. 17 CHAIRMAN CLOWE: So you're telling the 18 Commission that if I'm an operator and I'm out there 19 running my bingo operation, and today I am found to be 20 guilty of a violation, basically, you're telling us, 21 I'm going to be treated the same way today that I 22 would be if these rules finally were enacted by the 23 Commission? That the only difference is, I'm getting 24 more information as a result of these proposed rules? 25 MR. McDADE: There probably will be 0043 1 more penalties assessed as compared to historically, 2 and that is probably something that will happen. 3 Historically, we didn't assess as many monetary 4 penalties as the penalty rules would create now. 5 CHAIRMAN CLOWE: And talk to us about 6 why that comes about. Help us understand. That -- is 7 that the underlying reason for this consideration? 8 Because you've already told us there wouldn't be any 9 new violations. 10 MR. McDADE: I think as far as this -- 11 I mean, are you talking about the assessment of a 12 penalty versus the nonassessment of a monetary 13 penalty? Historically, we've always -- when there has 14 been a violation related to redeposits or show -- not 15 meeting charitable distribution, we've required 16 organizations to make though those redeposits and 17 either make those charitable distributions or correct 18 the other issues. We have requested they correct 19 those other issues as well. I guess the penalty rule 20 just kind of puts in place the monetary penalties 21 associated with those violations that -- trying to 22 help deter that future noncompliance. Did that answer 23 your question? 24 CHAIRMAN CLOWE: Well, I think it does 25 for the time being, but I think we may want to come 0044 1 back. Let's just hold that. Thank you for that 2 explanation. 3 MS. JOSEPH: I might add that I believe 4 that these rules will make it easier to use the tool 5 the Commission has already had. The Commission has 6 already -- has always had the ability to assess 7 administrative penalties. These rules will make it 8 clearer to the public what the guidelines are. And it 9 will make it clearer, also, to our own staff what the 10 guidelines are. Therefore, I believe it will -- it'll 11 make it easier and more fair to apply the authority or 12 tool we've always had. Therefore, it's likely it will 13 be used more frequently. 14 CHAIRMAN CLOWE: Judge, have you got a 15 comment? 16 COMMISSIONER OLVERA: I think the 17 message is that is being -- trying to be confirmed is 18 that it lends itself to uniformity and consistency in 19 terms of setting forth these penalties. Is that 20 correct, Ms. Joseph? 21 MS. JOSEPH: That's correct. 22 COMMISSIONER OLVERA: In other words, 23 the Commission then doesn't have to worry, well, last 24 month we were in a good mood and, you know, assessed a 25 penalty of X, and then this month, for whatever 0045 1 reason, we assess a higher penalty. Correct? 2 MS. JOSEPH: Yes. We'll have a more 3 solid basis in guidelines for feeling comfortable with 4 assessing penalties. 5 MR. ATKINS: Can I address part of 6 that? 7 CHAIRMAN CLOWE: Well, wait a minute. 8 Let me ask a question, Billy, and then we'll let you 9 get in this. 10 Okay. I'm the violator. I'm out 11 there, you know, and the auditor is talking to me and 12 he is saying, I'm here to help you, or she is. And I 13 know that you can't do anything to me that's not 14 authorized by the Bingo Enabling Act. 15 MS. JOSEPH: True. 16 CHAIRMAN CLOWE: I know that from what 17 you have told me, if these rules are adopted by the 18 Commission, you're not going to be creating any new 19 violations that don't already exist. 20 MS. JOSEPH: That's exactly true. 21 CHAIRMAN CLOWE: Then, what I think I 22 am hearing you telling me is, you're going to tell me 23 more clearly and explicitly what the violations are 24 and what the penalties are, so that I'll know that 25 when the auditor comes in and says, got you. 0046 1 MS. JOSEPH: Yes. 2 CHAIRMAN CLOWE: As the regulatee, am I 3 understanding this? 4 MS. JOSEPH: Yes, that's right. 5 CHAIRMAN CLOWE: Okay. 6 COMMISSIONER OLVERA: And that the 7 regulatee in Houston is not being treated any 8 differently than the regulatee in Brownsville. 9 MS. JOSEPH: That's right. We'll have 10 guidelines to help ensure consistency. 11 CHAIRMAN CLOWE: Has that been the case 12 in the past? 13 MS. JOSEPH: We have not had guidelines 14 in the past. 15 MS. KIPLIN: If I can, I would like to 16 jump in there. 17 CHAIRMAN CLOWE: Do you want to jump in 18 ahead of Billy? 19 MS. KIPLIN: Yeah. Because I want to 20 respond to that. 21 MR. ATKINS: I'm going to bet she is 22 going to say what I was going to say. 23 MS. KIPLIN: Do you want to put money 24 on it right now? 25 I want to get to the question that you 0047 1 all raised. You all impose disciplinary actions 2 probably at every single Commission meeting, through 3 either the entry of an order on a contested case 4 proceeding or the entry of an order in an agreed 5 fashion. And so you are creating policy, if you will, 6 through those -- those actions. You are also creating 7 policy through your rulemaking. And I have heard and 8 I think it's accurate, in the eyes of administrative 9 law, that when you enter orders in these contested 10 case proceedings and agreed orders and these agreed 11 fashions, that's what is called ad hoc rulemaking. 12 And you're doing it incremental step by incremental 13 step. The downside of that is that there is the need 14 in my mind, maybe I'm just too conservative, to reach 15 back and try to look at what, under same or similar 16 circumstances, what you have done for that level of 17 uniformity, so that you avoid the argument that -- and 18 I think somebody was getting to it, you know, happy 19 today, not happy tomorrow, that what you're doing is 20 actually arbitrary and capricious. And so that is -- 21 that is a good reason for having what you do in a 22 disciplinary setting, through the orders, set out in 23 some kind of framework in a rule so that you've got 24 that kind of uniformity that you can apply. Will a 25 licensee in Brownsville be treated the same as a 0048 1 licensee in Houston? I have to say, it depends. It 2 depends on the circumstances, it depends on the same 3 or similar license class, it depends on all those 4 factors that were laid out in a previous slide. 5 CHAIRMAN CLOWE: And that's helpful. 6 MS. KIPLIN: Yeah. And so I'll cut my 7 comments off. 8 Now, do I get the bet. 9 CHAIRMAN CLOWE: Let me comment, Billy, 10 before we give you a bite at this apple. 11 That comment is very timely and to the 12 point. And I think the effort here is to clarify and 13 to make these violations known as opposed to what you 14 commented on as ad hoc rulemaking, where if you're not 15 sitting in this Commission meeting or you're not in 16 the staff group, you know, you're out there operating 17 a bingo operation, this is folklore that's passed 18 around the campfire late at night and you don't hear 19 it. You're not in the loop. And I think we want to 20 eliminate that aspect of that kind of enforcement. 21 And that goes back to my comment about letting people 22 know what the rules are and what the enforcement is. 23 I think that's a threshold we ought to try to bring 24 everybody in the industry that we regulate to, in a 25 sense of everybody starts at the same place. 0049 1 MS. KIPLIN: If could follow up on one 2 more. The question I think was posed to Mr. McDade, 3 well, is what -- is what the Commission did in terms 4 of imposing administrative monetary penalties, is it 5 going to be the same after the -- assuming, you know, 6 that the rules are adopted in some form or fashion, 7 will penalties for that conduct be the same as the 8 penalties that were assessed prior to. And I think in 9 just some of the hypotheticals -- and I may be wrong, 10 and you guys can step on me if you want -- the answer 11 to that is going to be, no. So I want to make sure 12 that's clearly out there in terms of the examples that 13 have been raised. Under the form that you have now, I 14 think -- you know, and I may be corrected on this -- 15 but I don't think that there has been the imposition 16 of a monetary forfeiture so much as, you know, setting 17 out procedures in the agreed order that you've seen a 18 lot of them require the -- the licensee to establish 19 procedures, to go to operator training, and the like. 20 So I want to make sure that is clear and there is 21 no -- you know, no issue on that. I think that some 22 of the information that I have been privy to suggests 23 that the before and the after in terms of imposition 24 of penalties, the monetary amount is more likely than 25 not, not going to be same. And also, the number of 0050 1 administrative penalties that have occurred by way of 2 an agreed order or by a contested case proceeding, the 3 frequency, the number, the amount, will probably be 4 increased. Because this gives a framework, especially 5 for the auditors in the field, to engage in that kind 6 of enforcement activity, which, you know, I think 7 we're charged with under the Bingo Enabling Act. 8 So I want to make sure, you know, those 9 are clear, and you all are the workgroup that is more 10 closely involved in it, and if you think I'm wrong, 11 then I would certainly want you to say so. 12 CHAIRMAN CLOWE: Do you agree with that 13 comment? 14 MS. JOSEPH: I do. 15 MR. McDADE: Yeah, definitely so. I 16 think the -- just the sheer work load that we're going 17 to have is going to increase just because we're 18 dealing with more administrative cases that have to 19 come before the Commission for final sign-off and 20 approval. 21 CHAIRMAN CLOWE: So what that says to 22 me is, there will be no new violations, but there will 23 be more enforcement of the violations that exist. 24 MS. JOSEPH: That's what we anticipate. 25 CHAIRMAN CLOWE: Okay. That's 0051 1 clarification. 2 Billy. 3 MR. ATKINS: Thank you, Commissioners. 4 And actually, I do win the bet, so Ms. Kiplin owes me 5 20 dollars. 6 She made her point at the end of her 7 comments, the imposition of these penalties, Judge, 8 are going to be specific to the facts in a given case. 9 And I am a little reluctant to do this, but by way of 10 an example, if you looked at the guidelines -- I 11 believe it's the second page -- there is a violation, 12 number 1202, which is the conduct of bingo outside of 13 license times. If you look above that, it gives a 14 range of penalties for three separate offenses. Now, 15 it could be that there is an organization, say, in 16 Brownsville that gets their license and the very first 17 time this organization conducts bingo with their 18 all-volunteer staff, they exceed their license time. 19 They'll be able to go to this rule, they'll be able to 20 look at it, they'll be able to look at the factors 21 that we take into consideration, they'll be able to 22 come in and plead a case. It's the first bingo 23 occasion that this organization has ever conducted, 24 we're all volunteers, list all of the reasons that 25 that happened, and that is something that we'll take 0052 1 into consideration. And it's conceivable that in that 2 situation, based on the facts specific to that 3 situation, a warning letter may be all that is 4 merited. 5 Now, if we have an organization in Waco 6 that's been conducting bingo for 20 years, and has 7 repeatedly conducted bingo occasions outside their 8 license time, there are going to be different factors 9 specific to that. So there is going to be a different 10 range that's looked at. 11 CHAIRMAN CLOWE: And how does that 12 differ, if these rules are enacted by the Commission, 13 from what is going on today? 14 MR. ATKINS: Well, how it differs is 15 that the licensee doesn't have anything to go and look 16 at. What the licensee knows is, they can either 17 charge me 1,000 dollars or they can revoke my license. 18 CHAIRMAN CLOWE: So that's, in your 19 opinion, the actual difference to the licensee. 20 MR. ATKINS: Yes, sir. 21 COMMISSION COX: Mr. Chairman? 22 CHAIRMAN CLOWE: Yes, sir. 23 COMMISSIONER COX: Billy, if these are 24 only guidelines, then a licensee still won't know 25 whether they're going to get charged this, 1,000 0053 1 dollars, or lose their license. They may have a 2 better idea what the more common penalty would be or 3 where the presumption starts or the thinking starts, 4 but they're still not going to know. Right? 5 MR. ATKINS: Again, I'll go back, 6 Commissioner Cox, based on the facts specific to that 7 case, I don't think that they'll know exactly. 8 Because even if you look at the rule itself, there is 9 a range of zero dollar monetary penalty and a warning 10 letter to a 600 dollar administrative penalty. 11 CHAIRMAN CLOWE: I think we're back to 12 the range of violations on the back of the ticket that 13 you can use as a guideline, but until you appear 14 before the judge and plead, and the judge rules, you 15 don't know. 16 MR. ATKINS: And not only that, 17 Commissioners, but I think it's important for you to 18 keep in mind, you know, the staff can go through this 19 process of working with the licensees and everything 20 and get -- and, again, I haven't been as intimately 21 involved in the development of these, so if the staff 22 wants to correct me, but, you know, the staff can 23 negotiate some settlement in a proposed agreed order, 24 bring it to the Commission. The rule as it's written 25 does not prevent the Commission from saying, no. This 0054 1 is -- that's not enough. Or it's too much. 2 CHAIRMAN CLOWE: And I think Sandy made 3 that abundantly clear in her presentation. 4 MS. JOSEPH: Yes. 5 CHAIRMAN CLOWE: And the judge -- 6 COMMISSIONER OLVERA: And I want to 7 make sure that that's abundantly clear in the rule 8 that these are guidelines, so that a prospective 9 licensee who perhaps a first-time offender, would have 10 a reasonable expectation that the fine may be less 11 than what is published or a -- the reverse being true, 12 that someone who is a repeat offender on numerous 13 occasions could expect that it would be higher than 14 what is published. 15 MS. JOSEPH: It is stated in the rule 16 that these are guidelines, they do not bind the 17 Commission. 18 COMMISSIONER OLVERA: Okay. 19 MS. KIPLIN: If you want to actually 20 take a look, Commissioner, at the language, it's 21 proposed subsection G of 402.706. 22 MS. JOSEPH: That does state that the 23 administrative penalty chart will be considered as a 24 factor for the imposition of an administrative 25 penalty, but shall not in way bind the authority of 0055 1 the Commission to impose an administrative penalty 2 pursuant to subchapter M of the Bingo Enabling Act. 3 So -- 4 COMMISSIONER OLVERA: And I'm sorry, 5 Sandy, where are you reading that from? 6 MS. JOSEPH: That is in paragraph G of 7 706. 8 COMMISSIONER OLVERA: Okay. 9 MS. KIPLIN: Commissioners, 10 subchapter M is the administrative penalty portion of 11 the Bingo Enabling Act, and that's the monetary 12 forfeitures, the money ones, not revocation or 13 suspension of license. 14 MS. JOSEPH: All right. We're ready to 15 move ahead? 16 CHAIRMAN CLOWE: Yes. 17 MS. JOSEPH: All right. Following our 18 timeline, on December 2nd, 2004, Stephen Fenoglio met 19 with Phil Sanderson for over three hours to discuss 20 the draft administrative rules. The staff 21 subsequently made revisions to the drafts in response 22 to Mr. Fenoglio's comments. 23 On December 6th, the BAC workgroup and 24 the Commission staff met to discuss the Administrative 25 Penalty and Expedited Administrative Penalty Rule 0056 1 drafts. 2 On January 26th, the staff and BAC 3 workgroup provided an update on the draft rules to the 4 full BAC. At that meeting, Mr. Fenoglio made 5 additional comments. After that meeting, the staff 6 posted a revision -- revised draft penalty rules on 7 the Web for public comment. So revised drafts were 8 posted again. Again, no comments were received from 9 that posting. 10 On February 25th, 2005, the BAC 11 workgroup and the Commission staff met to discuss the 12 rules, the drafts, again. 13 On March 15th, the BAC workgroup and 14 Commission staff met to discuss the draft rules. 15 Mr. Fenoglio attended the three and a half hour 16 meeting. Staff made numerous revisions to the drafts 17 in response to his comments and suggestions. 18 On March 30th, the staff presented the 19 draft administrative penalty rules to the BAC for the 20 final time, and here we are today presenting the 21 proposed draft to you. 22 I would like to point out that we are 23 planning, if you so approve, to schedule a public 24 hearing on April 28th to receive oral comments. Now, 25 if someone cannot make the public hearing, they have 0057 1 the opportunity to provide written comments during the 2 30-day period. 3 I would like to talk to you for a 4 moment about some issues that have been raised by 5 recent letters to the Commissioners, just to address 6 these. Because they may have raised some questions 7 for you, I would like to go ahead and address them. 8 First of all, comment is made in the 9 letters that the rules are too long. As I previously 10 stated, we have tried to find a balance between 11 listing every violation and having the rules be 12 lengthy, and providing good information, good notice 13 to the public of what is going on. I think it has 14 been a little shocking or at least surprising to 15 members of the industry to see how many possible 16 violations there are in the statutes. I don't 17 think -- you know, nobody has ever compiled a complete 18 list before. And I think it kind of scared some 19 people. But, again, there is nothing new there. It's 20 just been putting it all in one place. So we have 21 addressed the concern about the length of the rules by 22 shortening them substantially and eliminating many of 23 those violations which we felt did not occur 24 frequently. 25 COMMISSIONER COX: Now, Ms. Joseph, I 0058 1 would say that -- I would think that was quite a 2 concession. I would argue that the length of the 3 rules, if they're properly organized, is irrelevant. 4 What we're really trying to do is provide guidelines 5 for people who are playing a game and would like to 6 know what the rules of it are. And if the legislature 7 and whoever else made the rules this thick, reducing 8 them to this thick hasn't changed the rules, it's only 9 provided less information for the people who might 10 want it. So I think we're looking at an area there 11 where both sides of that could be argued pretty -- 12 pretty well, that reducing it at all is a disservice. 13 MS. JOSEPH: Well, I agree. And it's a 14 difficult question, because we certainly hear comments 15 on both sides of the issue. One is, you know, staff 16 is told, you need to tell us everything. We want to 17 know up front what is going to happen. What is -- you 18 know, what is the story. Then on the other hand, it's 19 like, this is too much, it's too long. So where is 20 the correct balance? We've attempted to reach that. 21 If -- certainly, if the Commissioners want us to do it 22 a different way, you know, we're glad to do that. 23 MR. SANDERSON: May I make a comment? 24 Phil Sanderson, assistant director of the Charitable 25 Bingo Division. 0059 1 In my mind, the rule is only two pages. 2 It lays out -- the first two pages is the rule. What 3 is attached to it is the guidelines and the 4 violations, which you could make -- you could make it 5 two pages or it you could make it 25 pages, it's all 6 still -- that's irrelevant to the extent that the 7 violations are in the Act and the rules already. And 8 all we're doing is laying out what a proposed amount 9 of penalty -- monetary penalty could be for violating 10 those different sections. 11 CHAIRMAN CLOWE: Well, Phil, I think 12 that's in conflict with what Marshall told us, that 13 there will be more violations if these rules are 14 approved by the Commission, if I heard him correctly, 15 and there will be more penalties. 16 MR. SANDERSON: I -- 17 CHAIRMAN CLOWE: I got a sense of more 18 enforcement from Marshall's comment, and that's when I 19 said, let's leave it at that. And, Marshall, can you 20 help me? Did I misunderstand you? 21 MR. McDADE: I don't -- I hope that 22 that's not what -- not what I intended to say. What I 23 really -- what I wanted to say is that we still 24 currently enforce all parts of the rule and the Act. 25 And we still -- all of our audit letters and reports 0060 1 provide the detail. I think now what would happen is 2 that the administrative actions that occur as a result 3 of all the violations will probably increase. 4 CHAIRMAN CLOWE: Okay. And that's what 5 I thought I heard you say. 6 Now, Phil, can you respond to that? 7 MR. SANDERSON: Well, I -- there is not 8 any new violations. And like I said, the rule itself 9 is only the first -- the first two pages lay out the 10 thought behind the process. The -- 11 CHAIRMAN CLOWE: But I'm hearing, there 12 are no new violations, but there are going to be more 13 enforcement. That's what I'm hearing. Am I wrong in 14 what I think I'm hearing? 15 MR. SANDERSON: I don't think there is 16 going to be more enforcement. I think we're going to 17 enforce the same as we always have in the past. Now, 18 there may be more administrative penalties with that. 19 Currently, we do numerous agreed orders and some 20 warning letters for violations. And these -- these 21 two rules will actually put it out -- put everything 22 out on the table that this is what can happen. And 23 it's -- most of the penalties are from zero and a 24 warning letter up to a certain amount, anywhere from 25 100 to 500 dollars. 0061 1 CHAIRMAN CLOWE: But more 2 administrative penalties sounds like more enforcement 3 to me. I'm not picking at you, I'm just trying to 4 understand what you're telling us. 5 MR. McDADE: I think, historically, for 6 all the cases that occur -- I guess I can use last 7 year as an example. 14 -- you all signed 14 agreed 8 orders last year. There were probably ten times more 9 administrative cases that we have internally that 10 didn't include an administrative penalty associated 11 with those violations. And historically, when we've 12 assessed an administrative violation, those things 13 have come before the Commissioners for final approval. 14 So from that perspective, where you're assigned a -- a 15 dollar penalty, all those cases that didn't previously 16 come before the Commissioners, probably will now come 17 before the Commissioners as far as a work load 18 increase for the Commission. As far as the work load 19 that's on the staff, we're still doing the same things 20 that we've always done, going out and done audits or 21 the same number of audits, or even more audits, and 22 try to make -- encourage compliance. And it's the 23 same number of -- typical number of violations are 24 occurring year after year, so... 25 MS. KIPLIN: Commissioners, if I could. 0062 1 I've had an off-mike discussion with Mr. Atkins and, 2 you know, we all may think differently. I don't -- 3 and I don't know that I agree completely with where -- 4 what your all's focus is. I think, and time will 5 tell, that there will be more enforcement actions in a 6 fiscal year. And I -- and it doesn't have anything to 7 do with whether there will be more A&As or assistance 8 and -- whatever those two acronyms stands for. And I 9 think the reason for that will be because now there 10 will be guideline -- a guideline in process for these 11 expedited settlements in the field. So -- for the di 12 minimus. So what I think you'll see are those. I 13 don't -- you know -- and Mr. Atkins, you can obviously 14 correct me, but I think time will tell on the number 15 of enforcement actions in a year. That's not the -- 16 that's not the aim of the rules. It's not to increase 17 the number of actions. The -- I think that will be a 18 product as a result of having this guideline, but I 19 think what has happened is, as a result, and that's 20 why these -- to some extent the bingo enforcement 21 process review presentation you saw, there is a link 22 to these rules, because I think what has happened in 23 the past is that those have come up, they've come into 24 a fairly tedious process where they go through legal, 25 there has been advice provided to the bingo division, 0063 1 there has been an inherent delay on proceeding to 2 bring these cases before you, so that they have 3 dragged out over more of a fiscal year. 4 CHAIRMAN CLOWE: And I appreciate that 5 comment, and I'm sure the Commissioners have something 6 they wanted to say. Just let me add this point. You 7 know, you're coming to us asking us to approve these 8 rules for comment, and we're asking questions that 9 come to mind. And so if you don't have unanimity and 10 you're not sure in your own minds what the impact is 11 going to be, that puts me off a little bit, because I 12 want to understand, when you come to the Commission 13 and ask for this, that you all agree -- and, of 14 course, I would like to have the public agreement, and 15 if we can't have it, I want disagreement over agreed 16 items. And we haven't even gotten to that point of 17 this process yet. But this unsettles me just a little 18 bit. I'm not sure that I understand what you have 19 told me about a level of enforcement and whether or 20 not it's going to stay the same or -- you know, I'm 21 not quite clear on it. 22 Commissioner Cox has instructed me to 23 take a recess for ten minutes, and I'm going to follow 24 those instructions. 25 COMMISSIONER COX: It was a request. 0064 1 CHAIRMAN CLOWE: Oh, I see. Okay. And 2 we'll take a ten-minute recess. This is a good time 3 to gather your thoughts anyway. 4 (RECESS.) 5 CHAIRMAN CLOWE: We'll come back to 6 order now and, Sandy, I think we're back to you. 7 MS. JOSEPH: All right. Thank you, 8 Commissioner. I would like to address two comments. 9 First of all -- or that were made before we took a 10 break. 11 First of all, Commissioners, I would 12 like to say that we appreciate your questions and 13 comments. They help us hone our thinking and we 14 believe that's exactly what you're supposed to do and 15 what we expect. And we assume that y'all have more 16 questions throughout this process as we move into the 17 formal rulemaking proceedings and further 18 consideration. I would like to say, we did huddle 19 during the break and determined that we don't feel 20 there is any disagreement among us, that being 21 Marshall, myself, Phil, Stephen White, who is chief of 22 enforcement, Kim, or Billy, in terms of the possible 23 effect of the rules. I believe there had -- there is 24 a little confusion caused by different understandings 25 of what is meant by use of the term enforcement 0065 1 action. And in some of the staff's mind at least, 2 enforcement action -- probably all the staff -- that 3 includes a whole gamut of actions that the staff takes 4 possibly. I think what is being confused with, to 5 some people, enforcement action may mean imposition of 6 monetary penalty. So there is agreement that we do 7 believe there will, in all probability, be increased 8 monetary penalties assessed. Mr. Sanderson has 9 advised us that he didn't mean to contradict anything 10 that Marshall said. So it reminds me of my husband 11 and I. Often we discuss things, we have different 12 ways of saying things. He will say something, I'll 13 repeat it, thinking -- in a different way, thinking 14 I'm affirming it, and he thinks I'm arguing with him. 15 And it takes us a while to figure out, no, we're 16 actually saying the same thing, we agree. And I 17 believe that's somewhat what is happening. 18 CHAIRMAN CLOWE: Can we put that on the 19 agenda so we can have a full discussion of the 20 male/female relationships in a marriage? 21 MS. KIPLIN: I have to say, I was 22 thinking, that's my line. 23 CHAIRMAN CLOWE: Thank you, Sandy. You 24 just made that crystal clear. 25 MS. JOSEPH: All right. I would like 0066 1 to say, also, at this point before we continue any 2 further, that the purpose of these rules, we feel, 3 overall, if you want to state a broad simple purpose, 4 is to encourage compliance. Or to state it another 5 way, to deter violations. We're not out to bring in a 6 lot of money. The agency does not get to keep that 7 money. We don't see this as a revenue generator for 8 the State. This is a tool -- and I think it's clear 9 that from some of the responses we've gotten that when 10 you start talking about money, that does get people's 11 attention. And that's a tool that we want to use 12 that's going to be within the control, to a large 13 degree, of the licensees as to what amount of 14 penalties are collected. They have, hopefully, some 15 control over their own actions and, you know, again, 16 recognizing that some violations are inadvertent. 17 CHAIRMAN CLOWE: Thank you. 18 MS. JOSEPH: Moving on to the second 19 bullet, and I presume you want to me to continue with 20 these? I know this is getting lengthy and I apologize 21 for that. 22 The second issue that was raised was 23 that staff has not responded to many of the comments 24 and suggestions made by Stephen Fenoglio. Staff has 25 attempted to and believes that we have responded to 0067 1 Mr. Fenoglio's comments. He made that reference in 2 his letter particularly to comments that he made after 3 his meeting with Phil Sanderson on December 6th. 4 Subsequent to his meeting with Mr. Sanderson, there 5 were several opportunities that he had to further 6 submit or address or bring up his comments. Now, on 7 March 15th, we had a meeting with him and spent more 8 than three hours going over every comment that he 9 wanted to bring up and we attempted to address those. 10 Now, we may not have agreed with every comment, but we 11 talked about them. We made changes in response to a 12 lot of them, so I'm not sure what he means by we 13 didn't respond. 14 CHAIRMAN CLOWE: He'll tell us. 15 MS. JOSEPH: Oh, yes. 16 Now, on March 15th -- in our March 15th 17 meeting, he did raise an issue about concern of 18 provision of the rule, which appeared to -- or which 19 would allow what he called a cascading effect of 20 penalties. He has now also used the term, a piling on 21 of penalties. And this references a situation where a 22 basic violation occurs, and because of the nature of 23 the violation, it would necessarily lead to additional 24 violations. And the concern is that it would not be 25 fair to, quote, hang somebody for every one of those 0068 1 succeeding violations, because those were just kind of 2 a natural fallout of the first one, where the real 3 error or violation occurred. In our meeting, we told 4 him that we did not anticipate, we certainly don't now 5 and did not intend to try to assess an administrative 6 penalty every time for every single violation. It 7 would depend on the circumstances. He asked whether 8 we would consider some language to make that clearer 9 in the rule. And we -- and we said we certainly 10 would, and he offered to provide us such language. We 11 thought we would get that language in the next day or 12 two, but I know he has been very busy. He did not get 13 it to us until March 23rd. That -- March 23rd was the 14 day that we needed to turn in our drafts to go into 15 the BAC notebook, so that they could be mailed out to 16 the BAC members. So what I'm saying here is, 17 unfortunately, we didn't get that draft language in 18 time to consider to get into those BAC notebooks. 19 Now, once staff did have time to look 20 at it, staff did not feel and does not feel 21 comfortable with the language, because we believe it 22 is too restrictive and ties the Commission's hands too 23 much. There will be times when perhaps circumstances 24 would call for assessing penalties for each and every 25 violation. It's possible. We don't want to preclude 0069 1 the Commission from doing that in the appropriate 2 circumstances. So I -- we did not get back to 3 Mr. Fenoglio on his draft language, and I apologize 4 for that, that has caused him concern, but it was 5 largely a matter of timing, of deadlines, et cetera. 6 So there -- we have attempted to respond to his 7 comments and appreciate -- he has had some excellent 8 suggestions. 9 All right. Moving on, there was a 10 concern raised about the impact of the rules. And 11 that's actually what we were discussing just prior to 12 the break and a little bit subsequently. How will the 13 rules be applied. Hopefully, we have cleared that up 14 today, if there was a question about that. 15 Also, Mr. Fenoglio said that he -- in 16 his letter that he felt he had been shut out by the 17 staff during the last week. Again, there was 18 certainly no intent to do that. It was a matter of a 19 lot of things going on and a lot of deadlines having 20 to be met and the timing. We regret giving him that 21 impression. It was not intentional. 22 Another issue that was raised was that 23 we should delay this rule -- formal rulemaking process 24 until the legislative session ends. I would like to 25 address that more in just a moment. But before that, 0070 1 I would like to advise you of some other issues that 2 were raised at the BAC meeting on March 30th. All 3 right. At that meeting, Mr. Fenoglio and perhaps 4 others made the comment that they felt like the 5 four-year look-back period was too long. I mentioned 6 to you earlier that in considering whether it's a 7 first violation, a second violation, et cetera, we 8 would be looking at a four-year period. The comment 9 was raised that that was too long. As I said, the 10 staff used as a basis for that the length of time that 11 records are kept. Certainly, there may be a different 12 period that might be appropriate. Staff was not 13 comfortable with suggesting anything else, but 14 certainly, based on any comments we receive, the staff 15 or the Commission could decide that that should be 16 changed. 17 Another issue that was raised was the 18 source of payment of penalties. There seems to be a 19 lot of concern about where this penalty money is going 20 to come from. Is it going to come from the bingo 21 account or will the organization have to take it out 22 of another account. There is concern that bingo will 23 be -- that the organizations might be put out of 24 business, but where is this money going to come from. 25 Primarily here I want to make the point that these 0071 1 rules do not address this issue. These rules do not 2 address what account the money comes out of. That's a 3 separate issue. It's an issue that may need -- and 4 probably does need some further consideration, 5 possibly even a rulemaking pertaining to that, but 6 that is not an issue of these rules. 7 CHAIRMAN CLOWE: Where does it come 8 from today? 9 MR. McDADE: Currently, we typically 10 request that those funds come from other sources 11 outside of the bingo account. Some may pay it from 12 their general funds or by getting donations from 13 outside of their -- from their members. Just various 14 other places other than the bingo account. 15 CHAIRMAN CLOWE: And you say that's a 16 request? 17 MR. McDADE: Correct. 18 MS. KIPLIN: Commissioners, it's my 19 understanding and -- that that issue is the subject of 20 an -- of agreed orders, so that it's a settlement, by 21 way of an agreement, where the staff and the licensee 22 have agreed on where those funds will come from. It's 23 not something that's been imposed without agreement. 24 CHAIRMAN CLOWE: Is every agreement the 25 same or are there different agreements? 0072 1 MR. McDADE: Currently, all of the 2 agreed orders include that language, of requesting 3 that those funds come from non-bingo account sources. 4 CHAIRMAN CLOWE: So that's the way it's 5 settled now? 6 MR. McDADE: Right. 7 CHAIRMAN CLOWE: That would be your 8 answer? 9 MR. McDADE: Yes, sir. And it's all to 10 try to make sure that bingo dollars are used for 11 charitable purposes. 12 COMMISSIONER COX: Well, let me see if 13 I understand this. If the numbers that I saw in the 14 Bingo Advisory Committee's reports are correct, that 15 hundreds of thousands of dollars of penalties might be 16 imposed here, and we're going to ask the charities to 17 find a source for those outside of the funds that 18 they're raising for bingo? 19 MR. McDADE: That's the question that's 20 been raised now, and that's one of the ones that we're 21 going to have to resolve. 22 COMMISSIONER COX: It seems that it 23 would be a valid point to say, hey, you're talking 24 about assessing significant penalties, where is the 25 money going to come from. Where is it legal for the 0073 1 money to come from. What are the possible sources of 2 the money. And I wonder whether that might not need 3 to be resolved before we put the penalties in place. 4 Now I'll argue against that. There is 5 a provision for assessing penalties now, and there is 6 no provision for where they're coming from. So it 7 gives -- only gives the licensees a better idea of 8 what penalties might be assessed and for what, and 9 yet, it's not perfect in that it doesn't clear up 10 another problem that currently exists. 11 MS. JOSEPH: Thank you, 12 Commissioner Cox. I believe you set forth the 13 important issue. 14 All right. So what we're saying is, 15 that issue is not addressed in this rule. We can 16 certainly address that issue in another rulemaking, if 17 that is what is deemed appropriate. 18 In addition, an issue was raised about 19 the 20-day response period that is provided for for 20 the Expedited Penalty Settlement Agreement. I 21 mentioned earlier that an organization would have 20 22 days to respond to whether or not they wanted to agree 23 to the expedited penalty amount. Mr. Fenoglio raised 24 the concern that that period of time was not long 25 enough, because some organizations meet less 0074 1 frequently than once a month. He said that he 2 represents at least one organization that the operator 3 would not be comfortable in agreeing to such a penalty 4 without taking it to the board for their approval. 5 And that would be, in most cases, impossible to occur 6 within 30 days. Our goal with this rule is to have an 7 expedited penalty rule, and staff believes if we 8 increase this beyond -- much beyond 20 days, it won't 9 be an expedited penalty agreement any more. And there 10 is nothing that requires an organization to enter into 11 an expedited penalty, it's their choice and their 12 option if it works for them. So at this point, we 13 believe that 20 days is appropriate, although we 14 recognize that for some particular organizations, the 15 way they do business may preclude them from taking 16 advantage of this. 17 MS. KIPLIN: Ms. Joseph, under the APA, 18 what on the notice, the required notice of opportunity 19 to show compliance, what is the time line on that? Is 20 that a 20-day or is it -- 21 MS. JOSEPH: I believe it -- Mr. White? 22 MR. WHITE: I think it's ten days under 23 the -- (inaudible) fully apply to this. It's not -- 24 this is only administrative penalties, it's not a 25 revocation and suspension. 0075 1 MS. KIPLIN: The reason I asked the 2 question was -- 3 CHAIRMAN CLOWE: Wait. Wait. Let's 4 identify who that answer came from and what the answer 5 was. If it's going to be accepted by the Commission, 6 it needs to be on the record. 7 MR. WHITE: My name is Stephen White. 8 I'm the chief of enforcement, legal service division. 9 And your provision that Ms. Kiplin has referred to, I 10 think, is 2001.054(c) of the Government Code, and now 11 that I'm on the record, I hate to be quoted, but I 12 believe it's ten days notice, a minimum of ten days 13 notice. But my note was, you know, I don't think it's 14 really applicable to the assessment of administrative 15 penalties. I think the 20 days comes from, actually, 16 the Bingo Enabling Act, the section dealing with 17 assessment of administrative penalties. It says, it 18 must be -- organizations must be given 20 days notice 19 to respond. 20 CHAIRMAN CLOWE: Thank you. 21 MS. JOSEPH: The issue that I said I 22 would come back to is the request to delay publication 23 of the rules for the formal comment period. 24 Publication is the beginning of the formal rulemaking 25 required by the APA. And I want to emphasize it's the 0076 1 beginning, it's not the end. This is an additional 2 period and it is the required period for allowing 3 public comment. Everything that we've done heretofore 4 has been in addition to the requirements of the APA. 5 We don't believe that delaying a month or two will 6 eliminate the time needed for formal public comment. 7 It won't. We'll still have to have a 30-day public 8 comment period. And also, the proposed rules may be 9 revised or rejected after public comments are 10 received. 11 Staff would like to move ahead. 12 Significant time has been devoted. We feel that a 13 five-month period of opportunity for comments from 14 members of the public is, if not sufficient, it's 15 certainly above and beyond what is required by the 16 APA. We would like to move ahead to that formal 17 comment period. So at this point, I would be happy -- 18 we would be happy to answer any other questions, but 19 it's the staff recommendation that the Commissioners 20 vote to initiate formal rulemaking proceedings by 21 approving the draft rules for publication in the Texas 22 Register to allow public comment for a period of 30 23 days. Again, a public hearing is tentatively 24 scheduled for April 28th. Are there any additional 25 questions? 0077 1 CHAIRMAN CLOWE: Any questions of these 2 folks, Commissioners? 3 COMMISSIONER COX: I have one more 4 question, Mr. Chairman. 5 Sandy, you said that if the response 6 period were much longer than 20 days, that that would 7 defeat the purpose of expediting matters. Now, how 8 much of this effort was related to letting people know 9 what the rules of the game are and how much of it was 10 related to an expedite? 11 MS. JOSEPH: Well, there are two rules. 12 The first one, 706, the Standard Administrative 13 Penalty, that is primarily the rule which relates to 14 letting people know, here are the rules of the game. 15 Here are the violations, et cetera. 16 The second rule is to provide -- is not 17 so much of a notice for here are the rules of the 18 game. It's more of a rule of, here is a simple way to 19 address minor violations. So there are two different 20 rules. 21 COMMISSIONER COX: So the argument, I 22 guess, that one would make against the 20 days when 23 organizations, say, don't necessarily meet more often 24 than once a month or -- I have several charitable 25 boards where they don't meet but twice a year. So the 0078 1 importance of expediting as opposed to just letting 2 folks know what the rules are have been balance, you 3 think, here with the 20-day period? That that says 4 that if you're going to be able to take advantage 5 of -- if, in fact, these are a privilege, these rules, 6 you have to have an organization that can respond 7 within 20 days? 8 MS. JOSEPH: Yes. Or the organization 9 could choose to delegate authority to the operator. 10 COMMISSIONER COX: But then talking 11 about delegating the authority to the operator to 12 settle a matter, which might require that they raise 13 funds, I wouldn't do that as member of a charitable 14 board. 15 MS. JOSEPH: Well, that would -- that 16 would need to be something they would consider. 17 CHAIRMAN CLOWE: Any other questions 18 from this group? 19 Sandy, you mentioned the point and you 20 said you were going to come back to it and you didn't, 21 and I want to go back to it. And that's the delay 22 while the legislature is in session. 23 MS. JOSEPH: Oh, I thought -- 24 CHAIRMAN CLOWE: And just let me say 25 how I feel about that, and I don't know whether the 0079 1 Commissioners would agree with me or not. But I don't 2 think it's the legislature's intention for agencies to 3 stand down on their business while they're in regular 4 or special session. And my view is that the agency 5 should move ahead with conducting its business. And I 6 think there is a situation in the courts where a 7 member of the legislature representing a client gets a 8 deferral of prosecution of a case. I don't think we 9 have that situation here. So I just wanted to go back 10 and say, for myself, I am not in favor of the 11 Commission not dealing with its business while the 12 legislature is in session. And I just wanted to say 13 that and save you an explanation. 14 MS. JOSEPH: All right. Thank you. 15 CHAIRMAN CLOWE: Okay. Billy, I think 16 it's appropriate for you to make any comments to the 17 Commissioners if you have them at this time. 18 MR. ATKINS: Thank you, Commissioners. 19 I appreciate the time that you have afforded the 20 staff. And also, I want to thank not just the members 21 of the industry that have been involved in this 22 process up to this point, but also, Ms. Joseph, 23 Mr. Sanderson, Mr. McDade, additionally on our staff, 24 Georgia Oakley, has been involved with Mr. McDade in 25 producing many of the revisions that this rule has 0080 1 gone through. Sandy, in her presentation, discussed a 2 number of the meetings that had been held with 3 industry representatives. There was a lot of work 4 that the staff put into these rules also outside of 5 these meetings. 6 Commissioners, I concur with 7 Ms. Joseph's recommendation that you vote for 8 publication in the Texas Register and public comment 9 of these rules. I think that Ms. Joseph has provided 10 you with a thorough explanation of the amount of time 11 that these rules have been out there for comment, the 12 fact that there were -- I know you discussed one of 13 the versions that was on our website. There were 14 actually two different versions that were on our 15 website, neither one of which received any public 16 comment. We've gotten to the part, I think, in this 17 process where the rubber is ready to meet the road. 18 We're ready to move forward. And I think we have seen 19 in the past, Commissioners, some similar situations 20 where when we've gotten to this point there has been a 21 desire by the industry to slow down and look at it 22 some more. Based on the issues that were raised at 23 the BAC meeting, the specific issues contained in the 24 rules that were raised at the BAC meeting, I think 25 that those can be addressed through the public comment 0081 1 period. It may be that at the end of the public 2 comment period, staff still agrees to disagree. But I 3 think it's appropriate for us to bring it to you at 4 this time, to give you a briefing on it, and to get 5 your input. 6 CHAIRMAN CLOWE: Thank you, Billy. 7 And now, Ms. Taylor, I would like to 8 come back to you, because you raised the issue of the 9 vote in your report to the Commission, about the last 10 meeting of the BAC on March the 30th. And you 11 highlighted that the BAC moved, seconded, and passed a 12 recommendation that the TLC -- oh, that's not it -- 13 moved and seconded that the Commissioners not vote to 14 publish the proposed administrative rules following 15 that paragraph. 16 Would you care to elaborate on the 17 sense of that vote to us? I would like to give you 18 that opportunity if you wanted it at this time. 19 MS. TAYLOR: We had a very lengthy 20 discussion that went on for many pages of notes. I 21 have tried to get it into a small format here so that 22 I could just kind of give you an idea of what went on 23 during the meeting. There is a -- there is a lot of 24 worry in a lot of the things that Ms. Joseph talked 25 about, that -- these are not nonprofit organizations. 0082 1 And the worry is that it could put them out of 2 business. When we're talking about going from 800 3 dollars in fines to 10,000 dollars in fines, which is 4 the same thing that you were touching on earlier, if 5 there is no more new violations, why are the fines so 6 much more. Well, the difference is now, a lot of the 7 things, you know -- that organizations are warned, 8 you're not supposed to do that, but they're not fined 9 for every single one of the little things -- small 10 little infractions that might be found. What worries 11 us, I think, is the fact that, through this, we're 12 afraid that if every little thing is caught on and 13 acted on, you're going up tenfold with the fines that 14 are coming out of nonprofits. We're dealing with 15 nonprofits, not for profit entities. So it's a big 16 difference. These charities don't have fines and 17 violations built into their budget. They're not the 18 trucking industry, you know, where maybe that's part 19 of what their budget is. They know they're going to 20 get some sort of violation. Nonprofits don't build 21 these in, so it doesn't take a lot to really hurt and 22 cripple an organization. I belong to a lot of small 23 ones and that was my worry here at the BAC meeting, 24 and I think the worry of a lot of other members, of 25 what it could do to the general fund because there is 0083 1 a lot of times, not a lot of money. So the agreed-on 2 orders, you know, looked very small. I mean, when we 3 looked, it was less than 1,000 dollars going up to 4 10,000. The 270,000 was a worrisome figure also. 5 That's an awful lot of money. We know that right now 6 we have a Commission that works with us and is helpful 7 to us, but we know that you could be here today and 8 gone tomorrow and your -- unfortunately, the people 9 that replace you might not -- 10 CHAIRMAN CLOWE: You mean, we might 11 die? 12 MS. TAYLOR: Well, I mean you might get 13 tired of working with us. You know, everybody -- we 14 feel now that we have a staff that's working with us, 15 and we have a Commission that is working with us. 16 That can all change in a heartbeat. What could happen 17 in the future if we don't have people working with us 18 is always worrisome. 19 CHAIRMAN CLOWE: That's good and I was 20 hoping you would give us that flavor. I want to ask 21 you now, because I have to apologize that I was unable 22 to attend the meeting, I was called away, 23 Commissioner Cox had an illness in his family, and 24 Commissioner Olvera was unable to attend, so for the 25 first time in a long time, we didn't have a 0084 1 Commissioner present. I'm very regretful about that 2 because I want to ask you a question, was there -- 3 that I would have asked if I had been there. Was 4 there a clear understanding among the members of the 5 BAC that this is the pre-public comment activity, and 6 that there is a period, if the Commission votes to 7 publish these rules, when the concerns that you have 8 stated would be taken in on the record and you would 9 have the opportunity, under documentation, to make 10 these arguments for the Commission's benefit. Was -- 11 was there an understanding of that? 12 MS. TAYLOR: There was a clear 13 understanding that the committee that worked on this, 14 the workgroup, was not prepared to pass this forward 15 either. 16 CHAIRMAN CLOWE: For the same reason? 17 MS. TAYLOR: For the same reason. 18 CHAIRMAN CLOWE: What was the 19 alternative that was discussed, if there was an 20 alternative discussed? If the vote was not to ask the 21 Commissioners to publish these rules, was there 22 another choice articulated by the BAC? 23 MS. TAYLOR: What we would like to see 24 is the rules continue to be worked on, not 25 indefinitely, but there are some -- some of the 0085 1 intentions that are stated here, we would like to see 2 them put in the rules. Put, you know, in writing -- 3 it needs to be in writing, so future people coming, 4 whoever takes your place, in writing it's -- you know, 5 we would like to see it in black and white. 6 CHAIRMAN CLOWE: So there was not a 7 sense of just leave it like it is? 8 MS. TAYLOR: No. 9 CHAIRMAN CLOWE: It was more of a sense 10 of, we need more time and more work on it. 11 MS. TAYLOR: We wanted to get it -- 12 tweak it so that we felt comfortable before we passed 13 on that you were in agreement with it. 14 CHAIRMAN CLOWE: And that was the 15 alternative, even in the light of the recitation that 16 Ms. Joseph has given the Commission. If I remember 17 correctly, this process started a year ago on these 18 rules, and it sounds like it's been actively pursued 19 since November of last year. And certainly, in the 20 first quarter of this year, there has been quite a bit 21 of activity. 22 MS. TAYLOR: If I can draw your -- one 23 thing back. Do you remember how long it took to write 24 a new definition for a pull tab? That was a two-year 25 process that it took the staff to work on. So I don't 0086 1 think that this is a very long process for this rule 2 when we were talking about a definition for pull tabs. 3 CHAIRMAN CLOWE: Okay. That's a fair 4 answer and a good answer. I want to point out to you 5 that I think one of the things that I'm aware of is 6 the criticism that agencies receive for sitting on 7 rules and sitting on action and not being forthcoming 8 to the public. So I would say, as one Commissioner, I 9 am trying to balance that, and I think that comes to 10 bear and in focus in this issue. But I'm clear in my 11 understanding that what the BAC workgroup and what the 12 BAC and their vote was saying was, we're not for the 13 status quo, we need more work and more time to do that 14 work. Am I -- 15 MS. TAYLOR: Absolutely. Absolutely. 16 CHAIRMAN CLOWE: Okay. That's very 17 helpful. Thank you. 18 MS. TAYLOR: Thank you. 19 CHAIRMAN CLOWE: All right. Now, I 20 think, Mr. Fenoglio, we're going to ask you to come 21 up, and I think that you are going to speak to us in 22 regard to this item, and you've indicated that you're 23 against it. I also want to comment that the 24 Commission has 17 other appearance forms in addition 25 to yours. And I asked you during the break if you had 0087 1 asked these 17 folks to come up and appear before the 2 Commission and you said, well, you would either ask 3 them or somebody else would ask them. And I want to 4 get that comment on the record. And I want to ask you 5 the same thing on the record that I asked off the 6 record, and that is, will you try to make your 7 comments as all inclusive as possible, so that we can 8 eliminate the time and the redundancy that might be 9 expressed by a number of people who are here that you 10 represent. 11 MR. FENOGLIO: Mr. Chairman and 12 Commissioners, my name is Stephen Fenoglio. I'm here 13 today representing over 950 charitable and business 14 organizations. And I have appeared before you before. 15 Mr. Bresnen will not be here. The legislative session 16 continues, and there are members of his group here, 17 but he asked me to convey the same comments. Some of 18 the people, and I believe there -- we had about 50 19 show up. I know some have had to leave because I had 20 told them this issue would be on and off within a 21 couple of hours and several people left. I have not 22 visited with all of the individuals about the question 23 that you raised, but I have visited with enough that I 24 believe that it is true that they will waive, and if I 25 miss something that they think important, they will 0088 1 address that. But will they will not attempt to, as 2 we discussed before, pile on on an issue as far as 3 making repetitive comments. 4 CHAIRMAN CLOWE: And I'll be happy to 5 call them and see what their position is, but if you 6 could be as all inclusive as possible, I think the 7 Commission would appreciate that. 8 MR. FENOGLIO: I will attempt to do so, 9 Mr. Chairman. And -- 10 MR. ATKINS: I'm sorry. They each get 11 one of these? 12 MR. FENOGLIO: Yes. 13 I handed out some documents to 14 Mr. Atkins to distribute. And I think there are more 15 than enough, and I have given one copy to Ms. Joseph 16 of the issues. You've obviously received my letter 17 and staff received it as well, I gather. 18 I want to say first, Commissioners, 19 that that's the first letter I've ever written to an 20 agency in my 20 years of administrative practice and I 21 hope it's the last letter I ever have to send. But I 22 could reach no conclusion other than the one that I 23 said in the letter. As most of you know, I'm not a 24 shrinking violet. I've been active in practicing 25 before this agency, and I have been very active in -- 0089 1 I believe there have been 15 new rulemakings in the 2 last two years that have been started and completed, 3 and I have participated exhaustively in about seven of 4 them and quietly in the remaining ones. 5 I circulated to you three documents. 6 First is my attempt for a sequence of events because I 7 knew that I threw out a lot of facts to you that would 8 be hard to digest. I don't think that the -- and 9 staff's sequence was certainly more exhaustive. I 10 don't think we would disagree on exactly what 11 happened. The other two documents I circulated to you 12 is a side-by-side comparison. The longer one is the 13 Standard Administrative Penalty -- and this does not 14 include the chart, but it's the verbiage and my 15 comments on the right side and where I have provided 16 comments to the staff before or, again, in March, or 17 in bracket, in bold. And that's the text of which I 18 have commented repeatedly to staff on, beginning with 19 Mr. Sanderson back in November of '04, and 20 coincidentally, that's how I've generally done it when 21 I have commented to Ms. Kiplin on this issue. So it's 22 real easy to find where I'm -- my comments and what 23 they are. They jump out at you if you will. 24 The second, shorter document side by 25 side is the same thing for the Expedited 0090 1 Administrative Penalty. 2 COMMISSIONER COX: I only seem to have 3 one of those, Stephen. 4 MR. FENOGLIO: There should have been 5 two, a Standard and an Expedited. 6 MR. ATKINS: Okay. 7 MR. FENOGLIO: The Standard 8 Administrative Penalty Guidelines is the six-page 9 document. The Expedited is a three-page document. 10 And a former boss of mine told me a long time, when 11 Commissioners are reading something, you ought to shut 12 up and let them finish. I'll be happy to talk or -- 13 CHAIRMAN CLOWE: I think these 14 Commissioners can read and listen at the same time, so 15 go ahead. 16 MR. FENOGLIO: All right. Good. 17 This all stems from a Sunset Advisory 18 Commission staff recommendation, and the first time we 19 saw it formally in writing was in August of 2002. And 20 I brought as an additional handout that particular 21 recommendation, but I don't think you need it. I'm 22 trying not to cover you up with paper. But, 23 basically, it said that the Commission should adopt an 24 administrative penalty chart. There are a number of 25 agencies in the state that have them. When I met with 0091 1 BAC before, and I have talked with staff about a 2 number of them, we identified 22 agencies that had 3 administrative penalties. Some are detailed, some are 4 not. Some merely say, the agency will adopt an 5 administrative penalty chart. And they may have it, 6 but it's not on their website. When you file an Open 7 Records Act Request, you get nothing, and it's 8 certainly not in any rule. Some agencies even have an 9 administrative penalty chart in their statute. But 10 having said that, that was a Sunset Advisory 11 Commission recommendation in August of '02. It was 12 incorporated into the Sunset process in '03. It was 13 in the statute, the Sunset statute, SB-270 that went 14 through, and obviously it didn't pass. 15 They -- we renewed the Sunset process 16 in April of '04, and the staff of the Sunset Advisory 17 Commission made the same recommendation. So -- and 18 it's now in the latest version of the Sunset bill as 19 far as an administrative penalty chart. And I raise 20 that point to make a point, that the staff has said 21 repeatedly, this issue has been around a long time. 22 Why should you be surprised. It's true. But they 23 can't have it both ways. 24 The central issue of our concern, and 25 it's been the central comment I made when I met with 0092 1 Mr. Sanderson, and I praised him before and I'll 2 praise him again. I met with him on whatever my 3 sequence of events says, in November -- December '02. 4 Because of his schedule and mine, we could only start 5 the meeting at 4:00. We ended after 7:00. My central 6 comment was, I have this gut feeling that if this rule 7 is adopted, charities are going to pay a whole lot 8 more than they've had to pay in the past. 9 Mr. Sanderson didn't answer the question yes or no. 10 He said, well, it's going to depend case-by-case 11 basis. You know, we need some time to figure out how 12 we're going to do this. I knew for a fact that there 13 had been penalties assessed in -- as a result of 14 audits or enforcement actions. I raised the same 15 concerns again and again. 16 On March 15, when I met with Mr. McDade 17 and Ms. Joseph, I raised the same concern again. I 18 get this feeling that after this is imposed, if not 19 the first time the charity comes in, the second or the 20 third -- and I want to talk about that in greater 21 detail in a moment -- there are going to be 22 significant new penalties that this industry has never 23 faced before. Ms. Joseph, to her credit, for the 24 first time and the only time until the BAC meeting 25 last week, said words to the effect of, it would be 0093 1 disingenuous for me to leave you with an impression 2 that if -- yes, if this rule is imposed that the 3 charity will not pay substantially more in penalties 4 than they have in the past. The very first time. 5 Now, you want to talk about notice to the industry 6 about the impact of a rule? I think that's a big, big 7 issue and I think y'all do too. Why do we have to 8 drag it out of the staff? And, of course, earlier 9 today we were treated to former President Clinton's 10 response of, it depends on what the definition of a 11 word is, is. I mean, part of the staff says it's not, 12 part of the staff says it is. And I think now we're 13 on the sense that, yeah, there will be substantial new 14 penalties assessed as a result of the implementation, 15 you know, on a go-forward basis of this new rule if 16 it's adopted in it's current form or something close 17 to it. Huge concern. Huge problem. It should be a 18 huge notice issue to the industry. You ought to put 19 it on your website. They don't. Never have. Again, 20 the first time that any staff person verbalized it was 21 to me on March 15th. And then, as -- in response to a 22 comment that Suzanne Taylor, as chair of the BAC said, 23 well, exactly what would this do. Then Mr. McDade 24 promptly gave the response. You have to be an insider 25 to know that answer. You shouldn't have to be. 0094 1 There is a huge difference between a 2 regulated industry that is a for profit entity and a 3 regulated industry that is made up of nonprofits. And 4 I know y'all know that, but it bears repeating. 5 My experience, and I have reviewed over 6 300 audits or ANAs or -- there is another -- books and 7 records, different levels of examination, 98 percent 8 have been charities. The reality is, manufacturers 9 and distributors don't have problems. Why? Because 10 they're a for profit. They have a professional staff 11 that is usually highly motivated and well compensated. 12 Plus, they don't have the bookkeeping and regulatory 13 provisions on them that the charity does. I would 14 suggest to you that 90 percent of the statutes and 15 rules impact directly charities or the licensed 16 authorized organizations, as the statute calls them. 17 Commercial lessors that are both -- the majority of 18 them are for profit. There are no nonprofits who own 19 commercial lessors and, in fact, lease to themselves. 20 But their audit problems are very minimal and 21 primarily because they don't have the record keeping 22 and reporting requirements imposed upon them because 23 they're not handling the cash that a charity does. 24 And I'm not suggesting that the record keeping and 25 reporting requirements should be relaxed. I don't 0095 1 believe they should be. And I know some of my clients 2 will cringe at that and probably will seek to assault 3 me later, but you're dealing with a cash business and 4 you need good reporting and record keeping 5 requirements. The problem is that these charities 6 have either volunteers or relatively low paid workers 7 doing this, and there is a high degree of turnover. 8 And you're going to have the same sort of problems 9 repeatedly. I see it from my side of the table, I 10 know Mr. McDade sees it from his side of the table. 11 That is just the reality. And I don't think there is 12 a thing this Commission can do to change that fact 13 that you're going to have repeated violations. 14 Hopefully, there won't be the same level of violations 15 or the same seriousness of violations, but you're 16 going to have those violations. And I think, to the 17 Commission's credit and the staff's credit, they've 18 done a good job of trying to sit down with the 19 charities and explain to them some of the rules. 20 Sometimes they get the rules right and sometimes they 21 get the rules wrong, the explanation of them. 22 Occasionally I get hired, and I did recently when the 23 staff was trying to impose a rule that actually 24 expired about two and a half years ago. But my point 25 is, the staff of the Commission is doing a good job 0096 1 trying to educate. But volunteers who come in and out 2 of an organization, the chairman today or the 3 president today of a nonprofit, it is unlikely that 4 that same person will be in that same position two 5 years from now. It just doesn't happen. And, again, 6 a lot the workers, low paid, high level of turnover. 7 So if we're going to take the position 8 that staff wants to that this issue has been around 9 for a long time, then why can't staff, when confronted 10 with three specific audits, and in the meeting we had 11 March 15, I thought there was agreement that I would 12 submit three audits, you guys would tell us what the 13 particular impact, if this rule were in place today, 14 would be, assuming the same audits, violations 15 occurred the first time, second time or third time, so 16 we in the industry would know. What is this going to 17 cost. Where someone said earlier where the rubber 18 meets the road. Okay. The rubber meets the road on 19 these three audits. One of them had one particular 20 violation, the other two had several. Two of which 21 have already been closed, and one of which is still a 22 pending audit. How -- what will the charities pay. 23 Staff says, we're not going to do that. We're not 24 going to tell you. Specifically, they say, quote, due 25 to not knowing the detailed circumstances of the 0097 1 cases, I have been asked not to estimate the 2 administrative penalty. That goes back to the gnawing 3 concern of, how much is this going to cost. We don't 4 know it today. You don't know it today. I mean, the 5 fact that we're talking about potentially up to 270 6 grand in penalties of the roughly -- and I believe 7 there were something like 400 audits done in 2004, 8 raises a huge concern. 9 The cascading effect and the piling on. 10 And that specifically relates to, in the rule 11 402.706(h). It's in the document I circulated to you. 12 I proposed specific language because staff has said, 13 we don't intend to have a cascading effect or a piling 14 on effect. Okay. If you don't intend it, why don't 15 we put it in the rule. That's your intent. I 16 proposed that language and I hear now for the first 17 time why they never responded is, they ran out of 18 time. Provided that if one violation leads to a 19 separate violation, the person shall not be subject to 20 an additional penalty for the separate subsequent 21 violation that arises as a direct result of the 22 initial violation, unquote. Putting in writing what I 23 thought was the intent. Staff says they haven't had 24 time to comment, and maybe I missed the mark. I don't 25 know. I still don't know why we can't talk about some 0098 1 language like that. If they don't intend -- if a 2 charity erroneously uses 182 dollars of bingo proceeds 3 for an unapproved purpose, that likely will -- can 4 trigger a 35 percent reporting violation, a 35 percent 5 distribution -- under the very misleading term -- 35 6 percent distribution, charitable distribution, and a 7 violation in their filing on their quarterly return. 8 Those are three violations. One violation becomes 9 three. The staff says, we don't intend to cascade or 10 pile on. Well, let's put it in writing. Because 11 sometime in the future, Mr. Atkins isn't going to be 12 here, Mr. Sanderson is not going to be here, 13 Mr. McDade is not going to be here, and I'm not going 14 to be here, and so how are we going to know what the 15 intent of that rule is. 16 There was some discussion about, well, 17 how many violations are we talking about and haven't 18 the staff made significant progress. The original 19 proposal in November had a total of 147 discrete 20 violations in the penalty matrix. 147. They reduced 21 it to 126. They cut it by 13 percent. If they think 22 that's a significant reduction, okay. You don't have 23 that many violations in your Lottery Act under your 24 own Lottery Administrative Penalty Rule, yet the 25 lottery statute -- and I'm talking about the lottery 0099 1 side, not the bingo side -- and the rules are a couple 2 of hundred pages in length. Yet your Administrative 3 Penalty Rule is five pages, start to finish. The way 4 I have counted them, we started out, I believe, with 5 about 16 pages of text and we're now at the same 16 6 pages. I don't think the text has shortened 7 appreciably. 8 You asked the question about, well, why 9 didn't you include all the violations. And I agree 10 with staff that you shouldn't. It would be far too 11 cumbersome. And by way of example, Commissioner Cox, 12 the Texas Alcoholic Beverage Code -- and I have 13 practiced law in the Texas Alcoholic Beverage 14 Commission -- is over 800 pages in length. Their 15 Administrative Penalty Rule is nine pages, and their 16 regulation of the tier system, if you will, is far 17 more exhaustive than the Lottery Commission's 18 regulation of a tier system. So it's not surprising 19 that the rule would not capture every potential 20 violation. And the staff did not intend -- I guess, 21 initially, they did intend to. They went through 22 their statute and rule book and said, okay, we want to 23 identify each and every rule that's out there -- or 24 violation and put it into this rule. But I think they 25 quickly and wisely abandoned that process, because the 0100 1 reality is, there are a lot of potential violations 2 that either have never occurred or once in a blue moon 3 occurred. 4 The other issue that I really want to 5 touch on and drive down on is this issue of use of 6 nonbingo money to pay. And I think y'all have a sense 7 of our concern. Again, if we're talking about an 8 open-book notice to the world process, wouldn't you 9 expect that this issue of, you're not going to be able 10 to pay a penalty with bingo proceeds be front and 11 center? It hasn't been. 12 I am passing to Mr. Atkins, one for 13 you, Billy, and two for the Commissioners, the 14 standard settlement agreement language. And I know 15 staff is very familiar with the language because 16 that's their language. If you'll notice -- and it's 17 not my highlighting, by the way, that's the staff's 18 highlighting, of nonbingo funds. It makes it real 19 clear. And Mr. Chairman, you were absolutely correct. 20 They may say it's their policy. It's not policy. It 21 is -- when we go to an administrative proceeding, the 22 result is, if you're going to pay any penalties, 23 they're going to come from nonbingo funds. Make no 24 mistake about it. That's where the rubber meets -- if 25 you don't agree to that, go to hearing. 0101 1 Now, that's true to one point. It's 2 not true if a charity has to pay penalties and 3 interest on prize fees that the charity, for whatever 4 reason, did not timely pay. And under the statute, 5 there is -- there are penalties assessed for that and 6 including interest. The Commission has historically 7 allowed charities to pay those penalties and interest 8 with bingo funds. Why the difference? I can think of 9 no reason. But nonetheless, that's the position. 10 You would also expect, Mr. Chairman, 11 since that's an important issue that I think we now 12 know, that that -- not only would you have included 13 that -- it's not in your notebook, by the way, that 14 settlement language. It wasn't in the notebook for 15 the Bingo Advisory Committee when they considered it 16 the first or the second time. It's not on your 17 website. When you pull down your website to the 18 Charitable Bingo Division, Bingo Draft Administrative 19 Rules, there are two rule versions of these 20 administrative penalties, the standard and the 21 expedited. And there is a version dated 11-08-04, and 22 then a first revision 2-10 of '05. Nowhere in any of 23 that is that notion that if a charity is in violation 24 of a penalty that they're going to have to pay with 25 nonbingo funds. Now, the staff says, well, but that 0102 1 is not part of this rule. That would be subject to 2 perhaps another rulemaking. I don't think so. It is 3 part of this rule. And the reason I know it's part 4 and parcel to the rule is, when the staff first 5 circulated the version of the rule to me in November, 6 those two pages were the last two pages attached to 7 the electronic format of the rule that I received. So 8 it -- it may be true in a legal sense that it's not 9 part of the rule. I'm not suggesting a notice, 10 Counselor, violation, but it is so much a part and 11 parcel to this process and the fact that you have 12 not -- the Commission has not, the staff has not 13 notified the agent of the charities, I think is one 14 reason why you have not received a lot of comment on 15 it from the regulated industries. They don't know. 16 And as a matter of fact, I would suggest to you that 17 it would be reasonable to conclude, if you were a 18 charity reading that, well, a lot of this I don't 19 understand, but we've never -- we've been regulated by 20 the Lottery Commission for 12 years or 20 years, we've 21 never had a problem, so whatever this rule is, it's 22 just another one of those rules they keep coming up 23 with and we'll deal with it. And if we have a 24 violation, we'll be able to take care of it, because 25 we will able to -- we're profitable in bingo. Well, 0103 1 you may be profitable in bingo, but the way the staff 2 implements this enforcement process, you're going to 3 have to find proceeds other than bingo to pay for a 4 penalty. And for some organizations, that will not be 5 a problem. There are many organizations that have 6 substantial budgets unrelated to bingo. But within 7 those, just because they have large budgets unrelated 8 to bingo doesn't mean they can use those funds. Many 9 organizations I represent are funded and regulated by 10 state, local, federal, governmental agencies, and 11 there are specific uses of those funds that are used. 12 Many private funders, as I'm sure you're aware of, 13 want to specifically identify where their dollar goes. 14 And I have yet in any of my -- when funders restrict 15 funds for a particular agency, for a particular 16 purpose, I have yet to see them say, and, oh, by the 17 way, if we've got any administrative penalties, you 18 can use this money for that. Just throw that in for 19 good measure. That never happens. They're interested 20 in funding in a specific program to help a specific 21 concern they've identified, and they want those 22 dollars specifically used for that purpose. And the 23 agency, quite frankly, is bound by, either formally or 24 informally, or by contract to ensure that those funds 25 that they receive are used for that particular 0104 1 purpose. 2 We talked about the questions that I 3 had filed, and I want to clarify the letter I sent. I 4 was -- wasn't happy with everything I was winning, but 5 I was satisfied with the process up until the week 6 before the BAC meeting. And I still don't have any 7 explanation as to why the BAC members were circulated 8 the draft rule, and I was given the draft rule after 9 many e-mails and voice mails asking for it. Was told 10 it wasn't finished yet. We finally get it Tuesday 11 before the Wednesday meeting, to find out that, 12 actually, the rule had been sent to the BAC the week 13 before. I don't know the answer to that, but it's not 14 like I've been hiding behind a log waiting to spring 15 this issue. I've been intimately involved from the 16 beginning in this, because I felt it was an important 17 issue and would have a huge impact on the regulated 18 charities. 19 One of the concerns I also raised, and 20 it's found in my comments on the side by side, was 21 specifically, in addition to the penalty that could be 22 assessed, there is also that charities could be 23 assessed the cost of investigation. And that's in 24 706(j)5(i), found on page six of my side by side at 25 the very top, the cost of the investigation, 0105 1 examination, or audit associated with the violation, 2 the cost of any administrative prosecution necessary 3 to provide the violate -- prove the violation, 4 including, your hearing costs. 5 Every time I have commented that 6 comment on the right of that page, what is the typical 7 audit cost. Please give examples of costs of 8 investigation. What is the average cost of a two-hour 9 SOAH hearing, an all-day SOAH hearing. I think I know 10 what a transcript costs. I don't know what those 11 other costs are. We have yet to get any response to 12 that. 13 There are other issues that I have 14 raised that have never been addressed, but that's not 15 really my purpose is to nitpick. I understand I can 16 address those issues in a formal comment process. But 17 the important point is, when you get down to the cost, 18 that's a big issue. And until, Mr. Chairman, the 19 Commission started drilling down on that issue, I 20 think you saw the frustration we had. One part of the 21 staff was saying, there is not going to be any new 22 costs, and the other part is saying, yes, there will 23 be a new cost. And I think the charities are due to 24 know, going into the process, what those costs might 25 be. And I think it's poor public policy if they're 0106 1 not given that information. And I don't think the 2 staff are in a position today to tell you what those 3 could be. And I have been asking those same questions 4 since November. 5 The other issue about the 20-day 6 turnaround on the Standard Administrative Penalty. 7 The staff had had several answers to why they have to 8 have the 20-day penalty. They told the BAC in March 9 that the reason they couldn't move past the 20-day 10 period had to do with, the 20 days limit is 11 specifically stated in statute and we will not be able 12 to increase the number of days to respond. And that 13 has to do with the expedited penalty. True in part, 14 false in large part. 15 The Bingo Enabling Act -- and Mr. White 16 was sort of close to the issue, actually says, in 17 2001.604, that an agency, if you're going to assess 18 the administrative penalty, gives the licensee notice 19 within a 14-day period of it reaching Mr. Atkins' 20 desk, and then the licensee has to 20 days to respond, 21 either we agree or we want a hearing. Then the 22 hearing process would kick in. Well, that's not what 23 their administrative penalty -- expedited penalty 24 says. It says, you either agree or disagree in 20 25 days or it's off the table, presumably forever. 0107 1 That's not what the statute says. The statute is just 2 a notice period. And the example I used was the ARC 3 of the Capital Area, although I could have thought 4 of -- if I had been given time, over 50 agencies. 5 They've got about a 1.2 million budget. Bingo plays 6 about 60 grand to it. They don't meet in December and 7 they don't meet in one month in the summer, the board. 8 And so -- and an issue like this would be taken to the 9 board. Now, it's possible you could get a 10 subcommittee, and I guess on a go-forward basis, every 11 agency would have to know about this potential 20-day 12 and then all of them would have to adopt board 13 resolutions to give a subcommittee the authority 14 address this issue on quick time frame. But why? 15 Because the other concern is, you're not going to use 16 bingo money to pay this penalty. And you're darn 17 right, Mr. Cox, and I serve on the board of the ARC 18 and I serve on two other nonprofits unrelated to 19 bingo, no one is going to give that kind of authority 20 to a staff person if the reality is, you're going to 21 obligate this agency to pay a fine and you don't have 22 a clue where you're going to get the money? I don't 23 think so. I think that would not be a -- an example 24 of good stewardship on behalf of the board member to 25 give that type of approval. 0108 1 One final comment I want to make, and 2 that has to do with what Ms. Joseph characterized as 3 the four-year look-back period. This goes back to, 4 again, 98 percent of these issues are going to fall on 5 the charities. They're either volunteers or low paid 6 workers for the most part. Their board membership 7 changes a lot, too. And my suggestion is -- the 8 rationale I'm told by staff of why they used a 9 four-year period is because that's the length of time 10 they retain records, four years. Well, okay. True 11 enough, but why do you have to have everything on a 12 four-year period. It's been my experience that 13 charities will come forward with an audit and then 14 they may have an A&A within a year after the audit, 15 and they're still having some of the same problems, 16 and it all goes back to volunteers and low paid 17 workers. I would suggest it should be something other 18 than a four-year period. 19 Those are all of the comments that I 20 followed -- that I wanted to make, Mr. Chairman and 21 Commissioners, and I'll be happy to respond to any 22 questions to that. I think Mr. Heinlein, 23 David Heinlein, may have something to address, 24 although -- and he is not a shrinking violet either. 25 So if he wants to address it. And I don't know if 0109 1 anyone else will want to have a comment. 2 CHAIRMAN CLOWE: Thank you. 3 Questions? 4 COMMISSIONER OLVERA: Not at this time. 5 I would like to hear what Mr. Heinlein has to say. 6 CHAIRMAN CLOWE: Okay. Do you want -- 7 you don't want to ask Mr. Fenoglio anything? 8 COMMISSIONER OLVERA: Well, at least 9 I'm thinking that I would like to hear the entirety of 10 the comments and then maybe call you back, 11 Mr. Fenoglio. 12 CHAIRMAN CLOWE: Mr. Heinlein, are you 13 ready? 14 MR. HEINLEIN: I'm David Heinlein, 15 General Services, LLC. I represent charities that I 16 do their books for, which used to be almost 50 17 charities, and with the decline over the last couple 18 of years, we're down to about 34. 19 I'm not going to repeat the things that 20 Steve has said and -- 21 CHAIRMAN CLOWE: Thank you. 22 MR. HEINLEIN: I'm not going through to 23 that because I have some of the same concerns. But to 24 just kind of give you an overall sense of where I am, 25 I served on the workgroup committee and I met with 0110 1 them the first few times and we did some very good 2 work, and were moving forward. The last meeting they 3 had was a phone conversation that I was not made aware 4 of. Marshall did call me, either the day of the 5 meeting or the day before. He said he had lost my 6 number or something and I just didn't get included in 7 that. And I was unhappy that I didn't get to be a 8 part of that particular one. And I think what I'm 9 going to conclude with -- asking for, that I still 10 think that there is work to be done on this, and I 11 would really appreciate the opportunity to be able to, 12 once again, go into that workgroup for at least one 13 more meeting to iron out some of the little things 14 that we have come so close with, but I think we would 15 be better prepared to present this for public comment. 16 I had a couple of things to clarify. 17 One being, the source of the money. I think it's a 18 very important issue that ought to be part of this. 19 Currently, we are, you know, paying it from bingo 20 money. But the fines as they are looked at here, it 21 could be a larger sum of money and the charity is not 22 going to be able to stay in business. And so they 23 have to look at the reality in their real world, they 24 don't have the funds, and they'll just be getting out 25 of bingo. 0111 1 As I have been doing their books for a 2 number of years, I constantly beat them over the head 3 with a hammer about the -- caught the little mistakes 4 that they make that are wrong. They're violations of 5 the Act. Such as, making a mistake on their licensed 6 time and playing in an unauthorized time, untimely 7 deposit. Billy and the staff did get some language 8 that we appreciate, and I asked that -- because I 9 didn't get in on that last meeting, that was added in 10 a paragraph 5B, whether the violation was intentional, 11 grossly negligent or inadvertent or the result of 12 simple negligence, would be a consideration of that 13 assessment. So that is an important fact. And I 14 think, at the same time, the thing needs to be said 15 concerning the actual monies and the source of it. 16 And then the paragraph H, which says, 17 each violation constitutes a separate offense, even if 18 arising out of a single act. I think we should even 19 be more (inaudible) on how we do that. I would like 20 to have that opportunity to meet with the staff, in 21 this workgroup, and make a couple of these things -- 22 iron them out before we present them. 23 What I'm hearing from my charities as 24 we look at these rules, well, I've been saying these 25 things to them for years. When they actually see it 0112 1 in writing like this, seriously, they're saying, you 2 know, I'm not sure that we want to be in bingo. And I 3 would like to see some effort made to study the impact 4 that this rule might have on charitable bingo. We've 5 gone from 1900 charities to something around 1300 6 today, over just the last few years. And while we 7 spent two years to get the event tab, it's had a 8 tremendous impact on those that were able to make good 9 use out of it and it has saved some of the charities, 10 kept them in business. But we spent enough time on 11 that to really get a good new rule written that would 12 possibly do something very, very good for charitable 13 bingo. And it still has the possibility of saving the 14 others as they get more involved in event tabs. And I 15 think the same thing is true here. We shouldn't push 16 it out the door rapidly and cause an effect of putting 17 some people out of business. I think that if 18 they're -- were given enough time, and we were then 19 able to make the presentation to them and say to them, 20 this is for you. And that the rule has always been in 21 there. We're not creating a new rule and a new 22 penalty, it's just -- it's a better clarification of 23 what it is, because now we've got it in a format that 24 we think that they can live with. It's the real world 25 you have to present to them and they need to know that 0113 1 they can stay in business. So they've got ways of 2 dealing with these penalties. And that would be very 3 important. Thank you very much. 4 COMMISSIONER OLVERA: I guess my 5 question would be, to both staff and the workgroup and 6 Mr. Fenoglio is, why this battle now? Obviously, the 7 movement to -- the motion to promulgate the rule and 8 the formalization of the commentary period, all of 9 these are very valid points, and whether it's the 10 20-day issue, the source of the funds, the piling on 11 effect. I mean, all of these are very valid comments 12 that should be formalized, and I would think you would 13 want to move forward on. I mean, there are arguments 14 why you would want to vote on them. Why delay the 15 formalization of the process? 16 MR. FENOGLIO: For two reasons, 17 Commissioner. First, there is a legislative battle in 18 full force and effect at the Capital. And I hear what 19 you're saying, Mr. Chairman, and I'm not suggesting 20 that that be the standard procedure. We had 21 rulemakings during the session before. But this is a 22 unique session. We've got -- all three of y'all have, 23 rightfully so, commented that the Bingo Enabling Act 24 is in dramatic need of change. You did it in your 25 confirmation hearing. That's been a common concern 0114 1 that we've come to the Commissioners about, we've got 2 problems with the statutory authority. We're doing 3 that today, and we've been preparing for that for many 4 months. The process now is in what I consider the 5 white hot phase, and it's going to get -- if that's 6 possible, even hotter, between now and roughly the 7 third week of May. And your own legislative staff can 8 tell you that. We sat around for hours on end waiting 9 for the Sunset of Lottery Commission bill to be heard. 10 It was passed the first time. They brought it up 11 Monday, and it was left pending because they couldn't 12 get a quorum. There are legislative issues that 13 affect charitable bingo in that bill. There are some 14 issues that your staff care about in that bill. We've 15 also got other legislative issues pending, including a 16 bill that is now out of House Licensing and 17 Administrative Procedure. We're trying to get it on 18 the floor, House bill 1138 by Mr. Flores, that 19 Ms. Trevino has talked to you about. We've also got 20 our other proposals up in the air right now. And so 21 we're limited in our resources to deploy. And this is 22 a major undertaking. And to the extent that, you 23 know, last night I was here -- I was in my office 24 until 9:00 o'clock. And I'm not asking for sympathy. 25 I hope to get paid for that. But there is only so 0115 1 many hours in the day you can work. I have 2 administrative audits with this agency that they have 3 been waiting on months to get documents to me on. I 4 mean, it's not just a one-way street where the 5 charities are poor little charities. Your staff are 6 overwhelmed with the work load. I mean, I have 7 requested documents and it took your staff over a year 8 to get the documents to me, in an audit. These are 9 not simple issues that come up, necessarily. And I'm 10 not trying to throw a stone at anyone, but I'm just 11 trying to impart onto you that there is a huge 12 urgency. We only get one shot at this every two 13 years. We would rather not have our forces, if you 14 will, deployed here on this rulemaking. It will be 15 extremely difficult to get people to come back -- and 16 they're going to come back repeatedly for the 17 legislative hearings. It will be extremely difficult 18 to get them to say, well, we've got one more 19 rulemaking to do. Their focus, and I believe rightly 20 so, is that the legislative end of the street, not the 21 administrative Lottery Commission end of the street. 22 So that is my answer to that question. We're willing 23 to engage the issue and we have been engaging the 24 issue, it's just unfortunate that all of this is 25 coming at a particularly difficult time. 0116 1 MR. HEINLEIN: My reasoning is not 2 exactly the same as his because I'm not as involved in 3 the legislative process. And I agree that your agency 4 can't stand down just because of that. But I do have 5 a need to see more tangible -- and I don't think that 6 we've been dragging our feet. I mean, our first 7 meeting was November, and we've had two meetings since 8 then on this as a workgroup. And a part of it is a 9 discovery of issues. We're going through a process of 10 discovering that this issue of the money source didn't 11 come to my knowledge until this last meeting. And I 12 think that's one of the issues that needed to have 13 been worked out in the workgroup and it was, to my 14 knowledge, not addressed. And I don't think that's 15 asking a whole time to do that, from November until 16 now. While it might have been said that a year ago 17 that we had to do this rule, yes, but we didn't 18 actually get any information to start working on that 19 rule until just about five months ago. And I think 20 that it wouldn't hurt us to delay it for just a little 21 bit more time to just look at that a little more 22 carefully. Thank you. 23 COMMISSION OLVERA: And out of 24 fairness, let me ask the staff. What would be the 25 downside for a slight delay of a month or two months? 0117 1 MS. JOSEPH: True, the legislature is 2 in session now and that's a big -- a time demand. 3 Staff has a fear of what work -- the work load may be 4 after the legislature leaves and what we may be called 5 upon to implement. Our work load is not expected to 6 be lighter after the legislative session, if anything, 7 to increase. We believe that we've spent significant 8 time, both as a staff and working with representatives 9 of the BAC, that has been acknowledged, the five-month 10 period, and we don't see initiation of the formal 11 comment period as an end to working on this rule. We 12 certainly see that as an opportunity to continue to 13 look at the comments and suggestions and to study them 14 further and bring them to the Commission. But we 15 believe that the time is ripe to move ahead to that 16 formal comment period. 17 CHAIRMAN CLOWE: We're going to take a 18 short break and then we'll come right back and 19 Commissioner Cox can ask his questions and make his 20 comments. 21 (RECESS.) 22 CHAIRMAN CLOWE: We'll come back to 23 order. I believe Commissioner Cox has some comments 24 or questions that he wants to make at this time. 25 COMMISSIONER COX: Well, Mr. Chairman, 0118 1 I guess I'm going to address these to you. This is 2 the first time on this board where I have seen us 3 asked to vote to expose a draft that I believed would 4 almost certainly be substantially revised before it's 5 approved. In every other case, I have believed that 6 it could very well be the case that it would be 7 approved after public comment just exactly as it went 8 into public comment. This time, I don't have that 9 feeling. There are several issues here that have been 10 well covered, and I'll just mention some of them. I 11 share Mr. Heinlein's concern about the fiscal impact. 12 If we're, in fact, talking about hundreds of thousands 13 of dollars in potential penalties, I think there may 14 be charities that look at their whole card and decide, 15 maybe I don't want to subject myself to a process that 16 is so potentially expensive and that is -- has such a 17 short fuse on it that I'm going to have to call 18 special meetings or delegate more authority than I 19 want to delegate or the like. 20 Now, I think given some of the numbers 21 I've seen from what potential penalties might be, I 22 tend to wonder whether these -- these harmless-looking 23 numbers, 200, 300, 500 dollars, aren't really harmful 24 numbers. Are they way too big? Are we intending to 25 deter with a hammer when we could be deterring with a 0119 1 feather? I don't know the answer to that. 2 And, finally, this issue that is raised 3 about where the money is going to come from. And 4 Mr. Fenoglio gave us a piece of paper that had some 5 boldface words "with nonbingo funds." I don't know 6 what a nonbingo fund is. Let's take this example. I 7 am a charitable organization that has been conducting, 8 for five years, bingo. Bingo has transferred 100,000 9 dollars into my general fund and it's all still there. 10 I'm assessed a penalty. If I pay it out of that 11 general fund, am I paying it out of bingo funds or 12 nonbingo funds? Does nonbingo funds mean only those 13 funds that are currently in the operating account of 14 the bingo operation or does it mean money that's been 15 previously transferred and that money is fungible with 16 other dollars, so how do you ultimately make that 17 determination? 18 Additionally, while staff seemed to 19 think that it was significant to increase from -- 20 decrease from 147 to 126, if I have Mr. Fenoglio's 21 numbers right, the number of occasions for a penalty 22 that might arise, I would say, if you can't reduce it 23 by any more than that, leave them all in. Or at least 24 I would ask to hear more about why you would reduce it 25 by so small an amount when you could make it all 0120 1 inclusive with another half page. So I just ask you, 2 when you go into the process of asking for public 3 comment, do you do it knowing that there are issues 4 out there that are going to result probably in 5 amendment to it, and you go ahead and do it because 6 that's the process, or do you stay back from that 7 process a step and try to resolve a few of these. And 8 I just don't know. 9 CHAIRMAN CLOWE: And you want me to 10 answer that question? 11 COMMISSIONER COX: Or direct its 12 answer. 13 COMMISSIONER OLVERA: And if I may add, 14 I agree with everything that Commissioner Cox has 15 said. And one of the reasons I asked the questions 16 about the timing, and I am sensitive in terms of 17 moving forward and not being bound by the legislature 18 or their calendar and being sensitive to staff 19 recommendations, but it seems to me that -- and I'm 20 just throwing -- shooting this from the hip, but I 21 would not mind tabling this until the next meeting, 22 and allow staff to address the issues that have come 23 up today, and then move to promulgate the rules at our 24 next meeting. Now, once again, on the same token, I 25 recognize that the public comment period also begins a 0121 1 process that and you would still be able to do that, 2 and we could still revise the rules in the event that 3 the Commission decides to go forward today. But I 4 think there has been some very valid points brought up 5 today and a lot of answers and questions -- excuse me, 6 a lot of questions that need to be answered or at 7 least need to be addressed. 8 CHAIRMAN CLOWE: Well, I think you're 9 both on target and, you know, this answer will be just 10 exactly worth what you're paying for it. 11 I've always been an advocate of 12 informal interaction between the regulatory body and 13 the body being regulated, because I think it results 14 in clarification, simplification, and a better work 15 product if you can achieve agreement prior to entering 16 the formal ABA activity and you -- you start to clock 17 on it. And I think you're right, Commissioner Olvera, 18 we've heard good comments and a good recitation of the 19 history and the conflict in the facts here today, and 20 it's beneficial, the now almost three hours that we've 21 been on this subject. It is not untypical of what you 22 find in these types of activities, where you have a 23 regulated industry, and Mr. Fenoglio referred to the 24 lottery. The lottery is different in my mind from the 25 bingo in regulation. We have private enterprise in 0122 1 bingo. The State owns the lottery. And there is 2 always more conflict where you have private enterprise 3 regulated by the State than there is where the State 4 runs its business. And I am respectful of the 5 concerns that are stated about the issues, but when an 6 applicant gets a bingo license, a license to conduct, 7 they take on the responsibility of adhering to the 8 rules. That's the deal. And then you can bring up 9 the issue of the turnover in management and the 10 volunteerism and -- and I'm very responsive to all 11 that, but it is this agency's duty to enforce the 12 rules as they are implemented by the agency, to comply 13 with the statute that the legislature gives us. And 14 that in my mind calls for reasonableness, but you 15 don't get a lot of compassion there. If you start 16 making compassion decisions, I think the legislature 17 would look at us and say, we didn't give you rights to 18 compassion, we gave you rights to reasonableness, 19 follow the law that we gave you. 20 I'm trying to give you some background 21 music to answer your question, and I see both sides of 22 this very clearly in my mind, and I think there is 23 more work to be done. I am respectful of the staff's 24 desire, after having worked on this, to go forward. I 25 think there have been some valid points made on behalf 0123 1 of the industry. And I have yet to call on the people 2 who have filled out appearance forms, and I'm going to 3 do that. I'm not going to loop you because of the two 4 spokespersons that I've called on. But we've gotten 5 into this discussion, so I want to get to what I have 6 as a conclusion. 7 I think you have both indicated you 8 want further work done on this, and I am responsive to 9 that thought. I am as -- I've already stated, I'm not 10 sympathetic to saying, well, we're just going to let 11 this thing stand down until after the legislature 12 adjourns. My sense is, this agency needs to do its 13 business and go forward with it. And, you know, if 14 it's not the regular legislative session, it'll be 15 something else. But I think if we were to pass this 16 subject, after all of this good discussion, until our 17 next meeting in May, it would give both sides -- and I 18 think there are more than two sides on these issues -- 19 an opportunity to come together and see if they can't 20 get resolution, and that would be beneficial to us 21 prior to entering into the formal public comment 22 period, in my opinion. When you, frankly, put 23 pressure on the sides, as I have found in any 24 negotiation -- and that's really what we're talking 25 about -- you get the best movement and you get the 0124 1 best resolution of conflict. And this Commission, the 2 three Commissioners, must decide ultimately, this is 3 our rule. After we determine that the best work has 4 been done, if we're going to publish it for comment 5 and then after that comment period, you know, we get 6 to do work on it, and then we have to decide whether 7 we want to implement it or we want to implement 8 something else or -- the door is open to us. I see 9 this as a very positive process. And I am thankful 10 for the work and the efforts that everybody has put 11 into their comments, and I think it's helped me as a 12 Commissioner, and I know it's helped each of you, and 13 I'm very hopeful that after another 30 days or so, we 14 can see a lot of this resolved. And 30 days is not 15 going to hurt anybody or -- you know, we're not up 16 against a deadline that we've got to report to the 17 legislature and the leadership as of May the 1st that 18 we have this rule in place. We often are faced with 19 that situation. But, you know, I think we can tell 20 the staff, we want you to do more work on this, and we 21 can ask the public to work with the staff and bring us 22 a product that has the most resolution of these 23 conflicts in it and then we'll decision. 24 COMMISSIONER OLVERA: I agree. I would 25 like to avoid any kind of allegation or argument that 0125 1 I didn't get the draft, we would like maybe a little 2 more time, any and all of those allegations, for 3 whatever reason, I would like to give the parties at 4 least, not one last opportunity, they can meet as many 5 times as they want within the next 30-odd days or 6 until our next meeting and hopefully resolved those 7 issues. 8 CHAIRMAN CLOWE: Well -- 9 COMMISSIONER OLVERA: That's up to 10 them. 11 CHAIRMAN CLOWE: Yeah. And I'm -- as I 12 say, I want to make it clear, I think the three 13 Commissioners are very respectful of everybody's 14 position. But you understand, we get the big bucks to 15 make these decisions. And we have to finally decide, 16 to earn our pay, what it is that is best for the 17 State. Before we move forward with any kind of a 18 motion or a decision, I have to, I think, to be 19 correct, call on the folks that have filled out a 20 Witness Affirmation Form. 21 If these discussions and the comments 22 that have been made have covered your position in this 23 matter, if you will remain silent, I will assume that 24 constitutes a pass on your part. If you wish to 25 comment, you may do so when I call your name and 0126 1 indicate at that time -- and I'm going to call on 2 these folks in the order they've been given to me. 3 Don Webb, against item five on the agenda. 4 Charles Hudgins, against item five. 5 Robert Young, against item five. 6 Gerald Caldwell, against item five. 7 Cletus -- maybe that's Clay -- 8 Caldwell, against item five. 9 C.E. Williams, Junior, against item 10 five. 11 Donna Young, against item five. 12 Lee Davis, against item five. 13 Glen Garrison, against item five. 14 G. Webb, against item five. 15 Sharon Ives, against item five. 16 G.M. Caldwell, against item five. 17 Sandra R-e-g -- your handwriting is 18 about as bad as mine is. R-e-d-r-d-o, I believe. 19 COMMISSIONER OLVERA: Sandra Vescio 20 (phonetic). 21 CHAIRMAN CLOWE: Is that right? 22 Against item five. 23 Danny Hays, against item five. 24 John Bradley, against item five. 25 Walter T. Smith, against item five. 0127 1 And Shane Riley, against item five. 2 Donna Mora, against item five. 3 Suzanne Taylor, against item five. 4 MS. TAYLOR: Excuse me, Commissioner. 5 CHAIRMAN CLOWE: Suzanne, did you wish 6 to appear? 7 MS. TAYLOR: Yes, sir. 8 CHAIRMAN CLOWE: Come forward, please. 9 MS. TAYLOR: I am actually not 10 appearing as representing the charity that I'm the 11 treasurer for. I actually would like to ask one more 12 thing as the chair of the BAC. We would like our 13 workgroup to be able to meet again, and I am 14 requesting that you allow the workgroup to meet again 15 with the staff and nail it down, so that we feel 16 comfortable with it. As your advisory committee, I 17 would like you to let us have the opportunity to do 18 it. Our next meeting is not until May 25th, and we 19 would sure like the workgroup to come to the group 20 with a positive recommendation, so that we can give a 21 positive recommendation to you. So if there is some 22 way to allow us to have that meeting. If -- if you're 23 thinking of perhaps not going ahead with this today, 24 our next meeting isn't until the 25th of May. 25 CHAIRMAN CLOWE: Thank you. And I 0128 1 would suggest, depending on whatever action the 2 Commission might take on this item today, that you 3 might want to move your meeting up. Be flexible. 4 MS. TAYLOR: Thank you. 5 CHAIRMAN CLOWE: Commissioners, I would 6 suggest that we pass this item today and ask that it 7 be put on the agenda for our May meeting. That 8 doesn't require a vote, and it can be done with 9 nothing more than an nod of your head. 10 COMMISSIONER OLVERA: I agree. 11 COMMISSIONER COX: I agree. 12 CHAIRMAN CLOWE: The next item on -- 13 MS. KIPLIN: Commissioners, if I might, 14 I would like to ask a corresponding question. I'm 15 anticipating. And what I have heard is, to have the 16 folks that have an interest in this, work more and try 17 to resolve the issues. So let's assume, just for 18 today, that the staff still feels as strongly as they 19 did on the issues that they had and want to present 20 that frame of reference in a draft. I want to make 21 sure that -- I guess, my concern is that staff is 22 hearing the Commission say, well, we think that there 23 are some issues that are outstanding, but then, where 24 does that leave staff if they -- if they still feel, 25 as a matter of policy, that the issues and where they 0129 1 have landed, they still believe is the appropriate 2 recommendation for the Commission? Do they then 3 engage in a compromise to get, quote, off the dime, or 4 to bring back a document that they're thinking might 5 be what needs to be addressed to allay or satisfy any 6 of the issues or concerns that you might have. I'm 7 just trying to see what we can do about trying to get 8 some better direction to staff on -- on it. And I 9 haven't spoken to them, so I don't know how strongly 10 they feel about the positions that they've expressed. 11 CHAIRMAN CLOWE: Counselor -- 12 MS. KIPLIN: Because in the long run, 13 it is your rule. 14 CHAIRMAN CLOWE: For myself, I wouldn't 15 presume to direct the staff in that manner. I think 16 the staff has heard the comments of the Commissioners, 17 and I think they're plenty smart, and I would rely on 18 their intelligence and their ability to meet with the 19 public and come up with a product that they want to 20 recommend. And beyond that, I wouldn't give them any 21 direction. I think it would be a wrong move. 22 COMMISSIONER OLVERA: I agree. In a 23 worst case scenario -- well, I don't know if it's a 24 worse case scenario, but if the staff disagreed with 25 every one of the recommendations that come up prior to 0130 1 our next meeting, so be it. Just let us know so. 2 CHAIRMAN CLOWE: Anything further on 3 this item? 4 MS. JOSEPH: Commissioners, I would 5 like to thank you for your close attention and 6 guidance on this matter. 7 CHAIRMAN CLOWE: Thank you. Thank you 8 both. Thank you all. 9 We have a person here from out-of-town 10 that I would like to call on that item in the agenda. 11 It's number eight, report, possible discussion and/or 12 action on the demographic report on the lottery 13 players, at this time. Mike Fernandez. 14 MR. FERNANDEZ: Good morning, 15 Mr. Chairman, Commissioners. My name is 16 Mike Fernandez. I'm the director of the 17 Administration. With me this morning, I have 18 Doctor Susan Banducci, who is the faculty director -- 19 Professor Banducci is the faculty director of the Earl 20 Research Lab. And what she is going to do is to 21 discuss and present a revised demographic study. And 22 I'll turn it to Doctor Banducci. 23 DR. BANDUCCI: Thank you very much. 24 And thank you, Chairman, for accommodating my 25 appearance earlier in the day. I would like to get 0131 1 back to Lubbock as soon as possible. Apparently, 2 there is -- 3 CHAIRMAN CLOWE: Are you going back by 4 the way of Waco, are you? 5 DR. BANDUCCI: No. But apparently 6 there is a dust storm that I'm missing, so I would 7 like to get back. Thank you. 8 What I'll talk about is the revisions 9 that were made to the demographic report. You had a 10 presentation of the results of the report in January 11 from Brian Cannon, who is Director of Operations at 12 the lab. So I won't go over the results, because they 13 have not changed due to the -- due to the revisions. 14 But these revisions were requested in the -- or a 15 re-examination of the report was requested and we have 16 responded to some of the issues that were raised. And 17 so I would just like to go over briefly what the 18 revisions were to the demographic study. And I 19 believe you should have a copy of the revised report 20 in front of you. 21 Again, I'll start off by saying that it 22 is important that none of the substantive analyses or 23 the substantive results or the statistical 24 significance that are reported or the conclusions that 25 are drawn, are affected by the revisions. So the 0132 1 conclusions that are presented in the executive 2 summary stand as they are. But I will just go over 3 what the revisions are. 4 First of all, there were some 5 inconsistencies due to the fact that some reported 6 results were based on weighted data and some were 7 based on unweighted data. We had originally reported 8 weighted data results, but we noticed in the past 9 reports that unweighted data were used in the reports. 10 And so in order to be consistent with the past 11 reports, we reported unweighted data. Some of the 12 results, however, were not changed in accordance with 13 this decision to go with unweighted data, so that 14 produced some inconsistencies that were noted. We 15 have corrected those inconsistencies. And they have 16 not resulted, again, in any substantial changes to the 17 results. You know, we're talking about a difference 18 of less than a percentage point in most of the cases, 19 very small differences. So that mainly had to do with 20 what was reported in table one, as well as what was 21 reported in table three. 22 Another inconsistency was reported in 23 table 1-B as regarding the average spent. 37.73 was 24 reported, but it should have 38.73 average dollars 25 spent per month. That's a typo that has been 0133 1 corrected. 2 A third issue was raised in terms of 3 outliers. And in the report, we had reported results 4 based on a sample that included outliers, in other 5 words, those people who had reported spending a whole 6 lot more than the average, two standard deviations 7 more than the average in the results versus results 8 based on having those outliers excluded. And when we 9 wrote up the results of that, we mentioned only one 10 outlier in the lowest education category when, in 11 fact, there were two outliers. So again, that typo 12 has been corrected. And that was on page six and page 13 11 of the report and that has been corrected. 14 Also, an issue was raised about 15 projected sales based on the data that we had 16 collected. A reviewer had noted that based on the 17 data that we had collected, that scratch games 18 accounted for 41.2 percent of sales, while actually, 19 in the financial report, in the annual financial 20 report, scratch games accounted for 66.7 percent of 21 sales. Well, this underreporting of scratch game 22 sales, I have a couple of points to make about that. 23 First of all, it's underreported in prior reports. In 24 fact, the 2001 study, which is the -- I think, the 25 only study where we could find an estimate of the 0134 1 percent of scratch game sales based on the survey 2 data, was 15 percent of sales. So we are actually 3 closer in our study than in prior reports. 4 Secondly, we when you remove scratch 5 games from the projected sales that we're able to 6 calculate based on your data, our data are actually 7 quite close. And this is on page four in table one 8 and table two. I'm sorry, I don't have slides to show 9 you. But when you take out the scratch games, our 10 projected sales are quite close to what the actual 11 sales are. There are differences of just a few 12 percentage points between what the sales data show and 13 what our survey data show, which is actually quite -- 14 quite good because we're using two different sources 15 of data. We're using objectives for comparing our 16 survey results to actual sales data, and we are quite 17 close once the scratch games are removed. So our data 18 are quite accurate in terms of that. Now, of course, 19 why are scratch games underreported. We speculate -- 20 and, again, this is just simply speculation -- that 21 those who are casual players are not likely to -- who 22 buy scratch games are not likely to say that they 23 actually played the lottery in the last year or the 24 last week, even though they may have bought a scratch 25 games ticket. Now, again, that's simply speculation, 0135 1 as is the fact when it's no -- or when it was observed 2 that we may be underreporting lottery play by 3 disadvantaged groups because we're underreporting 4 scratch games. That's -- we simply -- that's mere 5 speculation, that observation is, and we simply don't 6 have the data to support that conclusion. Okay? 7 So those are the revisions and our 8 responses to the various issues that were raised about 9 the initial report that was reported to you in 10 January. 11 CHAIRMAN CLOWE: Are there any 12 questions? 13 COMMISSIONER COX: I have one. 14 CHAIRMAN CLOWE: Yes. 15 COMMISSIONER COX: Professor, on the 16 point you just covered about the underreporting of 17 participation in scratch games, you infer that perhaps 18 people didn't consider that they were participating in 19 the lottery when they were buying scratch tickets. Is 20 your -- were your questions imprecise enough to 21 support that hypothesis? 22 DR. BANDUCCI: No, our questions were 23 not imprecise. What is the problem is how people 24 perceive the questions and what they perceive the 25 question is asking them. The questions are quite 0136 1 precise about, when did you -- you know, did you play 2 the lottery, did you play this particular game. The 3 questions are quite precise. It's a matter of what 4 happens when somebody answers that question. What 5 exactly is it triggering in their mind when they 6 answer the question. And as you can see, we're quite 7 accurate on all other estimates. 8 COMMISSIONER COX: Well, I wonder if 9 your question could be considered accurate if they 10 don't understand what you're talking about. If they 11 don't understand what the lottery is, then it sounds 12 like your question might be imprecise. 13 DR. BANDUCCI: No, no. I think our 14 questions are quite precise, as is evidenced by the 15 other lottery games that we see where we are quite 16 accurate. And we're not talking about -- we're 17 talking about what we think are casual players. And, 18 again, I am simply offering this as -- as speculation 19 as to why this occurs, and it's not -- this is not the 20 first time this has occurred. This has occurred in 21 past reports as well. So -- and simply, this is 22 something that it is -- if it is of interest, should 23 be investigated further. 24 COMMISSIONER COX: And secondly, after 25 our last two meetings at which a representative from 0137 1 Texas Tech has not been present, there have been some 2 observations that might be characterized as critical 3 of your work by members of the public, specifically, 4 by Professor Gasalt from San Antonio College. Have 5 you read our transcript and do you have any comments 6 on those comments? 7 DR. BANDUCCI: Yes, I have read the 8 transcript where he pointed out the inconsistencies 9 between tables one and table three. And that's what I 10 addressed with my first point about the difference 11 between the weighted and the unweighted data. And as 12 I suggested, what we're talking about are differences 13 of less than one percent. It's less than .5 percent 14 in the results as they were reported. And I think -- 15 well, I don't think. I mean, the conclusion is that 16 it did not alter at all the results that we have seen 17 in the report as far as the conclusions about the 18 differences between groups. 19 COMMISSIONER COX: Thank you. 20 CHAIRMAN CLOWE: Thank you, Madam. 21 Mike, do you have any further comments? 22 MR. FERNANDEZ: No, sir. Thank you for 23 taking us out of order. 24 CHAIRMAN CLOWE: Sure. 25 Commissioners, if it meets your 0138 1 approval, due to Commissioner Olvera's need to depart 2 at a time after noon, I would move that we go into 3 Executive Session. We'll defer the rest of the agenda 4 until we come back. 5 At this time, I move the Texas Lottery 6 Commission go into executive session to deliberate the 7 duties and evaluation of the Executive Director and/or 8 Deputy Executive Director, Internal Audit Director, 9 Charitable Bingo Operations Director pursuant to 10 Section 551.074 of the Texas Government Code. 11 To deliberate the duties of the General 12 Counsel pursuant to Section 551.074 of the Texas 13 Government Code. 14 To receive legal advice regarding 15 pending or contemplated litigation and/or to receive 16 legal advise pursuant to Section 551.071 (1) (A) or 17 (B) of the Texas Government Code and/or to receive 18 legal advice pursuant to Section 551.071 (2) of the 19 Texas Government Code, including but limited to: 20 Patsy Henry versus Texas Lottery Commission 21 Sandy Surber, et al versus GTECH Corporation 22 Linda Cloud versus Mike McKinney, et al 23 James T. Jongebloed versus Texas Lottery Commission 24 Russell Verney versus Carol Keeton Strayhorn, Greg 25 Abbott, and Reagan E. Greer, in their individual and 0139 1 official capacities 2 Employment law, personnel law, procurement and 3 contract law, evidentiary and procedural law, and 4 general government law. 5 Is there a second? 6 COMMISSIONER OLVERA: Second. 7 CHAIRMAN CLOWE: All in favor, please 8 say, aye. The vote is three, zero. The Texas Lottery 9 Commission will go into Executive Session. The time 10 is 11:44 a.m. Today is April the 6th, 2005. 11 (EXECUTIVE SESSION) 12 CHAIRMAN CLOWE: The Texas Lottery 13 Commission is out of Executive Session. The time is 14 1:19 p.m. 15 Is there any action to be taken as a 16 result of Executive Session? If not, let's move to 17 item number six on the agenda, report and possible 18 discussion on bingo financial information and 19 statistics, including charitable distributions. 20 Mr. Sanderson. 21 MR. SANDERSON: Good afternoon, 22 Commissioners. For the record, I'm Phil Sanderson, 23 Assistant Director of the Charitable Bingo Operations 24 Division. 25 Today, in your notebook, I have 0140 1 provided you with three different spreadsheets, the 2 first two of which are based on organizations that are 3 currently active that have conducted 300 or more 4 occasions over the last three years. And that number 5 was chosen primarily because that -- those 6 organizations will be ones that are conducting at two 7 or more times per week, which would be those that are 8 in the, you know, full effect business of conducting 9 bingo. And the first spreadsheet takes -- it's sorted 10 by the distribution amount and it's those 11 organizations that reported their distributions on 12 a -- during that period of time, and it's less than 13 five percent of the whole, which the whole is gross 14 minus the prizes. It's just the money that's left 15 after they pay the prizes for expenses and 16 distribution. 17 And then the others -- the second 18 spreadsheet are those organizations where 20 percent 19 or more was distributed from the -- what was left over 20 and paid for their prizes. 21 And the last spreadsheet is based on -- 22 it's all organizations that are currently active, and 23 it's taking their activities over the last three years 24 and it's looking at an average -- whole and average 25 net revenue per occasion, which in that -- and that 0141 1 with the -- enables you to be able to compare 2 organizations that conduct once a week, twice a week, 3 three times a week, and see where the -- if there is 4 organizations that have a higher percentage of 5 expenses, or prize payout percentages. 6 And then I -- after looking at it a 7 little bit further, I've gone in and drilled down a 8 little bit more on some other numbers, because I was 9 looking at that last one of -- or the second sheet, 10 the 20 percent of distributions more than -- on the 11 whole. And I noticed a lot of those organizations 12 were those that are conductor lessors that have rental 13 income or other income, mainly rental income. And it 14 kind of distorts the picture in the sense that the 15 operating expenses are -- were based strictly on the 16 gross receipts from bingo and it did not include the 17 gross receipts or the rental income that they had 18 received. And their operating expenses does include 19 some expense that is associated with being a conductor 20 lessor or a commercial lessor. And with that, it did 21 change a little bit. 22 What I derived from looking at these 23 numbers primarily, in my mind, is that the 24 organizations that monitor their prize payout 25 percentages and they stay within that 70 to 80 percent 0142 1 range, and they can keep their cost of goods sold down 2 around ten percent, then those are the ones that are 3 making the money. And other organizations that aren't 4 making any distributions, primarily, their prize 5 percentage payouts are way above 80 percent and/or 6 their costs are above 15 to 20 percent. 7 And I'll be glad to answer any 8 questions. I know there is a lot of numbers to look 9 at and I can, you know, further drill down on these if 10 you like, sir. 11 COMMISSIONER COX: Now, I think that 12 you're headed in the right direction. You know, I 13 looked at these numbers and, frankly, my eyes glazed 14 over. I think they're smaller than my permissible 15 font for one thing, so that means I can't read without 16 glasses. And there are so many of them, and they just 17 kind of all run together. But the last three things 18 you've said have gone from presenting data to 19 analyzing data, and that's what I want you to 20 encourage you to do more of, and to be creative, 21 Billy, with the ways that you're looking at this data 22 to try to find out, okay. Now, if they're paying out 23 more than 80 or 90 percent and their expenses are more 24 than ten percent, then they're not giving much to 25 charity. Now, let's see if we can make a profile of 0143 1 who that is and then see if, golly, now, you know, 2 there is seven of those are in towns that are under 3 5,000 people, let's say, and then there is one in 4 Dallas. Interesting. What is going on at the one in 5 Dallas? And that kind of -- of critical analysis of 6 the data, breaking it into smaller pieces, sorting it 7 six different ways, and just seeing what song it sings 8 to you. So I encourage you to continue to develop 9 data like this and then make it play a tune for you. 10 MR. SANDERSON: Well, then -- and in 11 looking at the information, there were some areas that 12 did concern me when I saw a net loss over the 13 three-year period. And on those organizations, I went 14 back and looked, and I'm having the staff, you know, 15 pull the quarterly reports that they submitted, 16 because it looks like there may be some errors on what 17 they did report. And, of course, we don't audit 18 everybody every year, so those are areas that, 19 hopefully, with the new system that we've got, and 20 once we get everything in place, we'll be able to 21 analyze those reports quarterly and, hopefully, catch 22 some of those reporting-type mistakes where they 23 transpose the numbers or they put it on the wrong line 24 and that type of information, so that we can at least 25 get a little bit more accurate information. 0144 1 COMMISSIONER COX: Now, do your 2 auditors use some kind of analysis like this, a risk 3 analysis if you will, in determining who they're going 4 to audit? 5 MR. SANDERSON: We have a risk analysis 6 that we're modifying right now. In fact, I just got 7 the parameters last month, and we're starting to put 8 together the profile for the risk analysis and the 9 weighted averages. And we do use -- the first one 10 that we ever did use was based off of a lot of 11 percentages, you know, those organizations that 12 reported less than five percent or those organizations 13 had expenses or -- you know, too high. And some of 14 those audits that we did, based on that risk, we found 15 that, believe it or not, that organizations that were 16 actually reporting a higher distribution percentage 17 were actually distributing money that wasn't for a 18 charitable activity, and so we ended up having to 19 disallow it. So it kind of did a reverse factor on 20 us, so to speak, that an organization that looked like 21 it was doing a lot of distributions, ended up actually 22 getting a lot of that disallowed because they were not 23 considered a charitable activity. 24 CHAIRMAN CLOWE: Thank you, Phil. 25 MR. ATKINS: Commissioner Cox, we 0145 1 appreciate your feedback and we're developing a lot of 2 this through these discussions with you. Also, just 3 so you know, the folks in the financial administration 4 have been very helpful, and we'll continue working 5 with them in performing those different types of 6 analyses. They've been very beneficial in bringing a 7 fresh set of eyes to it. 8 CHAIRMAN CLOWE: Next we'll take up 9 item number seven, report, possible discussions and/or 10 action on lottery sales and/or revenues, game 11 performance, and trends. 12 Mr. Deviney. 13 MR. DEVINEY: Good morning, 14 Commissions. Mr. Anger and Mr. Fernandez are going to 15 lead off this morning. 16 MR. FERNANDEZ: Good afternoon, 17 Mr. Chairman, Commissioner Cox. My name is Mike -- 18 CHAIRMAN CLOWE: And that reminds me. 19 For the record, when the Commission reconvened, 20 Commissioner Olvera -- well, yeah, I'm just thinking. 21 He departed -- Commissioner Olvera departed during the 22 Executive Session, and when we reconvened in Public 23 Session, he has been absent since then. But the 24 record should know that he departed during the 25 Executive Session. Thank you. 0146 1 Pardon me, Mike, for interrupting you. 2 MS. KIPLIN: But you do have a quorum. 3 CHAIRMAN CLOWE: Yes, we do have a 4 quorum. 5 MR. FERNANDEZ: My name is 6 Mike Fernandez. I'm the Director of Administration. 7 As Mr. Deviney pointed out, with me I have 8 Michael Anger, the Director of Operations. And we 9 would like to take a few moments, if you would, to 10 provide some information about three slides or provide 11 three slides of information. 12 From time to time, and because of our 13 desire to provide as much information to the 14 Commission as we can, we sometimes put up slides that 15 have a variety of plots on them. And sometimes that 16 can be confusing, certainly with the speed of which we 17 move through them. And in order perhaps to give a 18 better, more accurate picture, historical picture of 19 the activities of sales and transfers to the State, 20 Michael and I worked together with Lee's staff to come 21 up with these slides. And basically, we have three. 22 The three are overall sales for all products, and then 23 we're going to break that by online and we're going to 24 break that by instants. 25 Before I turn this over to Mike, what I 0147 1 would like to point out, based on a suggestion or 2 recommendation that we had at our last Commission 3 meeting, I believe, from Commissioner Cox regarding 4 net win, where Commissioner -- the Commission 5 recommended that we perhaps look at the other 6 monickers or other terms that would be more 7 informative or better suited and perhaps less 8 confusing. And this may not be, so we're open to any 9 suggestions. But on the fourth item down, we're now 10 using the term Sales Contribution. And what that is, 11 is that sales less prize payout. And we believe 12 that -- obviously, that that's the sales contribution 13 to the bottom line, and certainly there are others. 14 So with that, I will turn it over to Mike. 15 MR. ANGER: Good afternoon, 16 Commissioners. For the record, my name is Michael 17 Anger, and I'm the Lottery Operations Director. And 18 as Mike Fernandez indicated, we're going to go through 19 a few of the slides with you today. 20 The first, depicting overall lottery 21 sales from fiscal year 1992 up through fiscal year 22 2004. And I just have a couple of observations to 23 share with you on each of the slides. I -- if you'll 24 note, from fiscal year 1992 up through fiscal year 25 1997, what we see is we see a period of increasing 0148 1 total sales for lottery products. We also see a 2 similar trend with sales contribution. This number 3 grows up until fiscal year 1997, and then at the 4 bottom of your screen, transfers to the State increase 5 along with those increases in sales. 6 We have a departure in the fiscal year 7 1998 and fiscal year 1999 from the trend of the past, 8 and what we see is, is we actually see a decline in 9 overall sales, a decline in sales contribution and 10 also a decline on the bottom line in transfers to the 11 State. And we'll talk a little bit more in detail 12 about that when we get into the instant and online 13 products, individually. 14 Fiscal year 2000 through fiscal year 15 2004 represents a return to increased lottery sales 16 and also increasing sales contribution dollars, which 17 can be attributed to a return to stable growth in the 18 instant product category, which I will illustrate on a 19 subsequent slide. 20 The next slide here is a depiction of 21 online sales for the same time period, fiscal year 22 1992 through fiscal year 2004. You'll note the same 23 trend is from the original overall sales slide. 24 Online sales, it didn't begin until fiscal year 1993, 25 but they continue to grow over the same period of time 0149 1 up until fiscal year 1997. And sales contribution 2 figures, the line below prize expense, grows along 3 with that. 4 Fiscal year 1998 through fiscal year 5 2000 represent a three-year period of sales and sales 6 contribution declines for the online product group. 7 And interestingly, when you get down into the numbers 8 supporting the online sales, what you see is that 9 there was also a related decline or correlated decline 10 in the Lotto Texas and Cash Five product that began in 11 1998 and continued through that same time period. 12 Fiscal year 2001 represents a positive 13 reversal for online sales and sales contributions. 14 There was a strong rebound in Lotto Texas sales, 15 largely related to an 85 million dollar jackpot that 16 took place during that fiscal year, and at the time 17 this was the highest ever offered in Texas. This 18 jackpot level was reached following a matrix change 19 that took place at the end of the prior fiscal year, 20 in July of 2000, changing the Lotto Texas matrix from 21 six of 50 to six of 54. 22 In fiscal year 2002 and in fiscal year 23 2003, we see moderate declines in online sales and 24 contributions. 25 In fiscal year 2004, online sales once 0150 1 again returned to a high level of online sales and 2 increased from the prior three fiscal years. During 3 this period of time, in fiscal year 2004, the lottery 4 introduced Mega Millions and Megaplier and, 5 additionally, the lottery also was record jackpot 6 levels never before seen in the state. Lotto Texas 7 reached an advertised jackpot level of 145 million and 8 Mega Millions reached two 200 million dollar jackpots, 9 one at a 230 million dollar level and another at 290 10 million dollars at the end of that fiscal year. 11 CHAIRMAN CLOWE: And, Michael, we've 12 had, what, two Texas winners of Mega Millions? 13 MR. ANGER: Yes, sir. That's correct. 14 The annual online sales seem to reflect 15 the online product group's reliance on jackpot games 16 overall as the primary driver for online sales. I 17 will note, the one notable exception to that is the 18 Pick 3 game, which was launched in 1994. We've seen a 19 steady, slow, incremental increase in sales in that 20 game year over year, every year since its launching in 21 fiscal year 1994. 22 If you'll go on to the next slide. 23 Now, moving on to instant product sales covering the 24 exact time same period, what you see is the same trend 25 that was apparent in the other two slides that we 0151 1 discussed. Fiscal year 1992 through fiscal year 1997, 2 you see a steady pattern of increasing instant ticket 3 sales as you move across through fiscal years, and you 4 see the same pattern following in sales contribution, 5 net of prize expense. 6 In fiscal year 1998 and fiscal year 7 1999, you see a significant decline in both overall 8 sales and then, also, a decline of the sales 9 contribution level. You'll note here that there was a 10 decline in the prize payout percentage that took place 11 from a trend that occurred in the prior four years of 12 around 60 percent. And during this two-year period of 13 time, there was a decline in sales that accumulated 14 from '97 to '99, and approximately a 40 percent 15 reduction in overall instant ticket sales. 16 Fiscal year 2000 is unique from all 17 other instant ticket sales years in that it marked a 18 year when the Commission restored average prize payout 19 levels on instant ticket games back to the 60 percent 20 level. But what we see that is unique in all of the 21 other patterns on this chart is that the increase in 22 sales that took place following from 1999 to 2000 did 23 not follow through on the sales contribution line. We 24 actually saw a small reduction in sales contribution, 25 and from that point forward, the trend that we've 0152 1 talked about in the past has continued. Beginning 2 with fiscal year 2001 through 2004, we see the normal 3 pattern where there is a continued increase in overall 4 sales, and that also continues on the sales 5 contribution line as well, where we have overall 6 year-over-year growth in total dollars at the sales 7 contribution line. 8 Commissioners, that concludes the 9 information that I wanted to note to you from the 10 slides, but I would be happy to answer any questions, 11 or Mike would as well. 12 CHAIRMAN CLOWE: Any questions? 13 Thank you, gentlemen. 14 MR. ANGER: Thank you. 15 CHAIRMAN CLOWE: Next, we'll go to 16 number nine, report, possible discussion and/or action 17 on the agency's drawings, including television 18 coverage and/or animation. 19 MR. ANGER: Chairman, the rest of the 20 standard sales presentation is still available by 21 Mr. Deviney and -- 22 CHAIRMAN CLOWE: Okay. I thought you 23 had concluded. 24 MR. ANGER: I'm sorry. I apologize. 25 CHAIRMAN CLOWE: Go forward, gentlemen. 0153 1 MR. DEVINEY: I'll move over here so I 2 can use the pointer. 3 Good afternoon, Commissioners. I'm Lee 4 Deviney, Financial Administration Director. And I 5 apologize, I don't have some much voice today. 6 Under tab seven in your notebook, this 7 is the usual or the monthly lottery sales and trends 8 report. At your last Commission meeting we presented, 9 not on a slide but on paper, this report, which is -- 10 which lays out sales contribution, which was just 11 discussed from a historical context, and also, net 12 revenue to the State, except in this slide we're 13 looking only at fiscal year 2005, how are we doing so 14 far this year. 15 And at this point in time, through the 16 end of March, our sales contribution has -- is 803.3 17 million dollars or 37.3 percent. To get down to net 18 revenue to the State, you take your sales contribution 19 and then you reduce it by retailer commission, which 20 is a fixed five percent, that's 107.6 million dollars, 21 and also, the amount that is reduced for paying the 22 lottery operator contract at 2.699 percent. And then, 23 finally, we also reduced an amount for lottery 24 administration at a rate of 4.3 percent, which brings 25 us down to a bottom line of 545 million dollars net 0154 1 revenue to the State or 25.3 percent. But before I go 2 past these two numbers, I need to take you back to 3 this one. This is not a fixed number for the entire 4 fiscal year. After we take seven percent from sales 5 each month to fund the lottery operator contract and 6 administration, until our administration appropriation 7 is fully funded, then we don't take this amount from 8 sales any more. So in later months of the year, this 9 money will actually be net revenue to the State until 10 we get to a point where sales are so high we invoke 11 rider four in our General Appropriations Act, which 12 appropriates about one and a half percent for 13 additional administration costs. 14 What all that says is, this number 15 will -- if all these things stay constant up here, 16 this number will increase by virtue of the fact that 17 this number will decrease during -- at the latter part 18 of the year. 19 Moving on, looking at sales and revenue 20 to date in fiscal year 2005, this is a slide we show 21 you each month, how we're doing on a game-by-game 22 basis and in total. We're still holding steady at 23 about 74 percent of our sales are from instant 24 tickets. And they're the leader in gross revenue. 25 339 million or about 61 percent of our revenue is from 0155 1 instant tickets. Following that, our next sales -- 2 our second sales leader is Lotto Texas at about 8.2 3 percent, followed by Pick 3 at 7.6 percent. Now, it's 4 something you'll notice here for the first time, or 5 perhaps we haven't noticed it before, is that Pick 3 6 is actually generating a bit more revenue than Lotto 7 Texas. And that is a function, of course, not of 8 sales, but of differences in prize payout. 9 Year-to-date sales are through the -- 10 through April 2nd are 2.2 billion dollars and revenue 11 is 551.6 million dollars. 12 This is sales. Again, we're just 13 showing it to you graphically in a pie chart. It's 14 the same information that was on the previous slide, 15 showing that instants make up the largest slice of the 16 pie by far on our lottery sales. 17 And the next slide will be revenue 18 generated from lottery sales. And here you'll see, 19 Pick 3 and Lotto Texas are just about equal in terms 20 of revenue generation, and the instants are a smaller 21 slice of the pie from a revenue perspective than they 22 are from a sales perspective. 23 MR. TIRLONI: Good afternoon, 24 Commissioners. For the record, My name is 25 Robert Tirloni. I am the Products Manager for the 0156 1 Texas Lottery Commission. 2 Moving forward from the slide that we 3 just looked at with Lee, we are looking at a pie chart 4 that shows instant ticket sales by prize claim. This 5 is for this fiscal year through the week ending 6 4-2-05, which was last Saturday. And the -- not much 7 change from what we've looked at during the previous 8 months. We still do continue to see the bulk of the 9 instant sales come in at the two and the five-dollar 10 price point, followed very closely by the one-dollar 11 price point at this time. 12 As we have been doing, translating that 13 revenue by price point, again, we see two-dollar price 14 points making up the bulk of the revenue, over 30 15 percent, with the five-dollar price point closely 16 behind, and then followed by the one-dollar price 17 point again. 18 Next month we'll be back with more 19 updates on some instant tickets and show you some of 20 the new products that we've put out here recently, and 21 products that we'll be planning to put out through the 22 rest of the fiscal year, so we can share those with 23 you. 24 I do have some -- a brief update on 25 Mega Millions for you. And this is from when we 0157 1 started in the game in December of '03, through the 2 Friday draw on April 1st. And our Mega Millions draw 3 sales are 289 million dollars, approximately, with 4 Megaplier draw sales coming in at almost 19 percent, 5 at 67.4 million, giving us a total of about 357 6 million dollars. And you see the revenue for both 7 games, Mega Millions and Megaplier, Mega Millions 8 coming in at 110 million and Megaplier revenue coming 9 in at just over 31 million. 10 Commissioner Cox, you had a question 11 last month about the percentage of the Megaplier draw 12 sales and the number of winners who Megaplied, and you 13 asked if there was any statistic significance in those 14 differences. And I wanted to let you know that 15 Doctor Ewbank is looking at this issue as part of the 16 bigger Megaplier drawing issue that was raised last 17 month, and we will have a report on both of those 18 issues for you in the May meeting. 19 I will recap on winners. We have had 20 almost seven million Texas winners, 1.6 million that 21 have Megaplied; and at the second-tier level, we've 22 had 102 winners and 17 who have Megaplied. 23 COMMISSIONER COX: Back to that one, 24 Robert. 25 MR. TIRLONI: Sure. 0158 1 COMMISSIONER COX: That second-tier, 2 there is a shared liability with the other 3 participants in Mega Millions. Is that correct? 4 MR. TIRLONI: That -- the second-tier 5 is a fixed prize amount, but there is shared 6 liability, yes, at the prize tiers. 7 COMMISSIONER COX: Are we giving or 8 getting? 9 MR. DEVINEY: Commissioner Cox, on -- 10 you're talking about the second-tier prize? 11 COMMISSIONER COX: Yes. 12 MR. DEVINEY: Okay. We only have 13 shared liability for the base prize, not for the 14 Megaplied portion. 15 COMMISSIONER COX: I understand that. 16 MR. DEVINEY: Okay. Looking at it just 17 on a prize level basis, I don't know that we could 18 necessarily identify whether we're getting or giving 19 at a particular prize level. 20 COMMISSIONER COX: Well, now, we would 21 certainly know at some point, because it is settled up 22 at some point, isn't it? 23 MR. DEVINEY: We settle up -- I'm used 24 to looking at that in total. In other words, looking 25 at all the prize tiers together. 0159 1 COMMISSIONER COX: Okay. Now, my 2 understanding, and I hear what you're saying, I think, 3 but the others don't have a P&L for that, they're just 4 changing dollars, but this has an P&L effect, does it 5 not, in that if we are disproportionately paying out 6 those prizes, we get money from the other states. If 7 we're disproportionately low in paying those out, we 8 kick into the pot. 9 MR. DEVINEY: Yes, sir. That's true. 10 That's true of all the lower tier prizes. 11 COMMISSIONER COX: All of the lower 12 tier prizes. 13 MR. DEVINEY: Correct. 14 COMMISSIONER COX: Not just the 15 second-tier? 16 MR. DEVINEY: Not just the second-tier. 17 COMMISSIONER COX: So are we winning or 18 losing? 19 MR. DEVINEY: We should be coming out 20 even. 21 COMMISSIONER COX: After the subsidy? 22 MR. DEVINEY: After everything is 23 settled. That's correct. It would be -- 24 COMMISSIONER COX: But my question is, 25 before the subsidy, given or received, are we coming 0160 1 out -- are we giving or receiving subsidy? 2 MR. DEVINEY: At any given point in 3 time, we could be up or down. Whenever -- if we 4 are -- let's say we're a million and a half dollars in 5 the hole, that's the current threshold. In other 6 words, we're in a due from situation. Then we could 7 call for a reconciliation and we would be made whole 8 by the other party -- 9 COMMISSIONER COX: I think that you 10 just answered my question. Right now we're paying out 11 money that is being sent to us by other states, at 12 least bookkeeping-wise? 13 MR. DEVINEY: That is correct. 14 COMMISSIONER COX: We're making out on 15 the interstate agreement? 16 MR. DEVINEY: Yes, sir. 17 COMMISSIONER COX: Or at least the 18 people of Texas are. 19 MR. DEVINEY: Yes, sir. 20 MR. TIRLONI: Commissioners, last month 21 on March 11th when you were here, we had a detailed 22 discussion about Mega Millions, and I wanted to give 23 you an update on the proposed Mega Millions rule. The 24 online game rule, the proposed rule, did publish in 25 the March 25th issue of the Texas Register. There is 0161 1 a public comment hearing tomorrow in this room at TLC 2 headquarters, that's April 7th. Besides that public 3 comment hearing, we are also accepting comment via the 4 lottery's website and fax and U.S. mail. The earliest 5 possible date of adoption for that online game rule 6 for the Mega Millions change is April 24th. And I 7 believe, since we last met, there has been a change in 8 the sales launch date. It has been pushed back a 9 week. And so the launch date is now a Wednesday, June 10 22nd. And in order to meet that launch date in Texas, 11 we would need to begin our multidraw countdown on 12 May 20th, which is a Friday. Mega Millions has ten 13 multidraws in Texas. 14 Mr. Chairman, you just asked Michael 15 Anger a question a few minutes ago about the second 16 Mega Millions jackpot ticket. A lot of this 17 information is repetitive from that March meeting. If 18 you recall that ticket, that second jackpot ticket was 19 sold in Rowlett for the March 1st drawing. That was a 20 112 million dollar advertised jackpot. That prize was 21 claimed on Friday, March 11th, actually, the date of 22 the last Commission meeting. The cash value option 23 payment was 68.2 million before taxes, and the 24 retailer is eligible for a 1 million dollar bonus. 25 And that -- that retailer bonus is in process and is 0162 1 going through our internal review process at this 2 time. 3 Just a quick update on both jackpot 4 games, Lotto and Mega Millions. This shows the 5 history since December when we joined Mega Millions of 6 the roll cycles for both Mega Millions and Lotto. 7 Mega Millions is in blue in the background and 8 Lotto -- excuse me, Lotto is in red in the foreground. 9 And you can just see the progression of the roll 10 cycles throughout the past year and a half, almost. 11 We are currently advertising a 102 12 million dollar jackpot for Mega Millions. After last 13 night's drawing there was no jackpot winner in any of 14 the states. And so, of course, we hope that jackpot 15 continues to roll, as we are now at the jackpot level 16 where we start to see increased play and increased 17 interest in Texas amongst our players. 18 And that's all I have. We would be 19 happy to answer any questions that you might have at 20 this time. 21 CHAIRMAN CLOWE: Thank you again, 22 gentlemen. 23 MR. TIRLONI: Thank you. 24 CHAIRMAN CLOWE: Now we're ready to go 25 to item number nine, report, possible discussion 0163 1 and/or action on the agency's drawings, including 2 television coverage and/or animation. 3 May we have the lights, or are you 4 going to have a slide for us? 5 MS. McCULLOUGH: Yes, sir. There is a 6 PowerPoint presentation. 7 CHAIRMAN CLOWE: Very good. 8 MS. McCULLOUGH: We can do it with 9 lights on or off. Good afternoon, Commissioners. For 10 the record, my name is Chelsea McCullough. I'm the 11 Creative Coordinator in the Lottery Operations 12 Division. 13 Our presentation today is in regards to 14 the broadcast and the lottery drawings and winning 15 numbers on television stations throughout Texas. To 16 assess the extent to which drawings and winning 17 numbers are being aired, A survey was conducted by 18 DDB, in cooperation with the Ward Group, in February 19 of 2005. The survey was sent to 74 stations across 20 Texas with 100 percent reporting. Questions on the 21 survey included, do you broadcast footage of Texas 22 Lottery drawings, do you broadcast Texas Lottery 23 winning numbers, and do you post information about the 24 Texas Lottery on your website. 25 The results of that survey is that the 0164 1 majority of stations never air live drawings, at 89 2 percent, and only 11 percent of stations air drawings 3 at all. Four Texas stations always air drawings, but 4 these are each on a slight delay, and five stations 5 sometimes air drawings, but these are only for 6 specific games. 7 In regards to winning numbers, the 8 results were much better. Most stations do air 9 winning numbers, at 73 percent. 50 percent of 10 stations always air winning drawings and five stations 11 sometimes air drawings, but only for specific games. 12 In regards to the question, do you post 13 information about the Texas Lottery on your website, 14 almost half of the stations provided either winning 15 numbers or a link to the Texas Lottery on their 16 websites. The media value of these winning numbers 17 and broadcasts equals 8.1 million dollars. There is 18 no actual cost for this media coverage, and the fixed 19 costs for the production is 1.6 million. So, you 20 know, we really would like to increase the coverage 21 and keep our costs fixed. So our next step is to 22 resurvey these stations and understand how we can 23 increase their participation. 24 With the cooperation of DDB and Ward 25 Group, we're going to resurvey these stations and 0165 1 determine why these drawings are not being broadcast, 2 why 100 percent of stations aren't airing winning 3 numbers, and why 100 percent of stations aren't airing 4 winning number -- or aren't listing the winning 5 numbers in a link to the Lottery on their websites. 6 In doing this, we've looked at creative 7 stations -- creative solutions from other states, in 8 particular -- 9 COMMISSIONER COX: Just a minute. I'm 10 hung up on a couple of things you said earlier. 11 MS. McCULLOUGH: I'm sorry, sir. 12 COMMISSIONER COX: You said we're 13 paying 1.8 million for something? 14 MS. McCULLOUGH: 1.6 million is the 15 cost for production and distribution of airing the 16 numbers. 17 COMMISSIONER COX: Okay. So that's a 18 number that we, by golly, know that we can call 19 Lee Deviney and he can add that up? 20 MS. McCULLOUGH: Absolutely. 21 MR. GRIEF: Commissioner, that's 22 basically the -- now the contract for MNS Productions 23 that handles the production of our broadcast -- 24 COMMISSIONER COX: Okay. So if we 25 weren't attempting to have anything other than people 0166 1 that want to look in the window, or whatever -- 2 whoever might observe here, we could take 1.6 million 3 out of the budget? 4 MR. GRIEF: I think that's basically a 5 factual conclusion. 6 COMMISSIONER COX: Okay. Now, tell me 7 about that eight million dollar number. 8 MS. McCULLOUGH: That eight million 9 dollar number is the value of the media coverage that 10 we are receiving at no cost. 11 COMMISSIONER COX: Okay. 12 MS. McCULLOUGH: From the stations that 13 are airing drawings -- 14 COMMISSIONER COX: Help me understand 15 how I could get to eight million. 16 MS. McCULLOUGH: The eight million is 17 derived from the coverage of the drawings and the 18 winning numbers. The stations basically have a length 19 of time that -- that they're aired for the winning 20 numbers, and then it's determined the cost for that 21 amount of time. 22 COMMISSIONER COX: As if it were 23 advertising? 24 MS. McCULLOUGH: I'm sorry? 25 COMMISSIONER COX: As if it were 0167 1 advertising? 2 MS. McCULLOUGH: As if it were 3 advertising. 4 COMMISSIONER COX: So if the rate for 5 10:13 is X, and we got two minutes at 10:13, then you 6 would multiply X times two and you would add that to a 7 bunch of other numbers. 8 MS. McCULLOUGH: Yes, sir. 9 COMMISSIONER COX: Okay. Where do we 10 get to those numbers? 11 MS. McCULLOUGH: Those numbers are 12 based on the ratings. 13 COMMISSIONER COX: And does that come 14 from the Audit Bureau of Circulation or someone like 15 that, or where do we get that? 16 MS. McCULLOUGH: There is a national 17 association called Nielsen, and they are the ones that 18 provide those rating numbers, and that's accepted 19 throughout the industry. 20 COMMISSIONER COX: Okay. So now, where 21 do we gather up the numbers that we multiply by the 22 Nielsen ratings? 23 MS. McCULLOUGH: The length of the 24 drawings times the Nielsen ratings, at the value of 25 that advertising, equals 8.1 million. 0168 1 COMMISSIONER COX: And we took that 2 from those surveys? 3 MS. McCULLOUGH: The length of the 4 drawings and the winning numbers? Yes, sir. 5 COMMISSIONER COX: Okay. And then, 6 since everybody participated, we weren't guessing. We 7 had actual data. 8 MS. McCULLOUGH: Yes. And I have that 9 in a binder here. If you would like to review these, 10 these are the actual results from each station. 11 COMMISSIONER COX: I don't -- I've 12 gotten the level of detail I need. Thank you. 13 MS. McCULLOUGH: Thank you for your 14 questions. 15 So in looking at solutions for how we 16 can increase the airtime that we're receiving, we 17 looked at other states, in particular, California 18 lottery and the New Mexico lottery. Which I'll share 19 these with you in a minute. California shows a single 20 board that quickly lists winning numbers, and New 21 Mexico broadcasts an entertaining animated drawing 22 results. So our plan in resurveying stations is to 23 share these with them and get their feedback, and I 24 would like to share these with you now with Glen and 25 Philip's help. 0169 1 (California lottery ad is played.) 2 MS. McCULLOUGH: And New Mexico will be 3 next. 4 (New Mexico lottery ad is played.) 5 MS. McCULLOUGH: So that provides an 6 example of things that we hope stations will give us 7 feedback on, if that would increase their likelihood 8 to air broadcasts -- or to air winning numbers and 9 drawings. 10 In summary, our goals are to increase 11 the number of drawings that -- increase the number of 12 stations that broadcast drawings, winning numbers, and 13 exposure on their websites. And we look forward to 14 sharing the secondary survey results with you. 15 That concludes my presentation and I'm 16 happy to answer any questions you have. 17 COMMISSIONER COX: Do California or 18 New Mexico pay people to run those things or do they 19 run them voluntarily? 20 MS. McCULLOUGH: I'm not sure on the 21 answer to that question, but I can get back to you on 22 that. 23 COMMISSIONER COX: And a follow-up, 24 obviously, from that is, are you going to look at the 25 feasibility of paying people to run these as part of 0170 1 our advertising budget if they won't run them any 2 other way? 3 MS. McCULLOUGH: Depending on the 4 stations' response, I think we can gauge our reaction 5 to that a little bit better, and we'll be happy to 6 share those results with you. 7 CHAIRMAN CLOWE: And when you find out 8 Commissioner Cox's question's answer about, are they 9 paying, if they are or are they not, what percentage 10 of the stations are carrying them in California and 11 New Mexico. 12 MS. McCULLOUGH: I'll be happy to find 13 out and report back to you. 14 CHAIRMAN CLOWE: They've gone to 15 automation entirely, haven't they? 16 MR. GRIEF: In New Mexico. 17 CHAIRMAN CLOWE: And California? 18 MR. GRIEF: In New Mexico they have. 19 In California, I believe their Lotto game is still 20 done manually with the ball machines and the balls. 21 CHAIRMAN CLOWE: But you can't tell 22 that from the presentation? 23 MR. GRIEF: Not from what you see on 24 television. You can go visually and physically view 25 the drawings. That's the only way you can tell the 0171 1 difference. And one thing I want to bring out in 2 Chelsea's presentation is, what we're exploring is a 3 way to perhaps decrease the amount of time necessary 4 for each of these stations to present our drawings to 5 the public. Not changing the way we do the drawings 6 per se, but change the way we present the results to 7 the stations in a way that's either appealing visually 8 or condensed in time, or both. That's what our 9 purpose is. 10 CHAIRMAN CLOWE: And that's what we saw 11 on California and New Mexico? 12 MR. GRIEF: Yes, sir. 13 CHAIRMAN CLOWE: Very good. Thank you 14 very much. Let's see. We're ready to go to item ten. 15 May I have a short recess? You have 16 had a couple. Just a short recess, please. 17 (RECESS.) 18 CHAIRMAN CLOWE: We'll come back on the 19 record. Next is item number ten, report, possible 20 discussion and/or action on HUB and/or minority 21 business participation, including the agency's 22 Mentor/Protege program. 23 Hi, Joyce. How are you this afternoon? 24 MS. BERTOLACINI: Good afternoon, 25 Commissioners. For the record, my name is Joyce 0172 1 Bertolacini and I'm the coordinator of the TLC 2 Historically Underutilized Business program. 3 And included in your notebooks today is 4 the February monthly HUB Minority Contracting Activity 5 report, which includes all fiscal year 2005 6 expenditures paid from September 1st of 2004 through 7 February 28th of 2005. Our total qualifying 8 expenditures during this period were 73.4 million and 9 our estimated HUB minority utilization was 18.8 10 million, which equates to 25.69 percent. I also 11 wanted to mention that the Texas Building and 12 Procurement Commission will be releasing the 13 semiannual report for fiscal year 2005, on April the 14 15th. And I hope to present analysis and summary 15 reports to you at either the May or June meeting, 16 depending on the timing on that. 17 There are no updates regarding the 18 Commissioner's Mentor/Protege program at the time. 19 However, I did want to let you know that I have 20 received a new agreement recently and I plan to 21 present that for Mr. Greer's signature at the next 22 Commission meeting. And I would be happy to answer 23 any questions that you might have. 24 CHAIRMAN CLOWE: Joyce, thank you. We 25 have received your reports and although we don't have 0173 1 any questions, we're very pleased with the progress 2 and urge your continued efforts in these areas as well 3 as everyone else. The Commissioners have a high level 4 of support for this activity. 5 MS. BERTOLACINI: Thank you, Chairman. 6 CHAIRMAN CLOWE: Thank you. Next is 7 item number 11, report, possible discussion and/or 8 action on the agency's contracts. Mike, I believe 9 you're back. 10 MR. FERNANDEZ: Yes, sir. My name is 11 Mike Fernandez. I'm the Director of Administration. 12 I believe it's tab 11 in your notebook, 13 has the status report on the prime contracts. If you 14 have any questions, I would be happy to try and answer 15 them. 16 CHAIRMAN CLOWE: I have none. Do you, 17 Commissioner? 18 COMMISSIONER COX: I have just one, 19 Mike. I know that you're going out for bid on the 20 financial audit services. At one time, I understand, 21 the financial audit of the drawing audit were part of 22 a single contract. Has that been considered recently? 23 MR. FERNANDEZ: Commissioner, I can't 24 answer that question. I don't know the answer to 25 that. I'll have to speak with Greg Royal about that. 0174 1 I do not have the answer. 2 MR. ROYAL: Excuse me, Commissioner. 3 Is this item number 18 that we're -- I was going to 4 provide an update on the -- 5 COMMISSIONER COX: No. I was asking 6 about two line items on the prime contracts list that 7 Mr. Fernandez gave us. 8 MS. KIPLIN: The question that was 9 posed is, has there been consideration given on, that 10 in the past was there an attempt on bundling the 11 services. Has there been consideration on this in 12 that vein again, I believe. 13 MR. FERNANDEZ: The bundling, I 14 understand. 15 COMMISSIONER COX: Now, I see here 16 810,000 dollars for drawing audit services and 83,725 17 for financial audit services. I am wondering whether, 18 A, it would reduce total auditing work if one firm did 19 that, in that it would not have to -- with one doing 20 the financial audit, would not have to do any work 21 into the adequacy of the work of the drawing audit 22 services firm; and, two, would there be economies of 23 sale or scope by having both of those done by the same 24 firm so that we would be paying less than that sum for 25 the two services combined. 0175 1 MR. FERNANDEZ: Commissioner, from 2 my -- I absolutely agree with your comment. To answer 3 your question, on my side of the house, we have not 4 looked -- we have not taken that into consideration at 5 this time. However, given those comments, we 6 certainly will take a look at that and we'll meet with 7 Greg or Catherine and our contracts folks. 8 CHAIRMAN CLOWE: He is an auditor, you 9 know. 10 COMMISSIONER COX: Once an auditor, 11 always an auditor. 12 CHAIRMAN CLOWE: I believe that's the 13 only question we have. 14 MR. FERNANDEZ: All right, sir. Thank 15 you. 16 CHAIRMAN CLOWE: Next, item 12, report, 17 possible discussion on the -- or action on the 18 agency's financial status. Lee. 19 MR. DEVINEY: Good afternoon again, 20 Commissions. I'm Lee Deviney, Financial 21 Administration Director. 22 Under tab 12 of your notebook, you'll 23 find the monthly report of transfers and allocations. 24 This morning, however, we presented you with a -- with 25 a new updated report. And I would just point out to 0176 1 you that this report has been reformatted. We hope 2 that you'll find it easier to read. And the 3 highlights from the report are that total transfers to 4 the State to date amount to 12.4 million dollars. So 5 far in fiscal year 2005, we've transferred 589.8 6 million dollars to the State. 7 The second page of the report is the 8 monthly detail of transfers and allocations, which you 9 have seen before. And then the bottom part of that 10 sheet shows the quarterly detail of unclaimed prizes 11 transferred to the State. And we do that quarterly, 12 so the next report you get, you'll see the April 13 transfer for the second quarter. 14 And then following that, you'll see 15 summary information on an accrual basis, where we are 16 today. And so far, in -- on an accrual basis in 17 fiscal year 2005, we've got about 728 million dollars 18 available to transfer to the State. 19 CHAIRMAN CLOWE: So that could be a -- 20 on that running rate, it could be a very good year for 21 contributions to the State, couldn't it? 22 MR. DEVINEY: Yes. Of course, you 23 know, we hope -- we would like to see a very large 24 Lotto or Mega jackpot, or better yet, both before now 25 and then, maybe in the fiscal year hence. Of course, 0177 1 we can't control that happening. In the absence of a 2 large jackpot, I think that what you'll see is that 3 our sales will exceed last year's level. Our revenue 4 will be in the ballpark of last year's revenue. It 5 all depends on the jackpots, though. If you get a 6 large jackpot, then it could get really good. 7 CHAIRMAN CLOWE: A very cagey answer. 8 Spoken as a true -- well, as a true fiscal 9 conservative. 10 MR. GREER: We try to be conservative. 11 MR. DEVINEY: And Commissioners, going 12 back to your notebook. Behind the blue divider, 13 you'll find the budget report for the agency. This 14 report is through February, which is the midyear point 15 of our fiscal year. For both lottery operations and 16 for bingo, we are running within our budget. In other 17 words, less than half spent. We don't anticipate 18 being over budget in any categories for either lottery 19 or bingo. 20 COMMISSIONER COX: Lee, do we still 21 have things like travel cap and that kind of stuff? 22 We're -- I assume, if we were in trouble in any of 23 that stuff, you would tell us? 24 MR. DEVINEY: Yes, sir, I would. And 25 unfortunately, given my reading of the appropriations 0178 1 bills that are in play, that stuff is only going to 2 get worse from the perspective of having less control 3 over what we can -- how we can spend our money. 4 CHAIRMAN CLOWE: Thank you, Lee. 5 Nothing further, Commissioner Cox? 6 COMMISSIONER COX: No, sir. 7 CHAIRMAN CLOWE: Next, item 13, report, 8 possible discussion and/or action on lottery 9 advertising and promotions. 10 MS. McCULLOUGH: Commissioners, again 11 for the record, my name is Chelsea McCullough, 12 Creative Coordinator. 13 With regards to lottery and advertising 14 and promotions and our general market, we're currently 15 running the jackpot spot putting our online product, 16 April 4th through the week of April 18th. That's for 17 radio and for television. 18 For live reads on radio, before this 19 morning we were running 100 percent Lotto Texas, and 20 made the decision that when Mega Millions hit 100 21 million that we would switch live reads to promote 22 Mega Millions. 23 In our minority markets, we're 24 currently running learner awareness spots, and that 25 will be through the week of April 11th on TV and in 0179 1 radio, through the week of April 18th. 2 In regards to promotions, April events 3 include the Petite Strawberry Festival coming up this 4 weekend; the Spring Crawfish Festival in Spring, 5 Texas; San Antonio Missions in San Antonio; the 6 Galveston County Fair and Rodeo, in Santa Fe; and the 7 Old Pecan Street Festival here in Austin. 8 And at this time, I would like to 9 provide some information on a pilot program that we've 10 instituted in regards to our billboard advertising. 11 One second, please, while I load the PowerPoint. 12 COMMISSIONER COX: While you're loading 13 your PowerPoint, what is a live read? 14 MS. McCULLOUGH: A live read is an 15 announcer reading on radio, where the DJ will simply 16 say, have you played Lotto Texas today, the jackpot is 17 up to X number, please buy your ticket today. 18 COMMISSIONER COX: That's as opposed to 19 a recording? 20 MS. McCULLOUGH: Correct. 21 Again, this presentation today is in 22 regards to a pilot program we've instituted with our 23 outdoor advertising. Outdoor has been deemed one of 24 the most efficient mediums that we currently use. 25 This is illustrated in a DDB matrix study that was 0180 1 completed earlier this year that examined advertising 2 ROI. Currently, our outdoor billboards communicate 3 one jackpot game each with realtime jackpot amounts 4 that are updated via satellite. Today, the Texas 5 Lottery currently has 137 billboards across Texas. 63 6 of these advertise Lotto Texas, 59 Mega Millions, and 7 15 Texas Two Step. And can you see an example here of 8 how they advertise one jackpot each. 9 A little bit of history. In October of 10 2003, there were 109 Lotto Texas boards. To support 11 Mega Millions, 59 of these 109 boards were converted 12 to communicate the Mega jackpot levels. Since this 13 time, Lotto Texas sales have declined and the 14 decreased billboard coverage may be a contributing 15 factor to this. 16 In order to maximize exposure for 17 jackpot games while minimizing the investment, a 18 billboard pilot program, we've since substituted that. 19 Our recommendation is to convert seven new boards in 20 two markets that will communicate two jackpot games 21 simultaneously. The two markets that have been 22 selected are Amarillo and Corpus Christi. These 23 markets were selected based on their demographics, 24 existing boards, as well as the ability of these 25 boards to handle two sunshine boxes. And sunshine 0181 1 boxes is the terminology used to describe the 2 boards -- the boxes, I'm sorry, that are updated via 3 satellite. And our hope is that by providing support 4 for both games on the one board, that sales will react 5 positively. To measure the results of this pilot 6 program, staff plans to monitor sales data before and 7 after the placement of these boards and compare them 8 to sales in other markets that are advertising the 9 single jackpots. This is a long-term measurement 10 process and we look forward to sharing the results of 11 this pilot program with the Commission. 12 That concludes the presentation and I'm 13 happy to answer any questions you may have. 14 COMMISSIONER COX: How many factors 15 affect sales other than advertising? 16 MS. McCULLOUGH: I think that's the 17 question of the day. 18 COMMISSIONER COX: I just wonder -- 19 this is easy to say, I just wondered how you are going 20 to do it. 21 MS. McCULLOUGH: There is a number of 22 factors that can contribute, including jackpot levels. 23 COMMISSIONER COX: Oh, I -- it's a 24 rhetorical question. 25 MS. McCULLOUGH: Sure. 0182 1 COMMISSIONER COX: I hope you don't 2 underestimate the difficulty of doing that or the 3 unlikelihood, in fact, that you can even -- 4 MS. McCULLOUGH: Absolutely. That's 5 something we've taken into account. And that's why 6 we'd like to monitor for a very long period of time to 7 account for any fluctuations in both markets. 8 COMMISSIONER COX: Gary, I think I am 9 hearing from -- I heard from the presentation on our 10 games that our biggest contributor to our sales 11 contribution is Pick 3. And I didn't see any big 12 advertising bucks being sent there, so it looks like 13 it's our poster child, and yet, we never hear about 14 it. 15 MR. GRIEF: And your thought on that is 16 that, why is that? Is that your question? 17 COMMISSIONER COX: Uh-huh. You know, 18 we get all these detailed reports on Lotto Texas and 19 Mega Millions, and yet our biggest moneymaker on the 20 online site, I didn't even know it was our biggest 21 moneymaker until today. 22 MR. GRIEF: Pick 3 is a different 23 animal when it comes to the online game mix, 24 Commissioner. It's not a jackpot-driven game. In 25 fact, the prizes are kept low. They're kept around 0183 1 the 500 dollar mark. That's the type of prize level 2 that heavy players who like to play Pick 3 like to 3 play for. It's a game that is more of a cultural 4 thing on the east coast that seems to be gaining in 5 popularity down in the southern states. I don't 6 believe it's suitable for a jack -- or a signage or a 7 jackpot-type program. 8 COMMISSIONER COX: No. And I wasn't 9 suggesting that it was. I was just observing that 10 since there was no billboard advertising to it, and 11 since it was already contributing more than Lotto 12 Texas, which contributes more than Mega Millions, that 13 it is, by a margin, our most profitable game. And yet 14 we have not heard anything about it. I will repeat 15 that again. 16 We have taken the Lotto game and 17 replicated it in the Mega Millions game. Should we 18 be, for instance, looking at replicating the Pick 3 19 game, so that there is a game like that drawing every 20 day instead of three days a week, or is there already 21 one every day and should we be drawing twice a day and 22 have another one. That kind of thinking, I would like 23 to know if -- you know, if it's going on and, if so, 24 sharing some of the thoughts with us. 25 MR. GRIEF: I would say it has been 0184 1 going on. For example, there is a game called a 2 Pick 4 game that takes place in many other states, not 3 all other states. And for years, we, the Texas 4 Lottery, our vendors, we have been in discussions 5 about whether or not that type of game, which would be 6 pretty similar to Pick 3, would be complementary to 7 game mix here in Texas or would adversely affect 8 sales. And up to now -- and I'll tell you, we haven't 9 had a discussion about that particular type of game in 10 some months -- it's been consistently decided that it 11 wasn't the -- it would not a complementary game at 12 that particular time. But we would be happy to take a 13 fresh look at that. I think you've always been 14 helpful in looking at those types of things when we've 15 involved you in that regard. That would be the next 16 logical progression if we were looking at a -- at an 17 expansion of the Pick 3 type of game. 18 MR. GREER: And I would like to make a 19 comment. Based on the fact that the numbers on Pick 3 20 have not been in the category that they were in today 21 until Lotto Texas has gone over this long period of 22 slow rolls. And so we've seen those consistently rise 23 on the Pick 3 side, and we've watched them decrease on 24 the Lotto Texas side for now. They've not equated 25 but, you know, they're in the same range, I think you 0185 1 would say. And so certainly that's something that 2 we're going to continue to monitor and I'll obviously 3 have discussions with you on. When we look at the 4 impact of Lotto Texas overall, it's still the game 5 that everybody attributes to a lot of the lottery play 6 that they do, 37, whatever, percent. And so we want 7 to look at ways -- and that was where this idea was 8 something that actually we had talked about before 9 when we got into Mega Millions, but it was cost 10 prohibitive, if we were going to exchange a number of 11 billboards into this dual thing, so we kept that on 12 the chart. And Amarillo and Corpus Christi, 13 specifically, we think will help us in the measurement 14 capability, because they're in sort of a finite, 15 limited area. And that way we can get more data to 16 come back if we determine that it would be in our 17 interests, from a billboard perspective, to shift some 18 of those dollars -- shift a larger percentage of 19 dollars to billboards. But before, we were just going 20 on what it would cost to do for that specific project. 21 This is more of a long-term type of opportunity that 22 we think can have potential benefit. 23 CHAIRMAN CLOWE: And Lotto Texas, I 24 think you've told us, has been hurt by the low 25 interest rate and, therefore, the smaller amount with 0186 1 the rolls of estimated jackpots, additionally. 2 MR. GREER: Yes, sir. That continues 3 to be a concern, and we have been looking at an 4 incremental growth at a slower rate, about two to -- 5 we used to see it maybe, you know, three to five 6 million. Now we're seeing about a two million dollar 7 bump per time. And for whatever reason, over the last 8 two weeks, I think the reason is, because as the 9 jackpot grows, players get excited. But like last 10 week, we had a seven percent lift and we were in the 11 30s. And it's -- as it slowly continues to rise, we 12 are seeing a lift that -- like Lee stated a moment 13 ago, it is a positive thing because that is when it 14 gets players' attention. And we'll just have to wait 15 and see how that happens. 16 CHAIRMAN CLOWE: What are the current 17 coverages? For example, last -- Saturday night would 18 be the last drawing, what was the coverage for Lotto 19 Texas? 20 MR. GREER: Do you remember, Gary? 21 MR. GRIEF: I can't recall, Chairman. 22 We would be glad to find that out. 23 CHAIRMAN CLOWE: I'm curious as to what 24 the current coverages are running. 25 MR. GRIEF: We'll find that out for you 0187 1 hopefully before the end of this meeting. 2 CHAIRMAN CLOWE: Okay. Greg, tell the 3 Commissioners, if you would. 4 Chelsea, what is the term of the lease 5 on these sign boards? 6 MS. McCULLOUGH: That hasn't been 7 determined yet. They haven't been actually leased to 8 the State. 9 CHAIRMAN CLOWE: On the 137 that we 10 have, what is the average term on those? 11 MS. McCULLOUGH: I believe it's one 12 year. Thank you. 13 CHAIRMAN CLOWE: One year? 14 MS. McCULLOUGH: One year. 15 CHAIRMAN CLOWE: And do we buy those 16 and pay for them based on the rate of vehicular 17 traffic at their location? 18 MS. McCULLOUGH: That's how they're 19 charged, yes, sir. 20 CHAIRMAN CLOWE: That's how they're 21 priced. And do we monitor that? 22 MS. McCULLOUGH: In terms of what their 23 traffic is? 24 CHAIRMAN CLOWE: Yes. 25 MS. McCULLOUGH: Yes, sir. Absolutely. 0188 1 CHAIRMAN CLOWE: Does that change 2 substantially from year to year? 3 MS. McCULLOUGH: It completely depends 4 on the market, on construction on the roads, on the 5 saturation of billboards. It -- there are a lot of 6 factors that contribute to that. 7 CHAIRMAN CLOWE: And my question is, 8 does that change? Is that a factor where we'll leave 9 one location frequently and go to another because of 10 that? 11 MS. McCULLOUGH: Yes, sir. Looking for 12 the maximum return on investment. 13 MR. GRIEF: And, Chairman, if I could. 14 Chelsea, correct me if I am wrong. Those billboards 15 are procured through our advertising vendor. 16 MS. McCULLOUGH: Correct. 17 MR. GRIEF: DDB. And we have a 18 representative from DDB here today, Commissioner and 19 Mr. Chairman, if you would like to ask any more 20 detailed questions about that. 21 CHAIRMAN CLOWE: No, I don't think so 22 impromptu, but I would like to see something in the 23 way of information on that when they've had time to 24 prepare, maybe at the next meeting. 25 MR. GRIEF: Great. 0189 1 CHAIRMAN CLOWE: Thank you. Thank you, 2 Chelsea. 3 Next, item 14, report, possible 4 discussion and/or action on the 79th legislature. 5 Ms. Trevino. Nelda. 6 MS. TREVINO: Good afternoon, 7 Commissioners. For the record, I'm Nelda Trevino, the 8 director of Governmental Affairs. 9 More than 5600 bills have been filed 10 thus far during this legislative session and we are 11 currently tracking and monitoring 159 bills for 12 possible impact to the agency. Because the status of 13 these bills change on a daily basis, we have provided 14 you with an updated tracking report to replace the one 15 in your notebooks. Bills that have been filed since 16 the March 11th Commission meeting report with direct 17 impact on the lottery or charitable bingo include the 18 following: House Bill 9, by Representative Kino 19 Flores, would authorize video lottery terminals at 20 racetracks and on the tribal lands and also authorizes 21 12 casino gaming locations. Additionally, this bill 22 creates a Texas Gaming and Boxing Commission. 23 House Bill 3172, by Representative 24 Charlie Geren, relates to the authorization and 25 regulation of gambling. This bill authorizes casino 0190 1 gaming. 2 House Bill 3224, by Representative 3 Debbie Riddle, relates to the creation of the Texas 4 Service Members Memorial Fund. And this bill includes 5 a provision that would reallocate the use of the 6 Lottery's unclaimed prize money. 7 House Bill 3230, by Representative Kino 8 Flores, relates to authorizing the operation of video 9 lottery games. And this bill would authorize video 10 lottery terminals at racetracks and on tribal lands. 11 House Bill 3343, by Representative 12 Carlos Uresti, authorizes internet sales of lottery 13 tickets. 14 And House Bill 3410, by Representative 15 by Patrick Rose, relates to the immunity from 16 liability for certain civil claims and civil actions 17 against lottery retailers. 18 In addition to the bills that I just 19 mentioned, there are additional joint resolutions that 20 have been filed to amend the Constitution to authorize 21 video lottery terminals and casino gaming. 22 With regards to the agency's Sunset 23 bill, Senate Bill 405, by Senator Jackson, this bill 24 was heard on Monday, April the 4th, in the Senate 25 Government Organization Committee. A committee 0191 1 substitute was offered by Senator Jackson and was 2 considered by the committee. Several amendments to 3 the bill were offered for consideration. These 4 include amendments authorizing a progressive bingo 5 game, instant bingo card-minders, and the procedure to 6 issue a temporary license to a charity when the 7 Commission has summarily suspended a bingo license of 8 another charity conducting bingo at the same hall for 9 failure to remit prize fees. These amendments were 10 withdrawn by the author. Additionally, an amendment 11 was offered amending the definition of a lottery. 12 This amendment and the committee substitute for the 13 bill were left pending for future action by the 14 committee. Reagan and Billy were both in attendance 15 at the hearing and were resources to the committee and 16 answered questions by members of the committee. 17 Also, on Monday, April the 4th, the 18 Senate State Affairs Committee considered Senate Bill 19 442, by Senator Juan Hinojosa. And this bill is a 20 companion bill to the bill that I just previously 21 mentioned, House Bill 3410, by Representative Patrick 22 Rose, which relates to the immunity from liability for 23 certain claims and civil actions against lottery 24 retailers. And our general counsel, Kim Kiplin, 25 served as the agency resource to the committee. A 0192 1 committee substitute was offered and the bill was left 2 pending. This committee is scheduled to consider the 3 bill again tomorrow at their hearing. 4 As I reported at the last meeting, 5 House Bill 1138, relating to the operation and 6 regulation of charitable bingo, was considered in the 7 House Licensing and Administration Procedures 8 Committee on March the 2nd. A committee substitute 9 was voted favorably and has been reported out of the 10 committee, and we anticipate this bill to be 11 considered on the House floor in the near future. 12 The House Licensing and Administrative 13 Procedures Subcommittee on Gaming and Raffles held a 14 hearing yesterday, April the 5th, to consider various 15 bills. There are two bills that were considered by 16 the subcommittee that I would like to bring to your 17 attention. The first bill is House Bill 2715, by 18 Representative Jose Menendez. And this bill 19 authorizes licensed bingo organizations to conduct 20 charitable poker games. A committee substitute was 21 considered and the bill was left pending. And Billy 22 Atkins was there in attendance to serve as the agency 23 resource to the subcommittee. 24 The other bill that was considered in 25 the subcommittee was House Bill 2797, by 0193 1 Representative Norma Chavez. And this would authorize 2 federally-recognized Indian tribes along the 3 Texas-Mexico border to engage in bingo without state 4 licensing. This bill was also left pending in the 5 subcommittee. 6 There are two bills, House Bill 865, by 7 Representative Tony Goolsby, and House Bill 3224, by 8 Representative Debbie Riddle, that both include 9 provisions to reallocate the use of lottery unclaimed 10 prizes. That was considered last week by the House 11 Defense Affairs and State Federal Relations Committee, 12 and Lee Deviney, the agency's financial administration 13 director, served as the agency resource on these bills 14 and responded to questions from the committee. These 15 two bills were also left pending in that committee. 16 The Senate has approved its version of 17 the appropriations bill, and the House is scheduled 18 to -- actually, as we speak right now, they are 19 considering their version on the House floor today. 20 There are several prefiled amendments to the House 21 version that would impact the agency's advertising 22 budget. And we will monitor today's action on the 23 House floor and keep you apprised of any developments. 24 It is anticipated a conference committee will be 25 formed to work out the differences between the House 0194 1 and the Senate versions of the appropriations bill. 2 This concludes my report and I'll be 3 happy to answer any questions. 4 CHAIRMAN CLOWE: Are there any 5 questions? Thank you very much, Nelda. 6 MR. GRIEF: MR Chairman, I have that 7 coverage number for you. 8 CHAIRMAN CLOWE: Thank you. 9 MR. GRIEF: It's just shy of seven 10 percent for the Saturday night Lotto Texas drawing. 11 CHAIRMAN CLOWE: Very low. Thank you. 12 Next, we'll take up item 15, 13 consideration of and possible discussion and/or action 14 on external and internal audits and/or reviews 15 relating to the Texas Lottery Commission and/or the 16 Internal Audit Department's activities. Mr. Royal. 17 Greg. 18 MR. ROYAL: Good afternoon, 19 Commissioners. For the record, my name is Greg Royal, 20 the Assistant Director of the Internal Audit Division. 21 And I would like to provide information 22 on a postpayment audit that's been initiated by the 23 Comptroller's Office. And these are routine audits 24 that the Comptroller performs on State agencies. And 25 they were here last at TLC in 2002. They're currently 0195 1 on-site and will likely be here through the end of 2 next week. And they'll focus on agency transactions 3 in purchasing, travel, and payroll. Internal audit 4 will serve as liaison during this review and ensure 5 the Comptroller has proper access to the records that 6 they require and management is kept informed of any 7 issues that come up. We anticipate having a draft 8 report from the Comptroller in about two months. 9 This concludes my presentation. I'll 10 be happy to answer any questions today. 11 CHAIRMAN CLOWE: Thank you. Thank you, 12 Greg. 13 Next, we'll go to item 16, 14 consideration of and possible discussion and/or action 15 on Instant Ticket Testing procurement. MR Anger. 16 MR. ANGER: Good afternoon, 17 Commissioners. For the record, my name is Michael 18 Anger, and I'm the Lottery Operations Director. 19 Commissioners, I would like to report 20 to you that the agency has executed an instant ticket 21 testing services contract with Affiliated Forensic 22 Laboratories, Incorporated. That took place on 23 March 15th. The contract is for a term of one year 24 and contains two one-year renewal options. Staff 25 began work on the transition from in-house instant 0196 1 testing services following the execution of the 2 contract and began transitioning that work to the 3 vendor right away. That was effective on March 28th, 4 and the vendor is now performing instant ticket 5 testing services for the agency. 6 That concludes my report. I would be 7 happy to answer any questions that you have. 8 COMMISSIONER COX: Michael, last year 9 we had difficulty with a game produced by one of our 10 vendors. And we questioned the adequacy -- I guess, 11 would be the right term -- of the product that they 12 presented to us, or its compliance with contractual 13 provisions or the like. 14 MR. ANGER: Yes, sir. 15 COMMISSIONER COX: We were going at 16 them primarily, or in some part at least, with data 17 produced by in-house forensic people. 18 MR. ANGER: Yes, sir. 19 COMMISSIONER COX: And now that you 20 have this in place, if we had another situation like 21 that, we would have the independent laboratory that we 22 would be calling upon for that? 23 MR. ANGER: That's correct. 24 COMMISSIONER COX: Which would probably 25 give us a little more credibility with the vendor? 0197 1 MR. ANGER: I believe so. It's an 2 independent third party that essentially does this 3 work as a large line of their business. The vendor 4 that we're with also does some other laboratory 5 services, but they are a -- a significant participant 6 in the industry in the instant ticket testing 7 services. 8 COMMISSIONER COX: So they have 9 credibility with -- if they say something, the vendor 10 is not going to say, oh, they're not qualified to make 11 that determination? 12 MR. ANGER: I do not believe so, no. 13 CHAIRMAN CLOWE: Michael, what did we 14 do with the equipment we had when we were internally 15 testing tickets? 16 MR. ANGER: We continue to maintain the 17 equipment and the laboratory, Commissioner. We have 18 two staff members, we recently hired a second, who 19 perform forensic work for the agency, continue to do 20 so, and also work as analysts for our security 21 department and lottery operations. And essentially, 22 we continue to use that equipment with regard to 23 tickets that come in that may be damaged, may be of 24 questionable nature, and they do work that's involved 25 with our enforcement department in the Legal Services 0198 1 Division. So there is some work that continues to 2 take place in-house, but the testing related to 3 instant tickets that come in from our manufacturers is 4 what is being exported out to a vendor. 5 CHAIRMAN CLOWE: So this is not 6 duplicative in nature? 7 MR. ANGER: No, sir. 8 CHAIRMAN CLOWE: Thank you. Next, 9 we'll take up item 17, consideration of and possible 10 discussion and/or action on the Broadcast Studio and 11 Production Services procurement. Mr. Marker. 12 MR. MARKER: Good afternoon, 13 Commissioners. My name is Andy Marker. I'm Deputy 14 General Counsel for the Texas Lottery. 15 I'm here to provide an update on the 16 drawing studio contract. The current agreement was 17 extended, I believe it was in March, it was extended 18 through December 31 of this year. Staff is working on 19 a new request for proposals, which we anticipate going 20 out, hopefully, sometime in April. I'd be happy to 21 answer any questions you may have. 22 COMMISSIONER COX: Gary, is that the 23 1.6 million dollars you were talking about earlier? 24 MR. GRIEF: Yes, sir. 25 CHAIRMAN CLOWE: Thank you, Andy. 0199 1 MR. MARKER: Thank you. 2 CHAIRMAN CLOWE: Next, item 18, 3 consideration of and possible discussion and/or action 4 on the Financial Audit Services procurement. 5 MR. ROYAL: Thank you again, 6 Commissioners. For the record, I'm Greg Royal, 7 Assistant Director of Internal Audit. 8 I'd like to provide an update on the 9 annual financial audit procurement. And with me here 10 is Mary Powell. She is Assistant General Counsel, who 11 has helped in drafting this RFP. The RFP has been 12 drafted and it's anticipated it will be re-released in 13 near future. Proposals currently we've gotten will be 14 due at the end of May, May 31st. And this concludes. 15 I'll be happy to answer any questions you may have. 16 COMMISSIONER COX: The balance sheet 17 date of the audit, Greg, is what date? 18 MR. ROYAL: Excuse me? 19 COMMISSIONER COX: What is the balance 20 sheet date? 21 MR. ROYAL: The balance sheet date is 22 the end of August. 23 COMMISSIONER COX: Okay. So we're 24 going to have them in place by the end of May. 25 MR. ROYAL: The proposals are due at 0200 1 the end of May. 2 COMMISSIONER COX: Okay. 3 MR. ROYAL: And it will probably take a 4 couple of weeks to do contract negotiations. 5 COMMISSIONER COX: Okay. 6 MR. ROYAL: And they'll be able to 7 start in July. 8 COMMISSIONER COX: And -- okay. Let's 9 make a note, I guess it would be two years out when we 10 do this again, unless we choose not to exercise the 11 option -- 12 MR. ROYAL: Actually, sir, the RFP is 13 for a two-year contract with a one-year renewal. 14 COMMISSIONER COX: Okay. So two or 15 three years out, we'll be doing it again. Let's move 16 it forward a couple of months. Get it out there a 17 little sooner. 18 MR. ROYAL: Yes, sir. 19 COMMISSIONER COX: So that they have 20 plenty of time to do preliminary work. 21 MR. ROYAL: Thank you. 22 CHAIRMAN CLOWE: Thank you both. Next, 23 item 19, report, possible discussion and/or action on 24 the Advertising Services contracts. Mr. Anger. 25 MR. ANGER: Good afternoon again, 0201 1 Commissioners. For the record, my name is Michael 2 Anger, and I'm the Lottery Operations Director. 3 I have a brief presentation for you 4 this morning -- this afternoon. Commissioners, the 5 agency's advertising contracts have been identified as 6 major contracts. And as a result of the previous 7 direction by the Commission, you have asked that 8 significant activities related to these contracts, 9 such as decisions to terminate, renew, or bid out such 10 services, be brought before you for consideration. 11 Today, I would like to begin with going over a little 12 bit of the history of the agency's advertising 13 contracts. And I have prepared for you some 14 information related to the last ten years of 15 advertising contracts, which captures two operating 16 models that the agency has utilized with regard to its 17 advertising service contracts. 18 The first contract that you see up at 19 the top is a contract that was executed with GSD&M. 20 This contract took place between June of '96 and June 21 of 1998. It was a two-year contract and had two 22 one-year renewal options on it. And as you'll note, 23 at that point in time, we operated with one vendor to 24 perform all of our advertising services for the 25 agency. The agency did execute one renewal on that 0202 1 contract, extending that contract through June of 2 1999. At that point in time, the agency converted to 3 a different model of operation, and actually began 4 doing business with two separate vendors for its 5 advertising services. One for advertising services in 6 the general market, the other for advertising services 7 in the minority market. Fogarty Klein was the vendor 8 who provided the general market services when this 9 contract was signed and executed back in 1999, and The 10 King Group was selected as the minority market 11 advertising vendor. Both of these contracts have the 12 same pattern, it was a one-year contract with two 13 one-year renewal options. In the case of both of 14 these contracts, the full contract was filled, the 15 initial contract term and the two renewal options. 16 Subsequent to this period, the agency 17 put out an RFP and bid out services following the same 18 model as the most recent approach, using a dual vendor 19 approach for general market and minority market 20 services. And this is our current contract that we're 21 operating under today. DDB Dallas was selected as our 22 general market advertising firm, and The King Group 23 was select as the minority market advertising firm. 24 The contract had a term of two years with two one-year 25 renewal options. We're currently operating in the 0203 1 first renewal option that's available on both of those 2 contracts. 3 Commissioners, the staff believes that 4 it would be prudent to identify and obtain 5 professional consulting services in the area of 6 advertising at this time to measure value in the 7 marketplace for the services that the agency is 8 seeking with regard to its advertising needs. The 9 staff is planning on considering both operating models 10 that I have laid out in the past slides that have been 11 employed by the agency in the past, together with 12 other operating models that might be available to the 13 agency to maximize its advertising dollars. Other 14 primary considerations will include the agency's goal 15 of reaching adult Texans through both general and 16 minority market advertising without unduly influencing 17 any group, the current media needs in the agency, 18 opportunities to streamline contract and billing 19 processes, and opportunities to achieve economies of 20 scale in spending the agency's declining advertising 21 dollars. 22 Present advertising activities under 23 the current contracts will continue during this 24 assessment, and the agency retains the ability to 25 exercise the renewal options that exist for both of 0204 1 the current contracts that come up for potential 2 renewal in October of this year. 3 In summary, the staff is requesting 4 your approval to go forward in retaining professional 5 consulting services to identify the most effective 6 operating structure related to the agency's 7 advertising service needs. And should staff conclude 8 issuance of an RFP is in the agency's best interests, 9 possibly assist in the preparation of an RFP and 10 evaluation of proposals. We would bring those results 11 back to you, following this analysis, at a future 12 Commission meeting for your approval. 13 This concludes my report. I would be 14 happy to answer any questions that you have or receive 15 any feedback. 16 CHAIRMAN CLOWE: Counselor, is this an 17 item that the Commission should consider as a policy 18 item and take action on? 19 MS. KIPLIN: I'm struggling in my mind, 20 because under the State Lottery Act, of course, the 21 executive director is the person who is charged with 22 awarding contracts. But at the same time, the 23 Commission, as a matter of policy, has indicated, 24 since the inception of the lottery, a strong interest 25 in being kept abreast and has provided direction in 0205 1 the past to the executive director, in fact, by way of 2 vote. And so I think it's really up to you all as to 3 whether you consider this to be a matter that would -- 4 that the Commission would want to be involved to that 5 level. And I apologize for the -- the not a direct 6 yes or no, but I wanted to make sure you had the -- my 7 advice. 8 CHAIRMAN CLOWE: That's exactly the way 9 I saw it. And, you know, I was a little bit surprised 10 when you said you wanted us to approve it. I'm 11 undecided in my own mind if it shouldn't really be 12 Reagan who undertakes this and oversights it and we 13 keep involved and -- or aware of it and know what is 14 going on. 15 Commissioner, what is your thinking on 16 it. 17 COMMISSIONER COX: That's the way I see 18 it. 19 CHAIRMAN CLOWE: Okay. I don't think 20 we want to take action, Michael. You have made us 21 aware, but I think it's Reagan's task to follow 22 through. My only comment to you would be, as you 23 engage the RFP and you move forward with the 24 consultant, you need to be absolutely certain that 25 whoever you engage has no ties to, I think, anybody 0206 1 we've done business with or anybody we're doing 2 business with or may possibly do business with. And I 3 don't know what degree of difficulty that puts on you, 4 but, you know, this is a very interesting industry, 5 and you need to really be careful about that aspect of 6 your engagement. 7 MR. ANGER: Yes, sir. We'll be 8 cognizant of that. 9 COMMISSIONER COX: Michael, I would add 10 that I applaud what you're doing here, because this 11 agency is about being experts in acquiring and 12 managing high quality professional services. And 13 having a high quality professional to help us look at 14 the approach to things and to draw up RFPs, I think, 15 is an important part of that. 16 MR. GREER: Well, one of the other 17 aspects -- one of the other aspects that we've been 18 talking about for a long time is being sure that we 19 are getting the best possible dollar value for every 20 dollar we spend on advertising and measurement and 21 matrix setting, all the things that we've done. I 22 think that will enter into the conversation as well 23 and can help us come to a conclusion. 24 CHAIRMAN CLOWE: And in that sense, 25 when you draw up your RFP and embark on this, the 0207 1 question should be looked at -- I'm not saying they 2 ought to do it, but it ought to be examined about 3 the -- not only the direction of the dollars to the 4 agencies that we employ and work with, but the issues 5 that have been raised by the demographic study. And, 6 you know, there is a -- there is an interesting 7 balance there between who the Commission is 8 advertising to and how to enhance sales and the 9 contribution to the State on the one hand, and on the 10 other, who is buying the tickets, and there are those 11 who are critical of that. And the more we can 12 understand about that through every avenue, and 13 advertising is certainly a large impacting expanse of 14 dollars, the more we can know about that, the more 15 beneficial it will be. If this consultant can have 16 included those aspects of our questioning of how we're 17 doing and what we're doing, it would be something to 18 think about. 19 MR. ANGER: We'll absolutely take that 20 under consideration. 21 CHAIRMAN CLOWE: That's broadening it 22 and it may be too broad, but I would like for you to 23 keep that in mind. 24 MR. ANGER: Yes, sir. And just to 25 clarify on one thing. We were seeking to pursue 0208 1 consulting services to look at the advertising 2 contracts and take a close look at these. But just to 3 be sure that I was clear in my comments, we may or may 4 not recommend going forward with an RFP. It is 5 possible that after that evaluation -- 6 CHAIRMAN CLOWE: Okay. You're just in 7 the first stages. 8 MR. ANGER: Yes, sir. Following that 9 evaluation, we might come back and recommend that we 10 pursue the renewal options that are available under 11 the existing contracts. 12 CHAIRMAN CLOWE: Okay. Well, I still 13 want to express this issue of interest, I think it 14 might be best stated, on behalf of the Commission, as 15 to how we, on the one hand, use the dollars 16 effectively and make the games of Texas attractive and 17 enhance the contribution to the State, and on the 18 other hand, there is a fairness and evenhanded 19 approach to the groups as identified in the 20 demographic study so that no entity is singled out by 21 this Commission relative to enhancing sales. That's 22 an interesting question that we're having to deal 23 with. 24 MR. ANGER: Yes, sir. 25 MR. GREER: I would like to make a 0209 1 comment on that as well, Chairman, in that, as you're 2 aware, recently at the legislature, we've been before 3 a number of committees and this issue has come up, 4 advertising dollars and demographics and all that. 5 And I just wanted to reinforce my commitment to the 6 sensitivity to the balancing issue that you've brought 7 forward. I've expressed that to members of the 8 legislature and we'll continue to look at that as a 9 part of this process. 10 CHAIRMAN CLOWE: What are the members 11 of the legislature telling you in this regard? 12 MR. GREER: There has been a, I guess, 13 new focus on this after the demographic study came out 14 in reference to the minority advertising campaign 15 specifically, and how those dollars are being spent. 16 There has been a question in reference to Spanish 17 language stations versus English language stations, 18 and there is some dialogue going on in that vein to 19 try to be able to give some good solid answers on how 20 close to the balance that we are, and that the dollars 21 are being spent in a proper manner. And that's been 22 what most of the questions from the legislature have 23 been pointed towards as a strong opinion, in the area 24 of minority ad campaign. 25 CHAIRMAN CLOWE: So there is -- the 0210 1 question, is the Commission balanced in its 2 expenditure of funds, to spread those dollars among 3 the groups that are identified in the demographic 4 study? 5 MR. GREER: Yes, sir. 6 CHAIRMAN CLOWE: And if that is done 7 and it's done effectively, it would cause sales to go 8 up among certain entities, would it not? 9 MR. GREER: Yes, sir, it should. 10 CHAIRMAN CLOWE: And there is some 11 questioning, if not criticism, on behalf of those who 12 are antigaming about groups that are buying tickets, 13 that -- all manner of lottery games, that are 14 either -- I think the two that are most in my mind, 15 lower income and lower educational levels. 16 MR. GREER: That's true. 17 CHAIRMAN CLOWE: And I think, if I 18 remember from the demographic study, the Hispanic 19 ethnic group is the largest purchaser of tickets. 20 MR. GREER: Yes, sir. 21 CHAIRMAN CLOWE: What is the 22 legislature's comment on that aspect of this 23 advertising issue? 24 MR. GREER: Well, that group, 25 specifically, the Hispanic aspect of our players and 0211 1 the Spanish-speaking language has been what a lot of 2 those comments have been pointed toward, that we 3 should be spending more dollars in that arena. And my 4 response back to that went back to what we just talked 5 about, about the sensitivity to balance, not to be 6 considered to be, quote, targeting, which is a term 7 that has been utilized before, any specific group. 8 And that we want to be sure that we are not making an 9 environment that could be uncomfortable, that we are 10 trying to unduly influence, which is in our statute, 11 as you're aware, any particular player to spend money 12 in a lottery game. 13 CHAIRMAN CLOWE: I think that's 14 important, Reagan, and I would like for you to keep 15 that in front of you as you work on this. 16 Michael, I call it to your attention. 17 Gary, the report that we like to see on 18 the billboards, for example, I'm curious as to where 19 those are relative to the breakdown of these groups 20 that have been identified in the demographic study. 21 You know, are they all on the Interstate system or are 22 they in neighborhoods where they might be seen more by 23 a predominant group as broken down by the demographic 24 study? 25 MR. GRIEF: Okay. I see that probably 0212 1 as getting a little bit broader, and I hope you 2 will -- we'll do our best to -- 3 CHAIRMAN CLOWE: It is. 4 MR. GRIEF: -- get it to you by the 5 next Commission meeting. But if not, it may take us a 6 little more time -- 7 CHAIRMAN CLOWE: It is. 8 MR. GRIEF: -- to pull that type of 9 comprehensive -- 10 CHAIRMAN CLOWE: But, you know, I think 11 it's a fair question. Where are your billboards and 12 are you targeting -- there is an article I read in 13 some newspaper about an analysis of purchase of 14 tickets by zip codes. And, you know, that was 15 interesting, if not puzzling to me, that we don't sell 16 tickets by zip codes, and I'm not sure people live and 17 work and buy their tickets in the zip code. But some 18 people are looking at that and are examining that. 19 And I think we need to examine that ourselves and be 20 able to answer any questions along those lines that 21 ask about where our advertising is directed and the 22 evenhandedness and well balanced aspect of our 23 program. 24 MR. GRIEF: I agree. 25 MR. GREER: I agree. 0213 1 MR. GRIEF: We'll add that to the 2 information. 3 COMMISSIONER COX: Have there been any 4 indications from the legislators that they were 5 concerned that we were unduly influencing people, or 6 that we were attempting to appear not to be unduly 7 influencing people, or anything that would criticize 8 what the agency was doing in this regard? 9 MR. GREER: Both comments have come up, 10 but not in a real strong vein. By both comments, I 11 mean, there are some legislators -- you know, we've 12 talked about the one-third, two-third. The one-third 13 that really doesn't embrace the aspect of having a 14 lottery in the state that might question spending any 15 money, you know, on any type of scenario. I mean, 16 those types of things have come up. More of the 17 questions have been oriented around spending more 18 money in a specific area, and that would be towards 19 the Hispanic market and the Spanish-language -- 20 CHAIRMAN CLOWE: And that's saying, 21 spend more money in this area. It's not criticism as 22 and I understand it. 23 MR. GREER: It's not criticism. 24 CHAIRMAN CLOWE: In the committee 25 meetings that I have attended, the comments I have 0214 1 heard the legislators make is, we want more 2 advertising to create more revenue to the State. 3 MR. GREER: That's true. 4 CHAIRMAN CLOWE: It's a picture of what 5 can be done to create more sales. 6 COMMISSIONER COX: Reagan, I think -- 7 correct me if I'm wrong, but I think I saw an article 8 that the gist of which was that the new demographic 9 study reveals information that we've been trying to 10 suppress. And -- does that give you any -- 11 MR. GREER: Yes, sir. 12 COMMISSIONER COX: The question I'm 13 asking is not a question, but that is a question. 14 MR. GREER: Well, the information as 15 far as demographics has been on our websites for 16 years. I mean, the prior demographic studies are out 17 there, this demographic study is out there. We were 18 very up front in going after this new group that we 19 worked with to be sure that numerous questions that 20 possibly had not been asked in the same way, were 21 asked in a new way based on information we got from 22 outside sources. So we felt -- I feel that we were 23 being very responsive to that and trying to create an 24 environment that would give us a picture better, so to 25 speak, of who our player is and where they come from 0215 1 and how they do that. And the advertising is a part 2 of that scenario, but not the whole picture, and so we 3 think that does have merit. 4 COMMISSIONER COX: Well, I remember 5 that -- I think I remember that one of the things we 6 value in getting a new demographic consultant was that 7 we'd like to hear how somebody else would approach 8 this thing. It wasn't so much how we wanted it done, 9 but how would an expert, given the assignment that's 10 in the statute, go about it. And that's pretty much 11 the way it was done, wasn't it? 12 MR. GREER: Yes, sir. It's a sensitive 13 area, and this will give us an opportunity to delve 14 into it some as we look at our ad dollars and how 15 we're spending them. And this new consultant will be 16 brought up to speed on all of these things that we've 17 discussed as we look at the options. 18 CHAIRMAN CLOWE: We're on the agenda. 19 Anything further, Commissioner? 20 COMMISSIONER COX: No, sir. 21 CHAIRMAN CLOWE: Thank you, Michael and 22 Andy. 23 Next, item 20, report, possible 24 discussion and/or action on the Retailer Services 25 Center. Mr. Rogers. 0216 1 MR. ROGERS: Good afternoon, 2 Commissioners. My name is Ed Rogers. I'm the 3 Retailer Services Manager in Lottery Operations. 4 And today, we would like to give you a 5 general overview of the retailer services -- a general 6 overview of the Retailer Services Center, which is a 7 new feature on the Lottery Commission's website. 8 Experience has shown that access to financial and 9 inventory information is very important for retailers 10 to successfully manage lottery ticket sales in their 11 businesses. We've heard this over the years in our 12 town hall meetings and in the course of our daily 13 business dealings with our retailers. The agency 14 wanted to use the Internet to make this important 15 information more accessible to our customers. 16 Retailers currently have access to some financial and 17 inventory information via their sales terminals and 18 via weekly statements, but this center will provide 19 more detailed information and allow them to access 20 historical and current week data at their convenience 21 24 hours a day. The retailer services center is 22 easily access through the Texas Lottery Commission 23 website from a link on the main home page. After 24 logging in, users can access the home page of the 25 service center, and this page provides easy access to 0217 1 all of the center's features. There is a list of the 2 11 financial reports available on the service center 3 and these provide quick links to each one. There are 4 also links to other parts of the center where 5 retailers can manage their service center accounts and 6 access information about their licensed business 7 locations. 8 The main page on the service center 9 also provides quick links to other information on the 10 main website that is useful to retailers. And these 11 links will be updated from time to time to keep 12 retailers current on items of interest. 13 The following are a few examples of the 14 reports that are available. The center contains 15 historical data going back six weeks and for the 16 current lottery business week. Financial information 17 and inventory information for the current business 18 week is updated daily. There are a variety of reports 19 that provide information on various aspects of instant 20 tickets. And I'm going to show you a couple of 21 examples here. The inventory report provides a list 22 of all the instant games assigned to a retailer's 23 account, including the game number, the game name, the 24 number of packs and the statuses of each of the packs. 25 Issued packs are tickets that are on order for that 0218 1 retailer, confirmed packs are tickets that are in back 2 stock at the retail location, and active packs are 3 tickets that are out, all be being offered for sale to 4 the public. And then this report also shows the 5 dollar value for all the instant ticket inventory 6 assigned to a retailer. 7 The pack settlement detail report 8 provides critical historical information on packs of 9 instant tickets. This report indicates when a pack of 10 tickets was activated and put out for sale to the 11 public, it indicates when a pack of tickets settled, 12 and when the cash value of that pack is added to a 13 retailer's balance due, and also has specific game and 14 pack information and provides some information on how 15 a pack of tickets settled against an account. This 16 report provides critical information that retailers 17 can use to track sales and to supplement internal 18 controls related to securing their inventory. 19 There are also a variety of reports for 20 online ticket sales. This online summary report 21 provides sales information for all of the online 22 games, along with ticket validation for prize winning 23 online tickets that are cashed at a particular 24 retailer's location, and also lists information on the 25 commission that's earned from the sale of lottery -- 0219 1 online games at a store. It also provides the net 2 value of all the combined online activity at an 3 individual location. 4 And then, finally, the summary report 5 pulls together all the financial information from all 6 of the game reports to provide a high level view of 7 each week's activity. The report provides subtotals 8 for both instant and online sales information, grand 9 totals -- or subtotals here for both games, and then a 10 total that -- amount that is the balance due that will 11 be swept from the retailer's account each week. The 12 center also contains general information on licensed 13 retailer locations and bank account information. The 14 ability to reference all of a retailer's licensed 15 locations helps ensure that retailers are looking at 16 data for the correct location. This is especially 17 helpful for our licensees that operate and sell 18 lottery tickets at more than one location. Retailers 19 can also confirm that the Commission has up-to-date 20 information regarding their businesses. 21 This is one of the first areas where 22 we're able to actually conduct business with retailers 23 through this service center. Retailers can request 24 changes to their bank accounts that the Commission 25 uses for each week's electronic funds transfer. 0220 1 Often, time is of the essence when updating bank 2 account information, and this online access will 3 reduced the amount of time necessary to complete bank 4 account changes. 5 When a new retailer services account is 6 established, the retailer services staff receive an 7 e-mail notifying them that a new account has been 8 requested. The request is reviewed by staff and 9 approved, and confirmation is sent that their account 10 is active to each retailer. Retailers with service 11 center accounts can manage the accounts themselves or 12 retailer services staff can assist them directly. And 13 users for a particular account can be added or deleted 14 as necessary by the retailer. 15 As we have completed phase one, I think 16 it's important to acknowledge the management support 17 of this effort through our E-Strategy, and also to 18 acknowledge the high degree of cooperation and team 19 effort that was exhibited by information resources 20 staff and lottery operations staff to bring all of 21 this information together so that we could make it 22 available to our retailers. 23 The Texas Lottery intends to expand the 24 uses of this retailer services center by adding some 25 features in the future. These would include allowing 0221 1 applicants to submit applications online, allow 2 retailers to submit license renewals, and provide a 3 way for retailers to update their general information 4 to us online. 5 That concludes our presentation on the 6 retailer services center, and I would be glad to 7 answer any questions you may have. 8 CHAIRMAN CLOWE: Excellent, Ed. Very 9 impressive. 10 MR. ROGERS: Thank you, sir. 11 CHAIRMAN CLOWE: I think that's very 12 progressive and you are all to be congratulated on 13 that. I think that's going to improve our bond with 14 our retailers tremendously. Looks good. 15 MR. ROGERS: Thank you, Commissioner. 16 CHAIRMAN CLOWE: Next, item 23, 17 consideration of the status and possible entry of 18 orders in dockets that are represented by the letter A 19 through E. 20 Mr. White, will you make that 21 presentation, please. 22 MR. WHITE: Yes, sir. Commissioners, 23 for the record, my name is Steve White. I'm Chief of 24 Enforcement, Legal Services Division. 25 Today you have three proposals for 0222 1 decision before you and two agreed orders. The first 2 PFD involves a lottery retailer agent, Samir Ismail, 3 I-s-m-a-i-l, if I pronounced his name wrong -- Doing 4 business as Shiner Foods. The administrative law 5 judge recommended revocation of his license due to the 6 fact that he had insufficient funds in his account 7 four times in one year. And the staff recommends you 8 revoke this agent's license. 9 The second proposal for decision 10 involves a commercial lessor by the name of 11 Ramone Zuniga, doing business as City Bingo Two. The 12 administrative law judge in that case recommended that 13 Mr. Zuniga's commercial lessor's license be revoked 14 due to, one, failing to produce records requested by 15 the Commission necessary to contact an audit; and, 16 two, conducting a bingo without a license. I would 17 like to note, this was a very deliberate and 18 intentional violation, the conducting of a bingo 19 occasion without a license. Mr Zuniga was informed by 20 the bingo operations employees that the senior -- Free 21 and Senior Citizens Association had surrendered their 22 license. He was personally informed of that, yet he 23 went ahead and conducted the bingo occasion even 24 though no license existed. And, again, the 25 administrative law judge in that case recommended 0223 1 revocation of license, and the staff recommends you go 2 along with the ALJ's recommendation. 3 The third proposal and decision 4 involves B'nai B'rith Lodge 3283. And -- excuse me, 5 that was -- I said recommend. The recommendation was 6 to revoke the license. I should correct that. It 7 was -- it's actually a renewal application, and the 8 recommendation of the administrative law judge was to 9 deny the renewal application. 10 Likewise, B'nai B'rith Lodge 3283 was a 11 renewal application for renewal of a conductor's 12 license. And, again, the administrative law judge 13 recommended denying the renewal application due to the 14 fact that B'nai B'rith Lodge 3283 conducted a bingo 15 occasion outside licensed times, failed to display a 16 sign with the name of the operator in charge, and 17 failed to display, on card-minding devices, the phone 18 number of the Problem Gambler's Help Line. 19 A couple of things I would like to note 20 about this particular case. The operator on duty was 21 an individual named Alder Rothenberg, who refused 22 to -- 23 CHAIRMAN CLOWE: We've read the -- 24 MR. WHITE: Yes, sir. I won't go into 25 that, but I would like to note, which may not be clear 0224 1 in the proposal for decision, this illegal bingo 2 occasion occurred in a commercial lessor entity in 3 which Ramone Zuniga was also -- was an owner and 4 operator and director of. And he was -- it also 5 should be noted that just by coincidence, again, or 6 maybe not coincidence, Ramone Zuniga was a conductor 7 for B'nai B'rith Lodge 3283. And, again, the staff 8 recommends that you go -- concurs with the 9 administrative law judge's recommendation that this 10 application be denied. 11 There were two agreed orders, one 12 involving LULAC Council 4451, conductors, and the 13 staff and LULAC Council 4451 entered an agreed order 14 based upon two violations, conducting bingo outside 15 licensed time, and some of -- a number of 16 accounting -- what I would refer to as accounting 17 violations -- I won't go through the list -- 20 of 18 them, approximately. I won't go through all of them. 19 LULAC Council 4451 agreed to redeposits, approximately 20 7800 dollars into its bingo account, and agreed to 21 send all of its officers and directors to the bingo 22 training program, and agreed to develop and implement 23 financial and internal controls, and pay an 800 dollar 24 administrative penalty. The staff recommends that you 25 adopted the agreed order. 0225 1 And the last agreed order involves City 2 Wide Club Crisis Calls Center. The violations were, 3 failed two times to produce records for the Commission 4 when requested, and failed to properly disburse and 5 report on it's quarterly report approximately 7,000 6 dollars in charitable disbursements. City Wide has 7 agreed to repay its bingo account the amount of 8 disallowed disbursements of approximately 7,000 9 dollars and pay an administrative penalty of 700 10 dollars. And, again, the staff recommends you adopt 11 this agreed order. 12 CHAIRMAN CLOWE: Any questions? 13 COMMISSIONER COX: No. 14 CHAIRMAN CLOWE: I move the Commission 15 approve the recommended orders represented in the 16 dockets lettered A through C, and adopt the 17 agreement -- agreed orders in the dockets represented 18 by the letters D through E. 19 COMMISSIONER COX: Second. 20 CHAIRMAN CLOWE: All in favor, please 21 say aye. Opposed, no. The vote is two-zero in favor. 22 Thank you, Steve. 23 MR. WHITE: Thank you. 24 CHAIRMAN CLOWE: We'll take just a 25 minute to sign those orders now, and then I'll call on 0226 1 you, Reagan, for your report. 2 MS. KIPLIN: Commissioners, if I might, 3 while you're signing those. We will, with your 4 permission, continue to point out cases and 5 individuals where we believe that there is a linkage 6 from one organization to another, because we think 7 that's important for y'all to understand and hopefully 8 recognize that type of behavior. 9 CHAIRMAN CLOWE: Thank you. 10 MR. ATKINS: And also, Commissioners, 11 if I can. I don't think that I necessarily concur 12 with Mr. White's representation that it was 13 coincidence that Ramone Zuniga was working at the 14 second organization. But we believe it's especially 15 because of that linkage that we wanted that drawn to 16 your attention. 17 CHAIRMAN CLOWE: Very good. Thank you. 18 Next, item 24, the report of the 19 Executive Director. Mr. Greer. 20 MR. GREER: Yes, sir. Commissioners, I 21 wanted to bring a couple of things to your attention. 22 We talked briefly about Lotto Texas and I wanted to 23 reinforce that roll amount at 35 million is getting 24 some good attention. Also, we have discussed in the 25 past about Mega Millions and how players seem to come 0227 1 out at the 100 million dollar mark. So we have an 2 opportunity to measure that again as the current Mega 3 Millions jackpot is 102 million. And we are seeing a 4 lot of activity in that game as well. 5 We had a successful customer service 6 training class, which is one of our goals, on March 7 the 3rd, that wanted to draw your attention to, as we 8 continue to be customer focused. I wanted to thank 9 Human Resources for their work in helping put that 10 together. 11 I've been over at the Capital a lot 12 lately on a number of different issues. Two recently 13 were to give a talk to the La Port Chamber of 14 Commerce, the Lamar and Texas City Chamber of 15 Commerce. We'll continue do that as an outreach and 16 enjoy the interaction with those two groups, as well 17 as going over there to appear before committees and 18 talk about bills and things that are going on with the 19 legislature. You're aware of that, but I just wanted 20 to reinforce that we'll continue to stay focused on 21 this session and I'm monitoring that. 22 We had an all-staff meeting yesterday 23 that was successful. Our theme of the month is stress 24 and humor and how the two interrelate and trying to 25 keep an even keel on things as we get into some 0228 1 interesting times. With tax season coming around, as 2 well as the legislative session, it gives us some good 3 opportunities to excel. 4 The other thing I wanted to let you 5 know is that the group as a whole went recently, 6 without me, but a number of our staff went to a 7 lottery symposium, the La Fleurs conference in 8 Washington, D.C. Mike Anger, Robert Tirloni, Dale 9 Bowersock, Chelsea McCullough, and David DiSulca went 10 up there. Robert made a presentation on instant 11 retailer games. And I mention that just because I 12 like to keep a broader perspective within the agency, 13 and going to these type of scenarios to do that. They 14 came back with some great information on new things 15 about maximizing lottery performance and E-marketing 16 and advertising and all kinds of ideas, so I was 17 pleased that we had a group represented at that, and I 18 wanted you to be aware that we continue to outreach 19 outside of Texas and to keep a broader perspective. 20 I wanted to thank the general counsel 21 as well as the legal division for their work on 22 putting together the Mega Millions Public Comment 23 Hearing that will be tomorrow. And also we've had a 24 lot of winners in lately, and I wanted to reinforce 25 the fact that, you know, we do have a lot of winners 0229 1 in our games. The 11th, we had a Mega Millions 2 winner, which was stated earlier, who came in, took a 3 check away for 68 million dollars; they took the cash 4 option. The 28th, we had a winner on Monthly Bonus 5 that had a Scratch-Off exciting experience of 2.4 6 million before taxes. The 29th, we had a Big Money 7 Bonus Spectacular winner, and we've had a lot of 8 smiling faces around our state by paying out prizes in 9 the month of March of over 270 million dollars. So we 10 are experiencing a lot of interesting and exciting 11 times here. And I'll continue to keep you apprised as 12 we move forward. 13 CHAIRMAN CLOWE: Thank you. Any 14 questions? 15 COMMISSIONER COX: No. 16 CHAIRMAN CLOWE: Thank you, Reagan. 17 Next, item 25, report by the Charitable 18 Bingo Operations Director, Mr. Atkins. 19 MR. ATKINS: Commissioners, in addition 20 to the information that is in the notebook, I wanted 21 to make sure that you know that last Friday, 22 April 1st, was bingo's 11th anniversary at the Lottery 23 Commission. Additionally, on April 1st, one of the 24 things that we did to celebrate was, the staff made a 25 donation to the Texas Salvation Army in the amount of 0230 1 560 dollars. In response to the Tsunami disaster 2 earlier this year, some staff in the bingo division 3 had thought that it might be appropriate, given the 4 fact that we work so closely with charitable 5 organizations that give money to worthwhile causes, 6 that we do something similar. So Reagan and I 7 discussed that and we made it available to the entire 8 agency, including that staff in the regional offices 9 and claims centers, and were able to make that 10 presentation to Mr. Munoz, with the Salvation Army, on 11 April 1st, here in the Commission building -- 12 Commission auditorium. We have a photograph and a 13 story about that on the agency's intranet website. 14 CHAIRMAN CLOWE: Excellent. 15 MR. ATKINS: Also, just to let you 16 know. This kind of follows up on the presentation 17 Mr. Rogers gave you on the lottery retailer services 18 center. We are now working with the vendor on the 19 bingo services center. It will provide functions very 20 similar to what Ed described to you earlier. It will 21 include financial information as well as licensing 22 information for specific organizations. Additionally, 23 it will have available to the general public some of 24 the most common requests we get for financial reports 25 relating to charitable bingo. And we're working with 0231 1 the vendor to develop it in such a way that it has a 2 very robust search capability. And that the public 3 will also be able, if they're so interested, they will 4 be able to download the information to -- either in 5 Excel or other database format and do with the 6 information as they will. Or they can just print the 7 information out. Finally, it will have a bingo hall 8 locator service, and they are also developing a very 9 robust search capability so that individuals will be 10 able to search for games by a specific city or county 11 or, if necessary, by a specific organization. 12 At our last status meeting last week, 13 the vendor reported being slightly ahead of schedule. 14 They are, I believe, anticipating at this time on 15 having all of the coding done by the end of June, 16 first part of July. We'll go through a beta test 17 period similar to what the lottery went through, and 18 our plan is to go live with it in September. 19 CHAIRMAN CLOWE: Very good. 20 MR. ATKINS: We've also had the 21 opportunity to review certain screens with members of 22 the bingo industry, usually at the end of Bingo 23 Advisory Committee member -- committee meetings, just 24 get their feedback on the layout of some of the 25 screens, how the information is presented, et cetera. 0232 1 CHAIRMAN CLOWE: Very good, Billy. 2 Anything further? 3 MR. ATKINS: No, sir. 4 CHAIRMAN CLOWE: Any questions? Thank 5 you. 6 Now, next item 26, is there anyone 7 wishing to make comment to the Commission from the 8 public? 9 Seeing no one, is there any further 10 business for this Commission at this time? Then we 11 will be adjourned at 3:23 p.m. Thank you all very 12 much. 13 14 15 16 17 18 19 20 21 22 23 24 25 0233 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 28TH day of 16 APRIL, 2005. 17 18 19 BRENDA J. WRIGHT, RPR, 20 Texas CSR No. 1780 Expiration Date: 12-31-06 21 WRIGHT WATSON STEN-TEL Registration No. 225 22 Expiration Date: 12-31-05 1801 N. Lamar Boulevard 23 Mezzanine Level Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 050406BJW