0001
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 2   
 3   
 4                  TEXAS LOTTERY COMMISSION
 5                          MEETING
 6   
 7                       JUNE 24, 2005
 8   
 9   *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *  *
10   
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16   
17               BE IT REMEMBERED that the TEXAS LOTTERY
18   COMMISSION meeting was held on the 24TH of JUNE, 2005,
19   from 8:00 a.m. to 3:59 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..................................  216
 7   Item Number 4..................................  225
     Item Number 5..................................  169
 8   Item Number 6..................................   13
     Item Number 7..................................  225
 9   Item Number 8..................................  119
     Item Number 9..................................  195
10   Item Number 10.................................  233
     Item Number 11.................................  236
11   Item Number 12.................................  238
     Item Number 13.................................  239
12   Item Number 14.................................  239
     Item Number 15.................................  240
13   Item Number 16.................................  245
     Item Number 17.................................  252
14   Item Number 18.................................  253
     Item Number 19.................................  129
15                                                    195
     Item Number 20.................................  129
16                                                    195
     Item Number 21.................................  129
17                                                    253
     Item Number 22.................................  258
18   Item Number 23.................................  260
     Item Number 24.................................  263
19   Item Number 25.................................  269
20   
     Reporter's Certificate.........................  270
21   
22   
23   
24   
25   
0004
 1                  CHAIRMAN CLOWE:  It is 8:00 o'clock,
 2   and we understand Commissioner Olvera is on the
 3   premises.  I've been told he may be ill.  And he may
 4   be here shortly.  We'll just stand by for a minute.
 5                     (OFF THE RECORD.)
 6                  CHAIRMAN CLOWE:  Good morning.  It's
 7   8:00 a.m.  Today is June the 24th, 2005.  Commissioner
 8   Cox is here.  Commissioner Olvera is here.  My name is
 9   Tom Clowe.  We'll call this meeting of the Texas
10   Lottery Commission to order.
11                  Commissioners, with your agreement, it
12   would be my intent this morning to ask Ms. Suzanne
13   Taylor to make her report and then move to item six,
14   and from there to -- under item 21, the case
15   identified by the letter L, and then move back next to
16   item five on the agenda, so that a number of people
17   who are here for those items may be able to see them
18   taken up by the Commission this morning.
19                  If there is no disagreement in that
20   regard, Ms. Taylor, will you come forward and, under
21   item two, give your report by the Bingo Advisory
22   Committee, as the chair, and possible discussion
23   and/or action regarding the Bingo Advisory Committee's
24   activities, including the May 25th, 2005, committee
25   meeting.
0005
 1                  MS. TAYLOR:  Good morning.
 2                  CHAIRMAN CLOWE:  Good morning.
 3                  MS. TAYLOR:  I have to wear glasses in
 4   order to read this, so just bear with me.  I can't
 5   look up with these on.
 6                  The Bingo Advisory Committee of the
 7   Texas Lottery Commission met on May 25th, 2005, in
 8   Austin, at 10:03 a.m.  All members except
 9   Kimberly Rogers were in attendance.
10                  Minutes of the March 30th, 2005,
11   meeting were approved with no changes.
12                  Outgoing Bingo Advisory Committee
13   member, Pete Pavlovsky, was recognized for his service
14   on the committee and new member, Rosalie Lopez,
15   filling the charity representative position on the
16   committee, was introduced.
17                  The BAC was advised that no new
18   applications for the commercial lessor position had
19   been received by the Lottery Commission.
20                  Sandra Joseph reviewed with BAC members
21   the PowerPoint summary presentation on the Charitable
22   Bingo Enforcement Process Review that had been
23   presented to the Commissioners at their April 6, 2005,
24   meeting.
25                  Nelda Trevino updated BAC members with
0006
 1   current Legislative activity.  She told members that
 2   it did not look like any bingo bills were going to
 3   make it through the process as stand alone bills, but
 4   could possibly be attached to another bill.
 5                  Sandra Joseph reviewed the
 6   Administrative Penalty Rule timeline.  She advised BAC
 7   members the list of violations had been shortened from
 8   126 to 38, and seven penalties have been moved from
 9   the standard to expedited list.  There were four
10   issues on which agreement was not reached:  One, the
11   source of money to pay administrative penalties; two,
12   length of time allowed to accept an expedited penalty;
13   three, cap on the amount of penalties; and, four, the
14   time for considering repeat violations.  Public
15   comment was received from David Heinlein, stating the
16   rules are moving toward encouraging compliance without
17   putting anyone out of business, but there were still
18   worries about the lack of a cap and the source of
19   funds to pay the fines.  Steve Fenoglio advised the
20   BAC this process was started by the Sunset Advisory
21   Committee in 2003.  The whole requirement sprang from
22   ten members and was never approved by the Legislature.
23   Therefore, perhaps the process is premature.  No other
24   State agency in Texas has this requirement.  He was
25   also concerned about the requirement that the funds to
0007
 1   pay penalties come from non-bingo source, the lack of
 2   a cap on penalties, and the expedited penalty time
 3   frame.  Many charities only meet quarterly.  The
 4   manager and primary operator may agree to settle, but
 5   since the funds must come from the general account,
 6   the manager and primary operator probably don't have
 7   the authority to bind the charity.  After 20 days
 8   pass, there is only two choices:  One, go to hearing;
 9   or, two, surrender the bingo license.
10                  MS. KIPLIN:  Ms. Taylor?
11                  MS. TAYLOR:  Yes.
12                  MS. KIPLIN:  I know you're reading.
13   Could you -- could you slow down just a little bit so
14   the court reporter can take down --
15                  MS. TAYLOR:  I'll be -- I'll be glad to
16   give you a copy.
17                  MS. KIPLIN:  Okay.  I'm sorry to
18   interrupt you.
19                  MS. TAYLOR:  No problem.
20                  Carol Lauder told the BAC members she
21   felt that adopting the rules was premature since it is
22   not mandated by the legislature.  Sandy told the
23   committee there was still time for the workgroup to
24   meet and continue to work on the rules before the next
25   Commission to try and reach accord on the disputed
0008
 1   items.  It was moved, seconded, and passed the BAC
 2   would recommend the Commissioners vote to publish the
 3   new Administrative Penalty Rule 402.706 and 402.707
 4   Expedited Administrative Penalty Guideline in the
 5   Texas Register for public comment, noting the four
 6   items of concern in the Sandy Joseph memo to the BAC,
 7   dated May 19, 2005.
 8                  The BAC annual report will be ready for
 9   presentation to the committee at the next meeting.
10                  BAC members were advised that
11   Commissioners approved the 2005 Bingo Advisory
12   Committee work plan at their meeting May 10, 2005.
13   Billy Atkins told members they should look at the
14   minutes from the meeting and read the discussion the
15   Commissioners had about this topic.
16                  Billy Atkins reviewed the report on the
17   activities of the Charitable Bingo Operations Division
18   with the Committee.  During the presentation, four
19   changes in the bingo Web site were noted.  One, bingo
20   news; two, 23 forms have been completed in PDF format;
21   three, how to talk to the media; and, four, the march
22   towards a billion dollars, which will be updated
23   quarterly.  The operations manual has been referred to
24   legal, and the completed project may be available to
25   licensees after the next meeting.  The bingo locator
0009
 1   is scheduled to go live September 2005.  Starting this
 2   June, internal testing will begin for an online
 3   resource for licensees that will allow organizations
 4   to review information specific to their organization
 5   and allow public access to information now requiring
 6   an Open Records Request.
 7                  During public comment, Carol Lauder
 8   told BAC members this is one of the best meetings she
 9   has attended, with good constructive input from the
10   members.
11                  Items for the future BAC meetings were
12   discussed, and the next meeting was tentatively
13   scheduled for August 3rd, 2005, at 10:00 a.m.
14                  And the meeting was adjourned at
15   1:25 p.m.
16                  And if you have any questions, I'll be
17   glad to answer those.
18                  CHAIRMAN CLOWE:  Are there any
19   questions?
20                  COMMISSIONER COX:  I have one question,
21   Mr. Chairman.
22                  CHAIRMAN CLOWE:  Yes, sir.
23                  COMMISSIONER COX:  Suzanne, good
24   report.  Thank you.  And this is for you or for Billy.
25   One of the things you read was that Carol Lauder, or
0010
 1   Lauder, told BAC members she felt that adopting rules
 2   was premature since it was not mandated by the
 3   legislature.
 4                  Who is Carol Lauder or Lauder and what
 5   is her standing to make recommendations to the BAC?
 6                  MR. ATKINS:  Carol Lauder is the
 7   individual from the Comptroller's Office who had
 8   facilitated the joint meeting between the Lottery
 9   Commission and the BAC in December of last year.  And
10   she has been attending subsequent meetings of the BAC
11   and working with them on ways to improve their meeting
12   processes.  I don't know if I took Carol's comments
13   the same way that Suzanne did.  I think Carol was more
14   questioning the -- the -- the reasoning for it.
15                  COMMISSIONER COX:  Well, I understood
16   that her -- I now know who you're talk about, and I
17   had understood her role to be that of a facilitator.
18   Is she, rather, a substantive representative of the
19   Comptroller's Office?
20                  MR. ATKINS:  No, sir, she is not.
21                  MS. TAYLOR:  I -- I do believe, sir,
22   that Carol was under the impression that the BAC
23   were -- were the ones that were going ahead with the
24   votes, and she was questioning why we were doing this
25   if it wasn't mandated by the legislature.
0011
 1                  COMMISSIONER COX:  I see.  That's all.
 2                  CHAIRMAN CLOWE:  Well, I would like to
 3   follow up on that.  I think you're right on track,
 4   Commissioner Cox.  I -- I don't think that is her
 5   role, and I was surprised when I read that line in
 6   Ms. Taylor's report as well.  I -- I would suggest
 7   that it is the feeling of the Commission that the
 8   reaction to her involvement in making that kind of a
 9   statement goes beyond where she really should be as a
10   facilitator.  And, you know, we're appreciative of her
11   help and the efforts she has made, but for her to make
12   that kind of comment, in my mind, and I believe that
13   is what Commissioner Cox is indicating, is not really
14   the role we see her in.  How do you feel about that?
15                  MS. TAYLOR:  I was surprised when she
16   got up and said that -- said it also, for the reason
17   that I thought maybe she was going to make comment on
18   how she thought we were proceeding through it and if
19   she had any more advice or suggestions for us.
20                  CHAIRMAN CLOWE:  Well, she is not a
21   member of the BAC, and she -- I -- I don't know
22   whether she filed an affirmation form and wanted to
23   make that statement as a representative of the
24   Comptroller's Office.  You know, it's just not really
25   proper, I think, is the reaction you're getting from
0012
 1   the Commission.  That's not her role.  And she is
 2   certainly able to assume that role if that's what she
 3   wants to do, but she should identify herself in that
 4   way and to proceed on that basis.
 5                  Is that where you are, Commissioner?
 6                  COMMISSIONER COX:  Yes, sir.
 7                  CHAIRMAN CLOWE:  Commissioner Olvera,
 8   do you have anything?
 9                  COMMISSIONER OLVERA:  I agree.  I
10   recall her role as asking questions and bringing up
11   issues that -- that the members were bringing up, and
12   perhaps placing them in an organized format.  But I
13   don't -- I've never recalled her function in terms of
14   giving legal advice or any type of advice.  And I
15   don't know if this is -- is perhaps a typo in -- in --
16   in the sense that it says, she told the BAC members X
17   as opposed to questioned the BAC members on -- on
18   issues.  I'm getting conflicting reports as to -- as
19   to what she actually did, but --
20                  MS. TAYLOR:  I -- I looked to see if
21   the transcript was online yet, and unfortunately it
22   wasn't.  But this is how -- what I had in my notes.
23                  CHAIRMAN CLOWE:  Well, I -- I think
24   we've expressed ourselves.  And we're clear on our
25   reaction to it.  And if you would discuss that with
0013
 1   her in the appropriate way and make certain that there
 2   is a clear understanding about her role, I think it
 3   would be beneficial.
 4                  Any other questions for the chair of
 5   the BAC?  Thank you again for your good hard work.
 6   This is a good report, and we'll take it under
 7   consideration.
 8                  MS. TAYLOR:  Thank you.
 9                  CHAIRMAN CLOWE:  Steve, will you turn
10   this light above here back on.  Somebody turned it
11   off, and --
12                  UNKNOWN SPEAKER:  Did that get it?
13                  CHAIRMAN CLOWE:  No.  No, it's -- it's
14   a spotlight of some kind.  There it is.  Yeah, could
15   you turn that one there off?
16                  UNKNOWN SPEAKER:  Just one?
17                  CHAIRMAN CLOWE:  Yeah, that's good.
18   Thank you.  This light over us is beneficial for
19   reading, and I like it on.  Thank you.
20                  Now, Commissioners, that concludes item
21   number two on the agenda, and I would like to move to
22   item number six, which is consideration and possible
23   discussion and/or action on Lotto Texas on-line game.
24   I would like your direction on how you would like to
25   proceed on this item.  It turns on the issue of the
0014
 1   advertised jackpot relative to the estimated jackpot.
 2   And I had asked that if the staff was called on, they
 3   would be prepared to make a presentation which would
 4   bring us up to date historically on the -- the history
 5   of these jackpots and the rules pertaining to the
 6   payment of the jackpots.  But there are other options
 7   as well.  And it may be that you have some questions
 8   that you wish to ask and that you want to do that
 9   before we hear anything from any member of the staff.
10   So I'm looking for some direction from you at this
11   point in time.  How do you feel about how you would
12   like to proceed on this agenda item?
13                  COMMISSIONER OLVERA:  I would -- I
14   would -- I would prefer some kind of history and --
15   and their input before asking questions.  I'll leave
16   it to your discretion.
17                  COMMISSIONER COX:  Same.
18                  CHAIRMAN CLOWE:  I think probably
19   Robert Tirloni would be the person who could give us
20   the history.
21                  Robert, give us the historical
22   perspective on how the estimates have been arrived at
23   and how these decisions have been made historically.
24   And I have gone back and read the testimony that
25   Professor Eubanks gave in November, I think, of 2001.
0015
 1   And you might refer back to that where it's
 2   appropriate.
 3                  MR. TIRLONI:  Good morning,
 4   Commissioners.  For the record, my name is Robert
 5   Tirloni.  I'm the products manager for the Texas
 6   Lottery.
 7                  Mr. Greer had asked me to prepare a
 8   PowerPoint that would give you the history of the
 9   rule.  Would you prefer I start with that PowerPoint,
10   Mr. Chairman?
11                  CHAIRMAN CLOWE:  I -- I for one don't
12   want to see a PowerPoint.
13                  MR. TIRLONI:  Okay.
14                  CHAIRMAN CLOWE:  I would just like for
15   you to -- what I'm really looking for, in my mind,
16   and, Commissioner Olvera, tell me if I'm on track or
17   not.  I would just like for you to articulate the
18   history of the estimation of the jackpots and what the
19   factors are, so that all three Commissioners hear it
20   the same way from you at this time and have that basis
21   of knowledge as we get into this subject.
22                  MR. TIRLONI:  I do have a flow chart
23   that shows the process.  Would that be appropriate to
24   show?
25                  CHAIRMAN CLOWE:  Sure.
0016
 1                  MR. TIRLONI:  I can walk you -- I can
 2   walk you through this process and -- and explain it to
 3   you and explain how we derive at the -- derive at the
 4   amount.
 5                  COMMISSIONER COX:  Robert?  Excuse me.
 6                  MR. TIRLONI:  Yes, sir.
 7                  COMMISSIONER COX:  Can you bold those
 8   so I can read them?
 9                  CHAIRMAN CLOWE:  Or get it in focus?
10                  MR. NAVARRO:  We've got copies,
11   gentlemen.
12                  CHAIRMAN CLOWE:  Good.
13                  MR. NAVARRO:  So you can follow along.
14                  MR. TIRLONI:  So for the Lotto Texas
15   jackpot game, the estimation takes place on -- on two
16   days every week, on Wednesdays and on Saturdays.  And
17   so on Wednesday, we are projecting what the jackpot
18   amount will be for the Saturday drawing if there is no
19   jackpot winner on Wednesday night.  And then on
20   Fridays, in the afternoon, we are doing a jackpot
21   estimate to project what the jackpot will be for the
22   following Wednesday if there is no jackpot winner
23   for -- for the Saturday drawing.  So that's -- that's
24   where we start at the top of the jackpot estimation,
25   beginning three to five days prior to the actual
0017
 1   drawing.
 2                  And there are two different
 3   departments, two staff, that are involved in
 4   developing the estimate.  Financial administration
 5   staff currently and products staff currently work on
 6   the estimate.  It starts off with financial staff
 7   obtaining investment cost information from the Texas
 8   Safekeeping Trust Company, and that determines the
 9   interest factor that we use during the estimate.
10   That -- that interest factor is passed on to the
11   product department staff, and then we use that as well
12   to prepare our estimate.
13                  The next two steps are the same for --
14   for both areas.  We are compiling actual sales for the
15   current drawing, and then we're estimating sales for
16   the current drawing.  And I'll give you an example of
17   that that -- that might help clarify what I'm talking
18   about.  For example, this afternoon we'll be doing
19   jackpot estimates, and we already know what our
20   advance sales are for tomorrow's drawing, and we know
21   what sales were yesterday for tomorrow's drawing.  And
22   when we do an estimate this afternoon, at around 2:30
23   or 3:00, we'll know what our sales are for that time
24   period.  So that's compiling the actual.  What we're
25   estimating is sales for the remainder of the day
0018
 1   today, and then we're estimating sales for all day
 2   tomorrow, leading up to the drawing.
 3                  The next bullet is then estimating
 4   total sales for the next draw.  So once we've -- once
 5   we've combined the actual for Saturday and we've
 6   estimated sales for the remainder of today and
 7   tomorrow, we then need to look forward to the next
 8   drawing and say what we think sales will be for that
 9   entire draw, because what we're doing is we're --
10   we're taking the sales from when we start at four and
11   we're -- we're adding all of those up to eventually do
12   calculations that -- that lead us to an -- an estimate
13   or a projection of what that next jackpot amount
14   should be.  This process that I just described takes
15   place completely independently.  Our product
16   department staff and financial staff are -- are
17   working through this process on their own with -- with
18   no interaction on -- on coming up with the estimates.
19                  Once those are completed independently,
20   there is a -- a joining of the two, so to speak.  So
21   products department staff and financial department
22   staff meet to compare what was developed.  And that's
23   that next box, and I'll -- I'll use the pointer.
24   That's this box here, where what we're doing is we're
25   comparing the actual and estimated sales for the
0019
 1   current drawing and estimated sales for the next
 2   drawing.  And then we concur on the sales estimations.
 3   And that leads us to the next or the second page in --
 4   in what Ben handed out to you.
 5                  COMMISSIONER COX:  Robert, let me ask
 6   this question at this point.
 7                  MR. TIRLONI:  Yes, sir.
 8                  COMMISSIONER COX:  Now, we've got some
 9   actual sales here, and we've got some estimated sales
10   for the current drawing, and we've got some estimated
11   sales for the next drawing, I presume it is.
12                  MR. TIRLONI:  Yes, sir.
13                  COMMISSIONER COX:  And on the one hand,
14   this is being done by financial administration, and on
15   the other hand, it's being done by the products
16   department.  I assume that's you?
17                  MR. TIRLONI:  Yes, sir, or a staff
18   member of mine.  Yes, sir.
19                  COMMISSIONER COX:  Okay.  And then
20   y'all get together and compare those and concur, it
21   says.
22                  MR. TIRLONI:  Yes, sir.
23                  COMMISSIONER COX:  Now, typically, are
24   the estimations by financial administration and by
25   products pretty close?
0020
 1                  MR. TIRLONI:  Yes, sir.  Actually, they
 2   are very, very close.
 3                  COMMISSIONER COX:  Okay.  And are they
 4   usually pretty close to the way it turns out?
 5                  MR. TIRLONI:  Yes, sir.
 6                  COMMISSIONER COX:  Thank you.
 7                  CHAIRMAN CLOWE:  That's a good
 8   question.  Thank you, Commissioner.
 9                  MR. TIRLONI:  And I -- to elaborate on
10   that, the way -- the sales history that we've seen
11   on -- on the Lotto Texas game for a pretty extended
12   period now is that there is very little variation
13   between the sales for the jackpots.  So I -- I think
14   in a lot of previous meetings we've talked about the
15   Lotto game, and -- and the sales history on the Lotto
16   game, and the sales decline that we've seen on -- on
17   Lotto, and -- and the slow rolling jackpot cycles that
18   we've experienced.  And so from -- from one draw to
19   the next, there is very little variation in sales.
20   And to go back to your question, I -- that's why
21   financial and -- and products department staff are
22   usually -- are very close on the numbers that we're
23   developing.
24                  COMMISSIONER COX:  Thank you.
25                  MR. TIRLONI:  So once staff concurs on
0021
 1   the -- on the sales estimations, we -- we produce what
 2   we call a jackpot estimate working paper.  And this
 3   provides the jackpot support in the event of a roll.
 4   And I'll -- I'll flip down to the next chart just so
 5   you can -- you can see the -- the schedule that we
 6   use.  It's -- it's an Excel spreadsheet that has a lot
 7   of formulas built into it.  I know it's -- I know it's
 8   very fuzzy to read when it gets blown up to this --
 9   this level of detail, but this is basically the
10   spreadsheet that -- that has been used.  And this is
11   basically the sheet that's been used since the game
12   started in '92.  Of course, it's tweaked and modified
13   as -- as the game has changed and as formulas need to
14   change, but the basic premise for the estimation has
15   not changed.
16                  So once we -- once we develop that
17   jackpot estimate working paper, that is then reviewed
18   by the financial administration director and the
19   products manager.  That jackpot estimation paper is
20   reviewed.  And those -- those two staff members
21   recommend the advertised jackpot for the next drawing.
22                  And then after that process takes
23   place, the -- the sheet that I just showed you a -- a
24   moment ago, that is brought to the Executive Director
25   for approval of the advertised jackpot for the next
0022
 1   drawing.  Once that -- once that advertised jackpot is
 2   approved by the Executive Director, that information
 3   comes back to products department staff, and then,
 4   basically, my staff is tasked with disseminating or
 5   providing that amount to various individuals who
 6   utilize it for different purposes.  Internal staff
 7   receive it, the drawing production services vendor,
 8   the -- the vendor who actually produces our -- our
 9   game drawings, receives it.  It's obviously very
10   important for them because that -- that next jackpot
11   amount is stated during the drawing.  And then it's
12   also sent to the Lottery operator GTECH because that
13   gets input into their system.
14                  And that's basically the entire process
15   from -- from beginning to end.
16                  CHAIRMAN CLOWE:  Do you have a
17   question, Commissioner Cox?
18                  COMMISSIONER COX:  I'm trying to
19   understand, what goes to those three circles at the
20   bottom?
21                  MR. TIRLONI:  I'm sorry.  That is
22   the -- the advertised jackpot that's been approved
23   is -- is sent or disseminated to staff and to those
24   vendors.
25                  COMMISSIONER COX:  Okay.  So the -- the
0023
 1   jackpot estimate working paper stops at the Executive
 2   Director, and from there, just the amount of the
 3   jackpot goes forward to the staff, to the drawings
 4   production services vendor, and to GTECH?
 5                  MR. TIRLONI:  That's correct.  The
 6   amount is communicated.
 7                  CHAIRMAN CLOWE:  Robert, I'm unclear
 8   on -- Commissioner, do you have a question?
 9                  COMMISSIONER OLVERA:  No.  Go ahead.
10                  CHAIRMAN CLOWE:  I'm unclear, on the
11   second page of this document you've given us, what the
12   interaction is between the financial and
13   administration director and the products manager,
14   where those two boxes come together below them at the
15   Executive Director.  What is the interaction on the
16   jackpot estimate working paper?
17                  MR. TIRLONI:  Let me clarify your
18   question.  Between the products manager and the
19   financial administration director, in terms of talking
20   about the --
21                  CHAIRMAN CLOWE:  What -- what is the
22   interaction?  You know, it looks like the jackpot
23   estimate working paper, after there is staff
24   consensus --
25                  MR. TIRLONI:  Uh-huh.
0024
 1                  CHAIRMAN CLOWE:  -- is developed, but
 2   then it goes back to the two entities before it goes
 3   to the Executive Director.  What is -- what is the
 4   function?
 5                  MR. TIRLONI:  I can show you on the
 6   actual schedule.  It might help clarify it.  And,
 7   again, I realize it's -- it's fuzzy, but --
 8                  CHAIRMAN CLOWE:  I -- I can't see that.
 9                  MR. TIRLONI:  It's in your -- it --
10   there is a --
11                  CHAIRMAN CLOWE:  You're just going to
12   have to tell me.
13                  MR. TIRLONI:  Okay.  That's fine.
14                  CHAIRMAN CLOWE:  You're just going to
15   have to tell us.
16                  MR. TIRLONI:  That's fine.  After -- so
17   I'll go back to this other one.
18                  CHAIRMAN CLOWE:  Just tell us what --
19   what happens.
20                  MR. TIRLONI:  After the jackpot
21   estimate working paper is developed, it goes to me,
22   the products manager.  I review it, and I sign off on
23   a recommendation for what the advertised jackpot
24   amount should be for the next drawing.  That sheet
25   also goes to the financial administration director,
0025
 1   who does the same thing.  He or -- or -- or that
 2   designee makes a recommendation and signs it, and then
 3   that sheet goes to the Executive Director for review
 4   and final approval.
 5                  CHAIRMAN CLOWE:  Okay.  Now, does that
 6   number change from the time that the staff has
 7   concurred and it's become a working paper, when it
 8   comes back to the financial director and the products
 9   manager for their review?
10                  MR. TIRLONI:  The numbers on the sheet
11   remain consistent.  The products manager can choose an
12   amount, and the financial administration director can
13   choose an amount and -- and fill that in on the sheet
14   and sign next to that number.
15                  CHAIRMAN CLOWE:  I'm not clear on why
16   this review is necessary.  Would the number change
17   once it's gone into a jackpot estimated working paper
18   and the staff has concurred?
19                  MR. TIRLONI:  Well, what -- I -- I -- I
20   understand your question.  What the staff concurs on
21   is the sales estimations.  The staff does not concur
22   on what the next advertised jackpot should be.
23                  CHAIRMAN CLOWE:  That helps me.
24                  MR. TIRLONI:  Okay.  I'm sorry.
25                  CHAIRMAN CLOWE:  The actual amount is
0026
 1   derived at that point, and then it goes back for
 2   approval?
 3                  MR. TIRLONI:  Yes, sir.  That's
 4   correct.
 5                  CHAIRMAN CLOWE:  By the finance
 6   administration director and the products manager, and
 7   then it goes to the Executive Director?
 8                  MR. TIRLONI:  That's correct.  I'm
 9   sorry I wasn't clear on that.
10                  CHAIRMAN CLOWE:  Okay.  I -- I
11   understand it better now.  And I would ask
12   Commissioner Cox's question at that point in time.  Is
13   there generally agreement on the estimate for the
14   advertised jackpot between those two entities?
15                  MR. TIRLONI:  Generally, yes.
16                  COMMISSIONER OLVERA:  And, Robert,
17   going back to the estimate working paper, is that --
18   is it the sales estimate that you're referring to that
19   the staff usually concurs on, is that reflected in the
20   box that -- that reads, low end and high end in terms
21   of sales?
22                  MR. TIRLONI:  Yeah.  The -- the low end
23   and high end is the -- that's the estimated sales for
24   the next drawing.  And, yes, staff does concur on that
25   range.
0027
 1                  COMMISSIONER OLVERA:  But staff does
 2   not plug in the -- there is also a -- a -- what
 3   appears to be a box that is shaded in green, where
 4   it -- wherein it -- it reads, the estimation team
 5   recommends X amount.  That's not what staff plugs in.
 6   That's -- that's what I'm hearing you say?
 7                  MR. TIRLONI:  That -- that is the --
 8   that's an old -- that is a previous version of the
 9   estimation sheet, and -- and, yes, staff plugs that
10   in, and the -- the -- the financial administration
11   director and the products manager sign off on that
12   amount.  And then that -- that recommendation goes to
13   the Executive Director.
14                  COMMISSIONER COX:  Robert, I'm sorry,
15   but I -- I could not follow what Commissioner Olvera
16   is seeing.  He is younger than I and has better eyes,
17   and I just can't see what he is seeing.  What --
18   can -- can maybe you put it up and just point us to
19   that box.
20                  COMMISSIONER OLVERA:  I'm referring to
21   a sheet that I received from the staff.
22                  COMMISSIONER COX:  Oh, I see.
23                  MR. TIRLONI:  I can show you it on the
24   box, though.  I can show you on the screen,
25   Commissioner Cox.
0028
 1                  COMMISSIONER COX:  Okay.  I'm sorry.  I
 2   was trying to catch up with Commissioner Olvera.
 3   Can -- can you describe to me what the point was of
 4   that discussion?
 5                  MR. TIRLONI:  Uh-huh.  This is -- this
 6   is the estimated -- this is the estimate working paper
 7   that we're using now.  So basically --
 8                  COMMISSIONER OLVERA:  And -- and when
 9   did this come into effect?
10                  MR. TIRLONI:  This began being used on
11   June 15th.
12                  COMMISSIONER OLVERA:  All right.
13                  MR. TIRLONI:  Basically, what's
14   happened --
15                  CHAIRMAN CLOWE:  Wait a minute.  What
16   was that question?
17                  COMMISSIONER OLVERA:  When did this --
18   he -- he just said, this is what is being used now,
19   and I asked, when did this come into effect.
20                  MR. TIRLONI:  The one that is on the
21   screen and that you have in your packet is being used
22   as of June 15th.  There were some modifications made.
23                  COMMISSIONER OLVERA:  June 15, 2005?
24                  MR. TIRLONI:  Yes, sir.
25                  COMMISSIONER OLVERA:  All right.
0029
 1                  CHAIRMAN CLOWE:  Okay.
 2                  MR. TIRLONI:  And the main difference,
 3   Commissioner Olvera, between what you have and -- and
 4   what is in this packet and what is on this screen --
 5                  COMMISSIONER OLVERA:  Uh-huh.
 6                  MR. TIRLONI:  -- is this area right
 7   here.  And basically, what happens is the financial
 8   administration director recommends a jackpot amount
 9   and writes it in in this box, and then signs off on
10   it.  Products department puts the jackpot
11   estimation -- or puts their recommendation for the
12   advertised jackpot in this box and signs off.  And
13   then it goes to the Executive Director for the final
14   approval of the advertised jackpot for the next
15   drawing.  And there is a sign-off that occurs.
16                  CHAIRMAN CLOWE:  What happened on June
17   the 15th to change this form?
18                  MR. TIRLONI:  It was thought that it
19   would be beneficial for there to be -- for -- the
20   previous version had a box that said the jackpot
21   estimation team recommends rolling two, and there was
22   an amount placed in that box, and then there was the
23   sign-offs that occurred.  It was thought that this
24   would be a better process because this would allow
25   financial staff or products department staff to
0030
 1   actually differ on their opinion of what the next
 2   advertised jackpot might be.
 3                  COMMISSIONER COX:  So the -- the form
 4   that you're showing us right there --
 5                  MR. TIRLONI:  Uh-huh.
 6                  COMMISSIONER COX:  -- is not the form
 7   that was used at the time we're talking about?
 8                  MR. TIRLONI:  That's correct.
 9                  COMMISSIONER OLVERA:  And,
10   Commissioners, I asked for the form that was used on
11   the June 3rd date.  That's the form that was used.
12                  COMMISSIONER COX:  Okay.  Thank you.
13                  CHAIRMAN CLOWE:  That -- that's
14   helpful.  So we're clarifying that there has been a
15   change since the incident which we are now discussing
16   occurred.  And that was June the 15th, you're telling
17   us, and you began then to require three signatures on
18   the form, to verify the actual amount that each
19   individual recommended for the advertised jackpot?
20                  MR. TIRLONI:  There were always -- the
21   signatures were always required, even on the previous
22   version.  There just were not signature block lines
23   for -- for those signatures to take place.  And this
24   new form that we started using on the 15th provides
25   different staff members that do the sign-off to
0031
 1   actually write in the amount that they would recommend
 2   and then sign off on it, as opposed to there being one
 3   amount in a box that everybody is signing off on.  But
 4   the signatures were always required under -- under
 5   both versions.
 6                  CHAIRMAN CLOWE:  Very good.  And then
 7   how did you handle this as far as communication is
 8   concerned?  When you came up with this agreed
 9   estimated jackpot for advertising -- for advertising
10   purposes, how was that communicated beyond the
11   financial administration director and the products
12   manager?
13                  MR. TIRLONI:  You mean, after -- after
14   both staff members fill in amounts and sign, what is
15   the next step?  This -- this sheet with those amounts
16   and signatures goes up to the Executive Director for
17   approval.
18                  CHAIRMAN CLOWE:  How -- how does it go
19   up?
20                  MR. TIRLONI:  Somebody physically
21   brings it up to the executive suite for -- for
22   signature and for approval.
23                  CHAIRMAN CLOWE:  Just somebody?
24                  MR. TIRLONI:  Somebody on the products
25   staff.  If there is -- if somebody on the products
0032
 1   staff is not available, in the past, some staff
 2   members from the financial department would bring it
 3   up.
 4                  CHAIRMAN CLOWE:  So you don't do that,
 5   or the financial administration director doesn't do
 6   that.  You don't have a formal meeting.  It's just
 7   carried up to the Executive Director, and then I
 8   assume that person okays it, and that's it?
 9                  MR. TIRLONI:  Sometimes I -- sometimes
10   I do personally bring it up.  It's not a formal
11   meeting where, you know, there is time scheduled for
12   that to take place.  And depending on the
13   circumstances that day, sometimes it's -- it's walked
14   in.  Sometimes it's dropped off in -- in the executive
15   suite, and then it's signed off at a later time, and
16   it comes back down to the products staff with
17   signature, and then, again, that information is then
18   communicated out to the necessary staff and necessary
19   vendors that utilize that amount.
20                  CHAIRMAN CLOWE:  Talk to us about the
21   computation relative to the interest rate.
22                  MR. TIRLONI:  Basically, what happens
23   is, we are taking -- we are taking draw sales for each
24   drawing.  So starting at the 4 million dollar jackpot,
25   you're taking the sales for that drawing.  If there is
0033
 1   no jackpot winning ticket sold, then you move on to
 2   the next drawing, and you're -- you're accumulating
 3   sales for that draw cycle or for that roll cycle.  So
 4   you take those sales, and you add those sales up.  52
 5   percent of sales, under the current rule, are
 6   allocated to the prize pool.  Then from that prize
 7   pool, 75.2 percent of those dollars is allocated to
 8   the jackpot prize category.  So that -- that's --
 9   those are the dollars that have accumulated in the
10   jackpot prize category.  And there is basically a
11   calculation that takes place.  You've got the -- the
12   total sales in that category, and you multiply that
13   times the interest factor.  And that provides you with
14   a -- an estimate of what your jackpot could be over a
15   25-year period.  And if -- if I'm misstating that, I
16   would ask somebody from financial to correct me.
17   Their -- financial staff is the one that deals with
18   the interest factor on a -- on a more regular basis
19   than I do.
20                  CHAIRMAN CLOWE:  Okay.  I think we
21   would like a full explanation.
22                  I think we can have the lights turned
23   back up, please.
24                  MR. NAVARRO:  Good morning,
25   Commissioners.  For the record, my name is Benito
0034
 1   Navarro.  I am acting financial administration
 2   manager.  And in fact, Robert, you are correct.  The
 3   interest factor is received from an independent third
 4   party, i.e., the -- the Treasury Trust Company.  And
 5   the factor allows us to take the amount of money that
 6   is in that prize pool amount and estimate what it will
 7   take to cover a jackpot of a certain amount, based on
 8   the interest factor and the amount of sales that have
 9   accumulated in that prize pool amount.  So, I -- I
10   mean, it's -- it really is just a -- you know, take
11   your sales and multiply it times that factor, and that
12   gives you an amount that will support a jackpot to be
13   paid over a period of time, i.e., in this case, you
14   know, the 25 annuitized, you know, payments.
15                  CHAIRMAN CLOWE:  So then help us
16   understand the difference in the payout if the winner
17   is a 25-year annuity chooser as -- as opposed to the
18   instant payoff winner.
19                  MR. NAVARRO:  In -- in essence, you
20   know, the amount that's in a prize pool amount, before
21   you multiply it times an interest factor, is what is
22   available to pay a winner if the cash value option
23   was, in fact, selected.  So that once you multiply it
24   times the interest factor, you've got what the
25   annuitized jackpot amount would be.
0035
 1                  CHAIRMAN CLOWE:  All right.  And if
 2   you're a cash option winner, you get what sales
 3   produces?
 4                  MR. NAVARRO:  Correct.
 5                  CHAIRMAN CLOWE:  And those numbers can
 6   be different?
 7                  MR. NAVARRO:  Correct.
 8                  CHAIRMAN CLOWE:  And in the case that
 9   has brought the attention to the jackpot we're
10   discussing, they were substantially different.  Is
11   that not correct?
12                  MR. NAVARRO:  That is correct.
13                  CHAIRMAN CLOWE:  Now, if I remember the
14   rules of the Commission correctly, for the first four
15   rolls -- and correct me if I'm wrong on this -- the
16   Commission pays to a winner the advertised jackpot,
17   period?
18                  MR. TIRLONI:  For the first four
19   drawings in the roll cycle, the Commission will pay
20   the advertised jackpot or the jackpot based on sales,
21   whichever is greater, during the first four.
22                  CHAIRMAN CLOWE:  So the Commission,
23   once it advertises, in the first four rolls, the
24   amount, that amount is going to be paid or a greater
25   amount will be paid?
0036
 1                  MR. TIRLONI:  That's correct.
 2                  CHAIRMAN CLOWE:  And if there is a
 3   shortfall in sales, which I seem to remember
 4   historically there has been at the lower levels, then
 5   it's made up from the prize reserve fund?
 6                  MR. TIRLONI:  Correct.
 7                  MR. NAVARRO:  That's correct.
 8                  CHAIRMAN CLOWE:  Now, let's go beyond
 9   those four rolls and say that you roll from four,
10   five, six, to seven.  And I believe that's where we
11   were in the case of this incident we're discussing.
12   What does the Commission do, as a normal practice,
13   when you reach that stage?  What is the history of
14   that?
15                  MR. TIRLONI:  The -- the history of --
16   the history is when you go four, five, six, seven,
17   the -- the -- there is -- there is different
18   scenarios, but typically, after seven, we increase the
19   jackpot.  In this current matrix, early on, when sales
20   were stronger, there were times that we went from six
21   to eight.  There were times that we went -- because
22   sales and the interest factor combined supported that
23   roll.  There are times we went four, five, six, seven,
24   nine.  So it -- it's varied at different points in
25   time.  Most -- most recently, I can tell you the
0037
 1   history has been four, five, six, seven, eight.
 2                  CHAIRMAN CLOWE:  And is the
 3   Commission -- if you know, is the Commission empowered
 4   by its rules or by legislation to make up a shortfall
 5   in sales to the advertised jackpot after the initial
 6   four rolls?
 7                  MR. TIRLONI:  I believe, based on the
 8   rule and the definition of a jackpot amount in the
 9   rule, that once you go beyond four, and you're in the
10   fifth drawing or beyond that, you would just pay based
11   on sales because there is -- there is a very specific
12   definition of jackpot amount in the current rule.
13                  CHAIRMAN CLOWE:  Your understanding is
14   the Commission could not make up a shortfall out of
15   the prize reserve fund after four rolls?
16                  MR. TIRLONI:  That's correct.
17                  MR. NAVARRO:  Right.
18                  COMMISSIONER COX:  Mr. Chairman?
19                  CHAIRMAN CLOWE:  Yes, sir.
20                  COMMISSIONER COX:  If I may.  Ben, I'm
21   looking at what I wrote down, based on what you
22   answered Chairman Clowe about how you compute the
23   jackpot, both the cash option and the total future
24   value of the annuity payments --
25                  MR. NAVARRO:  Correct.
0038
 1                  COMMISSIONER COX:  -- for those annuity
 2   winners.  What I've written down is that it is
 3   estimated sales times 52 percent times 75.2 percent.
 4                  MR. NAVARRO:  Uh-huh.
 5                  COMMISSIONER COX:  And that gives you
 6   what the cash winner would get.
 7                  MR. NAVARRO:  The amount of the prize
 8   pool.  Correct.
 9                  COMMISSIONER COX:  And that's what the
10   cash -- if the person selected the cash option, that's
11   what that person would get?
12                  MR. NAVARRO:  That's -- yes, sir.
13                  COMMISSIONER COX:  And then you take
14   the annuity factor that's provided to you by the
15   Comptroller's Office.
16                  MR. NAVARRO:  Correct.
17                  COMMISSIONER COX:  And in this instance
18   it was 1.5576.  And you multiply that by the cash
19   prize, and that gives you a future value of the
20   annuity payments that an annuity winner would receive,
21   and then that's the amount of jackpot that is
22   advertised?
23                  MR. NAVARRO:  It gives you an amount
24   that supports a jackpot to be advertised.  So, for
25   example, in the case that we have up here -- and I
0039
 1   know you can't see that -- but at the low end of this
 2   particular estimation, which was Wednesday, the low
 3   estimate, including the interest factor, jackpot
 4   support was 13.9 million dollars.  The high end
 5   support, including the interest factor, was 14,009,000
 6   dollars.  We advertised this roll or this advertised
 7   jackpot at 13 million.  So including the interest
 8   factor, we could have funded up to a 13.9 million
 9   dollar jackpot, but because of, you know, being
10   conservative and, you know, the way the rule is
11   written, if I'm -- if I'm not mistaken, we rolled to
12   13 million.  If, in fact, jack -- if, in fact, sales
13   support something beyond that, the winner gets it
14   anyway because it's -- the way the rule is written,
15   it's the greater of the advertised jackpot or what
16   sales brings in.  So we -- on this particular case, we
17   estimated sales, including the interest factor, you
18   know, we would have, you know, support for a 13.9
19   million dollar jackpot.  We advertised 13.  In fact,
20   we -- we would have gotten hit if we would have paid
21   any amount over that 13 million dollars.
22                  COMMISSIONER COX:  Thank you,
23   Mr. Chairman.  Sorry for the interruption.
24                  CHAIRMAN CLOWE:  No.  It's fine.
25   And -- and this is good history to cover.
0040
 1                  COMMISSIONER OLVERA:  And let me
 2   backtrack to --
 3                  CHAIRMAN CLOWE:  Sure.
 4                  COMMISSIONER OLVERA:  -- what was just
 5   discussed a few minutes ago.  And I don't limit this
 6   question for Robert.  I -- Kim or anyone else can kick
 7   in.
 8                  What was the purpose or the reasoning
 9   for limiting the -- the scenario to four cycles
10   wherein -- wherein if -- if, in fact, there was a
11   deficiency between sales and the advertised amount?
12   What was the rationale for -- between that and -- in
13   other words, if it happens on -- on the tenth cycle, I
14   don't see, theoretically, how the liability would be
15   greater or less than during the first four cycles.
16                  MR. TIRLONI:  Can I go back to the
17   previous version of the rule?
18                  COMMISSIONER OLVERA:  Please do, sir.
19                  MR. TIRLONI:  March -- it's in the --
20   the adopted rule that we followed prior to the current
21   rule was adopted in March of 2002.  And -- and that
22   rule basically said that we would pay the
23   advertised -- or an advertised jackpot or the jackpot
24   based on sales, whichever was greater.  And that
25   was -- that was true from four all the way through the
0041
 1   entire -- the entire roll cycle.  So under that
 2   current version of the rule, it was the advertised
 3   or -- or greater.  My recollection is, in 2003, when
 4   we were working on the current version of the rule,
 5   the Commission desired a more conservative approach to
 6   the paying of the jackpots.  I believe there was a
 7   concern that you could be advertising a jackpot of,
 8   let's say, 60 or 70 million, and there could be a -- a
 9   disaster, or a -- a natural disaster that could take
10   place.  And you could be advertising a jackpot which
11   you could not have sales to support.  So it's my
12   recollection that a more conservative approach was --
13   was desired, and that is my recollection of why we
14   ended up with the language that we have that talks
15   about guaranteeing for the first four, but then once
16   you get beyond that time period, it's just strictly
17   based on sales.  My recollection is, it was a
18   liability concern for the Commission.
19                  CHAIRMAN CLOWE:  All right.
20                  COMMISSIONER OLVERA:  Well, but the
21   estimation on sales -- once again, it --
22   theoretically, if you're estimating sales at -- at
23   five million and -- and the advertised amount is six,
24   and there is a shortfall of a million, you're still
25   looking at approximately -- there shouldn't be that
0042
 1   much of a variance in -- worst case scenario, as you
 2   just pointed out, if it's 60 million and sales were
 3   59, it's -- it seems to me that the formula should be
 4   consistent, regardless of what -- what the amounts
 5   are.  Isn't that correct?
 6                  MR. TIRLONI:  I personally think it --
 7   it depends on your perspective.  I -- I don't -- I
 8   don't disagree with what you're saying.  I -- I think
 9   it depends on -- on how you look at it.  I -- I think
10   the concern was, when you get to higher level
11   jackpots, the estimation becomes somewhat trickier to
12   perform.  So I can give you an example.  Last summer,
13   when we rolled up to 100 and then 120 and then 145,
14   that estimation becomes a little more difficult
15   because we don't have historical sales that we can go
16   back and refer to when we're developing that estimate.
17   And my recollection is it was those type of scenarios
18   that were of concern.  So it -- it wasn't so much the
19   four or the five or the five or the six, it was if you
20   get up to these high level jackpots that there is the
21   potential for a greater liability to the Commission
22   in -- in -- in those instances.
23                  COMMISSIONER OLVERA:  I guess, is there
24   a way -- well, I'm sure there is a way, but shouldn't
25   the emphasis on later jackpots be -- be on the
0043
 1   conservative side in terms of the advertised amount as
 2   opposed to the sales numbers?  Once again, it seems to
 3   me if -- if the emphasis is being -- is being -- if
 4   the emphasis is on the advertised amount, we -- we
 5   wouldn't have a problem, because if the sales can
 6   support that, then regardless of what the monetary
 7   amount is, whether it's 120 million or 20 million or 2
 8   million, there -- there shouldn't be a problem.
 9                  CHAIRMAN CLOWE:  You're shaking your
10   head yes.
11                  MR. TIRLONI:  I -- I -- I agree.  I
12   agree with what you're saying, Commissioner Olvera.
13                  COMMISSIONER COX:  Mr. Chairman, one
14   more further to that.
15                  Robert, I -- you said 2003, but I think
16   it may have been before that.  I was on this board in
17   2003, and I don't remember voting on that rule.  Help
18   me with that rule, if you will.  I read the rule, and
19   it talks about indirect prize pools for the first four
20   and, after that, direct prize pools, if I remember
21   correctly?
22                  MR. TIRLONI:  Uh-huh.
23                  COMMISSIONER COX:  That seems kind of
24   convoluted to me.  Why did we use that kind of
25   terminology in this rule to describe what seems to me
0044
 1   to be a very -- fairly simple concept, which is that
 2   for the first four rolls, Commission staff may, should
 3   it choose, subsidize the jackpot indicated by sales
 4   from the reserve fund, and after that, they can't.  So
 5   why didn't the rule just say that?
 6                  MR. TIRLONI:  In terms of why we use
 7   direct prize category and indirect?
 8                  COMMISSIONER COX:  Yes.
 9                  MR. TIRLONI:  Okay.  Commissioner Cox,
10   those are -- that's terminology that has been carried
11   forth in every version of the rule since the first
12   rule was drafted back in 1992 or 1993.  And I -- I
13   would have to defer to counsel as to why that language
14   was -- was continued to be used in -- in each version
15   of the rule.
16                  MS. KIPLIN:  Commissioners, I -- I
17   really -- it -- it has been in the rule since the
18   beginning and when the Lottery was a division of the
19   Comptroller.  And as I recall, it was a financial
20   issue.  And the direct prize category contribution had
21   to do with current sales.  And the indirect prize
22   category contribution had to do -- did not have to do
23   with current sales.  It had to do with the use of the
24   prize reserve fund.  And I may be wrong in -- you
25   know, with regard to that characterization and
0045
 1   would -- would look to financial to correct me if I'm
 2   wrong, but that is my understanding is direct prize
 3   category contribution had to do with current sales and
 4   indirect did not.
 5                  COMMISSIONER COX:  I think what I heard
 6   is, nobody knows.
 7                  MR. TIRLONI:  I don't think anybody is
 8   here that has the history back to that point in time
 9   when -- when that first rule was drafted.
10                  COMMISSIONER COX:  Okay.  Thank you.
11                  CHAIRMAN CLOWE:  Robert, as a matter of
12   practice, the Commission has always increased the
13   jackpots by no less than one million dollars.  Is that
14   not correct?
15                  MR. TIRLONI:  That is correct.
16                  CHAIRMAN CLOWE:  And all of our
17   advertising around the state, which has these signs
18   that report the estimated jackpot, are set up so that
19   there can be no increments of one million dollars
20   reported.  Is that not correct?
21                  MR. TIRLONI:  That -- that's correct.
22   The -- the outdoor billboards can only increase in
23   increments of one million.
24                  CHAIRMAN CLOWE:  Now, how long have you
25   been in your present position?
0046
 1                  MR. TIRLONI:  I've been the -- due to
 2   the agency reorg in November, I've been the products
 3   manager since November of 2004.  I've been the on-line
 4   product manager since June of 2000.
 5                  CHAIRMAN CLOWE:  And is that when you
 6   came to the Commission?
 7                  MR. TIRLONI:  No, sir.  I came to the
 8   Commission in '97.
 9                  CHAIRMAN CLOWE:  And what were you
10   doing from '97 to 2000?
11                  MR. TIRLONI:  In '97, I -- I -- when I
12   first started with the agency, I was in the lottery
13   operations division in the games compliance section.
14   I was there for approximately a year and a half before
15   I moved to the marketing division, where I worked on
16   the scratch off product from fall of '98 until summer,
17   June of 2000.  In June of 2000, I became the on-line
18   product manager and served in that position until
19   November of 2004, when I became the products manager.
20                  CHAIRMAN CLOWE:  And how long have you
21   been involved closely with the estimation of the
22   jackpot?
23                  MR. TIRLONI:  Since June of 2000.
24                  CHAIRMAN CLOWE:  So you were in that
25   capacity when Professor Eubanks made his presentation
0047
 1   in our November 2001 meeting about the accuracy of our
 2   computations and how, in his opinion, this agency did
 3   an excellent job of estimating those amounts, were you
 4   not?
 5                  MR. TIRLONI:  Yes, sir, I was.
 6                  CHAIRMAN CLOWE:  Now, you told
 7   Commissioner Cox that there has been very close
 8   agreement, historically, between your function and the
 9   administrative financial administration division.  Has
10   there been any instances of disagreement that come to
11   mind?
12                  MR. TIRLONI:  Between the -- between
13   the former marketing division and the financial
14   division?
15                  CHAIRMAN CLOWE:  Yes.
16                  MR. TIRLONI:  No, there have -- I -- I
17   don't recall when there have been any disagreements
18   between the two.
19                  CHAIRMAN CLOWE:  How many instances can
20   you recall where the sales have indicated one jackpot
21   and the advertised amount has been a different amount?
22                  MR. TIRLONI:  I don't know if I can
23   give you a number off the top of my head without
24   having --
25                  CHAIRMAN CLOWE:  I'm going to follow
0048
 1   that up.  You might want to think about this while
 2   you're thinking about that.  I'm going to ask you what
 3   the amounts were on the ones you can remember.  So
 4   that might help you think about it.
 5                  MR. TIRLONI:  Are you -- are you
 6   referring to the -- I'm not sure if I completely
 7   understand your -- your question, Mr. Chairman.
 8                  CHAIRMAN CLOWE:  Since 2002, which is
 9   your period of involvement in this process --
10                  MR. TIRLONI:  Uh-huh.
11                  CHAIRMAN CLOWE:  -- and we've agreed
12   that the process is one of extreme accuracy and one
13   where there is agreement between your division and the
14   financial division --
15                  MR. TIRLONI:  Uh-huh.
16                  CHAIRMAN CLOWE:  -- how many instances
17   can you recall where the estimate has been different
18   from the advertised jackpot -- I presume that's
19   lower -- and in those instances you can remember, what
20   are the amounts that are involved for each?
21                  MR. TIRLONI:  There have been the
22   situations where we have rolled out of the guaranteed
23   draw period, like we talked about earlier, from seven
24   to eight, where -- I'm not sure I'm understanding.
25   The -- I think there is -- there is -- through my
0049
 1   entire time in the process --
 2                  CHAIRMAN CLOWE:  Let -- let me help
 3   you.  I -- I don't want you to struggle.  I -- I want
 4   to be clear in my question.  It bothers me that your
 5   department and the financial department, as I
 6   understand it, came up with a sales estimate of six
 7   and a half million dollars in this last instance that
 8   we're talking about and the agency advertised an eight
 9   million dollar jackpot.  That concerns me.
10                  MR. TIRLONI:  I understand.
11                  CHAIRMAN CLOWE:  And we're going to get
12   into that specifically after we have this history and
13   we have this knowledge that I'm appreciative of so
14   everybody starts from the same place.  I'm asking you,
15   of your personal knowledge, how many times you know
16   where that situation has existed in the past, and if
17   you know of one or any number, what was the difference
18   in the sales estimate and the advertised jackpot?
19                  MR. TIRLONI:  I -- I understand that.
20                  CHAIRMAN CLOWE:  Are we clear now?
21                  MR. TIRLONI:  Yes, sir, we are.  Four
22   times.
23                  CHAIRMAN CLOWE:  Give us as much
24   information about those four times as you can.
25                  MR. TIRLONI:  The -- the four times are
0050
 1   practically -- they are practically identical.
 2   They've happened every time that we have been at seven
 3   and we have rolled to eight.  And that's happened four
 4   times since we made the current matrix change or -- or
 5   we've made the matrix change to the current game in
 6   May of 2003.
 7                  CHAIRMAN CLOWE:  Okay.  And when did
 8   they occur?
 9                  MR. TIRLONI:  October of 2004, February
10   of 2005, and then June of 2005.
11                  COMMISSIONER COX:  That's three.
12                  MR. TIRLONI:  I'm -- I'm sorry.  There
13   were two in June, June 3rd and June 8th.
14                  CHAIRMAN CLOWE:  Oh.
15                  MR. TIRLONI:  2005.
16                  CHAIRMAN CLOWE:  Of 2005.  And they
17   were all where we rolled from seven advertised to
18   eight advertised?
19                  MR. TIRLONI:  That's correct.
20                  CHAIRMAN CLOWE:  And what did the sales
21   indicate in each of those instances, if you have that
22   information?
23                  COMMISSIONER OLVERA:  Well, the two in
24   June could not have been the same seven and eight.
25                  MR. TIRLONI:  In June, we went from
0051
 1   seven to eight, and then we went from eight to eight.
 2   So those were the -- those were the four versions of
 3   the -- of the eights.
 4                  CHAIRMAN CLOWE:  And the sales didn't
 5   support the eight the second time is what you're
 6   saying?
 7                  MR. TIRLONI:  After actual sales came
 8   in, it did.  At the time of the estimate, it did not.
 9                  CHAIRMAN CLOWE:  That's how you get two
10   in that -- in June, I think.
11                  COMMISSIONER OLVERA:  Okay.
12                  CHAIRMAN CLOWE:  Okay.  So it was six
13   and a half the first time in June, and we went to
14   eights.  And then what was the estimate when we stayed
15   at eight the second time?
16                  MR. TIRLONI:  When we stayed at eight
17   the second time, we had jackpot support of 7,915,200
18   dollars, based on our low end sales estimate, and
19   7,976,543 dollars at our high end sales estimate.
20                  CHAIRMAN CLOWE:  So we had a -- a
21   shortfall estimated in that instance, which was the
22   second draw at eight million, of between 90 and 10,000
23   dollars.  And the actual sales came in over eight
24   million?
25                  MR. TIRLONI:  That's correct.
0052
 1                  CHAIRMAN CLOWE:  That's two of the
 2   four.  Give us the other two, if you have that.
 3                  MR. TIRLONI:  I'm going to pull the
 4   actual estimation sheet that was signed,
 5   Commissioners.  Give me one second.
 6                  CHAIRMAN CLOWE:  Good.
 7                  MR. TIRLONI:  Okay.  In October of
 8   2004, we were at seven, we were rolling to eight, and
 9   we had jackpot support of 7,156,287 at the low end,
10   7,220,457 at the high end.
11                  COMMISSIONER COX:  And this was in
12   October of '04?
13                  MR. TIRLONI:  Yes, sir.
14                  COMMISSIONER COX:  How many months was
15   that?
16                  MR. TIRLONI:  How many -- I'm sorry?
17                  COMMISSIONER COX:  How many months ago
18   is October of '04?
19                  CHAIRMAN CLOWE:  About nine.
20                  MR. TIRLONI:  About nine.
21                  COMMISSIONER COX:  Nine months ago.
22   Thank you.
23                  MR. TIRLONI:  The second time was in
24   February of '05.  At our low end sales estimate we had
25   jackpot support of 7,656,419, and at the high end we
0053
 1   had jackpot support of 7,687,688.
 2                  CHAIRMAN CLOWE:  So in each case, in
 3   October and earlier this year, prior to the two
 4   instances of June, there was a shortfall of just under
 5   a million dollars?  On the low end -- the estimate on
 6   the low end?
 7                  MR. TIRLONI:  Approximately, yes.
 8                  CHAIRMAN CLOWE:  Now, in your time at
 9   the Texas Lottery Commission, prior to this time that
10   we're talking about, where it stayed at eight, has
11   there ever been a period in Lotto Texas when the
12   jackpot stayed at a current amount from one roll to
13   another?
14                  MR. TIRLONI:  No, sir.
15                  CHAIRMAN CLOWE:  Has there ever been a
16   case where there has been a reduced amount of a
17   jackpot, from a higher number to a lower number?
18                  MR. TIRLONI:  No, sir.
19                  CHAIRMAN CLOWE:  As a professional in
20   this field and a person who has appeared before this
21   Commission almost every time we've met, how do you
22   feel about this discrepancy?
23                  MR. TIRLONI:  At the time that we did
24   these estimations, I felt that it was critical for the
25   long-term health of the game for the jackpot to
0054
 1   increase if there was no jackpot ticket sold.  In
 2   hindsight, I would have left the jackpot amount at the
 3   same amount, now that I've seen what the experience
 4   has been by staying at eight and -- you know, by not
 5   increasing the jackpot amount, I now see the
 6   experience of what -- of, you know, the results of
 7   making that decision.  And they're not -- this time
 8   that we did, they were not as severe as I may have
 9   thought they would be.  My -- my decision, though, or
10   the judgment that I made was in the best interests of
11   the game at the time and the long-term health of the
12   game from a marketing and sales perspective.
13                  CHAIRMAN CLOWE:  So you made a judgment
14   call based on what you thought was best for the -- for
15   the game?
16                  MR. TIRLONI:  Yes, sir.  That's
17   correct.
18                  CHAIRMAN CLOWE:  Well, we'll probably
19   talk about that more later on.
20                  Ben, you're the acting financial
21   department director.
22                  MR. NAVARRO:  Yes, sir.
23                  CHAIRMAN CLOWE:  How long have you been
24   with the Commission?
25                  MR. NAVARRO:  As a full-time employee,
0055
 1   I started December of 2001.  Before that I was on as a
 2   consultant.  I started in May of 2000.  I started on
 3   as -- I was on as a consultant.  I started as a
 4   temporary employee.
 5                  CHAIRMAN CLOWE:  So you've been here
 6   almost four and a half years?
 7                  MR. NAVARRO:  Yes, sir.
 8                  CHAIRMAN CLOWE:  And have you been
 9   involved in this process from the outset or have you
10   come into it more recently?
11                  MR. NAVARRO:  More recently, on the
12   tail end.  Most of my involvement has been in the
13   sign-off of jackpot amounts and situations where I'd
14   have signature authority for the director on -- when
15   he was on leave and -- and what have you.  But I have
16   not been intimately involved in the estimation process
17   up until a week and a half ago.
18                  CHAIRMAN CLOWE:  Okay.
19                  MR. NAVARRO:  Two weeks ago.
20                  CHAIRMAN CLOWE:  So you -- you really
21   haven't been involved.
22                  Anybody in the financial division who
23   has been that can talk to us about this?
24                  MR. NAVARRO:  Ms. Tia Pair, and I don't
25   see her in the audience.  Ms. -- Ms. Tia Pair has been
0056
 1   in that role, consistently, in financial
 2   administration for a number of years.
 3                  CHAIRMAN CLOWE:  Good.  Well, we would
 4   like to hear from her.
 5                  COMMISSIONER OLVERA:  That brings up a
 6   good question, Robert.  When -- when we read, staff
 7   recommends these amounts, how many people are we
 8   talking about, grand total?
 9                  MR. TIRLONI:  Two.
10                  COMMISSIONER OLVERA:  Thank you.  And
11   that's yourself and?
12                  MR. TIRLONI:  Currently, myself and
13   whoever has the signature authority on the financial
14   administration side.
15                  MR. NAVARRO:  And -- and from -- from a
16   financial administration standpoint, we -- we have a
17   lead for the jackpot estimation, and that would be
18   Tia.  In her absence, there is a backup person who
19   performs that same function.  And we have that for all
20   the games -- Texas Two Step, Mega Millions, you know,
21   we have a lead for each one of those games, and then
22   we have backup support so that when they're on leave,
23   someone can take over those duties.
24                  CHAIRMAN CLOWE:  I know, Commissioners,
25   you all have some other questions, and I don't mean to
0057
 1   dominate it.  I just wanted to get this history out
 2   and -- and get us all together.
 3                  I would like to ask you, Robert, a
 4   question.  My impression is that the staff at this
 5   agency really knows what they're doing when it comes
 6   to estimating these jackpots and that the accuracy has
 7   been verified from outside the agency and validated
 8   in -- internally.  We are on top of this.  What it
 9   seems to me to come down to is a judgment call.  The
10   information is good.  It's a judgment call about what
11   the jackpot should be.  Do you, in your history with
12   the Commission, disagree with that?
13                  MR. TIRLONI:  I completely agree with
14   what you said.
15                  CHAIRMAN CLOWE:  Good morning.
16                  MS. PAIR:  Good morning.
17                  CHAIRMAN CLOWE:  Would you identify
18   yourself for the record, please?
19                  MS. PAIR:  Yes.  I'm Tia Pair with the
20   Texas Lottery in financial administration.
21                  CHAIRMAN CLOWE:  Thank you for being
22   here.  We're -- we're having a discussion about the
23   estimation of the sales for determination of the
24   advertised jackpot, and we were talking about the
25   accuracy of the estimates.  And Ben has indicated that
0058
 1   you have a history of involvement in this.
 2                  MS. PAIR:  Yes, I do.
 3                  CHAIRMAN CLOWE:  And what would you
 4   tell us about your feeling regarding the accuracy of
 5   the estimates and the validity of them, insofar as --
 6   as your involvement?
 7                  MS. PAIR:  From what we have seen, our
 8   estimates seem to be pretty much on target.  We seem
 9   to -- when we come together, when Robert or any of
10   that staff comes over, meets with the finance staff,
11   we seem to be pretty much in order and agreement upon
12   what the sales would seem to be.  So from what I can
13   tell from the history of it, I think our sales have
14   been pretty much on target.
15                  CHAIRMAN CLOWE:  And I understand that
16   Ben is the acting director of the finance division
17   now.  And you've been in your position quite some
18   time.
19                  MS. PAIR:  For a few years.
20                  CHAIRMAN CLOWE:  How long?
21                  MS. PAIR:  Well, doing jackpot
22   estimation for about two to three years, but I've been
23   with the Commission since 1992.
24                  CHAIRMAN CLOWE:  Okay.  Okay.  Who did
25   it before you took it over?
0059
 1                  MS. PAIR:  Ken Timmerman and Beverly
 2   Wood, and prior to that, I believe Shirley Perry, and
 3   Lynn Gunn, Amy Weiss and Liz Day.
 4                  CHAIRMAN CLOWE:  These are people who
 5   are --
 6                  MS. PAIR:  Who have all gone on to
 7   other positions in other agencies.
 8                  CHAIRMAN CLOWE:  Okay.  Commissioners,
 9   from the historical standpoint, I'm very satisfied
10   with the ground that we've covered, and I think it has
11   been important to get this understanding of the
12   process and the degree of accuracy and how it works.
13   What questions do you have?
14                  COMMISSIONER COX:  Well, Mr. Chairman,
15   I have a couple of questions that may be in the
16   history section or may be in the next section so --
17                  CHAIRMAN CLOWE:  Let's go forward.
18                  COMMISSIONER COX:  Okay.  Robert, you
19   sign off on this for Products, and it goes, then, to
20   the Executive Director.  And I know that it goes to
21   Finance as well, but for Products, you sign off.
22                  MR. TIRLONI:  That's correct.  Yes.
23   That's correct.
24                  COMMISSIONER COX:  Okay.  Who do you
25   report to?
0060
 1                  MR. TIRLONI:  The Lottery Operations
 2   Director.
 3                  CHAIRMAN CLOWE:  And what is his name?
 4                  MR. TIRLONI:  Michael Anger.
 5                  COMMISSIONER COX:  Does Mr. Anger see
 6   this computation?
 7                  MR. TIRLONI:  No, he does not.
 8                  COMMISSIONER COX:  And does he see the
 9   recommended jackpot that you make?
10                  MR. TIRLONI:  Not typically, no.
11                  COMMISSIONER COX:  Okay.  And who does
12   Mr. Anger report to?
13                  CHAIRMAN CLOWE:  The Deputy Executive
14   Director.
15                  COMMISSIONER COX:  And does he see your
16   worksheet and your recommendation?
17                  MR. TIRLONI:  Typically not, unless --
18   unless he has been designated to sign on behalf of the
19   Executive Director, but typically not.
20                  COMMISSIONER COX:  Okay.  Now, Tia,
21   over in your department, you prepare the estimate and
22   you meet with Robert, and y'all concur?
23                  MS. PAIR:  Yes.
24                  COMMISSIONER COX:  And then there is a
25   recommendation made.  Do you make that recommendation
0061
 1   for what the jackpot would roll to?
 2                  MS. PAIR:  We don't make a
 3   recommendation of what it would roll to.  What we do
 4   is we suggest that it roll no more than.  And at least
 5   that's the way it has been done in the past.
 6   Currently, we do not make a recommendation at all.  We
 7   just recommend -- what we do is we -- we outline the
 8   projected outcome, which is what we've always done.
 9   We've always put three to four projections of what may
10   possibly be the outcome.  We used to say, please --
11   you know, we suggest don't roll over a certain amount.
12   So --
13                  COMMISSIONER COX:  And did I understand
14   you correctly to say that you don't make -- your
15   department does not make a recommendation for the
16   jackpot?
17                  MS. PAIR:  The only -- well, our
18   department is one thing.  Me, personally, I do not.
19                  COMMISSIONER COX:  Okay.  Okay.  To
20   your knowledge, does anyone in your department make a
21   recommendation for the jackpot?
22                  MR. NAVARRO:  I --
23                  CHAIRMAN CLOWE:  Wait a minute, Ben.  I
24   think he asked her that question.
25                  MR. NAVARRO:  Oh, I'm sorry.
0062
 1                  CHAIRMAN CLOWE:  You can answer after
 2   she answers.
 3                  MR. NAVARRO:  Okay.
 4                  MS. PAIR:  The director of financial
 5   administration will sign for financial administration
 6   as a recommendation.
 7                  COMMISSIONER COX:  Okay.  So to your
 8   knowledge, the director of financial administration
 9   concurs not only with the computations you've made and
10   your concurrence with Robert on the computations
11   you've made, but also concurs with -- or perhaps
12   disagrees with the recommendation that is made to the
13   Executive Director?
14                  MS. PAIR:  Yes.
15                  COMMISSIONER COX:  So in financial
16   administration -- in -- as I understand it, in
17   Products, Robert does both functions.  But as I
18   understand it in financial administration, you make
19   the estimates, and then the director makes the
20   recommendation, or concurs with Robert's
21   recommendation, or negotiates with Robert a
22   recommended jackpot, and the director and only the
23   director in your department signs off on that?
24                  MS. PAIR:  Yes.
25                  COMMISSIONER COX:  Okay.
0063
 1                  MS. PAIR:  The director or anyone
 2   appointed by the director in his absence.
 3                  COMMISSIONER COX:  Okay.  Now, do you
 4   know to whom the director of financial administration
 5   reports?
 6                  MR. NAVARRO:  May I -- may I answer
 7   that question?
 8                  COMMISSIONER COX:  Sure.
 9                  MR. NAVARRO:  Currently, the -- Mike
10   Fernandez, who is the administration division
11   director.
12                  COMMISSIONER COX:  Okay.  And does
13   Mr. Fernandez see these computations and this
14   recommendation?
15                  MR. NAVARRO:  No, he does not, not that
16   I'm aware of.
17                  COMMISSIONER COX:  Okay.  And to whom
18   does Mr. Fernandez report?
19                  MR. NAVARRO:  To the deputy executive
20   director, Gary Grief.
21                  COMMISSIONER COX:  Okay.  We've already
22   asked the question there about whether Mr. Grief sees
23   these things.  Thank you, Mr. Chairman.
24                  CHAIRMAN CLOWE:  Why don't you go
25   forward with your questions.  You -- you indicated you
0064
 1   had some forward-looking questions.
 2                  COMMISSIONER COX:  No.  Those are the
 3   ones that I didn't know whether they fell into your
 4   history category or the ongoing category.
 5                  CHAIRMAN CLOWE:  Yeah.  I think --
 6   thank you all very much.  I think we have covered with
 7   you all what we want.  We're going to now move to
 8   Mr. Greer and talk about this more recent incident,
 9   but before we do that, we'll take about a ten-minute
10   break.
11                    (RECESS.)
12                  CHAIRMAN CLOWE:  Let's come back to
13   order, please.
14                  Earlier, I have heard some cell phones
15   ring, and I would appreciate it, as a courtesy, if all
16   of you would turn your cell phones off or turn them to
17   mute.  It's disruptive to have those ringing during
18   this meeting.
19                  We'll continue now, and, Commissioner
20   Cox, I -- I think you're up if you have some questions
21   for Reagan.
22                  COMMISSIONER COX:  Reagan, I am looking
23   at this document that -- I'm looking at this document
24   that Kim handed me, which Commissioner Olvera had and
25   which Robert Tirloni seemed to be familiar with.  And
0065
 1   I'll just tell you a little bit about this document.
 2   It is -- it is in the general form that was up there.
 3   It shows a low end estimate of sales of -- of a
 4   jackpot that sales would support of 6,546,545 dollars
 5   and a high end of 6,592,226 dollars.  Then there is a
 6   box over to the left of that that says, the estimation
 7   team recommends rolling to no more than eight million.
 8   And then down below that I see an initial that looks
 9   like it's L-U-D-Y, eight million, 6-3-05.  Then it
10   says in another -- maybe another handwriting, eight
11   million okay per Robert Tirloni via two-way pager, 6-3
12   of '05.  And then it says, R-E-G, with a big
13   underline, note percent, big dash, eight mil okay,
14   R dot dot dot 6-3-05.  Can you tell us what I'm seeing
15   here?
16                  MR. GREER:  Yes, sir.  Each week, which
17   Robert stated a moment ago, on Wednesdays and Fridays,
18   this -- this document or a similar document comes to
19   the executive suite for me to review and okay.  And
20   the document that you're referring to was the one that
21   was utilized on June the 3rd, specifically in
22   reference to the conversation on -- on jackpot
23   estimation that we were talking about earlier.
24                  COMMISSIONER COX:  Okay.
25                  MR. GREER:  From a -- a further
0066
 1   perspective, the thing that, primarily, I focus on and
 2   have been focusing on since I started doing this
 3   from -- well, the primary aspect what we're talking
 4   about today is this current matrix.  But it's the
 5   recommendation from staff.  From the financial and the
 6   products manager -- I look for their initials.  I look
 7   at the recommendation box and move forward from there.
 8                  COMMISSIONER COX:  What does it mean to
 9   move forward from there?
10                  MR. GREER:  Let them know that I've --
11   I've taken a look at it and that we are in a position
12   to communicate the message of what we'll be rolling
13   to.  And then they come back and get it and take it.
14                  COMMISSIONER COX:  So would you
15   describe that as a critical review or a perfunctory
16   review?
17                  MR. GREER:  Well, there is -- there is
18   two aspects to that to answer that question.  One is
19   what I know now, and one is what I knew then.  At that
20   point, it was more of a macro approach.  And
21   certainly, my perspective was to be sure that everyone
22   was -- everyone being financial and marketing -- was
23   on the same page.  You've already seen one of the
24   things that we discussed in the form of the new sheet,
25   because in the past I felt that there was not an
0067
 1   opportunity, if they weren't all on the same page, to
 2   express that to me if I wasn't able to meet with them.
 3                  Initially, when I started doing this --
 4   and, Mr. Chairman, you asked the question a moment
 5   ago -- there was time set aside with the
 6   representative, whoever it might be, for me to meet
 7   with those groups to go over the recommendation with
 8   me.  After a series of rolls -- this -- this was the
 9   15th roll in this matrix cycle, the 223rd drawing that
10   we talked about on this scenario -- over the last six
11   months maybe, or so, the comfort level that I had in
12   the staff in bringing me recommendations that I felt
13   comfortable supporting was high.  From that scenario
14   and, obviously, based on what I know now, I think that
15   I should have asked harder questions, and I should
16   have examined that document more closely before I
17   signed off on it.
18                  COMMISSIONER COX:  I guess he was
19   responding to you, Mr. Chairman.  Do you want to pick
20   it up there?
21                  CHAIRMAN CLOWE:  No.  Go ahead.  You're
22   doing -- you're doing fine.
23                  COMMISSIONER COX:  Was that a yes or a
24   no?  Is it a perfunctory review or is it a substantive
25   review?
0068
 1                  MR. GREER:  I'm sorry.  It is a
 2   perfunctory overview.
 3                  COMMISSIONER COX:  Okay.  So what we
 4   have here is a recommendation that is prepared by
 5   Mr. Tirloni, who reports to Mr. Anger, who reports to
 6   Mr. Grief, and his bosses did not review this.  And it
 7   comes to you, and you review it perfunctorily.  And
 8   the recommendation is made by the finance director,
 9   who reports to Mr. Fernandez, who reports to
10   Mr. Grief, neither of whom reviewed this.  And you
11   review it perfunctorily?
12                  MR. GREER:  Yes, sir.
13                  COMMISSIONER COX:  So it has no
14   substantive review.
15                  MR. GREER:  Well, from my perspective,
16   the substantive review is prior to when it came to me.
17                  COMMISSIONER COX:  But it had no
18   review.  It was made by those two people and came
19   straight to you.  You were the reviewer.
20                  MR. GREER:  I was the reviewer.  In
21   this -- the final reviewer.  In -- in the scenario
22   that we've gone through over a period of time, there
23   was a time when I first started that I dealt directly
24   with the financial director.  And then after we went
25   to the reorganization, the other two changes that we
0069
 1   talked about earlier, Mr. Anger and Mr. Hernandez
 2   stepping up, came into place.  And certainly that
 3   would be one thing that, as we examine this situation,
 4   that will change.  There was not input from, what I
 5   would say, Tirloni and then going to Anger, then
 6   coming to me.  I mean, I --
 7                  COMMISSIONER COX:  Help me -- help me
 8   with this.  Let's stay with what happened, then we'll
 9   go with what is going to happen.  Okay?
10                  MR. GREER:  Okay.
11                  COMMISSIONER COX:  So what we've got
12   here, if I read this right, is a worksheet prepared
13   carefully, based on estimates that have been
14   time-tested and proven to be very correct --
15                  MR. GREER:  Yes, sir.
16                  COMMISSIONER COX:  -- and very
17   accurate, that says that sales are not going to
18   support a jackpot of more than 6.546 million to 6.592
19   million.
20                  MR. GREER:  Yes, sir.
21                  COMMISSIONER COX:  From that, springing
22   a fearless recommendation that we advertise eight
23   million, and that -- recommended by Robert, by someone
24   else here, and you approved it?
25                  MR. GREER:  Yes, sir.
0070
 1                  COMMISSIONER COX:  Okay.  Now, let's go
 2   back to October of '04.  Robert Tirloni tells us that
 3   back in October of '04, nine months ago, the estimates
 4   indicated that sales would support no more than a 7.2
 5   million dollar jackpot.  Do you recall that instance?
 6                  MR. GREER:  No, sir.
 7                  COMMISSIONER COX:  Do you think you
 8   signed off on that jackpot?
 9                  MR. GREER:  Yes, sir.
10                  COMMISSIONER COX:  Advertising that
11   jackpot as eight million?
12                  MR. GREER:  This -- this came to my
13   attention as we examined the entire draws of all the
14   matrix that there was prior incidences to the one that
15   we came to light with on June 3rd.
16                  COMMISSIONER COX:  So you signed, in
17   October, a worksheet that told you that sales would
18   not support a jackpot of more than 7.2 million, and
19   you signed off on advertising a eight million dollar
20   jackpot?
21                  MR. GREER:  Based -- based on the
22   recommendation of the team, I supported the
23   recommendation.  Yes, sir.
24                  COMMISSIONER COX:  And in February of
25   '05, there was a recommendation that indicated that
0071
 1   sales would not support more than 7.687 million, and,
 2   again, eight million was advertised.  Did you sign off
 3   on that document?
 4                  MR. GREER:  Yes, sir.
 5                  COMMISSIONER COX:  And -- well, you --
 6   you just told us that you signed off on this one,
 7   where there was a 1.4 million dollar shortfall.
 8                  Prior to October 4th -- October of '04,
 9   did you have any idea that the sales of Lotto Texas
10   were on a collision course with the inability to
11   advance the jackpot from seven to eight million?
12                  MR. GREER:  Yes, sir.  We began to look
13   into this matter in March of '04, and had a series of
14   meetings since then.  At the initial meeting, we
15   discussed that very thing, that sales were declining,
16   and -- and talked about different options that we
17   might carry out, including coming back with a
18   recommendation on a rule change from protecting the --
19   the early cycle of the roll from four to eight.  We
20   talked about maybe the possibility of a decimal point
21   being added to our billboards so that it would, you
22   know, more closely show an amount or we could do half
23   a million dollar increments.  And it was decided,
24   based on not just me, but the group as a whole, that
25   we needed to really look at the possibility of
0072
 1   changing the matrix on the Lotto Texas game to address
 2   this issue.  And that's been going on ever since then.
 3                  COMMISSIONER COX:  Okay.  So what I
 4   think you just told me is that for one month -- one
 5   year and three months, you and at least some members
 6   of your staff have known this problem might arise and
 7   that it, in fact, did arise nine months ago, in
 8   October?
 9                  MR. GREER:  Yes, sir.
10                  COMMISSIONER COX:  Have you or any
11   member of your staff, to your knowledge, communicated
12   this situation to any member of this Board?
13                  MR. GREER:  Yes, sir.  For the last six
14   months, I would say, we've been talking about the
15   decline in sales.
16                  COMMISSIONER COX:  No.  Pardon me.  Did
17   you communicate to any member of this Board the fact
18   that we were advertising jackpots --
19                  MR. GREER:  No, sir.
20                  COMMISSIONER COX:  -- that our
21   estimated sales would not support?
22                  MR. GREER:  No, sir.
23                  COMMISSIONER COX:  Why don't you take
24   it now, Mr. Chairman.
25                  CHAIRMAN CLOWE:  Reagan, I think it's
0073
 1   necessary to get a complete understanding on your role
 2   in this decision making.  And I'm going to ask you
 3   what you might consider to be some difficult
 4   questions.  But I think, at the end, we'll have this
 5   matter thoroughly aired, and we will understand what
 6   happened.  And I think that's very important because
 7   this is the people's business, and it is going to be
 8   done in the open.  I will tell you that, based on what
 9   information I have now, my initial reaction is that
10   you are responsible, and you made a mistake.
11                  MR. GREER:  Yes, sir.
12                  CHAIRMAN CLOWE:  And it occurs to me
13   that it is very important to this Board that there be
14   a clear understanding between you and the three of us
15   of the events that occurred here and -- and your role
16   and your responsibility.
17                  You have written Chairman Kevin Bailey
18   of The House Committee on General Investigating and
19   Ethics, in the fourth paragraph of your letter to him,
20   that you made a business decision to approve the
21   recommended jackpot of an estimate of eight million
22   dollars.  You say you accept the responsibility for
23   this business decision, and then you add, after the
24   close of business that day, agency staff sent me an
25   e-mail providing a more detailed explanation about the
0074
 1   fact that sales might not be sufficient to support an
 2   estimate of eight million for the following Wednesday
 3   draw, and that internal discussions had been initiated
 4   as to how best to address this possibility.  I opened
 5   my e-mail on Monday morning and responded that we
 6   should be proactive and address the issue directly.
 7                  If you got this form that morning and
 8   you approved the eight million dollars, and you've
 9   answered Commissioner Cox by saying, the team made the
10   recommendation and you supported the recommendation,
11   that answer is less than satisfactory to me because I
12   have seen you as the decision maker in this agency.
13   I -- I didn't see it as a democratic process where
14   votes were made and -- and they were counted up and
15   then the tally was announced.  I -- I've seen you as
16   the gatekeeper.
17                  MR. GREER:  Yes, sir.
18                  CHAIRMAN CLOWE:  And I'm going to first
19   ask you, help me understand the recommendation of the
20   staff at six and a half and your decision to take it
21   to eight.  And that seems to me to be very
22   questionable as a judgment call on your part.  We'll
23   get into that in more detail later, but what
24   information came to you after the close of business
25   that you referred to in your letter to
0075
 1   Chairman Bailey?
 2                  MR. GREER:  Specifically, the -- the
 3   jackpot estimation sheet comes in usually late in the
 4   afternoon, between 4:00 and 4:30, because they want to
 5   see what sales are doing.  You're trying to project
 6   out ahead three to five days, which is five days out
 7   ahead in the scenario we're talking about here today.
 8   And the e-mail specifically went into more detail in
 9   reference to the fact that the sales were not
10   supporting at the lower levels.  About nine -- the
11   nine million mark is where sales seem to support
12   everything.  The first four rolls are covered and then
13   we're moving in that next scenario, each of these
14   being at the eight million level that we've talked
15   about.  And it went into more detail about that.  At
16   that point, it was -- it was a decision that either
17   needed to be made -- should have been made before, now
18   that -- you know, looking back, that we would have to
19   look at the possibility, for the first time in the
20   history of the game, holding the jackpot at an amount
21   that will not roll.  And that e-mail went into detail
22   on that and brought about the fact that we had to deal
23   with the situation now.  It couldn't be any more
24   talked about the possibility of changing the game or
25   what might or might not happen.  We had to deal with
0076
 1   the fact that we had to deal with it at that
 2   particular moment.  And I do take responsibility for
 3   that, and from a business perspective, the discussions
 4   that I'd had with staff up to that point had given me
 5   an understanding of the fact that we had had a series
 6   of rolls.  The prior rolls to this was the 15th roll.
 7   The other incidence was in the 13th and the 14th
 8   that -- that we talked about.  But going back to the
 9   12th roll, we had begun this process of five, six,
10   seven, eight.  And there was issues that were brought
11   up about, you know, player perspective of what was
12   going to happen to sales if we didn't do it, if we
13   held the roll, and other things that we had to deal
14   with after that e-mail that we had been discussing in
15   the past, but no permanent action had been taken to
16   come up with how we were going to handle it.
17                  CHAIRMAN CLOWE:  Okay.  You got the
18   e-mail after the close of business, after you had made
19   the decision.
20                  MR. GREER:  Yes, sir.
21                  CHAIRMAN CLOWE:  And what new
22   information came in that e-mail that --
23                  MR. GREER:  It was information that was
24   much more specific in what was going to be happening
25   in -- in the next roll.  The -- the e-mail was really
0077
 1   a -- basically, an awareness of potentially the fact
 2   that if we -- since we approved going to eight, that
 3   if we went to nine, there would be a shortfall, which
 4   is what caused this whole investigative process to
 5   kick in.  We looked into the scenarios that we
 6   mentioned earlier on the other occurrences, et cetera.
 7   So the e-mail specifically said, on Wednesday, when we
 8   make the next estimation, we're going to have a
 9   shortfall that we've never seen before, never seen
10   this large of a variance.  We have to deal with it.
11                  CHAIRMAN CLOWE:  Well, did it deal with
12   the shortfall that existed between six and a half and
13   eight million?
14                  MR. GREER:  It touched on that, which
15   is what brought this all to a higher level.
16                  CHAIRMAN CLOWE:  Did it change that
17   estimate?
18                  MR. GREER:  No.
19                  CHAIRMAN CLOWE:  Would it have
20   changed -- are you saying it would have changed your
21   mind in the decision you made earlier in the day?
22                  MR. GREER:  It -- it would have
23   certainly given me pause to go back and reexamine and
24   ask harder questions and certainly get more specific
25   on some of the aspects of what they had discussed.
0078
 1   Yes, sir.
 2                  COMMISSIONER COX:  Did Mr. Greer say
 3   from whom the e-mail came?
 4                  MR. GREER:  It came from Lee Deviney,
 5   who at the time was the financial director and one of
 6   the signatures on that sheet that we discussed
 7   earlier.
 8                  COMMISSIONER COX:  Thank you,
 9   Mr. Chairman.
10                  CHAIRMAN CLOWE:  Okay.  I guess at this
11   point, to be honest with you, I hear a lot of
12   conversation about the fact that the sales are slowing
13   down, and that the interest factor is in there, and
14   you and I have talked about that individually and
15   we've talked about that in Commission meetings for
16   some time.
17                  MR. GREER:  Yes, sir.
18                  CHAIRMAN CLOWE:  But I think it's
19   really important to zero in on the fact that you were
20   presented, in this instance, with a six and a half,
21   roughly, million dollar prize, and we advertised eight
22   million.
23                  MR. GREER:  Yes, sir.
24                  CHAIRMAN CLOWE:  And I -- I was
25   surprised to hear, when this came to my attention,
0079
 1   that there had been three previous instances.  And I'm
 2   glad Commissioner Cox asked you if you had
 3   communicated that to your Commissioners.  And to my
 4   recollection, I had never heard of that.  Did you feel
 5   that that was something that was of a level of
 6   importance that it should have been brought to the
 7   Commission's attention, or, you know, how did you --
 8   we were talking about Lotto Texas and what we needed
 9   to do to make it a -- a healthier game, I would say,
10   but how did that fact get away from you in talking to
11   your Commissioners?  Didn't -- didn't you see that as
12   a concern in advertising, relative to the people who
13   would expect this jackpot?  How -- how did you -- how
14   did you deal with that, mentally?
15                  MR. GREER:  Well, first off, from the
16   perspective of the information and not bringing it to
17   you, it was a business practice, again, through a
18   period of time, that we went four, five, six, seven,
19   eight, nine.  And the whole scenario that we're
20   looking at, as far as doing the examination, came
21   about as a result of this variance that we talked
22   about.  And we went back, and it clearly stated --
23   which -- do you have that sheet there -- on the eight
24   million dollar level, that there had been some
25   shortfalls in the past.  Up until that point, we
0080
 1   had -- we had seen the decline, specifically, but we
 2   had not identified where that decline was.  And if I
 3   would have known that then, I would have brought it to
 4   your attention, you know, at that point.  What
 5   transpired was the fact that we were short there, I
 6   said, well, let's go back and relook at anything else
 7   that could have happened in the past.  And that's what
 8   brought it to light.  It was not a matter of me not
 9   bringing you the information if I would have had it,
10   it was that we had not examined, to the point of where
11   we are now, to be sure that we had not done this
12   before.  And when it came to our attention, then that
13   is what brought this to light.
14                  CHAIRMAN CLOWE:  Okay.  I -- I'm a
15   little confused by what you just said.  You knew we
16   were short three times prior, didn't you?
17                  MR. GREER:  The first --
18                  CHAIRMAN CLOWE:  I -- I'm sorry.  Twice
19   prior.
20                  MR. GREER:  Twice prior.  The first
21   knowledge I had of that was upon this examination.  In
22   going back --
23                  CHAIRMAN CLOWE:  So you didn't know we
24   were short in October --
25                  MR. GREER:  Not -- not --
0081
 1                  CHAIRMAN CLOWE:  -- of '04 and earlier
 2   in '05?  You didn't know we were short?
 3                  MR. GREER:  Not until the full
 4   examination was done.  And I take responsibility for
 5   that as well.  I was relying on the recommendation
 6   process to carry us through that, and --
 7                  CHAIRMAN CLOWE:  Well, how were you
 8   relying on the recommendation process?  Didn't they
 9   bring the form to you, and didn't you see what the
10   estimate was and what the recommendation was?
11                  MR. GREER:  I saw what the
12   recommendation was.
13                  CHAIRMAN CLOWE:  You didn't see what
14   the estimate was?
15                  MR. GREER:  But from a -- a macro
16   perspective, I should have examined the document more
17   clearly, which is what has come to light after this
18   last scenario came about.
19                  CHAIRMAN CLOWE:  Well, I think maybe
20   you should have examined it -- I don't think maybe --
21   I think you should have examined it then.  And --
22   and --
23                  MR. GREER:  I agree.
24                  CHAIRMAN CLOWE:  -- and what are you --
25   what are you telling us?  That -- that in October, the
0082
 1   first time it occurred, you didn't look at the form?
 2   You just initialed it?  Help me -- help me understand
 3   specifically about that.
 4                  MR. GREER:  Well, specifically, the
 5   practice that had become normal -- which is a matter
 6   of -- of definition, I guess, what normal would be,
 7   but -- was that it came up late in the day.  Sometimes
 8   I would be in another meeting.  Sometimes, you know, I
 9   would ask questions.  Other times, I might be in the
10   middle of something else.  I was not giving it, from
11   my perspective, the time that it needed so they would
12   walk me through the entire process before making a
13   recommendation.  I looked at the recommendation box
14   that they had worked on, relied on the knowledge that
15   they had of what was going on with the interest rates
16   and the sales to bring me a -- a recommendation that
17   we could support.
18                  CHAIRMAN CLOWE:  And you would sign
19   off?
20                  MR. GREER:  Except one time, I -- also
21   in examining this back in May of '03, they brought a
22   recommendation that I went outside that recommendation
23   process.  They recommended 25; I went to 26.  It was
24   similar to that sheet we saw a moment ago, just a few
25   thousand off of being at 26, and the high end was like
0083
 1   26.2.  Interest rates were in a positive perspective
 2   at that point, so I stepped out.  Other than that, I
 3   have not stepped out.  I have stayed within the
 4   recommendation of staff.
 5                  CHAIRMAN CLOWE:  I -- I understand
 6   that, but that is not really what I'm looking at.
 7   What I'm really looking at is what the sales estimate
 8   supported.
 9                  MR. GREER:  Yes, sir.
10                  CHAIRMAN CLOWE:  And staff
11   recommendation is there, as I understand it, for your
12   decision.  And supporting a staff recommendation --
13   you know, we heard from Mr. Tirloni earlier what his
14   personal thought was about it, his motivation.  And I
15   haven't commented on that.  I don't think it's
16   appropriate at this time.  But that is your job, as
17   the gatekeeper, to look at the recommendation and say,
18   yes if it's right or no if it's wrong.
19                  MR. GREER:  Yes, sir.
20                  CHAIRMAN CLOWE:  And I understand your
21   comments about the concern about the game and -- and
22   never in the history of Lotto Texas had a jackpot
23   rolled and been held at the same level.  I'm not
24   unresponsive to that.  But I am -- I am concerned
25   about the fact that the jackpot sales estimate said
0084
 1   six and a half.  It's a tough decision.  There is no
 2   question about it.  The recommendation was for eight.
 3   In my mind, I have to say, what about keeping it at
 4   six?  Or seven?  Still half a million short.  What
 5   would your -- what would your explanation be if a
 6   player had bought the ticket and was looking for the
 7   eight million, less tax, and you awarded the check,
 8   and it was based on six and a half.  What would you
 9   say to the player?
10                  MR. GREER:  I would say, we based this
11   on sales, and it was an estimate that we felt that,
12   from a historic perspective, would be, you know, down
13   the road something that we would look at.  And I would
14   just have to say, it was based on sales and --
15                  CHAIRMAN CLOWE:  It wasn't based on
16   sales.
17                  MR. GREER:  That the jackpot amount
18   would be based on sales if they went on the 25-year
19   payment plan.
20                  CHAIRMAN CLOWE:  Okay.  Well, if --
21   that's right.  But if you had a cash winner, you know,
22   if you sold -- if you sold that ticket to me, I would
23   be looking for eight million dollars.  And that's what
24   you said we would pay.
25                  MR. GREER:  If it was a cash winner, it
0085
 1   would be the -- you know, based on the rule of the
 2   percentage of sales that had come forward.  The eight
 3   million would be based on the 25-year payout, with the
 4   interest rates included in the process.  You know,
 5   and, Mr. Chairman, again, my scenario, looking back
 6   now, is, everything that you're asking me or telling
 7   me are things that I've asked or, you know, thought to
 8   myself, and that I need to take a much more micro
 9   approach to this concept.  And I can assure you that
10   that is what I'm going to do in the future.
11                  CHAIRMAN CLOWE:  I understand that.
12   I -- I'm empathetic to that kind of an introspective
13   examination after a problem occurs and a mistake has
14   been made.  But, you know, we are in the public, and
15   we are running the people's business.  And the
16   integrity and the honesty of this Commission, this
17   agency, is of critical importance.
18                  MR. GREER:  I agree.
19                  CHAIRMAN CLOWE:  And I think that's the
20   reason for the deep concern of these Commissioners
21   about this issue.  And I think it's deepened by the
22   fact that it had happened twice prior.  And, you know,
23   you've got -- for the kind of Commissioners we are,
24   appointed and not full-time, and giving up of our own
25   free time, you've got Commissioners around here a lot.
0086
 1   And you probably think we've got our nose in things
 2   that we shouldn't have them in, but it surprises me
 3   that we haven't been made aware of this because Lotto
 4   Texas has been an issue that we've been talking about
 5   a lot.
 6                  Let's -- let's just talk about that for
 7   a minute.  What is the story on Lotto Texas today, in
 8   your opinion?  What -- what is the problem?
 9                  MR. GREER:  It's a jackpot driven game.
10   You know, players respond with their dollars when the
11   jackpot levels get up higher.  Now that Mega Millions
12   has come on board, there's high jackpots there as
13   well, so they have some discretionary aspect of what
14   they're going to do with it.  But historically, as
15   we've examined through this process, the fact that you
16   have to refresh and renew the games is something that
17   the Commissioners addressed -- addressed before by
18   changing the matrix and keeping players' interest
19   fresh and new.  The decline in online interest,
20   specifically in Lotto Texas, is not just in Texas.
21   It's across the board because there are so many other
22   things that we didn't used to have, and -- and a -- a
23   good example of that would be our instant tickets
24   success.  The different price points and things we've
25   had there have been --
0087
 1                  CHAIRMAN CLOWE:  Okay.  Let's don't get
 2   off on that.  Let's stay on Lotto Texas if we can.
 3                  MR. GREER:  Well, I'm -- I'm just
 4   saying, from Lotto Texas perspective, now that
 5   Lotto Texas player that is jackpot driven has other
 6   options, and one of those is instant tickets.  So
 7   it's --
 8                  CHAIRMAN CLOWE:  Do you think that
 9   player is migrating to instant tickets?
10                  MR. GREER:  I -- I have to think that
11   when I look at the comparison to the year before, to
12   this year, and on-line sales are down 178 million, and
13   166 million of that is in Lotto Texas, that that money
14   is either going to Mega Millions -- we figured up it
15   probably would be about 30 percent -- or on the
16   instant side.  So what we've been trying to determine
17   and in -- in going back to the awareness factor of
18   what is taking place, we've -- we've talked about the
19   fact that since last March we've been looking at, what
20   do we do to this game.  Do we change the matrix; do we
21   come back with a rule recommendation.  And what the
22   players are showing through research that we've done
23   is that there is a -- just a moderate acceptance of
24   change in the game, about 50/50.  Some say they like
25   it, and some say they don't.  There is a consensus
0088
 1   that they don't like the bonus ball.  Apparently, when
 2   that entered into the mix, there was a lot of people
 3   that had played their own, you know, six numbers for a
 4   long period of time, and they didn't like that.  So we
 5   lost some people at that juncture.  But the health of
 6   the game was, frankly, where my focus has been -- is
 7   how are we going to fix this.  And in retrospect,
 8   looking at this information that has come to light now
 9   that we've done a full, you know, review of where we
10   are on all the draws, the 223 draws up to this point,
11   and these four occurrences that are outside that
12   boundary, we've done a good job overall of being able
13   to estimate those.  Was it that fifth roll level that,
14   over time, there has been a series of declines that
15   came into that eight million dollar mark.  It started
16   back -- and there is some information I've given you
17   that goes into this more in front of you, but it
18   started back, and like we'd go eight million and it
19   would be a minor discrepancy of maybe a hundred
20   thousand dollars, something like that, in the estimate
21   that would come out over the eight million mark, so to
22   justify it.  And then as time went by, what these
23   numbers show is that at the eight million mark, we
24   weren't at the same place we were the draw before, and
25   we'd never experienced that.  And, you know,
0089
 1   obviously, looking back, if back in October we would
 2   have done a better job of communicating that
 3   information, we wouldn't be in this scenario today.
 4   But we were looking at changing the game.  We wanted
 5   to bring to you -- which we're still discussing and
 6   hoping to do in future Commission meetings -- an idea
 7   of how we can make this game healthy because of the
 8   declining sales.
 9                  CHAIRMAN CLOWE:  Okay.  You took me
10   back to the subject of how the mistake was made from
11   your thoughts about the game.
12                  MR. GREER:  Yes, sir.
13                  CHAIRMAN CLOWE:  And my sense is, what
14   you're telling us is that Lotto Texas is a game that
15   is jackpot driven.  It is somewhat stale to some
16   players.  To other players, they want the original
17   matrix; they don't like the bonus balls.  Other
18   players are being drawn to instant tickets and the
19   Mega Millions.
20                  MR. GREER:  Yes, sir.
21                  CHAIRMAN CLOWE:  The migration is
22   perhaps more substantive than was originally
23   estimated.  And you have been looking for some time at
24   changing the game, trying to rejuvenate it and make it
25   more attractive to the players.
0090
 1                  MR. GREER:  That's true.
 2                  CHAIRMAN CLOWE:  Is that a -- a short
 3   summation of what you said?
 4                  MR. GREER:  Yes.
 5                  CHAIRMAN CLOWE:  What, in your opinion,
 6   has this issue of the advertised jackpot being in
 7   excess of the number that would actually be awarded to
 8   a winner, a cash value ticket, what has that done to
 9   the players' opinion of the integrity of the
10   Commission, the agency, and the trust and competence
11   that a player would have in the game?
12                  MR. GREER:  Based on the fact that it's
13   an estimated amount, that is something that we've --
14   we've focused on, and so far the sales shift has been
15   an increase of three percent, one week over the next,
16   of recent.  The message there to me is that there is a
17   base player out there that there might have been an
18   issue when this came to light a week or so ago,
19   whenever it made the paper.  Sales that day were a
20   little off.  But then when we came to the next
21   juncture and held it at eight and then went up to
22   nine, sales came back.  So players speaking with their
23   dollars are not saying much.  They're -- it's -- it's
24   status quo, I guess you would say.  Certainly, from my
25   perspective and from the agency's perspective, the
0091
 1   severity of the aspects of this, as far as the
 2   integrity of the process, is what bothers me the most.
 3   And that's where focus will be in the future, to
 4   ensure that this doesn't happen again.
 5                  CHAIRMAN CLOWE:  What is the experience
 6   in other states relative to their, what I would call,
 7   domestic on-line game when Mega Millions came in and
 8   when they found themselves with an older domestic game
 9   similar to the situation we're in, in Texas?
10                  MR. GREER:  Similar to what we're
11   dealing with in our state.  The fact that jackpots in
12   Powerball and in Mega Millions have both reached these
13   really high amounts over time, it's been
14   interesting -- and we've seen even within our own
15   state -- that it takes a higher and higher amount to
16   get their attention, and it's the same on Lotto Texas.
17   You know, what -- what would get their attention at
18   20, now it's 50.  What did get their attention at 100,
19   now it's 200.  Other states have gone to -- like
20   California just joining Mega Millions is a good
21   example of that -- the opportunity to give their
22   players these higher jackpot games because the
23   expectation level is there.  And they've seen these
24   huge amounts, so they're excited about being able to
25   embrace that.  But, again, we're not alone.  Other
0092
 1   states have similar declines.  We estimated it would
 2   be about 30 percent when we got into Mega Millions,
 3   there would be a shift in sales.  That the dollars
 4   would still come into the Lottery, but there would be
 5   a shift in sales.  And what has come to light recently
 6   is that we are now on the high 30s, and, again, we
 7   have known this for a while but couldn't come to any
 8   type of conclusion that we felt like we could come to
 9   you and say, we're going to bring you an idea to
10   change this game.  We're going to get rid of the bonus
11   ball and we're going to go to a six of something, and
12   be able to assure you that we're going to bring more
13   revenue into the game, more revenue into the State as
14   a result of that.  The research isn't there to support
15   that.  So it's an industry-wide scenario that in-state
16   games have taken a different light as a result of the
17   multi-state games.
18                  CHAIRMAN CLOWE:  You've heard the
19   discussion about the prize reserve fund and --
20                  MR. GREER:  Yes, sir.
21                  CHAIRMAN CLOWE:  -- are you in
22   agreement with my recollection of what the rules
23   provide for, relative to using that in the first four
24   rolls and not being able to use it after that?  And I
25   think Mr. Tirloni is of the same opinion I am.  Are
0093
 1   you in agreement with that?
 2                  MR. GREER:  Yes, sir.  There was some
 3   discussion about some of the definitions and some of
 4   the vagueness of that.  But as a whole, I would agree
 5   with that.
 6                  CHAIRMAN CLOWE:  What is the prize
 7   reserve fund currently?
 8                  MR. GREER:  About 13.8 million, getting
 9   close to the 14 million mark.  And because of the fact
10   that we've had so many rolls over a period of time --
11   this last roll was 30 -- there was 33 rolls -- the
12   time before that it was 29 rolls -- we have seen a
13   scenario there that the jackpot reserve fund continues
14   in Lotto Texas to grow because we're not yet at those
15   lower levels.  One of the reasons I know, initially,
16   when the matrix change came about the first time was
17   so that we could give players higher jackpots.  We did
18   that by the 145 million that came about, but it's just
19   taken so long to get there, so the reserve fund is a
20   significant amount.  Since I've been here, we haven't
21   utilized it because we've never been hit under the
22   four, five, six, seven mark, basically.  There were
23   some times in some of those initial rolls that we did,
24   maybe four, six, eight, ten, you know, back maybe in
25   2003.  The last three roll cycles have all been four,
0094
 1   five, six, seven, and then the estimation was just
 2   given in reference to eight because it was a rolling
 3   jackpot game and there was a fear as to how players
 4   would perceive the fact that we held.  In retrospect,
 5   that wasn't good, but I'm telling you the history.
 6                  CHAIRMAN CLOWE:  What is your feeling
 7   about the use of the prize reserve fund beyond the
 8   first four rolls?
 9                  MR. GREER:  Well, I reviewed the
10   history -- in looking at the history of the game and
11   reviewing the history of the game back to the initial
12   aspects of it, and certainly noted that, from the
13   Executive Director's discretionary perspective in the
14   past, that it was -- the reserve fund was utilized
15   pretty liberally.  By that, I mean, they might bring
16   an amount and the Executive Director may go way over
17   because it was a marketing thing.  Let's -- let's say
18   47 million, let's go to 50.  You know, 50 is a round
19   number.  So there was discretion that was given to the
20   Executive Director in those prior scenarios that, from
21   a marketing perspective, potentially could have helped
22   the revenue, because there is a -- a clear picture,
23   based on the history of what we've seen of how players
24   respond to certain amounts.  And it would be my wish,
25   which we talked about back in that March meeting, that
0095
 1   we looked at the possibility of maybe rolling the
 2   amount further out from four maybe to six or eight
 3   draws to give us the ability to continue to see the
 4   game in a healthy state.
 5                  CHAIRMAN CLOWE:  What role do you think
 6   advertising plays in this game?
 7                  MR. GREER:  No question it -- it plays
 8   a role, starting with the billboards.  I think, you
 9   know -- and that was one of the reasons we had talked
10   about the possibility of putting a decimal point,
11   maybe, up there, as we looked at different options
12   down the road, because so many people rely on the
13   billboard.  I've heard scores of people who are
14   driving to work, and they couldn't remember if it got
15   hit or not, so they, you know, rely on the billboard.
16   That's a huge element of what we utilized on that, as
17   well as some of the other campaigns in the past.  So
18   advertising does play a role.  When -- to -- to give
19   you an idea -- when the matrix change was done, we
20   spent about 12 million dollars on a new ad campaign.
21   I think last year was around 3.9 million that we spent
22   specifically on Lotto Texas to keep the interest level
23   up and keep players aware of what jackpot amounts
24   were.  Radio reads are very successful for us, letting
25   people know what goes on there.
0096
 1                  We've touched on an element to try to
 2   keep an awareness aspect of -- of the fact that we do
 3   have winners in the game, because one of the
 4   frustrating aspects from my perspective is because
 5   these rolls have been so long, you know, 29 or 30
 6   rolls, that -- that many -- that's six or eight
 7   months, maybe, between the time that we had a winner
 8   until the next winner.  And in any scenario, when
 9   there are more winners, people are reminded of the
10   fact that it would be a fun thing for them to go do.
11   So we talked about, in our most recent radio read, how
12   many winning tickets were sold in the prior draw.
13   Like for the last draw it was 38,910, for example.
14   And we'll say, you know, 38,910 winning tickets were
15   sold, were you one of those.  Advertising plays a
16   critical role in keeping Lotto Texas in people's mind.
17                  CHAIRMAN CLOWE:  What is our current
18   advertising budget?
19                  MR. GREER:  It's 33 million dollars,
20   and it's -- it's varied in the way that we utilize it,
21   but it's primarily in the element of TV, radio, and
22   billboards that we spend the majority of that money.
23                  CHAIRMAN CLOWE:  How much of that would
24   you say is allotted to this game?
25                  MR. GREER:  Well, there is -- there was
0097
 1   two aspects when we looked at this question recently.
 2   One was the figure I gave you earlier, around 3.9
 3   million specifically on Lotto Texas.  But then there
 4   is another category of that money that I just
 5   mentioned, of about 8.8 million dollars, that we've
 6   done a series of things about winner awareness, that
 7   Lotto Texas is a part of that winner awareness
 8   campaign.  So it's 3.9 million specifically, and then
 9   it's been a part of mentioning the overall aspect of
10   winners in a -- in another vein of 8.8 million.
11                  CHAIRMAN CLOWE:  Commissioner Olvera,
12   do you have questions?
13                  COMMISSIONER OLVERA:  Yes,
14   Mr. Chairman.  I've got some -- well, both comments
15   and questions, Mr. Greer.  And I -- I don't want to
16   reiterate some of the issues we've already discussed,
17   but -- and I know we've discussed this for the past
18   week and a half or so.
19                  Mr. Chairman, when this -- this issue
20   first came to my attention approximately a week and a
21   half ago, the first thing I did was -- was request the
22   estimation sheets that were relied on in coming to
23   this decision.  And I received a package which,
24   basically, had the estimation sheets for the four
25   rolls preceding the June 3rd date.  And just some of
0098
 1   the comments that I have made to both staff and Mr.
 2   Greer and I want to reiterate today is that, just
 3   using basic common sense, the advertised amount just
 4   does not coincide with the very precise and accurate
 5   data that is -- is evident on these sheets.  And let
 6   me go back to the May 27th sheet.  I mean, once --
 7   there, we have sales estimates at the four million
 8   dollar range, and they're -- they're recommending an
 9   advertised amount of six million.  We go to the June
10   1st date, and we've got sale figures of 5 point -- in
11   the 5.3 million dollar range, and once again, there,
12   they're -- they're recommending an advertised amount
13   of seven million.  And then we get back to the issue
14   of the date -- the date at issue, and once again,
15   we've got the 6.5 million dollar range and -- and the
16   eight million dollar estimate.  So it -- it's not --
17   this -- this issue, in terms of discrepancy, is not
18   just isolated to the October 2004 date or the February
19   2005 date.  We've got staff making recommendations and
20   the Executive Director okaying those recommendations
21   on numerous occasions, at least it appears to me from
22   these estimation sheets.  And -- and I'm not sure why,
23   number one, staff is making that recommendation to
24   you, and -- and, I guess, the global explanation has
25   been that, well, we've automatically rolled in million
0099
 1   dollar increments.  And I think that's the
 2   explanation.  But as Mr. -- as the -- as the Chairman
 3   has pointed out, I -- I don't think that's
 4   satisfactory, and I don't think it's satisfactory for
 5   the Executive Director to sign off on that.
 6                  So is there a question there?  I guess
 7   the question is, number one, I think there should be a
 8   policy or don't you think there should be a policy
 9   that the staff can only recommend what is evidenced in
10   their calculations?  And I would recommend that that
11   only be on the conservative amount on the low end.
12   Don't you think that's accurate?  Or -- or don't you
13   think that -- that would be prudent, Mr. Greer?
14                  MR. GREER:  Yes, sir.  That's certainly
15   one of the options that we're looking at.  And in the
16   sheet that we showed earlier, that's exactly what we
17   embraced.  The -- the earlier amounts --
18                  COMMISSIONER OLVERA:  And you're --
19   you're referring to the now new sheet?
20                  MR. GREER:  Yes.  We -- one of the
21   things that we've done to create a -- an easier flow
22   of information and give an opportunity for the
23   different departments to have varying opinions
24   expressed, when it comes to the Executive Director, is
25   to lay out a new sheet.  The -- the prior scenario,
0100
 1   if -- if I may mention, we looked at a -- a situation
 2   there where they were covered by the reserve fund.
 3   And in looking back and in retrospect, we may need to
 4   relook at the way that we roll the jackpots out so
 5   that when we're coming out of the fourth roll, going
 6   into the fifth roll, that it's already there.  And by
 7   that I'm saying, do you hold at four until you get to
 8   four, and then you go to five.  So is it four, five,
 9   six?  Is it four, five, five?  Is it four, four, five,
10   five, before you come out of the fourth roll and go
11   into the next roll.  That would certainly be
12   something, based on your comments, that we would
13   embrace so that we're sure that when we move out of
14   the prize reserve fund element, that in answer to
15   earlier questions, you can look the player in the eye
16   and say, this is the amount you're going to get.
17                  COMMISSIONER OLVERA:  And -- and I
18   realize there has been a balance, it seems, in -- in
19   terms of marketing.  And I understand that, that
20   these -- these jackpots -- the -- these amounts are
21   jackpot driven, and that we're trying to get sales up,
22   and -- and there is no -- and I think everybody is
23   working to make the most out of what we have and then
24   get the most dollars into the Lottery.  But on the
25   same token, there is nothing more important to this
0101
 1   entire business than the integrity of the game and I,
 2   for one, would hate to have to explain to a player
 3   that they got less than the advertised amount.  If we
 4   advertise X, I think that's what we have to be willing
 5   to pay the players if they win.  And if there is not
 6   an integrity in the game or the confidence that that
 7   will happen, well, I -- I think we're all wasting our
 8   time because players are not going to play.
 9                  So back to this new sheet.  If -- if --
10   there needs to be some kind of method that if there is
11   a calculation of sales of whatever that is and there
12   is an estimate -- the directors, whether it's
13   Mr. Tirloni or Mr. -- or I don't know who the director
14   of finance is going to be, if it's -- it's -- now that
15   Mr. Deviney is no longer going to be signing this,
16   but, you know, if there is going to be some deviation
17   from the numbers that are -- that are calculated,
18   there has to be a very specific reason, and there have
19   to be some very hard questions asked.  It cannot be a
20   system where you're just signing off on it.
21                  MR. GREER:  I agree.  And one other
22   element to that that would be helpful would be
23   comments, you know, things that from a -- a macro
24   perspective, i.e., the interest rates, things that are
25   out there, things that we're watching -- because,
0102
 1   really, when you're setting these, it's -- it's a
 2   moving target.  And by that I mean, you're five days
 3   out and you make the best estimate that you can to get
 4   into that bull's-eye, but interest rates may shift or
 5   sales may shift, based on a hurricane, or who knows,
 6   and you've got to be able to be in an aggressive
 7   posture to be able to be proactive on that.  But you
 8   have to, in your estimate, from my perspective, look
 9   at that bottom number that you're mentioning, and
10   that's what we're going to base it on in the future.
11                  COMMISSIONER OLVERA:  Well, you know,
12   you asked the question whether we hold on X or not.  I
13   mean, if -- if I see a low end number of 6.5, I think
14   it would be my policy to advertise for six, to answer
15   your question.
16                  MR. GREER:  I agree.  And that's
17   certainly something that we're going to embrace in the
18   future.
19                  CHAIRMAN CLOWE:  Well, I think it --
20   the point that Commissioner Olvera is making is -- is
21   very valid.  And I think it -- it's, you know, of
22   grave concern to all three Commissioners.  And it goes
23   to truth in advertising and the protection of the
24   consumer.  When you tell someone in business that
25   you're going to do something, you either do it or you
0103
 1   don't stay in business very long.  And I think the
 2   Commissioners have gotten an education here this
 3   morning about this process.  And I will tell you that
 4   I understand the team aspect and the collegial working
 5   together.  I understand, I think, very clearly the
 6   accuracy of the estimates.  I -- I mean no disrespect
 7   to you, Mr. Tirloni, in -- in saying that the answer
 8   you gave about your recommendation and the reasons why
 9   you did it were for the good of the game, but I
10   disagree with that reasoning.  And I see you, Reagan,
11   as the chief.  And I understand when members of the
12   team come to the chief and say, we need to do this,
13   and this will be good in the long run, and -- and
14   that's where the chief has to exercise self-discipline
15   and has to say, I am the decision maker, and we're
16   going to do the right thing.  In my opinion, we didn't
17   do the right thing in these four instances.  We did
18   the wrong thing.  And that's a real concern, a real
19   concern.
20                  MR. GREER:  I agree.
21                  CHAIRMAN CLOWE:  Anything further you
22   want to add, Reagan?
23                  MR. GREER:  Yes, sir.  Just in review,
24   my responsibility level certainly in this vein and in
25   all veins is something that I take very seriously, and
0104
 1   I have equal concern, as you do, as to the occurrence
 2   that took place.  There is a number of things that
 3   we're going to do to be sure that this doesn't happen,
 4   and just briefly to touch on those.  It will be the
 5   sheet reformatting that we've done to make it easier
 6   to understand and to give an opportunity for any
 7   discrepancy to come forward with comments in each
 8   division.  It would be the scenario that -- that we've
 9   discussed on being most conservative possible, by
10   that, looking at that bottom number.  And that sheet
11   that was up there a minute ago was a good example of
12   the last roll we went through.  It was 13.9 and some
13   change, and the -- the high end was 14.  We stayed at
14   13 because of the moving target element of that.
15                  Another aspect of what I see in the
16   future is us coming to you in future Commission
17   meetings, next month, and trying to come to some
18   conclusion as a staff and bring to you a
19   recommendation on what can we do about the game.
20   Because this, as we've discussed, was a result of
21   declining sales and declining interest, and we've been
22   frustrated with the length of time that it has taken,
23   but until I can look you in the eye and say, if we do
24   this, it's going to have this result, we're not to
25   that juncture yet.  It might be the recommendation of
0105
 1   doing something with the rule that would extend the
 2   amount of the rolls or, you know, exchange that for
 3   some elements of what possibly might change the game.
 4                  So we are embracing solutions
 5   immediately, to be sure that this type thing doesn't
 6   happen again.  I reinforce the fact that there was 223
 7   draws.  You take 20 out of those because they were
 8   guaranteed.  We identified these.  I apologize to you
 9   for the fact that we didn't get this to you sooner,
10   but in doing the investigation, this information came
11   to light, and that's what brings it all here today.
12   And we put it all out there.  We've -- we've discussed
13   the numbers.  I would be glad to get you anything else
14   that you may need for it and just want to give you a
15   commitment, from my perspective, that I'm going to
16   take a much clearer, more micro approach to this
17   process in the future and try to ensure to you that
18   it's not going to happen again through all the
19   information that we get and staff involvement in the
20   process.
21                  CHAIRMAN CLOWE:  Commissioners, in my
22   opinion, we have explored this matter to the extent
23   that the item is published in the agenda.
24                  COMMISSIONER COX:  Mr. Chairman, if I
25   could ask one more question.
0106
 1                  CHAIRMAN CLOWE:  Certainly.
 2                  COMMISSIONER COX:  And if this is not
 3   within the agenda, well, I know that you and
 4   Ms. Kiplin will pull me back.
 5                  Ms. Kiplin, when did you learn that we
 6   were advertising jackpots that were not supported?
 7                  MS. KIPLIN:  I received a forwarded
 8   e-mail from the Chairman Monday night.
 9                  COMMISSIONER COX:  So you did not know.
10   You're the chief compliance officer of this
11   organization, and you did not know what had been known
12   in this agency for 15 months, that we were about to
13   have, and, in fact, in October, did have a problem
14   with advertising a jackpot that our sales would not
15   support?
16                  MS. KIPLIN:  I did not know about it in
17   October, was copied on the -- on the memo --
18   memorandum Mr. Tirloni sent, I believe, Mr. Greer and
19   Mr. Grief, in March of '03, and my understanding was
20   the rulemaking were to -- was to occur.  Was not aware
21   of any specific actual incidents.
22                  COMMISSIONER COX:  Well, Reagan, given
23   that, I think your program falls significantly short
24   of what I expect.
25                  MR. GREER:  Okay.
0107
 1                  COMMISSIONER COX:  I heard you say that
 2   you're not going to come to the Commission until you
 3   have recommendations.  I think you need to come to the
 4   Commission at the first indication that there is a
 5   problem.  Even further, the first indication that
 6   there might be a problem.  I think if you had
 7   communicated this back in March or October to any one
 8   of us, we would have together focused in on the fact
 9   that we had something we needed to deal with, and we
10   wouldn't have this.  I further think that you need to
11   commit to us that if anything like this occurs again,
12   you'll communicate it to counsel.
13                  MR. GREER:  Absolutely.
14                  COMMISSIONER COX:  Because it is her
15   job to keep -- we look to her to tell us that this
16   agency is in compliance -- compliance with the laws
17   and regulations.  And if she doesn't know that we have
18   this kind of risk, or that we're, in fact, not in
19   compliance, she can't help you.
20                  MR. GREER:  I agree.
21                  COMMISSIONER COX:  Mr. Chairman.
22                  CHAIRMAN CLOWE:  I think it goes
23   without saying the Commission doesn't want a jackpot
24   advertised that sales don't indicate it would be
25   supported.
0108
 1                  COMMISSIONER COX:  Amen.
 2                  CHAIRMAN CLOWE:  That was an amen.
 3                  COMMISSIONER OLVERA:  That was an amen.
 4   Well, if -- that brings up the other issue to counsel.
 5   And -- and hopefully this -- this will not occur if
 6   our policies are put in place about being conservative
 7   and -- and engaging in the sales -- sales estimates
 8   with the -- the advertised estimate, but on the same
 9   token, I -- I think there should be some discussion
10   and/or recommendation from staff and counsel on
11   perhaps revising the current rules in the event there
12   is a deficiency in a roll after the four -- after the
13   initial four -- four rolls, wherein we would not have
14   the -- it's my understanding that this time anything
15   beyond the first four rolls, we as the Commission
16   would not have the authority to perhaps make up that
17   deficiency.
18                  CHAIRMAN CLOWE:  Under the present
19   rules.
20                  COMMISSIONER OLVERA:  Under the present
21   rules.
22                  COMMISSIONER COX:  Mr. Chairman,
23   further to what Commissioner Olvera said.  In January,
24   we had discussion of the rules.  And I recommended at
25   that time that the rule be rewritten so that there was
0109
 1   no discretion on the part of the Executive Director
 2   and that the rule was totally transparent and that we
 3   put on the Web site the amount of sales and the
 4   interest rate factor so that any player could figure
 5   out what first prize is.  And Chairman Clowe and
 6   Commissioner Olvera concurred that that was an
 7   appropriate thing.  And it is now June, and we haven't
 8   heard another word.
 9                  MR. GREER:  The explanation for that
10   would be the fact that we intended to bring you a -- a
11   proposal for a matrix change, and the information has
12   been inconclusive.  As part of that process, the rule
13   change was going to be included.
14                  COMMISSIONER COX:  I don't think that
15   is satisfactory.  The fact that you had the agenda of
16   including the matrix change with the rule change that
17   we -- we requested is not consistent.  We tell you
18   what we want, and you respond to that.  And six months
19   is not timely.
20                  CHAIRMAN CLOWE:  And -- and,
21   Commissioners, I don't think we've concluded on this
22   subject.  I -- I simply think we have taken this
23   discussion as far as the agenda allows at this time.
24   And I would like to see this on our next month's
25   meeting and the notice broadened so that the
0110
 1   Commission would be in a position to take some
 2   actions.  And I will consult with counsel on how to
 3   make that notice broad enough that we can go beyond,
 4   maybe, where we are today, if that's all right with
 5   you all.
 6                  COMMISSIONER COX:  Absolutely.
 7                  CHAIRMAN CLOWE:  Have you all asked all
 8   the questions that you want to ask?
 9                  COMMISSIONER OLVERA:  Yes, sir.
10                  CHAIRMAN CLOWE:  Reagan, have you got
11   anything further?
12                  MR. GREER:  No, sir.
13                  CHAIRMAN CLOWE:  We have one public
14   witness, Ms. Dawn Nettles, who wished to -- wished to
15   make a comment on this subject.
16                  Ms. Nettles, will you come forward.
17                  MS. NETTLES:  Good morning,
18   Commissioners.
19                  CHAIRMAN CLOWE:  Good morning.
20                  MS. NETTLES:  For the record, my name
21   is Dawn Nettles.  I'm with the Lotto Report out of
22   Dallas.  And I did want to make several remarks
23   pertaining to what I've heard this morning.  The first
24   thing I want to comment on is, staff has done a real
25   good job of explaining estimations, but they've done
0111
 1   it in -- in a manner that I feel like was a little
 2   complicated.  And I would like to phrase it for you
 3   all in layman's terms so you can understand.
 4                  Estimating jackpots should be a
 5   two-phase deal.  Okay?  First of all, they've got to
 6   know how much money they have for the jackpot winner.
 7   So they add up sales, and they take -- instead of
 8   saying that they -- the prize pool is 52 percent and
 9   the winner's share is 78 percent, it is so much
10   simpler to simply say that the jackpot winner has
11   39.104 percent of total sales.  So they add up sales
12   for each draw, and then they have to estimate what
13   sales will be for the draw in question.  Okay?  Then
14   the winner is entitled to 39.104 percent of that.
15   Okay?  Now, they have -- they know how much money they
16   have for the jackpot winner.  Phase two of it is they
17   have to say, how much money will that give us a return
18   of.  Okay?  That's the amount that they're going to
19   advertise.  It's really not complicated like
20   they've -- they've -- they've gone through the process
21   of showing you because -- and that's where the factor
22   comes in because they take that factor, and they
23   multiply it times that 39.104 percent of sales, and
24   that's about how much they'll get a return of, based
25   on the factor that day.  So it's really not
0112
 1   complicated at all.  They know how much they have, for
 2   sure, and they have to know how much they can
 3   advertise it, so they simply multiply the numbers.
 4                  The reason -- you all asked at one
 5   point why did they write it into the rule that they
 6   would guarantee the first four draws in a row.  And I
 7   felt like that was a very good question, and it's one
 8   that we've covered up here many times before,
 9   especially back in 2001, that was the nine-month rule
10   adoption -- or this was the '03 rule.  The reason that
11   they wrote it into the rule that they were going to
12   guarantee the first four draws in a roll is simply
13   because they did not have enough money to fund the
14   amount they were advertising.  And that's how come it
15   was written in.  Okay?  The Texas Lottery has known
16   since probably 2000 -- the year 2000 that they didn't
17   have enough to fund four million.  And I think that
18   the simple solution for this Commission to do is to
19   not worry about advertising four million and keeping
20   it four million.  Why not just lower it to two and
21   tell the truth?  That's all you have enough to fund.
22   You know, start the jackpots out at two.  When the
23   Lottery first started, that's how they -- that's how
24   they -- that's how they started out.  They would give
25   the people a game that they want to play and will play
0113
 1   and will support.  If it's not with astronomical odds,
 2   your sales will go up.
 3                  Then you all asked a question, well,
 4   what about the indirect and the direct prize category
 5   in the rule.  And I really was not satisfied with that
 6   answer at all.  The indirect prize category is the
 7   monies that have carried forward, that 39.104 percent
 8   of sales.  The direct category is the money coming
 9   from just that draw.  Okay?  Did that answer your
10   question, Commissioner Cox?  Or whichever one of you
11   asked the question?  Indirect means that all the money
12   in the indirect prize pool is monies that have carried
13   forward from the first, the second, the third, fourth,
14   fifth draw.  That's the indirect prize category.  All
15   right?  Then the direct prize category is just that
16   percentage from that draw.  You add those two, and
17   that's how much that winner has coming.  Okay?  Or
18   that's how much he really should get.  Okay?
19                  Y'all are going to love me on this one.
20   You also asked a question while ago, how many
21   instances has there been for overestimating jackpots.
22   And I believe they told you three or four.  And I have
23   a completely different answer.  The answer to that is
24   to the tune of 100 million dollars in overpayments to
25   winners.  And that is the cheated winners issue that
0114
 1   I've been harping about for years.  Okay?  It was not
 2   in the rule to pay the -- to guarantee any advertised
 3   jackpot amount.  Yet they have taken the discretionary
 4   ability to pull from reserve to fund all that money,
 5   and I even remember, Commissioner Cox, back before
 6   they adopted the new rule, you said, well, I sure will
 7   be glad when we can quit pulling from reserve to fund
 8   these winners.  Well, it never was in the rule.  I
 9   have a transcript from the March -- from the May 30th,
10   2001, Commission meeting.  And Kim Kiplin says, just
11   one sentence:  And there is an additional definition
12   of advertised jackpots in this rulemaking that did not
13   and does not exist today in subchapter D rulemaking.
14   It was never in the rule to pay the amount they
15   advertised.  Yet this Commission wanted to
16   overadvertise and then guarantee it.  And that's how
17   those winners got cheated, the ones that I complain
18   about, is because they were paid the amount, the
19   advertised amount, and even that's questionable,
20   but -- at any rate.  So they kept and transferred some
21   of their prize winnings into reserve.  And there is no
22   direction given, to my knowledge, on how reserve money
23   is supposed to be returned to the people.  And that
24   money is the players' money.  It's their share of
25   sales.
0115
 1                  I -- I got tickled at Robert, and I --
 2   I understood what he said when you said, why did you
 3   go on and roll to eight million.  And he said that it
 4   was because he felt it was in the best interests of
 5   the game.  I think of all the things here, this is the
 6   only good news that I have because, to me, this showed
 7   the Commission that the players are going to buy the
 8   Lottery tickets no matter what the jackpot is.  They
 9   had the same sales.  They did not have a decline in
10   sales -- just a hair, but it's not enough to say there
11   was a decline.  The same players bought the same
12   tickets for both eight million dollar jackpots, and
13   that's what Robert said when he said, I have
14   hindsight, you know, what I know now.  What he saw was
15   that there was no decline, and there won't be a
16   decline in sales if you change your starting jackpot
17   to two million either.
18                  The factor?  Wow, that is a real touchy
19   subject with me, but, Commissioner Cox, you just took
20   care of that while ago.  That factor needs to be
21   released.  Even though that may not be -- if somebody
22   wins, that may not be the factor at the time they win,
23   that number is the key to determining the cost and to
24   see if that advertised jackpot amount is -- is close
25   to their...
0116
 1                  I was also real disturbed in some of
 2   the news accounts where I read that the Commission
 3   said -- was asked, if there was a winner for that
 4   eight million, what would the Commission do.  And the
 5   answer was, they would take money from reserve to fund
 6   it.  That's a no-no.  They couldn't do that, which
 7   we've heard now today.
 8                  My take on the reason that they went on
 9   and rolled from seven to eight is because they knew
10   there weren't going to be a winner.  There would be no
11   winners for the game that we have.  There hasn't been,
12   and there is not going to be.  The coverage is not
13   good enough.  It -- it just won't happen.
14                  You all said that this is the first
15   time you've heard of this, and clearly that's not true
16   because I have mentioned a number of times up here
17   when I testified that nowadays you do not even have
18   enough money to fund the amount you're advertising,
19   that sales are so bad and have declined so badly with
20   this game.  So this is something I've been complaining
21   about for a long time.  Of course, I've been trying to
22   get you to change the game.
23                  Then, a statement made up here is that
24   this is game fatigue, and all the states have
25   encountered this problem.  Well, sir, the states have
0117
 1   all encountered this problem because they've all
 2   changed their games, and the people aren't supporting
 3   their changes.  It's not game fatigue.  We just want
 4   fair games.  And the people are speaking with their
 5   dollars.  Give us the games that we want.
 6                  That's why the lotteries are losing, is
 7   because they want to make more money so they increase
 8   the odds of the games to get those rolls, but we've
 9   seen 33 draws in a roll and they've only made, what,
10   66 million?  I forget.  Okay?  A year ago it was 145
11   million and 33 draws.  They lost 100 million dollars
12   in that 33 draws, compared to the same time last year.
13                  And I think that's all.  I just want to
14   conclude by saying that we don't need any guaranteed
15   advertised jackpots.  If you guarantee prizes, the
16   people do not get their money back.  And just since
17   May of '03, that reserve fund is 8.6 million.  That's
18   the players' money.  It belongs to the people of
19   Texas.  It does not belong to the Texas Lottery
20   Commission.  It does not belong for anybody to make
21   any kind of decision on how to spend that money.  It
22   belongs to the people.  And if we had pari-mutuel
23   payouts, we could get our share of sales.  They --
24   they come up here -- every month I hear them say, we
25   return 52 percent to the players.  No, they don't.
0118
 1   The players' percentage of sales doesn't even equal a
 2   hundred percent.  It only equals 98 because they keep
 3   two percent in reserve.  And the sales are so bad now
 4   that what you do have allocated from the three and
 5   five dollar prizes sometimes is falling short, and it
 6   has to get on up there.  But still they come out every
 7   draw, and that's an over-allocation, for the most
 8   part.
 9                  I would like to see change up here.
10   We -- we need to cover.  We have -- we have overpaid
11   players to cover the advertised amount when it wasn't
12   even in the rule.  We have a -- a -- a March 30th,
13   2000, memo that has everything to do with the cheated
14   winners, where the Commission is asking the Executive
15   Director for permission to pay according to the rule,
16   something that this Commission has denied any
17   wrongdoing on.  And -- and we've got people out there
18   that did not receive all that they rightfully won, and
19   you all have refused to pay them.  And some are here
20   now.  And -- and they -- and -- and they -- it's not
21   right to do this to the people.  You've overpaid by a
22   hundred million and cheated others out of three.  It's
23   wrong.  I'm sorry.  Thank you for listening to me.
24                  CHAIRMAN CLOWE:  Thank you,
25   Ms. Nettles.
0119
 1                  While we're on on-line games, under
 2   item number eight:  Report, possible discussion and/or
 3   action on the lottery terminal functionality,
 4   including the Quick Pick feature, Michael, will you
 5   come up, and I think it would be of interest to the
 6   Commissioners, particularly about this stoppage of
 7   play on Quick -- Pick 3.  And I am under the
 8   impression that that subject is appropriately noticed
 9   under this item agenda.  I think the Commissioners
10   would like to hear about that.
11                  MR. ANGER:  Yes, sir.  That's my
12   understanding as well.  For the record, my name is
13   Michael Anger.  I'm the Lottery operations director.
14   Good morning, Commissioners.
15                  CHAIRMAN CLOWE:  Good morning.
16                  MR. ANGER:  With regard to the -- the
17   matter that you are referencing, on the afternoon of
18   Thursday, June 16, GTECH contacted -- GTECH the
19   Lottery operator contacted Commission staff to notify
20   the agency that GTECH had identified a computer code
21   problem affecting generation of Quick Pick tickets for
22   the Pick 3 game.  Shortly after GTECH informed the
23   Lottery of the issue, and pending resolution of the
24   code error, the Commission directed GTECH to suspend
25   sales for the Pick 3 game.  Sales were suspended at
0120
 1   approximately 6:16 last Thursday evening.  The Lottery
 2   operator prepared, tested, and implemented software
 3   changes to the terminal computer code to correct the
 4   issue that they had identified in the report to the
 5   agency.  These changes were implemented through a
 6   broadcast distribution to the terminals after on-line
 7   ticket sales ceased at midnight on that evening.  When
 8   terminal sales resumed for on-line games at 6:00 a.m.
 9   on Friday, June 17th, Pick 3 sales resumed as well.
10   In short, sales were suspended that evening from 6:16
11   in the evening up until the draw break for the Pick 3
12   game.  And when sales would have normally resumed for
13   the Pick 3 game, they stayed down and we were not
14   selling up until midnight, when we generally see sales
15   for on-line games.
16                  As a result of that development, agency
17   staff has requested additional analysis as follows:
18   The agency has reasserted its interest in GTECH
19   continuing with planned third-party certification of
20   all the Quick Pick functionality on their terminals
21   related to all Texas on-line games.  This request was
22   made by the agency as a follow-up to GTECH's internal
23   testing process that they used to identify the
24   issue -- that they used in identifying the issue with
25   the Pick 3 game.
0121
 1                  GTECH has confirmed that they have
 2   entered into an agreement with Gaming Laboratories
 3   Incorporated to conduct third party testing and
 4   certification for all Texas Lottery on-line games in
 5   accordance with this request.
 6                  Additionally, agency staff has
 7   requested that GTECH engage an independent third party
 8   to complete their thorough review of this matter.
 9   GTECH agreed and contacted Deloitte and Touche, who
10   currently conducts reviews of GTECH's compliance with
11   the Lottery operator contract.
12                  The internal audit division at the
13   agency and other agency representatives are currently
14   in discussions with Deloitte and Touche regarding the
15   full scope of services to be performed, including a
16   thorough review of the matter involving the Pick 3
17   game and a comprehensive review of the Quick Pick
18   functionality on the terminals.
19                  Finally, the agency has requested that
20   Doctor Randy Eubank, the statistician who does
21   consulting services for the agency, conduct a review
22   of the Pick 3 matter and evaluate the statistical
23   impact related to the computer code problem identified
24   and later remedied by GTECH.
25                  I anticipate with the following actions
0122
 1   that are taking place that we'll be able to report to
 2   you more fully on in the future, Commissioners.  And I
 3   would be happy to receive any feedback that you have
 4   or any -- any recommendations that you have with
 5   regard to follow-up on this matter.
 6                  CHAIRMAN CLOWE:  Commissioners, do you
 7   have any questions?
 8                  COMMISSIONER COX:  Yes.
 9                  CHAIRMAN CLOWE:  Please go ahead.
10                  COMMISSIONER COX:  Michael, could you
11   bring into sharp focus for me what Gaming Labs is
12   doing and what Deloitte is doing?
13                  MR. ANGER:  Yes, sir.  And -- and let
14   me take a step back.  I -- I mentioned that GTECH does
15   a certification process.  I understand that they have
16   an 11-point internal process that they've identified
17   for conducting statistical analysis of the
18   functionality of the Quick Pick feature.  And that is
19   an independent testing of each of the games.  And that
20   has to do with the way those tickets are generated.
21   So they conduct that analysis and they certify that
22   the game is operating properly.  As a part of that
23   certification process, they identified the issue with
24   the Pick 3 game and reported that to us.
25                  We had had prior conversations with
0123
 1   GTECH, asking that they update and -- and recertify
 2   the Quick Pick functionality on their terminals for
 3   all Texas on-line games.  And then in addition to
 4   that, we had requested that they also send data to a
 5   third party company to conduct an analysis.  So,
 6   essentially, Gaming Laboratories Incorporated, GLI,
 7   would take data from GTECH, and they would conduct
 8   their own separate statistical analysis to assess the
 9   randomness and how those Quick Picks are generated.
10                  With regard to Deloitte and Touche,
11   we've asked that a full review be conducted of the
12   matter with regard to what information was available
13   when, how long had this condition existed, and -- and
14   conduct a review on the GTECH side with regard to this
15   matter.
16                  COMMISSIONER COX:  Who knew what, and
17   when did they know it?
18                  MR. ANGER:  Yes, sir.
19                  COMMISSIONER COX:  I have no doubt that
20   Deloitte would be qualified to do an investigation
21   like that.  What do we know that assures us that
22   Gaming Laboratories is qualified to do the work that
23   they're being retained to do?
24                  MR. ANGER:  We have not conducted an
25   independent review of Gaming Laboratories with regard
0124
 1   to that.  I -- my understanding is that they are a
 2   company who does a large number of certifications,
 3   primarily in the casino industry with regard to slot
 4   machine functionality, random number generation,
 5   and -- and probability studies.  So they are a company
 6   with -- with a well-documented history in -- in this
 7   type of analysis.  Having said that, the agency
 8   employs a vendor to conduct its own statistical
 9   consulting services.  And I would anticipate that if
10   anything is performed by GLI -- and we've also
11   requested a copy of their testing processes and what
12   testing that they would put this information through
13   so that we can provide that to Doctor Randy Eubank and
14   have a -- an independent assessment from a separate
15   vendor as well --
16                  COMMISSIONER COX:  So we're going to
17   look at their credentials?
18                  MR. ANGER:  Yes, sir.
19                  COMMISSIONER COX:  And we're going to
20   let Doctor Eubank look at what they've done.  So it
21   sounds like you've got that pretty well covered.
22   Thank you.
23                  COMMISSIONER OLVERA:  No questions.
24                  CHAIRMAN CLOWE:  Michael, what is your
25   sense of the problem, at this point in time in your
0125
 1   investigation?
 2                  MR. ANGER:  As far as the specifics
 3   with regard to the matter?
 4                  CHAIRMAN CLOWE:  Do you have any
 5   preliminary indication you can give us or anything at
 6   this point?
 7                  MR. ANGER:  I -- I have a preliminary
 8   understanding, sir, and I'm not sure -- I haven't
 9   verified those facts, so I'll -- I'll qualify my
10   statements by saying that.  But my understanding --
11                  CHAIRMAN CLOWE:  You probably -- if you
12   haven't verified your facts, I -- I really don't want
13   speculation --
14                  MR. ANGER:  Yes, sir.
15                  CHAIRMAN CLOWE:  -- if you don't know.
16   Has there been any damage that you're aware of to any
17   players of the game?
18                  MR. ANGER:  No, sir, I don't believe
19   so.  We have asked that -- that Randy Eubank, as a
20   part of his process, to review that and give us an
21   independent response on that matter.  But my
22   understanding of the matter is that, no, there was no
23   harm to any player.
24                  CHAIRMAN CLOWE:  And how long was the
25   game down totally?
0126
 1                  MR. ANGER:  It would have been down
 2   from 6:16 p.m. up until draw break for the game that
 3   night, basically, Thursday night, sir.  But 6:16 p.m.
 4   up until midnight, we would not have had sales during
 5   the draw break period, which is traditional when we
 6   bring the down -- game down to conduct the drawing, so
 7   that was the period of missed sales.
 8                  CHAIRMAN CLOWE:  And then it came up on
 9   time?
10                  MR. ANGER:  It came up at 6 a.m. the
11   next day.  GTECH implemented a change in their code to
12   correct the issue that they had identified, and the
13   game came up with all of the other on-line games at
14   6 a.m. on Friday.
15                  CHAIRMAN CLOWE:  Was this occurrence
16   peculiar to Texas or, to your knowledge, did it occur
17   involving other states?
18                  MR. ANGER:  I don't have independent
19   information on that with regard to the -- the depth of
20   this issue except to say, I -- I have personally read
21   a news article that identifies a similar issue in
22   Louisiana with the Louisiana lottery, and GTECH is the
23   operator in that state.  But I -- I don't have any
24   independent confirmation that those are related events
25   or that -- that it's more widespread than that with
0127
 1   other jurisdictions.
 2                  CHAIRMAN CLOWE:  So when we get this
 3   problem and the solution fully defined, we may
 4   determine that it's broader than the state of Texas?
 5                  MR. ANGER:  That's correct.  And that's
 6   one of the questions that we've posed as a part of the
 7   Deloitte and Touche.  That's -- that's one of the
 8   things that we've asked that would be a part of that
 9   analysis.
10                  CHAIRMAN CLOWE:  And, Counselor, this
11   disruption in the conduct of the game would be covered
12   in the operator contract and regarding any damage
13   done, would it not?
14                  MS. KIPLIN:  Yes, sir, I believe so.
15                  CHAIRMAN CLOWE:  Any other questions?
16   Thank you, Michael.
17                  MR. ANGER:  Thank you.
18                  CHAIRMAN CLOWE:  Commissioners, I would
19   imagine that everyone would like a break, but before
20   we call for that, I would like to say to you that I
21   intend next to call, in item 21, Case Number
22   2005-4821, GameTech International.  And in light of
23   that, my understanding is there is an attorney on
24   staff that would like to brief us relative to the Open
25   Records aspect of this case.  I am asking for your
0128
 1   guidance now, whether you want to take that legal
 2   advice in executive session, or whether you would like
 3   to have the presentation as we do normally from the
 4   staff and see whether you want legal advice later on.
 5   I have been advised that there is an Open Records
 6   aspect to this that it might be beneficial to have the
 7   Commissioners take legal advice in executive session
 8   before we take this up.  But it is your decision.
 9   How -- how would you feel about that?
10                  COMMISSIONER COX:  Judge, what do you
11   think?
12                  COMMISSIONER OLVERA:  Well, based on
13   that comment, I would prefer to hear the legal advice
14   first.
15                  COMMISSIONER COX:  I agree.
16                  CHAIRMAN CLOWE:  I -- I think that
17   makes sense, and -- and we'll then follow that.  And
18   that will give everybody a chance to have a break,
19   with the knowledge that when the Commission comes out
20   of the executive session, we will be taking up that
21   agenda item.
22                  At this time I move the Texas Lottery
23   Commission go into executive session to receive legal
24   advice regarding pending or contemplated litigation
25   and/or to receive legal advice pursuant to Section
0129
 1   551.071 (1) (A) or (B) of the Texas Government Code
 2   and/or to receive legal advice pursuant to Section
 3   551.071 (2) of the Texas Government Code, including
 4   but not limited to:
 5   GameTech International versus Greg Abbott, Attorney
 6   General of Texas, et al.
 7                  Is there a second?
 8                  COMMISSIONER COX:  Second.
 9                  CHAIRMAN CLOWE:  All in favor say aye.
10   The vote is three/zero.
11                  The Texas Lottery Commission will go
12   into executive session.  The time is 9:50 --
13   10:50 a.m.  Today is June 24, 2005.
14                    (EXECUTIVE SESSION.)
15                  CHAIRMAN CLOWE:  The Texas Lottery
16   Commission is out of executive session.  The time is
17   11:20 a.m.  Is there any action to be taken as a
18   result of the executive session?
19                  If not, let's move to item on the
20   agenda, 21, Case Number 2005-4821, GameTech
21   International, Inc.
22                  MR. WHITE:  Good morning,
23   Commissioners.  My name is Stephen White.  I'm Chief
24   of Enforcement, Texas Lottery Commission.
25                  CHAIRMAN CLOWE:  Good morning.
0130
 1                  MR. WHITE:  This item is a proposed
 2   settlement and consent order that is as a result --
 3   thank you.  This settlement and consent order is the
 4   result of allegations of price fixing and unlicensed
 5   sales by GameTech International, a licensed
 6   manufacturer of bingo equipment, in violation of
 7   Sections 2001.556 and 2001.553.  After extensive
 8   investigation into the matter, the staff concluded
 9   that there was a violation by GameTech of these
10   violations.  Evidence shows GameTech was setting the
11   floor price below which it would not allow its
12   distributors to lease bingo equipment.  The evidence
13   shows GameTech attempted to sell this equipment
14   directly to industrial organizations.  GameTech was
15   provided notice of the allegations reported in
16   2001.054(c), Texas Government Code.  Negotiations
17   ensued, and a proposed settlement and agreed order was
18   reached.
19                  The settlement, with compromise
20   language, requires GameTech to pay a substantial sum
21   of money to the Commission, considerably higher than
22   any previous penalty paid by a single licensee, and
23   requires GameTech to implement safeguards designed to
24   prevent future violations.  As in all settlements, the
25   advantage of -- of settling a case versus proceeding
0131
 1   to a hearing include the immediate implementation of
 2   the safeguards, prompt payment of the amounts due,
 3   vice trying the case which would -- could -- would
 4   involve substantial Commission resources with no
 5   guaranteed outcome.  And based on that, the staff has
 6   recommended that you adopt this proposed agreed order.
 7                  MS. KIPLIN:  Mr. Chairman, I believe
 8   the director also has comments.  I didn't know if you
 9   wanted it all.
10                  CHAIRMAN CLOWE:  Certainly.
11                  MR. ATKINS:  Thank you.  Thank you,
12   Mr. Chairman, and members.  I concur with Mr. White's
13   presentation of this matter and the recommendations
14   enclosed.  I do believe that this proposed settlement
15   is an appropriate sanction for the alleged violations
16   against GameTech.  As Mr. White mentioned, it provides
17   several checks and safeguards in an attempt to prevent
18   future violations of the law.
19                  Also, I believe Mr. White mentioned
20   that this proposed settlement provides for a speedier
21   and less costly resolution to the issues involved.
22   The legal staff has estimated that going to hearing
23   all the way through the administrative --
24   administrative and appeals process could take up to
25   three and a half years.  Mr. White touched on the cost
0132
 1   to the agency of any future litigation.  That would be
 2   in addition to the costs that have already been
 3   incurred.  So, in short, as I mentioned, I concur with
 4   the recommendation and would also recommend your
 5   adoption of the proposed settlement.
 6                  CHAIRMAN CLOWE:  Commissioners, at this
 7   time I would like to inform you that there are three
 8   individuals who wish to appear before the Commission.
 9   In the order I received these witness affirmation
10   forms:  Mr. Steve Hieronymus -- I believe he is a
11   complainant in this matter and wishes to speak against
12   it.  Mr. Jay Stewart, who -- representing GameTech,
13   wishes to speak for it.  And Mr. James Rebell -- I
14   believe that may be the way to pronounce his name --
15   who is neutral on this subject.
16                  I'll ask you at this point if you have
17   any questions.  If you have at this point, we'll go
18   into those.  If you do not, at this point it might be
19   appropriate to hear from these three individuals.
20   What is your pleasure?
21                  COMMISSIONER OLVERA:  I don't mind
22   hearing from the individuals.
23                  CHAIRMAN CLOWE:  Mr. Hieronymus, would
24   you come up, please?  Mr. Hieronymus, before you
25   identify yourself for the record, I would like to
0133
 1   state for the record that I have received a letter
 2   from you, dated June the 20th, regarding this matter.
 3   And I have read that letter, and I would be happy to
 4   make it available to all parties that have an interest
 5   in it.  I also received from you a telephone
 6   conversation through the General Counsel, wishing to
 7   have a meeting with me.  I don't know whether you made
 8   that request of the other Commissioners or not.  But I
 9   felt, although I have met with you in the past, that
10   at this time, this week, precisely, it would have been
11   improper and not good procedure for me to have met
12   with you to discuss this issue.  I would just like to
13   get that on the record so, in fairness to everyone
14   involved, it's known.  And we're happy to have you
15   here and would like to hear from you at this point in
16   time.
17                  MR. HIERONYMUS:  Okay.  Thank you.
18                  CHAIRMAN CLOWE:  Make sure that light
19   is on, if you will.  It should have a green light.
20                  MR. HIERONYMUS:  Yes.  My name is
21   Steven Hieronymus, and I'm the managing member of
22   Trend Gaming Systems, a licensed distributor here in
23   Texas.  I've been licensed since 1995.  I was the
24   first distributor of GameTech product back in 1996.
25   And in 2002, my agreement with -- with GameTech was
0134
 1   terminated and there was litigation that resulted.
 2   But as a result of that termination, I did file the
 3   original complaint back in September of 2002.  And
 4   that's -- you and I have discussed, I think, in '04, I
 5   believe, at one point.  During the course of the
 6   litigation with GameTech, which concluded in a trial
 7   in October of 2004, in which the jury found in favor
 8   of Trend on all issues that were presented to the
 9   jury, a great deal of evidence came out that I have
10   provided to the Lottery during the course of the
11   investigation, or at least some aspects of the -- of
12   the evidence that came out.
13                  Post-trial, an additional trial record,
14   which is both documentary and testimony evidence, were
15   also presented to the Lottery investigators for
16   purposes of concluding this, you know, fairly lengthy
17   process that has taken on.  And I will tell you -- and
18   I'm not -- I realize I am not allowed to talk to you
19   about the evidence, but I will say it was
20   overwhelming, and it was extremely compelling.  And
21   everybody that has looked at it -- I have had the
22   opportunity to, now, share some of that information --
23   it's in binders that I've made available to anybody
24   who has inquired here just of late.  This information
25   has been kept from the public and for the most part
0135
 1   even the charities that have been -- that have paid
 2   the price from this price fixing issue have not even
 3   seen the information or the evidence that's there.  I
 4   did not even become aware of the notice actually being
 5   issued until I read it in GameTech's 10Q, their
 6   quarterly SEC filing that was filed in March, and I
 7   immediately made a request for that from the Lottery
 8   through the Open -- Open Records process, and any
 9   other communications associated from the Commission to
10   GameTech and GameTech to -- back to the Commission.
11                  The Lottery chose to send that to the
12   Attorney General for an open -- ruling -- an Open
13   Records ruling.  I made appropriate comment to the
14   Attorney General's Office, and ultimately, the
15   Attorney General ruled that this information was
16   public record and was to be produced.  Both GameTech
17   and the agency, then, had filed suit against the
18   Attorney General.  And I believe there is a hearing on
19   July 7th on that matter.
20                  What was distressing was even the 504
21   letter was not originally produced, or the response to
22   the 504, the notice of opportunity to show compliance.
23   And, in fact, I did not get the original one until
24   this past Monday, and yesterday I picked up the
25   amended notice that was issued in May, I believe.  I
0136
 1   did speak with Ms. Kiplin about that yesterday, and
 2   actually she apologized to me because that should have
 3   come out.  And it was through the efforts of the
 4   Attorney General's Office, the Open Records litigation
 5   division, that called that matter to attention that
 6   that should have been a document that was responsive,
 7   that should have been produced.  And -- and Kim has
 8   told me that that was an oversight and should have
 9   been produced.  But it was almost inadvertent that I
10   was able to get a copy of that so that I could
11   properly prepare.  And I just found out that this
12   settlement agreement was going to be pending before
13   you, of which nobody from the public has any idea, you
14   know, what is -- what it -- what settlement -- what --
15   what is an appropriate settlement.  I'm not privy to
16   that information.
17                  But I think it's important that you
18   understand some of the issues that -- that are before
19   you, and what your decision means, and what impact it
20   has.
21                  As I told you, there is a great deal of
22   evidence in this case, which unfortunately you have
23   not yet been able to see.  Who has been hurt?  Well,
24   who has been hurt has been the charitable conductors
25   in this state, going back for a number of years.  So
0137
 1   we're talking about a lot of money.  I don't believe
 2   that anybody has done a full economic analysis, but I
 3   think you'll find if -- if it was done, and I suspect
 4   it will be done, you know, it's in the millions of
 5   dollars.  I think there is also the issue of respect
 6   for -- for Texas law.  I mean, does the rule of law
 7   really apply and does it apply to, you know, a large
 8   company that can afford to hire a whole lot of
 9   attorneys?  I think that -- that needs to be an area
10   of concern.  Basically, this process has not been
11   public.  It has very much been hidden and, like I say,
12   even now, I mean, I just handed a binder to -- to one
13   of the members of the -- Ms. Taylor, from the BAC,
14   this morning.  People in the industry don't -- you
15   know, have not been privy to any of the information
16   and have not had the opportunity to weigh in at all or
17   at least share concerns to you.
18                  The -- you know, I think it also begs
19   the question of how -- how other licensees are
20   treated, and -- you know, for events and dollar
21   amounts that I think would pale in comparison to the
22   issues that are involved with this complaint, you
23   know, revocations happen.  And it -- it really bothers
24   me when on the ground that -- I met for two hours
25   yesterday with staff, with -- with Billy and Kim and
0138
 1   Mr. White.  It bothers me that, for expediency
 2   purposes, for allocation of resources, that the issue,
 3   the biggest issue -- and I believe Kim will -- this is
 4   the biggest issue that has ever confronted you on a
 5   bingo matter.  And I think for -- almost for moral
 6   authority within the industry, this issue needs to go
 7   through a more public and a process that's independent
 8   even of the agency, such that when a result would come
 9   back, you get a proposed decision.  There is findings
10   of fact that actually give you more information than I
11   think you're probably submitted right now.
12                  It was interesting that in GameTech's
13   response to the original notice of opportunity,
14   basically, the biggest section of the response -- I
15   believe it was paragraph number three -- was, well,
16   the law doesn't -- price fixing law doesn't apply.  We
17   didn't sell; we leased.  We didn't -- you know, it
18   only has to do with horizontal, manufacturer to
19   manufacturer.  It doesn't have to do with the vertical
20   relationship with a -- telling the distributor what to
21   charge the conductor.  And that flies in the face of
22   Attorney General Opinion -- I think it was JC-0296,
23   issued October 7th, 2002, by Attorney General John
24   Cornyn -- it flies in the face of a published Fed
25   Report that was in '03, that cited that AG opinion.
0139
 1   It even flies in the face of testimony of executives
 2   of GameTech in our matter where they acknowledged that
 3   it did apply.  Yet, that's the response back.  I don't
 4   think that that's showing respect even for the law,
 5   and I would have great question whether these
 6   compliance issues -- that enough attention is -- you
 7   have gotten their attention enough that they're going
 8   to comply.
 9                  Again, I -- I -- I think it's important
10   that this agency, this Commission, keep the -- the
11   high ground here and not lose it in light just for
12   purposes of expediency.
13                  You made an interesting comment.  I was
14   taking notes earlier.  I've been here all morning, and
15   you made a -- a thing that -- you know, this is the
16   people's business and it should be open.  And I one
17   hundred percent agree with that, and I think allowing
18   this process to go forward through the administrative
19   hearing process will allow this to be more open.  I
20   mean, issues are going -- are coming to light.  I
21   mean, the media has now gotten attention, and some of
22   the things that have -- and everybody who has seen
23   these documents are -- are quite astounded.  I'm --
24   I'm testifying in front of the House Licensing
25   Committee next Wednesday, I also have been invited to
0140
 1   provide testimony.  I mean, so this is going to come
 2   out, and I think it needs to be examined in this more
 3   independent -- and is it a dedication of resources?
 4   Yes.  And will -- will it be litigated?  I mean, you
 5   know, the -- the list of -- I don't know if I could
 6   list all the names of the attorney firms that are
 7   involved with this thing, but they're well
 8   lawyered-up.  I know because I've been at the sharp
 9   end of their spear.  But I think for the health of
10   charitable bingo, to show respect for the other -- for
11   the, you know, 1300 some-odd conductors in this state,
12   it's something that -- that you need to allow the
13   process to work.  The adversary process is -- is there
14   for a reason, and it works.  It allows both sides --
15   it protects GameTech and the other two -- the two
16   distributors that were involved with this, and it
17   protects you and -- you know, just the -- the validity
18   of what we're doing.  And I would -- would encourage
19   you to allow that to work.
20                  I would ask that, you know, you reject
21   this proposal and, you know, direct staff to continue
22   with that process.  I met with Kim and, you know,
23   she's assured me that they're ready, willing, and able
24   to be able to successfully move forward.  And I trust
25   that she will do that, given that direction.
0141
 1                  I guess, in closing -- because I don't
 2   want to take up too much of your time -- but I was
 3   thinking last night, you know, what -- what do I want
 4   to leave with you this morning.  And something I
 5   learned when I was quite young is, you know, that
 6   might does not and should not make right.  And that's
 7   what we're looking at here.  But, you know, when
 8   the -- when the charities come before you with, you
 9   know, issues that, again, I would say pale in
10   comparison to this, they can't afford, you know, these
11   monster law firms and P.R. firms and everything
12   that -- that you may or may not be aware of.  And they
13   don't have that.  And, you know, so there is might on
14   the side of GameTech, but it shouldn't make right.
15   And you have the opportunity, you know, to turn right
16   into might.  And I would just challenge you to -- to
17   do that.  I mean, maybe it's not appropriate for me to
18   challenge you, the Commission, but I would encourage
19   you down that path.  It -- it deserves -- it deserves
20   inspection, and, you know, again, it's not -- it's to
21   protect everybody's rights.  GameTech and -- the SOAH
22   process is to protect everybody's rights.  But it does
23   allow this to be better viewed.  I don't think it will
24   serve the Commission well to not allow this to happen.
25   And that's all the comments I have.
0142
 1                  CHAIRMAN CLOWE:  Thank you,
 2   Mr. Hieronymus.
 3                  Questions, Commissioners?
 4                  COMMISSIONER OLVERA:  Well,
 5   Mr. Hieronymus, just a few comments or questions.  You
 6   were -- you were referencing -- I just want to make
 7   clear, when you're -- you're referencing an adversary
 8   proceeding, are -- are you referring to a civil
 9   proceeding between yourself and -- and the respondent
10   in this complaint?
11                  MR. HIERONYMUS:  No.  I'm saying the
12   SOAH process is litigation.  I mean, it's obviously
13   different than in civil court, which I just completed,
14   you know, an adversary process with GameTech.  But the
15   SOAH process is an adversary process where both sides
16   get to question and present evidence before the
17   hearing officer, who would then make a recommendation
18   with findings of fact that would give you more
19   information to appropriately evaluate the -- the
20   impact of what's been done.  And I think it would
21   guide you in knowing what to accept or reject or, you
22   know, ultimately to make that decision, because it
23   does reside with you ultimately.
24                  COMMISSIONER OLVERA:  Well, you also
25   referenced the opportunity to allow this to be
0143
 1   displayed to the public.  You understand that -- that
 2   in the complaint process -- this Commission wears many
 3   hats and -- and, in some instances, we do want
 4   everything to be out in the public and to let the
 5   light shine on in, as my fellow commissioner likes to
 6   say, is our -- is our common theme, but with respect
 7   to the complaint process, that is not a process that
 8   is open to the public.  You're not suggesting that, as
 9   a prosecuting entity, we allow the public to set
10   penalties or -- or settlements or what have you.
11   That's not a rule of law.
12                  MR. HIERONYMUS:  No.  I -- and I one
13   hundred percent agree.  But the SOAH process, a SOAH
14   hearing, is public, and it's going to allow more
15   opportunity for the evidence, which is now out there
16   and available through the public record, and will have
17   the opportunity to seep out there.  And I think you do
18   deserve -- you would have more people, I think, making
19   comment to you if they even knew it existed.  But a --
20   but a SOAH hearing is public.  The complaint process,
21   the investigative process, I understand that, and I'm
22   not suggesting that in any -- any manner.
23                  COMMISSIONER OLVERA:  I just wanted to
24   clarify.  Thank you.
25                  COMMISSIONER COX:  Mr. Chairman, this
0144
 1   is a question for you.  Mr. Hieronymus said that
 2   millions of dollars of damage has been done and that
 3   we don't have the information about that because the
 4   industry has not been able to weigh in.  I don't know
 5   whether I should ask Mr. Hieronymus or ask Mr. White
 6   or ask you, what information do we have along that
 7   line?  Was that kind of information available to
 8   Mr. White and the others on our staff who made the
 9   investigation or not?
10                  CHAIRMAN CLOWE:  Well, I would like to
11   answer your question with two -- a two-part answer.
12   It's been my position always since I've chaired this
13   Board to be open to comments from the members of the
14   public, whether they had a participating interest, as
15   is the case with Mr. Hieronymus, where he is the
16   complainant in this matter, or whether it's a citizen
17   who just has an interest.  I think so often when you
18   have an open policy like that, you get a lot of
19   information.  And you are asking a question that turns
20   on the value of all of those kinds of comments about
21   how much is factual.  And you -- in our position, as I
22   see it, must deal only with the facts.  The -- the
23   emotion, the enthusiasm, the heat that goes into
24   comments that are given to any board must be peeled
25   way and you must deal with the facts.  And I think
0145
 1   that's what you're looking for in this instance, sir.
 2   And I'm respectful of any comment that a public person
 3   makes, but I have appeared before a number of boards
 4   and enthusiastically urged my cause.  And the board
 5   members that I have appeared before have always
 6   required facts and proof, and I'm respectful of that.
 7                  The second part of my answer to your
 8   question is, I think that I certainly don't have any
 9   corroborating facts to back up, from my knowledge,
10   anything that Mr. Hieronymus has said in that regard.
11   I don't know whether counselor has it or not.  I don't
12   know whether it's available.  But if you want to ask
13   those here if they have it, I think that would be
14   proper.  I will respond and tell you, I don't have any
15   of that kind of information.
16                  COMMISSIONER COX:  Okay.  Mr. White,
17   was -- in your investigation, did you talk to folks in
18   the industry that might have purchased these machines,
19   and were you able to determine whether, in fact, they
20   overpaid for these machines by millions of dollars, as
21   Mr. Hieronymus suggests?
22                  MR. WHITE:  Whether we talked to
23   specific conductors, I don't recall.  I don't believe
24   we did.  But what we did do in calculating the
25   settlement amount and whether we should agree to this
0146
 1   settlement, we did take into account the -- the
 2   potential overcharges to the conductors.  And that was
 3   a key component in our initial assessment in what was
 4   an appropriate penalty.  We made the assumption -- and
 5   I don't have the facts and figures -- Mr. Atkins may
 6   be better prepared to speak specifically, but we --
 7   whatever it was, the amount we estimated the
 8   overcharges, 50 cents a use times -- you know,
 9   calculate the number of uses during this period of
10   time and came up with a number.  And based on that
11   number, we negotiated from there.  So I guess the
12   short answer is, yes, we considered the overcharges to
13   date to the conductors as a result of this price
14   fixing.
15                  COMMISSIONER COX:  Okay.  Well, at some
16   point I'm going to ask you what percentage of the
17   overcharges this settlement represents in dollars.
18                  MR. WHITE:  Yes, sir.  And, Mr. Atkins,
19   do you want to respond to that, sir?
20                  MR. ATKINS:  I don't know if we
21   calculated it that way, Commissioner Cox.  We
22   calculated what we believed would have been the amount
23   that would have gone to GameTech.
24                  COMMISSIONER COX:  Okay.
25                  MR. WHITE:  Right.  So I guess there is
0147
 1   a difference there, but we did -- we did take into
 2   account the overcharges, I guess.
 3                  COMMISSIONER COX:  Okay.  So there --
 4   in the millions that he is talking about, there may
 5   have been the distribution chain involved.  And what
 6   you looked at was not everything that the chain might
 7   have benefited by, but what this party to this
 8   settlement might have benefited by?
 9                  MR. ATKINS:  That's correct.
10                  COMMISSIONER COX:  I still will ask you
11   at some point, how did they compare.
12                  MR. ATKINS:  How did -- tell me again
13   what --
14                  COMMISSIONER COX:  How did their games
15   compare with expenses.
16                  Thank you, Mr. Chairman.
17                  CHAIRMAN CLOWE:  Mr. Hieronymus, I want
18   to thank you again for appearing here this morning and
19   make certain that I understand what you've said to us.
20                  You are not privy at this time to the
21   settlement agreement which the staff is asking the
22   Commissioners to approve.  You have exchanged some
23   information with Commissioner Olvera, and you don't
24   wish to be a part of that.  You understand that's not
25   your role, but you are asking the Commission, in your
0148
 1   appearance here this morning, not to approve this
 2   settlement and to refer this issue to SOAH for a
 3   hearing.  Am -- am I understanding you correctly?
 4                  MR. HIERONYMUS:  Yes, sir.
 5                  CHAIRMAN CLOWE:  I don't think we have
 6   any further questions.
 7                  MR. HIERONYMUS:  Okay.  Thank you very
 8   much.
 9                  CHAIRMAN CLOWE:  Thank you.
10                  MR. HIERONYMUS:  I appreciate the
11   opportunity.
12                  CHAIRMAN CLOWE:  Next I would ask
13   Mr. Jay Stewart to come forward.  Mr. Stewart, your
14   law firm, would you identify that, please?
15                  MR. STEWART:  For the record, this is
16   Jay Stewart.  My law firm is Hance Scarborough, right
17   here in Austin, representing GameTech, the respondent.
18                  CHAIRMAN CLOWE:  And let me, in -- in a
19   sense of openness, state before you begin your
20   presentation that I received a telephone call earlier
21   this week from a colleague of yours, Mr. Robert Floyd.
22   And he asked if he could discuss some subjects with
23   me, and I said, no, not if it's GameTech.  And that
24   was, he indicated, the reason he was calling, so we
25   did not discuss that subject.  And I do not know
0149
 1   whether you're aware of that call or not, but I just
 2   wanted to let you know that I did receive the call, we
 3   did not discuss this issue, and I would like for
 4   everyone to be aware of that.
 5                  Thank you and you may proceed.
 6                  MR. STEWART:  Yes, sir.  Good morning,
 7   Mr. Chairman, Commissioners.  Again, this is Jay
 8   Stewart, lawyer here in Austin.  I do regulatory work.
 9   I have got co-counsel, Jamie McNally, also here and
10   general counsel of the -- my client, GameTech, Andy
11   Bunkse, who is also here.
12                  CHAIRMAN CLOWE:  Could we ask those
13   individuals to identify themselves by raising their
14   hands so we can just --
15                  MR. STEWART:  That's Jamie McNally.
16                  CHAIRMAN CLOWE:  Great.
17                  MR. BUNKSE:  Andy Bunkse.
18                  CHAIRMAN CLOWE:  Thank you very much.
19                  MR. STEWART:  What we have here is a --
20   is a -- a settlement agreement.  It's a well
21   thought-out settlement agreement.  It's after -- it's
22   been after extensive investigation.  This thing, as
23   Mr. Hieronymus testified, started in September of
24   '02 -- actually, it really started before that.  There
25   was another matter regarding allegations of price
0150
 1   fixing that was fully litigated by my client and the
 2   Lottery Commission and resolved in '02.  That was
 3   resolved to the favor of GameTech, but some of the
 4   same allegations, some of the same fact patterns were
 5   decided back then.  Mr. Hieronymus did file his
 6   complaint in -- in '02.  The Lottery Commission and
 7   their very good staff started an extensive
 8   investigation into those allegations at that time.
 9   Tens of thousands of pages of documents have been
10   produced.  The documents are from Mr. Hieronymus,
11   they're from my client, they're from the distributors.
12   Interviews have taken place in the state of Texas, the
13   state of Nevada.  Reno is where my client is
14   headquartered.  The state of Arizona.  There has been
15   fantastic, in our way, disruptive investigations for
16   my client, but it has been extremely extensive by
17   the -- the bingo folks here at the Lottery Commission.
18   The investigators have done a good job.  This is
19   something not -- it's not an off-the-cuff settlement.
20   This has been, through the years, developed on both
21   sides.  You have heard Mr. White's characterization of
22   some of the -- of the -- the evaluations of the
23   evidence.  We hold different evaluations of that
24   evidence, as you might expect.  But after this
25   process, we felt it necessary to, as we always do,
0151
 1   continue to work with the Lottery Commission as the
 2   regulator and desire to try to settle this case, if
 3   possible, with the recognition it might not be
 4   settleable, but we think it -- it should be and it
 5   could be.  We agree with Mr. White's evaluation that
 6   if we cannot settle this case, it will cost the agency
 7   and my client extensive resources, manpower, financial
 8   impact.  It's -- it's a good case to settle at this
 9   point.  We don't agree with all of the evaluations.
10   You don't ever like to be in the -- in the position of
11   a respondent in an enforcement case, but that's a
12   reality of being a regulated entity.
13                  We have the greatest respect for the
14   staff.  We have the greatest respect for General
15   Counsel's office.  Ms. Kiplin is one of the best
16   general counsels in the -- in the state, and I have
17   practiced in front of ten, 12 agencies over the last
18   15 years, and I -- I say that with pride.
19                  This was hard-fought negotiations.  We
20   did not start in the middle.  We started on different
21   sides, and we -- we weeded down the -- the aspects of
22   this negotiation through argument, through independent
23   evaluation on both sides, through counsel, through
24   give and take by each client -- the typical way you
25   resolve these cases.  We don't want to -- we do want
0152
 1   to avoid the -- the -- the cost and expense and the
 2   time of the litigation and think we -- we would
 3   impress upon you that we would like to go ahead and
 4   settle this case.  We're paying a substantial amount
 5   of money in this matter, we're providing for a
 6   compliance officer which will afford the -- the bingo
 7   folks a -- a window into the company, if you will, to
 8   ensure that any of these types of concerns as they
 9   hopefully will never arise again, but if they do,
10   there will be an instantaneous passage of information
11   so that the Commission has a feel for it immediately,
12   so that action can be taken and corrective actions can
13   be taken by my client and any matters that the Lottery
14   Commission would want to bring, they certainly could
15   do so at that time.
16                  Mr. Hieronymus has -- has indicated
17   that he has been at the end of the spear of my client.
18   I -- I have learned that is a -- a
19   mischaracterization.  Mr. Hieronymus started this
20   process when he was dismissed as a distributor to
21   GameTech.  The volumes of communications to the
22   Lottery Commission of complaints of his is continuous
23   and ongoing.  He is fully aware of the status of this
24   matter.  He -- he has provided a significant amount of
25   information that he has characterized in -- in one --
0153
 1   one way or the other.  Mr. Chairman, you -- you
 2   characterized the facts.  Well, he may evaluate the
 3   facts a certain way, and I certainly would evaluate
 4   the facts another way, and Mr. White will evaluate the
 5   facts in another way.  The -- the evidence is not
 6   plain in this case, but the dispute is certainly
 7   plain.  That's why we want to settle the case.
 8                  He wants -- he says that he wants an
 9   ALJ process.  That is consistent with his activities
10   against my client, because the entity that is going to
11   pay for that effort to prove these allegations or
12   disprove these allegations or reach a final settlement
13   will, of course, be my client, who is at really the
14   end of his spear and his lobbies.
15                  I hope that we've presented a -- a
16   concerted effort with the -- the -- the Lottery
17   Commission.  My client does significant business in
18   Texas.  Over the last five or six years, I am informed
19   that costs have gone significantly down and are
20   trending down for charities.  The -- the allegation
21   that millions of dollars have been lost by charities
22   because of these concerns, we believe, is completely
23   unfounded.  In fact, we believe that the -- the market
24   forces, the competitive market forces in Texas is very
25   healthy.  And, in fact, my client's margins have
0154
 1   narrowed even more.  And we think that the charities
 2   are certainly not suffering from any pricing scheme
 3   that GameTech has employed and -- or -- or have been
 4   investigated regarding.
 5                  That's all I have.  I urge the
 6   Commission respectfully to approve this settlement.
 7   As I said, it's been thoroughly investigated.
 8   Documents have been reviewed.  Witnesses have been
 9   interviewed extensively.  The -- the staff has done
10   a -- a good job, almost too good a job, from my -- my
11   standpoint, because my client will have to make a
12   payment.  But we respect their rights to do this.  We
13   respect their abilities to conduct these
14   investigations.  And my client is committed to
15   continuing to provide good service and products in
16   Texas and work hand in hand with the regulators.  We
17   do not want to in any way stiff-arm the regulators.
18   We are there to work with them because that's the
19   reality of being a regulated entity.
20                  We encourage your approval of this
21   settlement so that we can move forward, close the
22   chapter of this book on these issues, and everyone
23   move in a positive way towards serving the bingo
24   interests in Texas.  Thank you, sir.
25                  CHAIRMAN CLOWE:  Thank you, sir.
0155
 1                  Any questions?
 2                  COMMISSIONER COX:  I have one,
 3   Mr. Chairman.
 4                  CHAIRMAN CLOWE:  Sure.
 5                  COMMISSIONER COX:  Mr. Stewart, you
 6   mentioned that competitive forces in the state have
 7   been strong and that margins have gone down.
 8                  MR. STEWART:  Yes, sir.
 9                  COMMISSIONER COX:  Help me understand
10   what that has to do with complying with the law.
11                  MR. STEWART:  We believe that we have
12   been in compliance with the law, Mr. Commissioner.  We
13   believe -- the -- the reason I made that point was
14   that there has been a bald-faced allegation that --
15   that charities have somehow lost extensive amounts of
16   money due to a pricing scheme that has been
17   investigated by the Lottery Commission.  We simply
18   don't believe that.  We don't believe that charities
19   are losing money from any activity that -- that
20   GameTech's -- that -- that GameTech has -- has been
21   involved in.  And our empirical data shows that our
22   margins are going down, so the resulting money is
23   there for someone, and we generally assume it is the
24   charitable organizations.  Speaking from the company's
25   empirical data, that's the only way we can evaluate
0156
 1   it.
 2                  COMMISSIONER COX:  Okay.  Thank you,
 3   Mr. Chairman.
 4                  CHAIRMAN CLOWE:  Mr. Stewart, have you
 5   been the attorney representing GameTech through these
 6   days of negotiation and settlement?
 7                  MR. STEWART:  Yes, sir.  And -- and
 8   Mr. McNally.
 9                  CHAIRMAN CLOWE:  So you all have been
10   at the table from the very beginning when they
11   started?
12                  MR. STEWART:  Mr. -- Mr. McNally
13   started with it in '02.  We have been involved more --
14   much more recently.
15                  CHAIRMAN CLOWE:  Very good.  Thank you
16   very much.
17                  Next I would ask Mr. James -- I believe
18   it is Rebell --
19                  MR. REBELL:  It's Rebell.
20                  CHAIRMAN CLOWE:  Rebell.
21                  MR. REBELL:  Yes, sir.
22                  CHAIRMAN CLOWE:  Thank you, sir.
23                  MR. REBELL:  How are you doing?
24                  CHAIRMAN CLOWE:  Fine.  Come up,
25   please, sir.  Thank you for that help on pronouncing
0157
 1   your last name.
 2                  MR. REBELL:  Thank you very much, sir.
 3   Commissioners, staff, I'm a commercial lessor here in
 4   Austin, Texas.  The name of my bingo hall is Big Star
 5   Bingo.
 6                  CHAIRMAN CLOWE:  Why don't you, if you
 7   will, please, sir, get that mike a little closer.
 8                  MR. REBELL:  Would you like me to do
 9   that again?
10                  CHAIRMAN CLOWE:  That's great.  Thank
11   you.
12                  MR. REBELL:  All right, sir.  I'm a
13   commercial lessor here in Austin, Texas.  The name of
14   my hall is Big Star Bingo.  I'm kind of surprised of
15   this meeting on this issue.  I was rather uninformed
16   as to the circumstances of what was happening on this
17   price fixing issue up until this past week, so I'm a
18   little behind the curve, but I would like to -- to
19   make a couple of points.
20                  At Big Star, over the past five to six
21   years, monies that have gone out of that hall for
22   computers -- and when I say computers, I -- I would
23   have to focus on Trend because that, up until quite
24   recently, is the only equipment manufacturer that was
25   used at our hall -- has been approximately 700,000
0158
 1   dollars in the last five years.  That's an enormous
 2   amount of money.  By the way, we have a very
 3   successful hall.  We are very proud of it.  We haven't
 4   been displeased in generating that type of income, but
 5   we've been displeased in being unable to find products
 6   that would allow us to be price competitive.  That
 7   being said, of that 700,000 dollars that the charities
 8   paid to use that equipment, if there is a violation
 9   here, if it's only 10 percent, that's 70,000 bucks.
10   Now, we have six nonprofits that conduct bingo at that
11   bingo hall.  That's 70,000 dollars.  I think that
12   money would be very important to them.  So before you
13   make a decision to make a -- a settlement, I would
14   like to ask you, is -- is the charity going to get any
15   of that money?  Was that a no, ma'am?  Would they get
16   any of that money?
17                  CHAIRMAN CLOWE:  We're not in a
18   position to answer your question at this point in
19   time.
20                  MR. REBELL:  I see.  Okay.
21                  CHAIRMAN CLOWE:  You can pose that --
22                  MR. REBELL:  I suspect, therefore --
23   I -- I -- just let me go on.  I don't think the
24   charity is going to see any of that money.  But if
25   there is any price fixing in this -- this mix -- and I
0159
 1   have a lot of friends in this room, both -- on both
 2   sides -- if it represents 70,000 dollars, wouldn't it
 3   be important to consider in any settlement that the
 4   nonprofits are recognized as an important player in
 5   this -- this process?
 6                  Basically, that's all I have to say.
 7                  CHAIRMAN CLOWE:  Thank you very much.
 8                  MR. REBELL:  Yes, sir.
 9                  CHAIRMAN CLOWE:  Any questions?
10                  Thank you, sir.
11                  MR. REBELL:  Thank you.
12                  CHAIRMAN CLOWE:  Commissioners, now I
13   believe I'll ask you again if you have any questions
14   regarding this matter or any comments.
15                  COMMISSIONER OLVERA:  I'll start.
16                  Fellow Commissioners, I guess my
17   general comments on this are, I'm trying to draw back
18   on my -- my experience as a former judge in criminal
19   proceedings, and -- and before I -- I use that
20   analogy, I want to preface my comments that I am in no
21   way implying that anyone is a criminal in this case or
22   that anyone has been found guilty of any -- any crime.
23   But I think it's a proper analogy in that, in the
24   criminal process, as a judge, you have a victim; you
25   have a complaint filed with the State of Texas, and
0160
 1   that victim then, technically, is no longer a part of
 2   the process, aside from the fact that that victim may
 3   be a witness in the case.  The State of Texas is the
 4   prosecuting entity, and usually in -- in -- in State
 5   court, that comes down to the local D.A.'s Office.
 6   And the D.A.'s Office, as the prosecuting attorney, as
 7   is its normal course, investigates cases, negotiates
 8   with the defendant, and in the vast bulk of the
 9   criminal cases there are -- are what is called plea
10   agreements tendered before the Court.  And those plea
11   agreements are subject to the approval of the Court.
12   The Court does not have to approve that plea
13   agreement, but -- I don't have the statistics in front
14   of me, but 90 percent of those plea agreements are
15   approved.  Now, obviously, the victims in each one of
16   those crimes are usually wanting the maximum sentence
17   possible, but that's not the reality of -- of what can
18   happen or does happen.
19                  So I use that as an analogy, and I just
20   want to point that out that the public is not part of
21   setting penalties, is not part of imposing fines, or
22   what have you.  It's up to the State of Texas.
23                  We now sit in the position of, quote,
24   the State of Texas in this analogy.  So when I
25   referenced earlier that we -- we wear many hats, the
0161
 1   complaint process is not one where we are allowed to
 2   divulge information to the public, to the bingo halls,
 3   to -- to what have you because they just don't have
 4   standing to receive the information that's part of an
 5   ongoing complaint procedure.  The respondent in that
 6   procedure has its rights.  And obviously, the -- we,
 7   as the regulating agency, have an obligation to keep
 8   that confidential.  So the issue of negotiations and
 9   disclosures and being -- I think Mr. Hieronymus was --
10   was implying that a lot of this had to be divulged to
11   the bingo parlors, but that's just not feasible, it's
12   not realistic, and would be violating the civil
13   rights, probably, of the respondent if -- if that were
14   the case.
15                  So I say that just very open-endedly in
16   terms of -- of my general comments on the process.  We
17   now have a motion by our staff to approve a settlement
18   agreement.  And that -- I'm not -- I'm not weighing in
19   on that, whether we should do that or not.  But these
20   are just my comments with respect to the very general
21   themes that I've heard this morning.
22                  CHAIRMAN CLOWE:  Thank you,
23   Commissioner.
24                  COMMISSIONER COX:  Mr. Atkins,
25   Mr. Stewart has told us that his client didn't
0162
 1   charge -- didn't have any ill-gotten gains, if you
 2   will.  They have agreed to pay a significant amount of
 3   money, however, which would cause me to believe you
 4   feel differently.
 5                  MR. ATKINS:  That's correct.
 6                  COMMISSIONER COX:  Would you share your
 7   side of that with us?
 8                  MR. ATKINS:  I'm -- I'm looking to
 9   counsel, Commissioner Cox.  I'm -- I'm -- I'm not sure
10   exactly what you want to me to share, and I don't want
11   to --
12                  CHAIRMAN CLOWE:  Let me try to help in
13   this matter by making two points.  First of all, this
14   has been a lengthy investigation.  It's taken a long
15   time and it is complex to a certain extent, but it is
16   certainly large, insofar as the proposed settlement.
17   I believe maybe the largest in the history of this
18   agency.  Is that correct, to your knowledge?
19                  MR. ATKINS:  I don't know if it's the
20   largest for the entire agency in terms of any
21   liquidated damages that the Lottery may assess.  It
22   mostly definitely is the largest that's ever been
23   issued in a bingo-related matter.
24                  CHAIRMAN CLOWE:  And I was referring to
25   the bingo commission.
0163
 1                  MR. ATKINS:  Yes, sir.
 2                  CHAIRMAN CLOWE:  I got this settlement
 3   agreement in my notebook Wednesday night.  I had one
 4   business day to read it and to understand it.  I had
 5   had numerous conversations with the attorneys on
 6   staff, but I really didn't begin to understand where
 7   you all were until Wednesday night.  I have a concern
 8   about my understanding and my knowledge of this
 9   matter.  And I'm going to have to ask some questions
10   about it, and I think that's where Commissioner Cox
11   is.  You know, if you want me to vote on this issue,
12   I've got to know more than I know right now.  And I'm
13   not attempting to speak for the Commissioners, but
14   that's where I am.
15                  Does that help you a little bit.
16                  COMMISSIONER COX:  That's exactly where
17   I am.
18                  I asked you earlier, Billy, to be
19   prepared to help me with how the amount of monetary
20   settlement here, penalties, compares with what you
21   estimate the profits that this entity obtained from
22   this.
23                  MR. ATKINS:  Okay.
24                  COMMISSIONER COX:  And I'll -- I'll
25   tell you where I'm coming from on this.  There is a
0164
 1   big controversy in the accounting business right now
 2   about whether criminal charges will be brought within
 3   one of the Big Four accounting firms.  And one of the
 4   pieces of evidence in that case is that that
 5   accounting firm did a cost-benefit analysis and
 6   determined that for every 14 dollars in penalties they
 7   would incur for engaging in an inappropriate activity,
 8   they would generate 100 dollars in revenue.  So they
 9   had a seven-to-one payback on the administrative
10   penalties that they were going to pay.  That's where
11   I'm coming from.
12                  MR. ATKINS:  Okay.  And I'm sorry I
13   didn't understand your question.  The penalty amount
14   that is in your notebook, in addition to the amount
15   that is being charged for the investigative costs that
16   the agency had gone into, is approximately 11 to 12
17   percent of the amount that we calculated that GameTech
18   would have received.
19                  COMMISSIONER COX:  So that's gross or
20   net?  Is that the money they made, the profit they
21   took to the bottom line?
22                  MR. ATKINS:  No.  That's the -- that's
23   the -- the gross they would have gone --
24                  COMMISSIONER COX:  Okay.  And what is
25   their cost-benefit analysis?  How much did they take
0165
 1   to the bottom line as a result of this activity?
 2                  MR. ATKINS:  We didn't calculate that,
 3   Commissioner.
 4                  COMMISSIONER COX:  So it is possible
 5   that they have gained from this process, even though
 6   they're paying the largest penalty that anyone has
 7   ever paid in the state of Texas?
 8                  MR. ATKINS:  That could be.
 9                  COMMISSIONER COX:  In this area?
10                  CHAIRMAN CLOWE:  In the Bingo Division.
11                  COMMISSIONER COX:  In the Bingo
12   Division.  And has there been any consideration to
13   whether restitution should be paid to the people who
14   paid too much?
15                  MR. ATKINS:  My understanding from
16   legal counsel is that that's not anything that would
17   be appropriate for this type of settlement.
18                  COMMISSIONER COX:  I see.
19                  MR. ATKINS:  That would -- my
20   understanding is that that is something that would be
21   more appropriate for a civil matter.
22                  COMMISSIONER COX:  So those folks, if
23   they have evidence that they paid too much, they would
24   take their action, and that would be separate and
25   apart from this.
0166
 1                  MR. ATKINS:  That's my understanding,
 2   yes, sir.
 3                  COMMISSIONER COX:  So even though these
 4   penalties might be less than all of the profits that
 5   this respondent earned from this, others may have
 6   claims that would wipe out that margin?
 7                  MR. ATKINS:  That's correct.
 8                  COMMISSIONER COX:  Thank you,
 9   Mr. Chairman.
10                  COMMISSIONER OLVERA:  And let me
11   address that, I guess, with -- with counsel.  Counsel,
12   I think restitution is -- is a proper variable in any
13   settlement agreement.  I -- I understand that anyone
14   has their civil remedies, but based on Billy's
15   comments, he is saying that restitution is not
16   something that is -- it's a variable, but it was not
17   taken into consideration by the group.
18                  MS. KIPLIN:  And I'll -- I'll ask
19   Mr. White to chime in, but I think when parties
20   settle, to the extent it's not prohibited by law, I
21   think anything is -- is on the table to consider.
22   Should this case go to hearing, over to the State
23   Office of Administrative Hearings, I don't believe
24   that that would be an opportunity.  I don't believe
25   that would be part of what could be allowed by law.
0167
 1                  COMMISSIONER OLVERA:  All right.
 2                  MS. KIPLIN:  But, certainly, parties
 3   can agree.
 4                  COMMISSIONER OLVERA:  Okay.  Is that
 5   what you were asking?
 6                  COMMISSIONER COX:  Yes, sir.
 7                  MR. WHITE:  And, I guess, Ms. Kiplin,
 8   I -- I concur that it is legally permissible through
 9   an agreed order, I believe, to include restitution.  I
10   think it would be very difficult in this matter.
11   There's going to be so many charities involved in
12   calculating however it would be divided up.  But
13   that -- that's legally permissible, as Ms. Kiplin also
14   said.  However, if it went on to SOAH, I do not
15   believe SOAH would have any authority to provide for
16   restitution.
17                  CHAIRMAN CLOWE:  Any further questions
18   at this point?
19                  COMMISSIONER COX:  Mr. Chairman, I
20   would just say that I share your concern about the
21   lack of time to prepare for this and the lack of
22   understanding that I have, having never gone through
23   one of these before, and that while I have asked every
24   question I know to ask, I don't very feel very
25   comfortable in going one way or the other with this
0168
 1   thing.
 2                  CHAIRMAN CLOWE:  Well, thank you for
 3   that expression.  I -- I think the choices the
 4   Commissioners have at this point in time are to not
 5   sign this order and give the staff direction to sign
 6   it -- to not sign it, and direct that it be sent over
 7   to SOAH for trial.  And then an option, which may be
 8   my favorite at this time, is to pass this case until
 9   our July meeting, giving the Commissioners -- and I
10   put myself at the head of this list -- time to receive
11   more information and legal advice so that I might feel
12   better prepared, in the July meeting, to go forward
13   with whatever action the Commission might want to
14   take.  This case has been going on for a long time,
15   and I want to make a good vote when I come to that
16   point.  And I don't think waiting for another month is
17   going to cause any damage if that would be offset by
18   the opportunity to do the right thing.
19                  COMMISSIONER OLVERA:  I agree.
20                  COMMISSIONER COX:  I agree.
21                  CHAIRMAN CLOWE:  Then, I think, Steve,
22   what we're going to do is ask you to bring this back
23   to us in our July meeting.
24                  MR. WHITE:  Yes, sir.
25                  CHAIRMAN CLOWE:  Thank you.
0169
 1                  Next, Commissioner Olvera, let me ask
 2   you what your schedule is regarding your further
 3   attendance.
 4                  COMMISSIONER OLVERA:  I have 15
 5   minutes.
 6                  CHAIRMAN CLOWE:  Well, you answered the
 7   question, didn't you?
 8                  I just wondered if we might not get
 9   started, to some extent, on item number five, then,
10   consideration of and possible discussion and/or
11   action, including proposal, on new rules 16 TAC
12   402.706 and/or 402.707 relating to Standard
13   Administrative Penalty Guideline and Expedited
14   Administrative Penalty Guideline.  Ms. Joseph.
15                  MS. JOSEPH:  Thank you.  Good morning,
16   Commissioners.  I am Sandra Joseph, Assistant General
17   Counsel.
18                  Before you are draft documents which
19   are prepared for possible submission to the Texas
20   Register, in order to propose adoption of two new
21   rules.  The purpose of the new rules is to provide
22   guidance for administering penalties to persons that
23   violate the Bingo Enabling Act; also, to provide an
24   alternative disciplinary procedure for certain de
25   minimis violations of the Bingo Enabling Act.
0170
 1                  Now, this matter was presented to you
 2   at the April 6th Commission meeting.  At that time,
 3   you asked that we go back, work with members of the
 4   public and the industry further, and review some
 5   issues that had been raised.  We did do that.  We
 6   spent many hours of meetings going over the prior
 7   draft, and as a result, certain changes were made.
 8                  The list of violations is much shorter
 9   now.  Most violations which have never or rarely
10   occurred were removed from the -- from the list.  In
11   addition, any unnecessary language was deleted.  This
12   made the list shorter and more easy to read and use.
13                  And there were a number -- several
14   issues that the workgroup did not reach consensus on,
15   and I would like to outline those for you.  The first
16   one was the source of money to pay administrative
17   penalties.  The second one, the length of time allowed
18   to accept an expedited penalty.  And, finally, the
19   time period for considering repeat violations.
20                  To discuss those further, the first
21   one, the permissible source of money to pay
22   administrative penalties.  On that issue, language has
23   been added to the draft which states that money used
24   to pay any administrative penalty imposed pursuant to
25   the Bingo Enabling Act must be from a non-bingo source
0171
 1   of funds.  This was identified as an issue at the --
 2   at the last Commission meeting.  At the meetings which
 3   have been conducted subsequent to that, among staff
 4   and members representing charities, we did not come to
 5   consensus on that.  Members of the public do not want
 6   such a provision.  They did not want that to be a
 7   requirement, either in the rule or out of the rule.
 8   They would like to be able to pay any penalties from
 9   whatever source of money they choose.  The Bingo
10   Division staff has indicated they felt that it was
11   important to have such a prohibition in there or such
12   a requirement that any penalties would not come from
13   bingo source of funds.  I can go ahead and go through
14   all the issues, or if you have any questions about
15   this issue before I talk about another one, I -- I
16   don't know which you would prefer.
17                  CHAIRMAN CLOWE:  Why don't you just
18   proceed, and we'll just interrupt you if we have
19   questions, please.
20                  MS. JOSEPH:  Okay.  All right.  All
21   right.  The second issue is the length of time allowed
22   to accept an expedited penalty.  The draft rule
23   402.707 provides that a respondent will have 20 days
24   from the receipt of notice of a violation and
25   settlement agreement to accept the administrative
0172
 1   penalty or to make a request for a hearing.  Bingo
 2   representatives state that 20 days is insufficient
 3   because it would not be enough time for some
 4   organizations to meet -- to make a decision whether
 5   they want to accept the expedited penalty amount or to
 6   request a hearing.  The staff's position is that the
 7   purpose of the rule, which is to facilitate
 8   expeditious resolution of certain types of violations
 9   in cases and to encourage settlements, will be
10   defeated if the time is extended beyond 20 days.  In
11   addition, we would like to point out that the rule --
12   the proposed rule would give the respondent 60 days
13   from the date of the order approved by the director of
14   bingo to actually pay any penalty.  So it provides
15   there to be 20 days to decide whether or not they
16   would like to accept the expedited penalty, and then
17   at least 60 days to actually pay it.
18                  The third issue is the time period for
19   considering repeat violations.  The draft of the
20   proposed rule 706 that was presented to you on
21   April 6th, provided that the look-back period for
22   considering repeat violations would be 48 months.
23   Based on discussions that the group had, it -- it was
24   agreed upon by the staff that that time period could
25   appropriately be reduced to 36 months.  That, of
0173
 1   course, was more acceptable to the group as a whole,
 2   but there was some reservation as to whether that was
 3   satisfactory.  They still felt that 24 months would be
 4   a more appropriate period of time to look at prior
 5   violations.  The problem that the staff has with that
 6   is that compliance audits are conducted every three to
 7   four years, and using a 24-month period would mean
 8   that many repeat violations might not be identified.
 9                  Now, the group also considered an
10   additional issue, in addition to the three that I've
11   just outlined, concerning the desirability of having a
12   cap on penalties for unintentional violations.  This
13   was raised by, in particular, David Heinlein, that he
14   thought it might be desirable to have a cap on the
15   amount of penalties.  After discussion, however, no
16   one in the group was convinced that a cap would be
17   beneficial.  Therefore, no language on this issue has
18   been added to the draft.
19                  Finally, at the May 25th, 2005, BAC
20   meeting, Stephen Fenoglio, attorney for numerous bingo
21   organizations, raised an issue challenging the need
22   for the Commission to propose administrative penalty
23   rules at this time.  He asserted that because of the
24   legislature's failure to act on the agency's Sunset
25   bill, the impetus to consider such rules no longer
0174
 1   exists.  And his assertion is apparently based on the
 2   belief that the original reason for developing and
 3   proposing the rules was the anticipated enactment of
 4   proposed Sunset legislation that included directions
 5   to adopt standard penalty rules.  However, staff
 6   maintains that the sole reason for proposing the rules
 7   was not anticipated legislative directive.  The staff
 8   believes that, independent of a legislative directive,
 9   proposal and adoption of standard penalty rules would
10   be beneficial to both Commission staff and all other
11   persons interested in the conduct of charitable bingo.
12   We are proposing -- it is recommended that the rules
13   be proposed for a comment period of 30 days, during
14   which time a public hearing would be held to accept
15   additional comments.
16                  I'll be happy to answer any questions.
17                  CHAIRMAN CLOWE:  Are there any
18   questions?
19                  COMMISSIONER COX:  Yes, sir.
20                  CHAIRMAN CLOWE:  Please.
21                  COMMISSIONER COX:  Sandy, I've talked
22   to you and the staff about an issue of concern.  We
23   talked about it at the last meeting, and we talked
24   about it again yesterday.
25                  MS. JOSEPH:  Yes, sir.
0175
 1                  COMMISSIONER COX:  And that is my
 2   inability to understand where a charity is going to
 3   get the money to pay any penalties.  Apparently, the
 4   law prohibits money that came from bingo, whether it's
 5   in the bingo account or whether it's already been
 6   distributed to the charity's general account, from
 7   being used to pay penalties.  Is that your
 8   understanding?
 9                  MS. JOSEPH:  My understanding is that
10   it prevents any money being spent from the bingo
11   account.
12                  COMMISSIONER COX:  Okay.  Now, we know
13   from our discussion yesterday that it specifically
14   says that no money can come out of the bingo account.
15                  MS. JOSEPH:  Yes.
16                  COMMISSIONER COX:  And then yesterday
17   Phil read -- Phil Sanderson read to us several
18   provisions of the Bingo Enabling Act that seemed to me
19   to prohibit payment of penalties from any account --
20   seemed to me, I say.
21                  MS. JOSEPH:  Yes.  When read together.
22                  COMMISSIONER COX:  Because it's my
23   interpretation that if any bingo money has gone into
24   the general fund, that that percentage of every
25   dollar -- every dollar, every penny is bingo money,
0176
 1   bingo funds.  Now, I recognize there are different
 2   fund flow assumptions that can be made.  One could
 3   assume that as long as the penalties are not greater
 4   than the amount of money that came into the general
 5   fund from sources other than bingo, that it would be
 6   attributable to those dollars and that the bingo
 7   dollars remain pristine and untouched by penalties.  I
 8   don't think that's realistic.  I think the more
 9   realistic assumption -- flow assumption is that a
10   percentage of every dollar is bingo funds to the
11   extent that bingo contributed to the total that went
12   into that general fund.  Now, if my interpretation is
13   correct, does the Bingo Enabling Act prohibit bingo
14   licensees from paying penalties?
15                  MS. JOSEPH:  From bingo funds?
16                  COMMISSIONER COX:  At all?  Because if
17   I -- I'm asking you to assume for a moment that my
18   fund flow assumption is correct and that is, some
19   percentage of every penny that's in the general fund
20   comes from bingo.  If that is the case, is it your
21   opinion that the Bingo Enabling Act prohibits bingo
22   licensees from paying penalties?
23                  MS. JOSEPH:  I would -- I want to say,
24   I'm not prepared to say with a hundred percent
25   certainty, that I believe that that is logical.
0177
 1                  COMMISSIONER COX:  So where I have
 2   gotten is confused because, on the one hand, I'm told
 3   the Bingo Enabling Act requires us to assess
 4   penalties --
 5                  MS. JOSEPH:  Uh-huh.
 6                  COMMISSIONER COX:  -- to have a
 7   schedule of penalties, and presumably assess them, and
 8   on the other I'm told that they're prohibited from
 9   paying them.  How -- how do we get past that?
10                  MR. ATKINS:  Commissioner Cox?
11                  COMMISSIONER COX:  Yes, sir.
12                  MR. ATKINS:  If I can address that.
13                  COMMISSIONER COX:  Sure.
14                  MR. ATKINS:  The bingo Enabling Act, as
15   it's written now, does not require us to have a
16   schedule of penalties.
17                  COMMISSIONER COX:  Okay.
18                  MR. ATKINS:  It doesn't prevent us.
19   What it does do is allow us to assess administrative
20   penalties.
21                  COMMISSIONER COX:  Okay.  So it allows
22   us to assess administrative penalties, but it doesn't
23   allow them to pay it, under my scenario.
24                  MS. JOSEPH:  The -- the only way I can
25   make sense of that, Commissioner Cox, is to suspect
0178
 1   that the legislature didn't envision charities as
 2   having only bingo money as -- as a source of money.
 3   If it -- and I haven't looked at legislative history
 4   and certainly wasn't around at that time, but I would
 5   think they would have assumed there would be other
 6   monies coming in to the charities.
 7                  COMMISSIONER COX:  The legislature
 8   knows that dollars are fungible, so I am -- I am not
 9   sure that I am comfortable that they made that
10   assumption.
11                  MS. KIPLIN:  May I offer a comment?
12                  COMMISSIONER COX:  Yes, ma'am.
13                  MS. KIPLIN:  There is a -- a rule of
14   construction, and -- and that is the legislature, when
15   enacting legislation, doesn't intend absurd results.
16   And -- and I haven't looked at this as the case in
17   question has -- it's arisen just now, but it doesn't
18   seem to me to make sense that the legislature would
19   give the agency the authority to assess and impose
20   administrative penalties -- and, in fact, set out a
21   subchapter on that very subject -- and not intend for
22   that assessment to lead to actual payment of the
23   penalties.  And that's just an off-the-cuff in terms
24   of a remark that I have, in terms of a rule -- a very
25   long-standing rule of statutory construction.
0179
 1                  COMMISSIONER COX:  Okay.  Let's just
 2   take that for a moment for all of them that have other
 3   sources of funds.  How many charities are there out
 4   there that get all of their income from bingo
 5   operations?
 6                  MS. JOSEPH:  I don't know.
 7                  MR. ATKINS:  We don't know that,
 8   Commissioner Cox.
 9                  COMMISSIONER COX:  So if there is one
10   and it incurred a penalty, we would be putting it out
11   of business?
12                  MR. ATKINS:  Unless they -- they got
13   those funds from somewhere else.  I think you
14   described a situation where their directors could kick
15   in.
16                  COMMISSIONER COX:  Or they could hold a
17   special fund-raiser --
18                  MR. ATKINS:  That's correct.
19                  COMMISSIONER COX:  -- or those kinds of
20   things.  But it is possible that we could assess
21   penalties against an organization that is prohibited
22   by law from using any of its money, unless it goes out
23   and raises it some other way, to pay these penalties?
24                  MR. ATKINS:  That's correct.  It's also
25   correct that we could impose a penalty that just the
0180
 1   amount in and of itself would put them out of
 2   business.
 3                  COMMISSIONER COX:  Okay.  That's --
 4   that's all I have on that.  Those are questions,
 5   nothing more.
 6                  I worked in the gaming business in
 7   Nevada for 18 years.  And there were lots and lots of
 8   rules that were supposed to be complied with, and
 9   everybody violated lots of them on a continuing basis,
10   not on purpose, but because it just wasn't possible,
11   with the thousands of documents that were processed
12   every year, that every one of them had the requisite
13   three signatures or four signatures or this kind of
14   thing.  It just didn't work out that way.  And my
15   recollection is, the State of Nevada did not have a
16   schedule of penalties for those instances of
17   noncompliance.  Have you looked at other jurisdictions
18   and found whether -- learned whether they have
19   penalties for these -- I don't want to characterize
20   them as minor offenses because I don't want to say
21   they're trivial, but for certain levels of
22   noncompliance, saving the penalties for very
23   significant events of noncompliance?  Have you looked
24   at what other folks do in that area?
25                  MS. JOSEPH:  Yes.  I -- I believe
0181
 1   Mr. Sanderson has some recent information that he has
 2   seen on that, for at least one state.  But before he
 3   shares that with you, I would just like to say that on
 4   the charts you may notice that, for first violations,
 5   many times the penalty is a warning.  So I just wanted
 6   to mention that.
 7                  COMMISSIONER COX:  Yeah.
 8                  COMMISSIONER OLVERA:  Commissioners, I
 9   need to take my break.
10                  CHAIRMAN CLOWE:  We'll adjourn -- or
11   recess for ten minutes.
12                         (RECESS.)
13                  CHAIRMAN CLOWE:  We'll come back to
14   order.  I believe at the time that Commissioner Olvera
15   excused himself -- and I would like the record to
16   reflect that he is now absent, Commissioner Cox is
17   here, and we have a quorum -- Commissioner Cox was
18   digging in on an issue.
19                  Did you have an answer, Phil, that you
20   wanted to give him?
21                  MR. SANDERSON:  Yes, sir.  And for the
22   record, Phil Sanderson, Assistant Director of the
23   Charitable Bingo Operations Division.
24                  I believe his question was if we looked
25   at other states and their penalty structure and how
0182
 1   their penalties were assessed.  We did look at some
 2   other states and the amounts of penalties that they
 3   assessed for similar violations.  I don't know if we
 4   based our amounts on any of those, but we did go out
 5   and find other states that did assess penalties.  I've
 6   got some examples, if you would like to hear some of
 7   those, that are on their website, and I'll leave that
 8   up to you if you want to go through some of those.
 9                  COMMISSIONER COX:  That would be okay.
10                  CHAIRMAN CLOWE:  Well, did they wear
11   you out?  You didn't get an answer.
12                  COMMISSIONER COX:  Well, I think the
13   answer was -- I think the answer was that we're not
14   the only state imposing penalties.
15                  CHAIRMAN CLOWE:  Well, that's only that
16   there are a whole bunch of us that are doing something
17   that seems impossible to do.  Let's get back to
18   Commissioner Cox's original question.
19                  COMMISSIONER COX:  Let me add one more
20   thing to that question, which I forgot to mention.
21   And the discussion with Sandy reminded me.  Can the
22   charities pay penalties out of what we'll call for the
23   moment non-bingo funds, without jeopardizing their
24   501(c) exemptions?
25                  MR. SANDERSON:  I don't exactly have an
0183
 1   answer to that because that would be an IRS question.
 2   And I do know that there are certain activities that
 3   the IRS allows.  And, of course, there again, it's
 4   based on the 501(c) type that they are.  There is 27
 5   different 501(c) designations.  For the most part,
 6   there is four to five of those that conduct bingo.
 7   And I think it would depend on what classification
 8   they are and how the -- the activity or the -- you
 9   know, what are their activities are exempt, their tax
10   exempt status, basically, is what it's for.
11                  COMMISSIONER COX:  Was that kind of an
12   I don't know?
13                  MR. SANDERSON:  Yes, sir.
14                  COMMISSIONER COX:  Does anybody know?
15                  Okay.  So what we don't know is whether
16   the charities would jeopardize their 501(c) exemptions
17   if they paid the penalties that we're proposing to
18   assess.  And what I don't know is whether the Bingo
19   Enabling Act prohibits their paying penalties at all,
20   because if you assume that some cents of every dollar
21   proportionate to the contribution of bingo to the
22   general fund is bingo money, then they're prohibited
23   from paying them at all.  Those seem like important
24   issues to me.
25                  MR. SANDERSON:  There are some -- and
0184
 1   maybe this will help answer both the previous question
 2   you had and that one there.  There are other states
 3   that assess penalties.  And they have in their rules
 4   that -- they actually use the term gaming funds
 5   because they authorize more than just bingo -- that
 6   they are not allowed to pay any administrative penalty
 7   with gaming funds.  And additionally, those
 8   organizations for the most part are all tax exempt
 9   organizations with the IRS.  So it would not be a
10   situation unique to Texas to --
11                  COMMISSIONER COX:  I know that you're
12   telling me we should do it because everybody else is
13   doing it.
14                  MR. SANDERSON:  No, sir, that's not
15   what I'm telling you.  I'm just saying that to maybe
16   help clear up -- you know, whether some other states
17   have looked into that aspect of it, I'm not aware of.
18                  COMMISSIONER COX:  Mister Chairman, my
19   recommendation is that we find out.
20                  CHAIRMAN CLOWE:  I agree with you.  I
21   don't see how we can put up rules for public comment
22   if we don't know if they can be enforced.  And I don't
23   think you ever got an answer to your question -- if
24   you did, I missed it -- on how they pay these
25   penalties when they're levied against them.
0185
 1                  MS. KIPLIN:  Can I direct your --
 2   Ms. Joseph, I don't know if you've looked at this, but
 3   under 2001.607 and 2001.608 of the Occupation Code, it
 4   says, not later than the 30th day after the date on
 5   which the order becomes final, the person shall pay
 6   the penalty.  And then the -- 2001.608 discusses that
 7   if they don't pay, then you refer the matter over the
 8   AG for collection of the penalty.  So --
 9                  CHAIRMAN CLOWE:  That's out of what?
10                  MS. KIPLIN:  That's out of the Bingo
11   Enabling Act.
12                  CHAIRMAN CLOWE:  So it says they will
13   pay, but --
14                  MS. KIPLIN:  And if they don't, refer
15   it over to the AG for collection.
16                  COMMISSIONER COX:  But how can they?
17                  CHAIRMAN CLOWE.  Yeah.  If you -- the
18   person is trying to pay, and they turn to us and they
19   say, well, what funds shall we pay this out of, what
20   do we answer?
21                  MS. KIPLIN:  You know, I don't know
22   that that's a -- in terms of the issue that's before
23   the Commission on whether it can or cannot come from
24   bingo funds, I want to set that aside for a second.
25   And the general question is, you know, what can they
0186
 1   do.  Well, it's like anybody.  I can remember at the
 2   Railroad Commission you could assess penalties and
 3   then if somebody can't pay, for whatever reason, you
 4   still try to collect the penalty.  That's an issue of
 5   financial solvency.
 6                  COMMISSIONER COX:  But the Railroad
 7   Commission is not dealing with not for profits.
 8                  MS. KIPLIN:  And I'm using that by way
 9   of example, recognizing --
10                  CHAIRMAN CLOWE:  I don't think that's a
11   good example.  When you get through with that thing
12   you're doing, let's discuss this further.
13                  MS. KIPLIN:  I'm sorry.
14                  CHAIRMAN CLOWE:  At the Railroad
15   Commission, you're dealing with private companies, and
16   their bookkeeping wasn't regulated by the Railroad
17   Commission.  In this case, the bookkeeping of these
18   charitable entities is regulated by this agency, and
19   we're saying they cannot use bingo funds to pay these
20   penalties.  How do they pay the penalties?
21                  MS. KIPLIN:  From -- if you go down
22   that scenario, from another source.
23                  COMMISSIONER COX:  Let me just stop you
24   for a minute here.  The question that I perceive the
25   Chairman is asking has an accounting model
0187
 1   application.  Okay?  The world is full of entities
 2   that account for their monies by fund.  Fund
 3   accounting.  Most companies account for their money by
 4   fund.  And those -- each fund has an indication of
 5   where the money comes from and where the money can go
 6   to.  Now, if a charity had a general account and a
 7   bingo account, and they're separate funds, separate
 8   bank accounts that were segregated, and if it said in
 9   its charter or appropriate document that every dollar
10   that comes out of the bingo account into this bingo
11   fund may only be spent for X purpose, and that there
12   is this other fund over here and we pay penalties out
13   of that if it doesn't cost us our exemption, then the
14   world might be fine.  But I don't think that's the way
15   the world is.  And until the world is that way, I
16   don't know how we're going to know whether the law
17   permits their paying these penalties or not.  Now, if
18   you're prepared to come next month, two months,
19   whenever it is, and tell us that, yes, there is a way
20   and here it is, and we say, by golly, there it is,
21   let's approve the rule and publish it, then I'll be
22   ready to vote for it.  But I'm not convinced that this
23   holds together.
24                  MS. JOSEPH:  And I appreciate that.  I
25   would like to suggest another way to look at it
0188
 1   perhaps and see if that helps anything or changes
 2   anything.  2001.453 says that a licensed authorized
 3   organization may draw a check on its bingo account
 4   only for, and it names several categories of things,
 5   the first one of which is, only for the payment of
 6   necessary and reasonable bona fide expenses.
 7                  Now, if payment of penalties were
 8   considered to be a reasonable and necessary expense,
 9   then I would say the Act does authorize payment from
10   the bingo account.  If you follow what I'm saying.
11                  COMMISSIONER COX:  I follow it, but
12   what is your point?
13                  MS. JOSEPH:  My point is that there
14   would be a way.  If you adopt that analysis, there is
15   a way for the penalties to be paid from bingo money.
16                  COMMISSIONER COX:  Okay.  Is that -- is
17   that your opinion that the law says that?
18                  MS. JOSEPH:  I believe that's one
19   interpretation of it, yes.
20                  COMMISSIONER COX:  No.  Is it your
21   opinion and does General Counsel share the opinion
22   that they can be paid from the bingo account
23   notwithstanding Mr. Atkins' longstanding position that
24   they can't?
25                  MS. JOSEPH:  I believe that it would be
0189
 1   permissible if the Commission chooses to adopt a
 2   policy that penalties are necessary and reasonable
 3   expenses.  And I -- personally, I could -- I could --
 4   I personally could live with that interpretation
 5   because, as I believe you have mentioned earlier, it's
 6   likely that organization is going to commit some
 7   violations, inadvertently, you know, whatever, and so
 8   I can see that it would be acceptable to decide that
 9   some amount of penalties would be reasonable and
10   necessary.
11                  COMMISSIONER COX:  Well, I think you
12   suggest a possibility that is (inaudible) but I have
13   two questions.  One, it is your considered opinion
14   after doing appropriate research that that is the
15   case; and, two, do we have the authority to make rules
16   that so interprets the law?
17                  MS. JOSEPH:  Is that -- would you like
18   for me to answer that now?
19                  COMMISSIONER COX:  No.
20                  MS. JOSEPH:  Okay.  I'll -- I am ready
21   to answer the second one.  I do believe we do have the
22   authority to interpret the law for our policy.
23                  CHAIRMAN CLOWE:  And I think that, you
24   know, everybody has got to be comfortable with that.
25   Billy, you've got to partake in that determination,
0190
 1   and apparently, we're beyond now where everybody was
 2   up to the point of this presentation.
 3                  MR. ATKINS:  Well, and I think -- I
 4   think so, Mr. Chairman.  And from what I understand
 5   from the discussion, you would also like for us to
 6   look at whether these organizations can pay
 7   administrative penalties from other funds.
 8                  COMMISSIONER COX:  Yes, sir.
 9                  CHAIRMAN CLOWE:  I think the sense from
10   the two Commissioners is that we don't want to be in a
11   position of putting out for public comment a rule that
12   says you've got to do something, and the public
13   saying, well, how do we do this?  And we say, well, we
14   don't know.  We want to able to answer that question
15   and say, here is the way you do it.  And we approve of
16   this way of doing it.
17                  COMMISSIONER COX:  Yes, sir.
18                  MS. JOSEPH:  Be happy to look into this
19   further and research it, get you some more good
20   information.
21                  CHAIRMAN CLOWE:  Anything further on
22   any other aspects of this at this time?
23                  COMMISSIONER COX:  No, sir.
24                  CHAIRMAN CLOWE:  Thank you all very
25   much.  Mr. Bresnen, I think I got your appearance form
0191
 1   first.  I read your letter.  I don't know whether
 2   Commissioner Cox has read it or not.
 3                  COMMISSIONER COX:  I have read your
 4   letter.
 5                  CHAIRMAN CLOWE:  Do you still wish to
 6   address the Commission?
 7                  MR. BRESNEN:  No, sir.
 8                  CHAIRMAN CLOWE:  Mr. Fenoglio, your
 9   appearance form came second.  Do you now wish -- you
10   didn't write a letter, did you?
11                  MR. FENOGLIO:  Not this time,
12   Mr. Chairman.
13                  CHAIRMAN CLOWE:  Okay.  Do you wish to
14   address the Commission?
15                  MR. FENOGLIO:  Just briefly.  And the
16   issue that y'all have teed up, I think, is a very --
17   for the record, my name is Stephen Fenoglio.  I'm an
18   attorney and I also represent over 950 charitable and
19   business organizations.
20                  The issue you have teed up is a very
21   important issue.  It's an issue that I've raised since
22   I have gotten into this rulemaking proceeding back in
23   the fall.  And I am a little surprised that for the
24   first time I hear that the Commission staff has now
25   taken a position that it's prohibited by law, which is
0192
 1   not what I've heard before.  And I'll be happy to get
 2   with Phil and others about that.  But while we're on
 3   the issue of the proper interpretation of 2001.458, I
 4   think it bears bringing to your attention, the
 5   Commission's staff position in all of their audit
 6   issues has been, if an item of expense is not on one
 7   of those one through 11 items, under 458, there is no
 8   way that a charity can utilize bingo expenses -- I'm
 9   sorry -- bingo funds to pay that expense.  And I think
10   that's an abuse of the interpretation of the statute
11   and for the simple reason that the word "include" --
12   and I know Ms. Kiplin is aware of that the legislature
13   has actually given us a statutory definition of
14   "include," which is, it's a term of enlargement and
15   not of limitation or exclusive remuneration, and that
16   from the Code construction act, specifically the Texas
17   Government Code, Section 3001.005.  So it has been my
18   contention in a number of these issues that the
19   statute is not as limited.  I mean, for example, it
20   says -- well, the 11 items are included as expenses.
21   It doesn't prohibit the expenditures of bingo funds
22   for others.  The test is, is it reasonable and
23   necessary.
24                  And Commissioner Cox, I take my hat off
25   to you.  The -- the way you phrased the issue on the
0193
 1   Internal Revenue Code is an issue that I had never
 2   thought of.  And I was busily writing and I will share
 3   with the Commission my research on that issue.  It
 4   went right over my head for nine months, and I'm
 5   ashamed to say that it did.  And I thank you for
 6   bringing up the issue.  And I'll withhold the balance
 7   of my comments, Mr. Chairman and Commissioner Cox,
 8   until the next time you bring this up.
 9                  CHAIRMAN CLOWE:  We thank you for that
10   and we thank you for your working with the staff and
11   with the BAC.  And I think, as we move together, your
12   input and Mr. Bresnen's input, on behalf of the
13   clients you represent, has a beneficial result.
14                  MR. FENOGLIO:  Great.  And I would just
15   like to say on the record, this is the shortest
16   presentation I've ever made to the Commission.
17                  CHAIRMAN CLOWE:  For which we are
18   grateful.
19                  Commissioner Cox, with your approval,
20   at this time I'm going to move we go into executive
21   session.
22                  At this time I'll move the Texas
23   Lottery Commission go into executive session to
24   deliberate the duties and evaluation of the Executive
25   Director and/or Deputy Executive Director, Internal
0194
 1   Audit Director, Charitable Bingo Operations Director,
 2   pursuant to Section 551.074 of the Texas Government
 3   Code.
 4                  To deliberate the duties of the General
 5   Counsel pursuant to Section 551.074 of the Texas
 6   Government Code.
 7                  To receive legal advice regarding
 8   pending or contemplated litigation and/or to receive
 9   legal advice pursuant to Section 551.071 (1) (A) or
10   (B) of the Texas Government Code and/or to receive
11   legal advice pursuant to Section 551.071 (2) of the
12   Texas Government Code, including but not limited to:
13   Patsy Henry versus Texas Lottery Commission
14   Sandy Surber et al versus GTECH Corporation
15   Linda Cloud versus Mike McKinney et al
16   James T. Jongebloed versus Texas Lottery Commission
17   Russell Vierney versus Carol Keeton Strayhorn, Greg
18   Abbott, and Reagan E. Greer, in their individual and
19   official capacities
20   GameTech International, Inc. versus Greg Abbott,
21   Attorney General of Texas et al.
22   Employment law, personnel law, procurement and
23   contract law, evidentiary and procedural law, and
24   general government law.
25                  Is there a second?
0195
 1                  COMMISSIONER COX:  Second.
 2                  CHAIRMAN CLOWE:  All in favor, please
 3   say aye.  The vote is two-zero.
 4                  The Texas Lottery Commission will go
 5   into executive session.  The time is 1:05 p.m.  Today
 6   is June 24th, 2005.
 7                   (EXECUTIVE SESSION.)
 8                  CHAIRMAN CLOWE:  The Texas Lottery
 9   Commission is out of executive session.  The time is
10   2:10 p.m.  Is there any action to be taken as a result
11   of the executive session?
12                  If not, let's move to item number nine,
13   report, possible discussion and/or action on the
14   lottery advertising, including advertising
15   expenditures impact on sales, and promotions.
16                  Good afternoon.
17                  MS. McCULLOUGH:  Good afternoon.
18   Mr. Chairman, Commissioner Cox, for the record, my
19   name is Chelsea McCullough.  I'm the Creative
20   Coordinator for the Texas Lottery Commission.
21                  I would like to start with the current
22   advertising and promotions initiatives.  In terms of
23   our TV and radio advertising, DDB, our general market
24   agency, will be running Mega Millions from June 22nd
25   through July 16.  Live reads for one -- will run 100
0196
 1   percent Mega Millions during this time.  Our minority
 2   marketing advertising agency, The King Group, will
 3   also run TV and radio campaigns starting June 22nd and
 4   continuing through July 23rd.
 5                  In regards to promotions, there are a
 6   number of lottery races, selling events, and couponing
 7   events.  And that's -- all those details are indicated
 8   within the memo.
 9                  I would like to move on to the Texas
10   Education logo if there are no questions on the
11   advertising and promotions at this time.  As you can
12   see to your right and to the audience's left, the
13   Texas Lottery supports Texas education, is the new
14   message that we have within the logo that was adopted,
15   I believe, last month.  We took the existing graphic
16   elements, the chalkboard and the apple, and simplified
17   the message and also emphasized the amount that is
18   being contributed back to the Foundation School Fund,
19   which is seven billion dollars.  There is two versions
20   of this logo, one with the seven billion dollars in
21   the apple, and another one which you can see to the
22   far right, upper -- upper right-hand corner, which
23   doesn't include the information, the seven billion
24   dollars.  That will be used on long-term signage so
25   that as that amount increases, we won't have to
0197
 1   replace the signage.  And that -- that logo is also
 2   translated into Spanish, for our Spanish-speaking
 3   language advertising.
 4                  Are there any questions in regards to
 5   the logo?
 6                  CHAIRMAN CLOWE:  No.
 7                  MS. McCULLOUGH:  The third item on the
 8   agenda, which hasn't been presented to the Commission
 9   yet because it will be on agenda eight, I believe, but
10   Dale Bowersock is going to be presenting the Wheel of
11   Fortune instant ticket.  And we have the Scratch Dance
12   commercial, which I believe was requested to be aired
13   in the last Commission meeting.  Would you like to
14   hear that spot at this time?
15                  CHAIRMAN CLOWE:  Could you send it to
16   us individually, in light of the time and the length
17   of the meeting?
18                  MS. McCULLOUGH:  No problem.  We would
19   be happy to do that.
20                  CHAIRMAN CLOWE:  Thank you.
21                  MS. McCULLOUGH:  The fourth item under
22   this agenda item is an update on a question from the
23   last Commission meeting regarding the New York lottery
24   drawings and their coverage.  We spoke to the New York
25   lottery and understood that their drawings are
0198
 1   basically -- I'm sorry.  That an RFP is sent out to
 2   the stations within their ten markets regarding their
 3   drawings because their drawings are aired in all ten
 4   markets.  They are not aired by every station in the
 5   market; however, there is at least one station in each
 6   market that airs them.
 7                  The final item on the agenda is a
 8   request from the last Commission meeting in regards to
 9   the impact of lottery advertising.  I would like to
10   defer to David Sizemore, the research coordinator who
11   will be introducing our presenters.
12                  DR. DAVID SIZEMORE:  Thank you,
13   Chelsea.  Good afternoon, Commissioners.  I am
14   Doctor David Sizemore, Research Coordinator for the
15   Texas Lottery Commission.  And I have the pleasure of
16   introducing Doctors -- Doctor David Huff and
17   Doctor James Jarrett, from the University of Texas
18   Austin.  And they will present a brief on the impacts
19   of advertising -- advertising expenditures on Lotto --
20   I'm sorry -- lottery revenue.  Thank you.
21                  DR. HUFF:  Commissioners, my name is
22   David Huff.  I am a recent retiree from the University
23   of Texas after 37 years.  And I have a formal title
24   now.  It's called professor emeritus.  I don't -- know
25   the difference.
0199
 1                  I have had -- James and I -- by the
 2   way, James Jarrett, to my right, is a senior research
 3   scientist over at the University and has teamed up
 4   with me on a number of projects.  We were retained by
 5   the Commission to look at determinants that might
 6   affect the demand for lottery products.  We completed
 7   that first phase.  It was a national study.  And so
 8   today, what I'm going to do is just take that part of
 9   this, unless -- unless you would like me to go through
10   this today.  I'm just kidding, of course.  And -- but
11   I'll just treat the -- the part that deals directly
12   with advertising.
13                  But as I said earlier, our -- our
14   overall project was to determine these determinants.
15   These determinants can be classified as both
16   controllable and noncontrollable.  What we're talking
17   about today, obviously, is a controllable group,
18   advertising, what you can do with it, and the amount
19   of money you spend, and the types of -- where -- where
20   you place it.  And so the questions that we want to
21   address, then, today, is what impact does advertising
22   have on lottery sales, and what is the gain in sales
23   for every dollar spent on advertising by the Texas
24   Lottery Commission.  And, finally, what are the
25   implications for decisions about future advertising
0200
 1   expenditures.
 2                  The data that we utilized in doing
 3   this -- now, mind you, this was at the national level.
 4   We looked at four data sets.  The first one was a data
 5   set that deal -- dealt with Texas as a -- as a whole.
 6   I'll talk about that briefly in a moment.  We also
 7   used national sets of data dealing with advertising
 8   that also dealt with the impact of the advertising on
 9   different lottery products.  The third data set that
10   we looked at was additional research and experiences
11   from other states.  And, finally, advertising
12   benchmarks that we felt were relevant in assessing
13   this.
14                  Now, at the state level, the first set
15   of data that we looked at dealt with the experience of
16   Texas for the last ten years.  This was expressed on a
17   per capita basis, that is, a per capita of those
18   adults that were eligible to play for the past ten
19   years on both expenditures and on the -- the -- the
20   response rate that we got.  You'll see that -- from
21   this slide that is on the screen at the present time,
22   that there is a definite -- a definite -- what did I
23   do -- a definite relationship between the sales per
24   capita and the advertising cost per capita.  We have
25   three anomalies there, three years, 1999, 2000, and
0201
 1   2001.  They are the only ones that are not following
 2   right on that -- that line that you -- imaginary line
 3   that you can see, running from left to right.  It's my
 4   understanding that that was a period when the
 5   legislature froze or reduced the advertising budget
 6   for the Commission.  And you can see --
 7                  COMMISSIONER COX:  Mr. -- Mr. Huff?
 8                  DR. HUFF:  Yes, sir.
 9                  COMMISSIONER COX:  Could we look at
10   that again?  So what we've -- we've got sales per
11   capita over here, and ad cost per capita over here.
12                  DR. HUFF:  Ad cost per capita.
13                  COMMISSIONER COX:  Yeah.  So we've got
14   that line up there that is showing as one goes up the
15   other goes up, except for those three years where
16   there was an artificial, if you will, cap on the
17   amount of advertising.
18                  DR. HUFF:  That's correct.
19                  COMMISSIONER COX:  Now, I guess we
20   have, if you will, an artificial cap on advertising
21   every year because we have only so much we can spend.
22   How was it different in those three years than it is
23   every year?
24                  DR. HUFF:  In terms of variation?
25                  COMMISSIONER COX:  In terms of how --
0202
 1   what were the -- what were the constraints on our
 2   advertising in those three years that we don't face
 3   every other year?
 4                  DR. HUFF:  Well, they must have been a
 5   lot more severe.  I don't know the exact numbers,
 6   but --
 7                  CHAIRMAN CLOWE:  I don't -- I don't
 8   think that was the impact.  It was the reduction of
 9   the prize payout.  That's what caused the -- the
10   reduction.  The legislature cut the prize payout to,
11   what, 37 cents?  Anybody got that -- is that number
12   correct?  37 cents out every dollar?
13                  MR. GRIEF:  I think you're right,
14   Mr. Chairman.
15                  CHAIRMAN CLOWE:  Yeah.  So I -- I -- I
16   think the answer would be, Commissioner Cox, it wasn't
17   the advertising that impacted that, it was the
18   reduction in the prize payout that impacted it.
19                  COMMISSIONER COX:  Okay.  So said
20   another way, Professor Huff, would it be true that
21   those years are outliers that really can be excluded
22   because of external circumstances that made them
23   irrelevant to the question?
24                  DR. HUFF:  I -- I -- I think you're
25   right.  I think -- what we did, we included them, and
0203
 1   we excluded them for the calculation.  What's
 2   important here, if you look at this and fit a line to
 3   that, if you will, statistically, the slope of that
 4   line will tell you what is the incremental gain or
 5   loss.  And we found that that -- if you looked at
 6   the -- the -- that particular line, with the three
 7   excluded -- excuse me -- if you included -- included
 8   the three, it's 38 dollars.  For every dollar that you
 9   spend on advertising, you can expect a 38 dollar
10   increase in revenue.  Now, if you -- if you exclude
11   those three, it jumps up to 49 dollars.  Now, whether
12   or not this -- you feel this is realistic or not,
13   that's the way the data are.  And I'll show -- if we
14   can't support that by some other work that I'm about
15   to talk about.
16                  This was the second data set that we
17   have.  Now, mind you, this was U.S.  So we looked at
18   all of the -- of the four games that you see here and
19   then went ahead and did a similar operation to what I
20   did for the state of Texas.  We found that for the
21   three-digit games, the sales per capita increased by
22   38 dollars for every new ad per capita.  Four-digit,
23   where there's a whopping 128 dollars, multi-state
24   block lottos, 23 dollars, and for the instant games,
25   it was 29 dollars per capita.  So, interestingly, all
0204
 1   of these are extremely responsive to advertising.
 2                  COMMISSIONER COX:  Professor Huff?
 3                  DR. HUFF:  Yes, sir.
 4                  COMMISSIONER COX:  Back on that last
 5   slide.  You say sales per capita increase by 128, in
 6   the second bullet, for every new ad dollar.  How did
 7   you isolate the effect of old ad dollars and new ad
 8   dollars?
 9                  DR. HUFF:  Can you answer that, Jim?
10                  MR. RICHARDSON:  We really didn't.  We
11   just used total ad dollars for the 14 or 15 states
12   that had the four-digit games for 2002.  So we
13   didn't -- we just did a cross-sectional analysis.
14                  COMMISSIONER COX:  So cross-section of
15   a -- a one year versus a second year?
16                  MR. RICHARDSON:  No, all states --
17                  DR. HUFF:  No, this (inaudible).  It
18   was cross-sectional.  And that's -- we're using
19   different states.
20                  COMMISSIONER COX:  Okay.  So if
21   Delaware had ten dollars more in three-digit-game
22   advertisings than Maryland, then they would have ten
23   times 38 dollars more in sales?
24                  DR. HUFF:  That's correct.
25                  COMMISSIONER COX:  Thank you.
0205
 1                  DR. HUFF:  One study that the third set
 2   here was additional research that I thought was
 3   extremely well done and that reinforces what our
 4   findings are.  This was a doctoral dissertation that
 5   was done at the University of Maryland in the
 6   Economics Department, and the person that wrote this
 7   dissertation was looking at the impact of a reduction
 8   in advertising expenditures for the states of
 9   Illinois, Washington, and Massachusetts.  And all
10   three of these states had experienced extreme cutbacks
11   in their advertising budgets sometime during the last
12   15 years.  The study found that a reduction of one
13   dollar in advertising expenditures resulted in a
14   decrease of 31 to 36 dollars in lottery sales.  Now,
15   that's very close to the figures that we have for
16   Texas, going the other way.  And the -- and -- and, to
17   me, that was one of the best pieces of work that we
18   were able to find.
19                  There are other research, though, for
20   other states, in terms of eliminating advertising.
21   Wisconsin eliminated advertising for its instant game
22   for a period in 1993, and the ratio of lost sales to
23   advertising dollars was 25 to 1.  Nebraska halted
24   advertising for one single game, which led to a 47
25   percent sales decline for that game.  And when
0206
 1   advertising was reinstated in Nebraska, sales
 2   increased by 25 percent.
 3                  Now, increases in advertising,
 4   additional research from other states, these are
 5   changes, now, in advertising budgets.  Maryland
 6   increased their budget by a million eight.  The
 7   concomitant change in sales was 9,660,000, or a ratio
 8   of 5 to 1.  We can go down through each one of these,
 9   New York, Pennsylvania, Minnesota, and Canada, and all
10   of them were in excess of 3, and I think, as I recall,
11   the average for those was 5 -- 5 to 1.
12                  Now, I looked at benchmarks on lottery
13   advertising as a percent of sales.  If you look at
14   that particular table that I have here, Texas ranks
15   fairly low, one percent.  Louisiana, Arizona, and --
16   and the other states are all in excess of one percent.
17                  Another benchmark are other industries
18   and those are listed for you.
19                  COMMISSIONER COX:  Professor Huff?
20                  DR. HUFF:  Yes, sir?
21                  COMMISSIONER COX:  Can we go back
22   there?  Where is Massachusetts on that schedule?
23                  DR. HUFF:  Where is Massachusetts?
24                  MR. RICHARDSON:  It would be all the
25   way at the bottom.
0207
 1                  DR. HUFF:  It would be at the bottom.
 2                  COMMISSIONER COX:  And yet they would
 3   be at the top in per capita sales?
 4                  DR. HUFF:  They what?
 5                  COMMISSIONER COX:  And yet they would
 6   be at the top in per capita sales?
 7                  DR. HUFF:  They are -- yes.  And that's
 8   for a completely different reason.  Their -- their
 9   payouts are one of the highest in the country, too.
10   So you can manipulate that both ways, obviously.
11                  Okay.  And so other benchmarks, we look
12   at the motion picture industry, 1.1 percent of sales;
13   restaurants, 3 percent; amusement parks, 9.6; and so
14   on.
15                  I think the main thing from all of this
16   that we have shown here at the national level --
17   we're -- we're currently doing this at -- at the state
18   level now on -- intrastate, and that's going to be
19   much more applicable, I think, to us.  But in any
20   event, the findings here, I -- I don't think you can
21   argue at all that advertising does have a significant
22   impact on the sales of lottery products.  And whether
23   you accept the notion of 31 to 1 or 38 to 1 or -- and
24   so on, like that, we know that it's significantly --
25   it -- it's a significant amount.  To put a number down
0208
 1   that was -- would be statistically defensible on --
 2   that would make you on much more of a micro level,
 3   would be to actually set up some kind of an
 4   experimental design for the state of Texas as a whole,
 5   where you can -- you can actually vary the amount of
 6   advertising for different reasons, where you can also
 7   alter the different kinds of media that you might
 8   approach that.  And then you would have a -- a
 9   thorough understanding.  But our findings clearly show
10   that the R -- ROI against all studies are strongly
11   stimulated by well-informed advertising and that state
12   lotteries are currently underinvesting, in our
13   judgment, in advertising.  When the advertising
14   dollars are well invested, then it seems to me that
15   it's reasonable that the figures that we have, you
16   could expect the per capita sales to increase by
17   approximately 30 dollars.
18                  That concludes this brief review of --
19   of this part of the study that we did.  I would like
20   to mention that there are certainly other control --
21   controllable variables that the Commission could
22   utilize in increasing their operating profits as well.
23   And that is by -- you have your product, your price,
24   your promotion -- I used to flunk students for that.
25   Products, price --
0209
 1                  COMMISSIONER COX:  Place.
 2                  DR. HUFF:  Hopefully, Cox was a student
 3   of mine.  A good one, too, I might add, but anyway...
 4                  And so you can manipulate any one of
 5   those conditions, and I've always thought to be -- I
 6   know I'm deviating from my purpose here and I'll stop
 7   it, but one of the big things is place.  And you know
 8   why you're under a cap for advertising.  You're under
 9   this also kind of a cap -- well, it is, in terms of
10   your payout -- well, what are you free of?  Well,
11   you're free of place in terms of your distribution --
12   how many outlets, what kinds of outlets, and so on,
13   like that.  And we've shown in our studies here, the
14   more of those babies you put out there, it's -- it's
15   some -- it's a no-brainer.
16                  And the other thing that deals with
17   that place, too, is some kind of an incentive program.
18   So you put those together, and you're not even
19   constrained by these others, and you have a much
20   greater opportunity to -- and then the other one that
21   I've thought of is -- is very important, that we've
22   given a lot of consideration, too, is the product.
23   And I was listening today.  You know, we're talking
24   about Lotto and some of these others, but they all
25   have a life cycle.  And that life cycle is
0210
 1   determinable.  And you should expect it -- and it
 2   should be expected to die.  If you're Frito-Lay and
 3   you're running a product portfolio like they do, they
 4   have the new ones coming out just as the other ones
 5   start to peak and so that the overall growth curve,
 6   then, is positive.  And that's really what we should
 7   be thinking about -- I -- in my judgment, in terms of
 8   lottery products.  And I think for people to panic
 9   because one is going downhill is to be expected.
10   It's -- it's the fault -- and I don't mean this in a
11   negative sense, but -- of having something to come out
12   to supplant that.
13                  Well, thank you very much.  And I will
14   come back anytime.
15                  CHAIRMAN CLOWE:  Well, you know, you
16   always like somebody who thinks the way you do.  Thank
17   you for the information you gave us on the benefit of
18   advertising.  I think this is the most definitive and
19   meaningful presentation on what the benefit of a
20   dollar of advertising is.  I hope we have your
21   presentation in writing because I want to refer to it
22   and use it with people in the legislature and people
23   in the marketplace.  And that's beneficial.
24                  But the last thing you said, and you
25   certainly are more studied and better versed than I
0211
 1   am --
 2                  DR. HUFF:  Oh, no, I'm not going to say
 3   that.
 4                  CHAIRMAN CLOWE:  Well, I will.
 5                  DR. HUFF:  Okay.
 6                  CHAIRMAN CLOWE:  My view is that this
 7   agency -- and, of course, you know it's unique in that
 8   we're a three and a half billion dollar business, and
 9   we're out there competing for the discretional or --
10   discretionary or the entertainment dollar, on the one
11   hand, and on the other, we're a regulatory agency.  So
12   it's a hybrid animal.  But when you look at it with my
13   business background, I see us sort of like the grocery
14   store.  And we've got bananas, and we've got apples,
15   and we've got pineapples, and we've got lettuce, and
16   we've got tomatoes.  And they all come into season at
17   different times, and people come in -- they don't want
18   one of everything every time they come into the store.
19   Some days they come because they want tomatoes and
20   lettuce in their salad.  That's all they buy.  And you
21   know, early on, I told my wife I wanted roasting ears.
22   I wanted some corn on the cob.  And she said, well,
23   there isn't any.  It's out of season.  And I thought
24   everything was in season all the time at the grocery
25   store.  And I find, well, it is, but it's at a high
0212
 1   price and it's not very good.  And I see our lottery
 2   products in much the same way.  You know, we've got
 3   these things that we sell, and some of them appeal to
 4   different customers, and they go out of season -- and
 5   that's relevant to your dying -- and sometimes nobody
 6   wants them at all.  And I think we have followed that
 7   and pursued that in our instant tickets better than we
 8   have in the on-line games.  The problem we've got in
 9   the instant tickets, in my mind -- and I would like to
10   point this out to you.  I happen to have a little bit
11   of knowledge about those three years that were an
12   anomaly because I was here when that happened.  The
13   players are very smart.  They know when the prize
14   payout is reduced from 56 or 57 percent to 37, and
15   they -- they don't play.  And they didn't play in
16   those three years.  And the legislature gave us back
17   that higher prize payout, and, zoom, they went right
18   back to that game.  I mean, they're smart.  But we are
19   not getting the return to the State out of the instant
20   tickets.  And depending on how long your engagement is
21   and how much time you have to spend, you know, when
22   you give away more of the store -- GM now is giving
23   everybody their employee discounts -- that's just
24   price cutting.  And that's sort of what we're doing.
25   We're giving up to 70 percent prize payout on some of
0213
 1   these instant tickets, but when we do that and those
 2   instant tickets get over 70 percent of our sales, the
 3   return to the State, which is the reason we're in
 4   business, is reduced substantially.  So we're having
 5   to work harder and sell more to maintain the return to
 6   the State.  That's not really where I want to see this
 7   Commission go -- this agency go.  We are emotionally
 8   attached to the on-line games.  And -- and I don't
 9   understand so much the psychology of that, but it's
10   there.  Our sweetheart is Lotto Texas.  It was the
11   first one that got all the publicity, and when you
12   talk to a player or a non-player, they don't want to
13   talk about anything but Lotto Texas.  Well, Lotto
14   Texas is not doing very well.  And this issue that we
15   talked about this morning earlier is altogether
16   different, in my mind, from the issue of what -- what
17   are we going to do about Lotto Texas.  And to say,
18   well, you know, we may let her die.  That's almost
19   blasphemy.  That's kind of like -- well, that's not a
20   good example.  But -- I've got a dog I'm treating now,
21   and, you know, the idea of animals, you know, you can
22   just justify so much.  It's sort of like turning Lotto
23   Texas.  After you try everything in the world, you
24   just say, well, that game is over.  And I think
25   it's -- what, Robert?  -- still about 8 or 9 percent
0214
 1   of our sales?
 2                  MR. TIRLONI:  Yeah.
 3                  CHAIRMAN CLOWE:  You don't want to turn
 4   loose of anything until, as you pointed out very
 5   astutely, you have something else coming on.  I liked
 6   your example of Frito-Lay, and I've seen that with
 7   Doritos, and -- you know, those -- those people are
 8   smart marketers.
 9                  DR. HUFF:  Very smart.
10                  CHAIRMAN CLOWE:  But we get all caught
11   up, and I don't think we've done a real good job of
12   analyzing, with the emotional outcry of, well, you
13   know, we -- we want this or we don't want that, and
14   people are inherently against change.  We haven't sold
15   the idea of new and fresh products as well as we
16   should.  And you're a part of that effort, thanks, I
17   think, to Commissioner Cox.  This is the path that we
18   ought to be looking at.  From what I see, he has, I
19   think he said earlier in this meeting, 18 years
20   experience in Las Vegas, managing big gaming
21   operations.  Those people have got marketing and
22   expectation of product development and that sort of
23   thing.  I mean, they're -- they're -- in my mind,
24   they're way ahead of General Motors, other domestic
25   car companies.  I think that's another subject, but,
0215
 1   you know, when the Wynn people build a hotel out
 2   there, like they just finished and opened, just think
 3   of the research that went into that and the business
 4   plan that supports it.  And we've got a three and a
 5   half billion dollar a year business here.  And I think
 6   we're very light on product development.  So you kind
 7   of came at it through advertising, and I appreciate
 8   that.  That's valuable.  And I was interested in that,
 9   but I'm really sort of turned on about comments you
10   made later on.  And I -- I hope there is some way that
11   we can avail ourselves of the benefit of your
12   knowledge and experience in regard to our product
13   development.
14                  DR. HUFF:  Thank you very much.
15   I'll -- I'll -- I'll do that.
16                  CHAIRMAN CLOWE:  That's great.
17   Anything further?  I'm sorry that we delayed you
18   gentlemen so long.  We apologize to you.  We had a
19   very lengthy and detailed discussion about other
20   subjects, and we're appreciative of you for staying
21   the course and being with us.
22                  DR. HUFF:  Thank you, Commissioners.
23                  CHAIRMAN CLOWE:  Thank you.
24                  DR. HUFF:  One suggestion.  You could
25   save three million dollars by just turning down the
0216
 1   air around here.
 2                  CHAIRMAN CLOWE:  You know --
 3                  DR. HUFF:  You can hang meat out here.
 4                  CHAIRMAN CLOWE:  You know -- you know,
 5   Professor, I have had the same thought, but I find the
 6   guys your and my age are more sensitive to that than
 7   younger people.  So I go out outside and warm up every
 8   now and then.
 9                  DR. HUFF:  Yeah, I'm going to.  Bye-bye
10   everybody.
11                  CHAIRMAN CLOWE:  Thank you.
12                  Next we'll go to item three, report and
13   possible discussion on bingo financial information and
14   statistics, including charitable distributions.
15                  MS. KIRKPATRICK:  Good afternoon,
16   Commissioners.
17                  CHAIRMAN CLOWE:  Good afternoon.
18                  MS. KIRKPATRICK:  Janet will be
19   distributing a PowerPoint presentation.  I am Betty
20   Kirkpatrick, Financial Operations Manager,
21   Administration Division.
22                  MR. SANDERSON:  Phil Sanderson,
23   Assistant Director of the Bingo Division.
24                  MS. MULUSCHKA:  And I'm Janet
25   Muluschka, Financial Analyst with the Administration
0217
 1   Division.
 2                  MS. KIRKPATRICK:  Today we are
 3   presenting our second bingo financial analysis.  This
 4   presentation will address gross receipts, attendance,
 5   the occasions, and the conductors report.  In
 6   addition, we will be introducing a new format for the
 7   conductors quarterly reporting summary for the
 8   Commission's approval.
 9                  Let's begin by briefly reviewing our
10   previous findings.  Gross receipts have been
11   increasing since 2002, due to the introduction of the
12   new style of instant pull tabs.  Prices have been
13   increasing faster than gross receipts, due to
14   increasing prize payout percentages.  Net revenue has
15   been declining as a result of increasing prize payout
16   percentages, but increasing in 2004.  Total expenses
17   have remained fairly constant.  Reported charitable
18   distributions have been following the decline in net
19   revenue and leveling off in 2004.  However, they have
20   consistently exceeded the required charitable
21   distributions.
22                  We have completed additional analysis
23   which involves, for the past five years, quarterly and
24   annual trends for gross receipts, attendance,
25   occasions, and the conductors reporting.  Gross
0218
 1   receipts are highest in the first quarter of each
 2   year.  Overall, gross receipts increases in 2003, and
 3   again in 2004, to the highest level during this
 4   five-year period.  It is to be noted that gross
 5   receipts spiked in the third quarters of 2001 and 3,
 6   and slightly in 2004.  The average amount spent by a
 7   player has remained relatively constant throughout
 8   each year.  However, there was an increase in the
 9   fourth quarters of 2002, 3, and 4.  It is to be noted
10   overall gross receipts per player is relatively
11   constant throughout each year.  One thing you might
12   note at 2004, quarter one, is 2792; quarter four,
13   2843, an increase of $1.10, which is only 4 percent.
14                  Like gross receipts, attendance is the
15   highest in the first quarter of each year; however,
16   attendance has been decreasing annually during the
17   five-year period.  It is to be noted that fourth
18   quarter attendance consistently declined in each year,
19   possibly due to the holiday season.  And third quarter
20   spikes over second quarter.
21                  Like gross receipts and attendance, the
22   average number of players per occasion is highest in
23   the first quarter of each year.  Overall, the average
24   number of players per occasion has also been
25   decreasing annually since 2000.  Again, third quarter
0219
 1   spikes over second quarter.
 2                  The number of occasions remains
 3   relatively constant the first three quarters of each
 4   year; however, fewer occasions are held during the
 5   fourth quarter of each year.  Overall, the number of
 6   occasions has been decreasing annually since 2000.  It
 7   is to be noted that fourth quarter occasions
 8   consistently decline in each year, again, possibly due
 9   to the holiday season.  The average number of
10   occasions per conductor has consistently ranged
11   between 23 and 26 over the five-year period and
12   decreased only slightly during the year.
13                  The number of conductors reporting
14   tends to increase throughout each year.  However, the
15   overall number of conductors reporting has decreased
16   each year except for a temporary rise occurring in the
17   third and fourth quarters of 2003.
18                  As we review the data of each of the
19   components, we can determine the following:  Gross
20   receipts decreased in 2001 and 2002, and then
21   increased in 2003 and 4, due to the introduction of
22   the new style of pull tabs.  The average amount spent
23   by player increased in 2003 and 2004 more than
24   attendance decreased.  It is to be noted that between
25   2003 and 4, the average amount spent by player
0220
 1   increased 10.63 percent, while attendance decreased
 2   5.04, which drives gross receipts up.  The average
 3   number of players per occasion has declined each year.
 4   Fewer occasions were reported each year.  The average
 5   number of occasions per conductors are remaining
 6   fairly constant, and a decreasing number of conductors
 7   are reporting.
 8                  In summary, attendance has been
 9   decreasing due to a declining number of conductors
10   holding the same number of occasions with fewer
11   players attending each occasion; however, higher gross
12   receipts have resulted from increased spending by the
13   players attending.
14                  Are there any questions?
15                  CHAIRMAN CLOWE:  Questions?  Mr. Cox?
16                  Thank you for this.  It's very
17   informative.  I would like to think about it and look
18   at it, and then I -- I think I will have some
19   questions.  And I'll come to you individually at a
20   later time to discuss it with you.
21                  MS. KIRKPATRICK:  That sounds
22   wonderful.
23                  CHAIRMAN CLOWE:  Thank you very much.
24                  MS. KIRKPATRICK:  Now, I will turn it
25   over to Phil Sanderson of the Bingo Division to
0221
 1   present the summary of the first quarter 2005
 2   conductor return information.
 3                  MR. SANDERSON:  Commissioners, in your
 4   notebook there's three sheets.  The first page
 5   outlines the information that was reported in the
 6   first quarter of 2005.  The second page compares the
 7   first quarter information with the previous four
 8   quarters.  And the third page compares the first
 9   quarter of 2005 with the first quarter of each of the
10   previous five years.
11                  I would like to go to page two first,
12   which -- which goes over the information that compares
13   the first quarter of 2005 with the previous four
14   quarters.  As you can see, the first quarter gross
15   receipts increased 9.25 percent over the previous
16   quarter and almost a 3 percent increase over the first
17   quarter of 2004.  Total prizes also increased 6.2
18   percent over the previous quarter and 4.7 percent over
19   the previous -- over the first quarter of 2004.  The
20   total revenue increased 18 percent over the fourth
21   quarter of 2004; however, it decreased 1.4 percent
22   from the first quarter of 2004.  The overall net
23   revenue increased from 6.8 million to 12.4 million
24   from the previous quarter, which is almost an 84
25   percent increase.  However, it -- the 12.4 million net
0222
 1   revenue for the first quarter was a decrease of 3.75
 2   percent over the first quarter 2004 12.9 percent -- or
 3   12.9 million.  Charitable distributions for the first
 4   quarter was a 12 percent increase over the previous
 5   quarter, the 7.6 million, and the first over -- over
 6   the first quarter of 2004, it decreased 6.1 percent.
 7                  On the next page are the comparison
 8   numbers.  It compares the first quarter with the first
 9   quarter of each of the previous four years.  Once
10   again, the first quarter 2005 is an increase over the
11   first quarter 2004 for gross receipts and prizes.  And
12   for the first quarter 2001, we've seen gross receipts
13   increase ten percent, and prizes have increased 15.7
14   percent.  However, total net revenue has decreased 1.3
15   percent since 2001.  The overall net revenue of 12.4
16   million for last quarter is an increase of two percent
17   over the first quarter of 2001, with 12.2 million
18   dollars.  However, the distributions have dropped 14
19   percent over the first quarter of 2001.
20                  Now, to give you some breakdown of
21   information as it pertains to the first quarter of
22   2005 -- and that's the first page in the -- in the --
23   in your notebook.  Total gross receipts of 162.5
24   million dollars is the highest it's been since 1994
25   for a particular quarter.  Prizes of 117 million
0223
 1   dollars is -- is not the highest prize payout we've
 2   had, and the total net revenue of 45.1 is not
 3   necessarily the highest net revenue we've had since
 4   the -- 1994.  As you can see, the prize payout
 5   percentages represents 72 percent of gross receipts.
 6   Net revenue is 27.7 percent of gross receipts.  The
 7   cost of goods sold, which is the cost of goods
 8   paper -- cost of goods -- paper products, as well as
 9   the lease payments to the distributors, at 8.4 million
10   is 5.2 percent of the total gross receipts, leaving
11   adjusted gross of 22.6 percent or 36.7 million
12   dollars.
13                  There are some slides that represent
14   these payout percentages.  As you can see, the overall
15   regular prize payout, which is paper and electronics,
16   is 71.5 percent.  The instant prize payout is 73.7
17   percent as a -- of the gross receipts.
18                  The next slide will show how the cash
19   disbursements, which is all expenses, as well as
20   charitable distributions, rate as far as a percent of
21   gross receipts that come in.  The highest percentage,
22   6.2 percent, is rent payments, followed by the
23   salaries for the callers, cashiers, and ushers of 5.4
24   percent, your cost of goods purchased of 5.2 percent,
25   then your charitable distributions paid of 4.7
0224
 1   percent.  The other categories of janitorial, 1.4
 2   percent; security, legal, and accounting salaries, 1.2
 3   percent; miscellaneous expenses, which is made up of
 4   mortgage payments, advertising, the bingo equipment
 5   purchases, repairs, license fees, training, debit card
 6   transactions, and other expenses, is 1.4 percent.
 7                  We have further broken down the total
 8   expenses and how each individual item represents what
 9   percentage they represent of total expenses.  Once
10   again, the highest percentage is going to be the rent
11   payments for the lessors, at 39.6 percent or 10.1
12   million dollars, followed by the salaries for the
13   callers, cashiers, and ushers at 8.8 million or 34.4
14   percent.  When you combine all the salary categories,
15   which is the janitorial, the caller, cashiers, ushers,
16   and security, legal and accounting, they account for
17   more than 50 percent of total expenses.  And when you
18   add the rent payments to the commercial lessors for
19   use of the building facilities, that amount jumps up
20   to 90 percent of total expenses.
21                  And with that, I'll be glad to answer
22   any questions you may have, sir.
23                  CHAIRMAN CLOWE:  Any questions?
24                  Thank you, ladies and gentleman.
25                  Billy, I believe, in view of the time
0225
 1   and the additional items we have to cover, if I may,
 2   I'll ask you to bring up the report and possible
 3   discussion or action on the Bingo Services Center at
 4   the next meeting.
 5                  MR. ATKINS:  Yes, sir.
 6                  CHAIRMAN CLOWE:  And we'll go to item
 7   number seven, report, possible discussion and/or
 8   action on lottery sales and revenue, game performance,
 9   new game opportunities, and trends.
10                  Let's take a short break before we get
11   into that.
12                    (RECESS.)
13                  CHAIRMAN CLOWE:  We'll come back to
14   order.  We'll hear item number seven, which I
15   previously announced.  Gentlemen?
16                  MR. NAVARRO:  Good afternoon,
17   Commissioners.  Again, for the record, my name is
18   Benito Navarro.  I am the acting Financial
19   Administration Manager.  To my right is Robert
20   Tirloni, Products Manager, and Dale Bowersock, the
21   Instant Ticket Coordinator -- Instant Ticket Product
22   Coordinator.  Our presentation today is our standard
23   monthly presentation.
24                  We'll start with the revenues and sales
25   and net revenue to the State calculations for the 42
0226
 1   weeks ending June 19, 2004, and the June -- the week
 2   ending June 18, 2005.  As you can see from the
 3   computation at the top, the sales contribution for
 4   both periods are, you know, fairly similar.  As you
 5   walk down through the -- the presentation and the
 6   calculations, you get down to the estimated net
 7   revenue to the State Foundation School Fund, and you
 8   see that for this period of 2004, we had generated
 9   789.2 million dollars in revenue from sales to the
10   Foundation School Fund, compared to the same period in
11   2005 of 781 million dollars in revenue.  Project
12   expense as a percentage of sales for '04 through
13   that -- that time period is 60.4.  For the same time
14   period in 2005, 62.6.  Fiscal year 2005 sales to date
15   and, of course, finding -- revenue by game, we see
16   instant tickets bringing in 73.9 percent of our sales,
17   a corresponding 61.6 percent of revenue, followed by
18   Lotto Texas at 8.5 percent of sales and 11.9 percent
19   of revenue.  And that's followed very closely by
20   Pick 3 at 7.7 percent of sales and 11.5 percent of
21   revenue.  Total sales to date, rounded, to three
22   billion, revenue to the State from sales of 781
23   million.
24                  This is a graphical representation of
25   the information we -- we spoke about earlier.  You can
0227
 1   see instant tickets make up 73.9 percent of our sales,
 2   again, followed by Lotto Texas and Pick 3 sales.  Here
 3   is a graphical representation of the revenue to the
 4   State, by game, again, instant tickets bringing in
 5   481.2 million dollars, 61.6 percent of our revenue
 6   from sales, followed by Lotto Texas and Pick 3.
 7                  This is our instant sales by prize
 8   point for fiscal year to date for the week ending June
 9   18th, '05.  And you can see here that our two -- two
10   dollar prize point is bringing in about 27.9 percent
11   of our sales of six hundred and -- 690.9 million
12   dollars.  That's followed by our five dollar prize
13   points, which are bringing in 23.7 percent of our
14   sales.  And then our one dollar prize point is
15   bringing in 296.8 million dollars in sales.
16                  This is a -- the revenue corresponding
17   to those sales.  And, again, our two dollar prize
18   point is bringing in 30.2 percent of our sales, five
19   dollar prize points bringing in 22.4 percent of our
20   sales, followed by our one dollar prize points
21   bringing in 17.5 percent of our sales.  Total revenue
22   to date from instant tickets is 481.2 million dollars.
23                  MR BOWERSOCK:  All right.
24   Commissioners, I've got a very brief update for you
25   today.  I'm sure everyone appreciates that.
0228
 1   Commissioner Cox, in the May Commission meeting you
 2   had requested to have some information on a game that
 3   we had advertising support behind.  And Wheel of
 4   Fortune was one of those games.  These are some of the
 5   features from the Wheel of Fortune game.  It was a two
 6   dollar prize point.  It offered over 1800 second
 7   chance drawing prize packages, and one of the top
 8   prizes, besides the 25,000 dollar cash top prize, was
 9   a grand trip -- grand prize trip for two to Hollywood,
10   with the chance to audition for the Wheel of Fortune
11   show.  So far we've had three of those top prizes
12   claimed.  And two of them are actually going on the
13   trip, and they're excited to be going in -- in this
14   fall.  So we look forward to hearing their stories
15   when they come back.
16                  This game was supported with three
17   weeks of advertising, both on the television and
18   radio, and with point-of-sale advertising pieces that
19   were in the store.  These pieces included the -- the
20   pump topper advertising, like you might see in our
21   hallways now in those metal frames.  Also the
22   oversized cards, which would sit on top of the
23   registers or on top of the counters in different
24   places.  And then also the wobblers that can be
25   displayed across the store, and they just sort of
0229
 1   dangle.
 2                  And this is the sales chart for not
 3   only the Wheel of Fortune game, but we thought you
 4   might want to see what the average two dollar prize
 5   point sales are right there.  The game that launched
 6   just before it, Super Duper Doubler, which is the
 7   darker blue.  The light green, which is Six Times The
 8   Money, is the game that launched just after six --
 9   after Wheel of Fortune.  And then, of course, the red
10   is the Wheel of Fortune sales.  And I will point out,
11   also, that our advertising flight is the first three
12   weeks of sales for the game.
13                  And basically, that was my presentation
14   for you today on the sales and the game features for
15   this.  Do you have any questions?
16                  COMMISSIONER COX:  I think so.  The
17   advertising flight of three weeks refers only to Wheel
18   of Fortune?  It was --
19                  MR BOWERSOCK:  Correct.
20                  COMMISSIONER COX:  It was the only one
21   advertised?
22                  MR BOWERSOCK:  Correct.
23                  COMMISSIONER COX:  The others are
24   average two dollar game, Super Duper Doubler, and Six
25   Times The Money?
0230
 1                  MR BOWERSOCK:  Right.
 2                  COMMISSIONER COX:  I never heard of any
 3   of them.
 4                  MR BOWERSOCK:  We didn't have
 5   advertising for them.
 6                  COMMISSIONER COX:  But I heard of Wheel
 7   of Fortune before you advertised it.
 8                  MR BOWERSOCK:  Yes.  We had brought it
 9   to you, I believe, in the February Commission meeting.
10                  COMMISSIONER COX:  I mean, I've heard
11   of it before you brought it anywhere because the
12   program has been on TV for a long time.
13                  MR BOWERSOCK:  Oh, yes.  Correct.
14   Correct.
15                  COMMISSIONER COX:  So I can't really
16   conclude anything here about advertising.  If you had
17   advertised Lucky Duck versus Super Duper and Lucky
18   Duck did a hundred times better than Super Duper, I
19   would know something.  I don't know anything from
20   this.
21                  MR BOWERSOCK:  Yes, and most -- and in
22   many cases, our advertising does support the licensed
23   properties because we have our licensed property games
24   that we hope to entice new players to come and play
25   our games with the licensed properties.  So we want
0231
 1   them to know that these licensed properties are now
 2   available.  So we're hoping that by telling them that
 3   Wheel of Fortune is out in the stores, they'll
 4   actually go out and try our new products.
 5                  COMMISSIONER COX:  Now, I wasn't
 6   suggesting you shouldn't advertise it.  I'm just
 7   suggesting that we don't know anything about this
 8   because that's a recognizable name that people might
 9   have bought without advertising, whereas, Super Duper
10   Doubler, who cares.
11                  MR BOWERSOCK:  I understand.
12                  MR. TIRLONI:  Commissioner Cox, we have
13   talked about, in -- in the past, our -- we have to
14   advertise the initiatives, as Dale just said, behind
15   our licensed properties.  But we have talked about, in
16   the upcoming fiscal year, choosing a licensed property
17   game and releasing it without any support.
18                  COMMISSIONER COX:  There you go.
19                  MR. TIRLONI:  And then being able --
20                  COMMISSIONER COX:  Then we'll know
21   something.
22                  MR. TIRLONI:  And then being able to
23   come back and do a comparison to see if the strong
24   branding behind the licensed property carries its
25   weight, so to speak, in the marketplace when you have
0232
 1   other products there, as well, available.
 2                  COMMISSIONER COX:  Good.
 3                  MR. NAVARRO:  And that concludes our
 4   presentation, Commissioners.  Do you have any
 5   questions?
 6                  CHAIRMAN CLOWE:  Thank you, gentlemen.
 7                  MR. TIRLONI:  I -- I did want to just
 8   let you know that our Mega Million sales, with
 9   California participating, did start as scheduled on
10   Wednesday, the 22nd, at 6:00 a.m.  And the first
11   drawing with California in the game is tonight, and
12   that drawing is taking place in California.  Depending
13   on the meeting in July, we hope to have some
14   information for you about sales and show you some of
15   the sales that California has had, so we can do some
16   comparisons with that as well.
17                  CHAIRMAN CLOWE:  Robert, I know you
18   were listening to that discussion that Doctor Huff --
19                  MR. TIRLONI:  Yes, sir.
20                  CHAIRMAN CLOWE:  -- led off, and I
21   think there was some good material discussed there.
22                  MR. TIRLONI:  I agree.  And I have been
23   working with Doctor Huff.  He's going to be coming in
24   to meet with myself, some other staff members, and
25   representatives from GTECH and Scientific Games.
0233
 1                  CHAIRMAN CLOWE:  Good.
 2                  MR. TIRLONI:  And we hope to be able to
 3   get more information and some useful information from
 4   him.
 5                  CHAIRMAN CLOWE:  Good.
 6                  MR. GRIEF:  Mr. Chairman, if I could, I
 7   just want to make you sure you know and Commissioner
 8   Cox knows, we have used the information from
 9   Doctor Huff's presentation in information that we have
10   provided to legislative offices since we received his
11   information some number of months ago.  So I -- I want
12   to assure you that we are spreading the word on that
13   and getting that information disseminated.
14                  CHAIRMAN CLOWE:  Great.  Very good.
15   Thank you all very much.
16                  MR. NAVARRO:  Thank you.
17                  CHAIRMAN CLOWE:  Next we will go to
18   item 10, report, possible discussion and/or action on
19   HUB and/or minority business participation, including
20   the agency's mentor/protege program.
21                  Good afternoon.
22                  MS. BERTOLACINI:  Good afternoon,
23   Commissioners.  For the record, my name is Joyce
24   Bertolacini, and I am the Coordinator of the TLC's
25   Historically Underutilized Business program.
0234
 1                  In your notebooks are the April and May
 2   monthly HUB minority contracting activity reports,
 3   which include all fiscal year 2005 expenditures paid
 4   from September 1st of 2004, through April 30th and May
 5   31st, 2005, respectively.  Our total qualifying
 6   expenditures, as of May 31st, 2005, are 113.2 million,
 7   and our estimated HUB minority utilization was nearly
 8   27.9 million, which equates to 24.62 percent.
 9                  Regarding the agency mentor/protege
10   program, I wanted to mention to you that on May 20th,
11   I had an initial meeting with our newest
12   mentor/protege team, DDB Dallas and Lewis Printing
13   Services Limited, and I look forward to working with
14   them on developing and refining the goals that they
15   will be -- that will be the focus of their
16   mentor/protege relationship.
17                  I also wanted to mention that on May
18   19th and 20th, Commission staff participated in a
19   statewide spot bid fair that was held in conjunction
20   with the Black Enterprise Conference in Dallas.  And I
21   am pleased to report that the Commission made over
22   6500 dollars worth of awards to HUB vendors who
23   attended this event.
24                  And finally, I wanted to mention to you
25   today that the TLC conducted its annual Historically
0235
 1   Underutilized Business Forum yesterday.  We had 85
 2   attendees.  And we had eight of our largest
 3   contractors represented, and all of the divisions of
 4   the agency were represented here as well.  We did
 5   receive a lot of positive feedback from the vendors
 6   who attended.  They were very satisfied with the
 7   information that we gave them.  And I just wanted to,
 8   you know, give you a short update about that.
 9                  And I would be happy to answer any
10   questions.
11                  CHAIRMAN CLOWE:  Joyce, what kind of
12   awards did we make to our HUB vendors who attended the
13   event, 6500 dollars in awards?  What -- what is that,
14   please?
15                  MS. BERTOLACINI:  A spot bid fair
16   generally provides bid opportunities for vendors
17   that -- that attend.  Normally, these are fairly
18   standard types of purchases of commodities like -- I
19   believe in -- in our case, the majority of what we
20   ordered -- what we ended up awarding was for toner for
21   fax machines or copier -- not copiers -- I'm sorry --
22   printers, toner for our printers, and office supplies
23   and things of that nature.
24                  CHAIRMAN CLOWE:  Okay.  Very good.
25   Thank you.  Thank you very much.
0236
 1                  MS. BERTOLACINI:  You're welcome.
 2                  CHAIRMAN CLOWE:  Next we'll go to item
 3   11, report, possible discussion and/or action on the
 4   agency's contracts.
 5                  Good afternoon.
 6                  MS. ZGABAY-ZGARBA:  Good afternoon.  My
 7   name is Angela Zgabay-Zgarba, for the record.  I'm the
 8   Contract and Procurement Specialist in the
 9   Administration Division.
10                  In your notebook, under agenda item
11   number 11, is a report that's been updated for the
12   month of -- month of June.  And if you have any
13   questions, I'd be happy to answer them.
14                  CHAIRMAN CLOWE:  Any questions?  I
15   believe that we have none.  Thank you very much.
16                  Mike, you must have the next item,
17   number 12, report, possible discussion and/or action
18   on Market Research Services contract.
19                  MR. FERNANDEZ:  Yes, sir, I do,
20   Mr. Chairman.  Good afternoon, Commissioners.  My name
21   is Mike Fernandez.  I'm the Director of
22   Administration.
23                  One of the -- one of the significant
24   contracts or prime contracts that we have is our
25   marketing -- marketing research contract.  And we want
0237
 1   to brief you this afternoon on the status of that
 2   contract.  It's -- the first term is scheduled to end
 3   August 31st of this year.  And that contract does
 4   provide for three one-year extensions.  And it's our
 5   intent to extend that contract or execute the first
 6   year extension.  If you have any questions, I would be
 7   happy to try and answer.
 8                  COMMISSIONER COX:  Mike, I know that
 9   there were a couple of meetings that I attended that
10   were an effort to get all of our data providers
11   together and making sure that they weren't producing
12   data that we didn't need, or they weren't all
13   producing the same data and we're paying for it two or
14   three times.  How do you feel about that, as we sit
15   here today?
16                  MR. FERNANDEZ:  Well, I -- I personally
17   feel that we've made what I would term significant
18   progress in that area.  And from certainly your
19   participation, I think initially, what we had seen was
20   very little sharing of that information from either
21   side.  Information that we might have been able to
22   glean from our market researcher, we weren't -- we
23   weren't attempting to obtain because we weren't
24   getting that information from our advertising folks.
25   And, conversely, we were probably asking questions
0238
 1   that were not being of benefit to both our
 2   marketing -- or -- or our product managers and our
 3   advertising companies.  Since that time, since those
 4   initial meetings, what we have done is we've begun --
 5   or we immediately began to share data with, to look at
 6   the questions that were being asked, to look at the
 7   types of monthly research questions that we were
 8   asking, and then trying to set that agenda, if you
 9   will, in terms of our product development effort to
10   coincide with our advertising.  Our -- our research
11   folks, David Sizemore, along with -- with our product
12   managers, meet regularly with the advertising folks on
13   conference calls.  They meet -- they meet regularly
14   with -- with Ipsos-Reed, our market research firm, and
15   Michael Anger and I also work very closely with them.
16   So I -- I think it's very positive.  I -- I think that
17   it's going to improve.  I -- I think it's a learning
18   curve for -- Commissioner, for -- for -- I -- I mean,
19   I can't speak for Michael, but certainly I think it's
20   a learning curve for -- for our staff.
21                  COMMISSIONER COX:  Thank you.
22                  CHAIRMAN CLOWE:  Thank you, Mike.
23   Next, this is your item as well, number 13:  Report,
24   possible discussion --
25                  MR. FERNANDEZ:  Yes, sir.
0239
 1                  CHAIRMAN CLOWE:  -- and/or action on
 2   the Audit Services procurement.  Go ahead.
 3                  MR. FERNANDEZ:  Yes, sir.
 4   Mr. Chairman, with your permission, I'm going to let
 5   Ms. Zgarba handle this.
 6                  CHAIRMAN CLOWE:  Certainly.
 7                  MS. ZGABAY-ZGARBA:  Again for the
 8   record, my name is Angela Zgabay-Zgarba, Contract and
 9   Procurement Specialist.
10                  We have issued the audit services RFP,
11   as you probably know, in the spring this year.  And we
12   have completed -- or staff has completed the
13   evaluation process, and we have announced an apparent
14   successful proposer on that procurement.  We are now
15   pending contract negotiations.  Any questions?
16                  CHAIRMAN CLOWE:  Thank you, ma'am.
17                  Next item 14, report, possible
18   discussion and/or action on the Drawings Audit
19   Services contract.  And I can't guess who is going to
20   handle that.
21                  MS. ZGABAY-ZGARBA:  That would be me.
22                  CHAIRMAN CLOWE:  Okay.
23                  MS. ZGABAY-ZGARBA:  This is actually a
24   contract that the Administrative Division is the
25   Lottery Operations Department, but I will be speaking.
0240
 1   This is one of the prime contracts that the Commission
 2   has been asked to be kept informed of the status on.
 3   The contract is with Daubla Schubert & Company.  The
 4   current expiration is August 31, '05.  The executive
 5   staff has approved a recommendation by the
 6   Administrative Division to extend the contract for an
 7   additional year, which will make the expiration
 8   8-31-06.  Any questions?
 9                  CHAIRMAN CLOWE:  Thank you, ma'am.
10   Thank you, Mike.
11                  Next, item 15, report, possible
12   discussion and/or action on the agency's financial
13   status.
14                  MR. NAVARRO:  Commissioners, for the
15   record, again, my name is Benito Navarro.  I'm the
16   acting Financial Administration Manager.
17                  I direct your attention to tab 15,
18   titled Agency's Financial Status.  Under this tab you
19   will find a report of transfers made to the Foundation
20   School Fund for the month of May, in June.  That
21   amount totaled 95.2 million dollars.  In addition to
22   that amount, we transferred 16.6 million dollars to
23   the State in unclaimed prizes, bring the total
24   transfer for the month of June to 111.9 million
25   dollars.
0241
 1                  Behind the transfer report you'll find
 2   the report of Lotto revenues, expenditures, and
 3   transfers for fiscal year to date.  Total transfers to
 4   the State through the month of May, for this year,
 5   totaled 12.6 billion dollars.  Of this amount, 7.4
 6   billion has been transferred to the Foundation School
 7   Fund.
 8                  Finally, behind the green divider page,
 9   you'll find the Texas Lottery Commission's budget
10   reports for the period September 1st, 2004, through
11   May 31st, 2005.  Both lottery and charitable bingo
12   operations expenditures and commitments are tracking
13   as expected, with the exception of expenditures for
14   the lottery operator contract, which are running at
15   approximately a rate of 94.2 percent of actual -- of
16   budgeted expenditures.  Obviously, this is due to the
17   increased sales that we have -- we have, you know,
18   recognized through May 31st.  I would like to say that
19   we've exceeded our BRE estimate for sales.  So we have
20   received an additional amount of funding, due to rider
21   four kicking in.  That amount for the month of May
22   totaled 4.4 million dollars.  2.8 of that is allocated
23   to the lottery operations division to pay the lottery
24   operator contract for the excess sales.  And now I am
25   available to answer any questions if you have any.
0242
 1                  COMMISSIONER COX:  Is the rider four
 2   money related to sales --
 3                  MR. NAVARRO:  Yes, sir.
 4                  COMMISSIONER COX:  -- or revenue?
 5                  MR. NAVARRO:  Sales.  The biannual
 6   revenue estimate that the Comptroller put out had a
 7   target of sales, and that -- that target was placed in
 8   our rider four.  That total was 2.681 billion dollars
 9   in sales.  And once we exceed that limit, we get the
10   additional appropriation of 4.19 percent.  So it is
11   based on sales.
12                  COMMISSIONER COX:  Wasn't there some
13   discussion in the last legislature about making that
14   based on revenue rather than sales?
15                  MR. NAVARRO:  I -- I believe there was,
16   and -- and I'm not --
17                  COMMISSIONER COX:  And it ended up
18   being on sales --
19                  MR. NAVARRO:  Correct.
20                  COMMISSIONER COX:  -- as it had been in
21   the past?
22                  MR. NAVARRO:  Correct.  And I believe
23   that's -- that's still the case for the proposed
24   biannual, '06-'07.
25                  COMMISSIONER COX:  Thank you.
0243
 1                  CHAIRMAN CLOWE:  Ben, by my
 2   calculations, I would project for the fiscal year 3.7
 3   billion in sales and 1,500,000 in contributions to the
 4   State.  Have you made that calculation?
 5                  MR. NAVARRO:  I -- I came to a number
 6   closer to a billion 36, based on a -- a 28 to 29
 7   percent return to the State after we account for
 8   unspent funds and sales.  So -- and the -- just so
 9   you'll know, the BRE estimate for revenue to the
10   Foundation School Fund, as revised by the Comptroller
11   for '05, when their '06-'07 estimate came out, is
12   actually a billion 35 and some change.  So --
13                  COMMISSIONER COX:  It came to a billion
14   36?
15                  MR. NAVARRO:  Yes, sir.  I mean -- so
16   we're -- we're -- you know, cross your fingers and --
17                  CHAIRMAN CLOWE:  It sounds like a
18   public earnings announcement.
19                  COMMISSIONER COX:  Beat it by a penny.
20                  MR. NAVARRO:  Too bad we're not SEC
21   regulated.
22                  CHAIRMAN CLOWE:  Ben, is there anything
23   in our financial statements that concern you or
24   anything that's an anomaly that you want to call our
25   attention to?
0244
 1                  MR. NAVARRO:  No, sir, except that, you
 2   know, obviously, you know, we -- we keep a real close
 3   eye on the -- on prize payout percentage, which
 4   obviously affects our advertising budget.  And -- and
 5   right now we're tracking about two percent higher than
 6   normal.  But we haven't accounted for, ultimately,
 7   what the final unclaimed prize monies will be through
 8   the period ending August 31st, which affects our year
 9   end prize expense and that percentage.  And so I
10   imagine that -- that by the time we -- we cross that
11   bridge, we -- we may be just about where we were last
12   year from the prize expense and the prize payout
13   percentage.  So from -- from that standpoint, you
14   know, that's probably about the only thing we're
15   looking at because it doesn't affect our advertising
16   budget for the next biannual.  So we get -- for
17   every -- for every prize point that's over that --
18   that cap that we have, we get hit a million dollars to
19   our budget.  So that -- that's the one thing that
20   we've just got to keep an eye on and make sure that we
21   don't adversely affect that advertising budget.
22   Because, as Mr. Huff said, you know, for every dollar
23   that we spend, you know, that's an additional 30 --
24   potential 30 dollars per capita that we can get, so...
25                  CHAIRMAN CLOWE:  And that's the only
0245
 1   thing?
 2                  MR. NAVARRO:  And that -- that I know
 3   of, right, as of today, yes, sir.
 4                  CHAIRMAN CLOWE:  And this is the first
 5   time you've appeared before us as the acting Financial
 6   Division Director.  Do you feel competent and
 7   qualified and experienced to fill this role?
 8                  MR. NAVARRO:  Yes, sir.
 9                  CHAIRMAN CLOWE:  Very good.
10                  MR. NAVARRO:  Thank you, sir.
11                  CHAIRMAN CLOWE:  Thank you.
12                  Next, item 16, report, possible
13   discussion and/or action on the 79th Legislature.
14                  MS. TREVINO:  Nelda Trevino, Director
15   of Governmental Affairs.
16                  The 79th Legislature ended its regular
17   session on Monday, May the 30th, 2005.  During the
18   regular session, the Governmental Affairs Division
19   tracked and monitored 169 bills filed, for possible
20   impact on the agency.  31 of the 169 bills have been
21   enacted and have been identified as part of the
22   agency's legislative implementation project.
23                  There are two reports that we provided
24   in your meeting notebooks.  One is the legislative
25   tracking report, listing these 31 bills, and the other
0246
 1   report lists the agency division bill assignments as
 2   it relates to the agency's legislative implementation
 3   project.  Melissa Villasenor in the Governmental
 4   Affairs Division is coordinating the agency's efforts
 5   on this project.  Each division has formed committees
 6   for each of the bills to identify any necessary
 7   actions that the agency would need to take in order to
 8   be in compliance with implementing the bill.  And we
 9   will certainly keep you posted on the progress of the
10   implementation project.
11                  I would like to mention several bills
12   of interest during the regular session.  Senate Bill
13   405 and House Bill 1434, those were the two bills
14   containing the agency's Sunset recommendations.  These
15   bills did not make it through the legislative process.
16   However, a provision was added to House Bill 1116 that
17   contains the agency's -- that continues the agency's
18   existence and extends the Sunset date to September 1,
19   2011.
20                  House Bill 10, relating to making
21   supplemental appropriations and reductions to
22   appropriations, includes a -- includes a provision
23   reducing the agency's appropriation by 1.69 million
24   dollars for fiscal year 2005.
25                  One bill of interest to lottery
0247
 1   retailers is Senate Bill 442, and that relates to the
 2   immunity from liability for -- for certain civil
 3   actions against lottery retailers.
 4                  Senate Bill 1 is the appropriations
 5   bill for fiscal years 2006 through -- through 2007.
 6   And today I provided each of you a copy of the
 7   agency's appropriation bill pattern, and I wanted to
 8   highlight several items contained in the agency's bill
 9   pattern.  You will note that there are two methods of
10   financing for the agency's appropriation.  First,
11   general revenue funding for charitable bingo will be
12   13.4 million dollars for fiscal year 2006, and 13.3
13   million dollars for fiscal year 2007.  And this
14   includes approximately 10.9 million dollars each
15   fiscal year that is estimated in bingo prize fee
16   allocations.  Secondly, there is GR dedicated funding
17   for the Lottery, and that is set at 186.4 million
18   dollars for fiscal year 2006 and 186.8 million dollars
19   for fiscal year 2007.  The number of FTE positions
20   noted in the agency's bill pattern remains at 325, and
21   the Executive Director's salary cap was increased from
22   110,000 to 115,000.
23                  In addition to the agency's
24   appropriation for 2006 and 2007, there are several
25   provisions contained in article nine of Senate Bill 1
0248
 1   that are applicable to all State agencies.  And there
 2   are about five provisions that I would like to mention
 3   and highlight for you today, and these include the
 4   following:  The across-the-board State employee pay
 5   raise, which provides a four percent increase,
 6   beginning September 1st, 2005, and an additional three
 7   percent increase, beginning September 1st, 2007.  An
 8   additional provision mentions an increase in per diem
 9   for food and lodging for board and Commission members
10   from 110 dollars to 121 dollars per day.  There is
11   also a provision stipulating a reduction in the amount
12   that an agency may transfer from one appropriation
13   strategy to another, from 25 percent to 12.5 percent.
14   A new provision was added that restricts the use of
15   appropriated funds to contract with an outside
16   auditor.  Agencies would be required to either enter
17   into an interagency contract with the State Auditor's
18   Office for services or have the SAO review and approve
19   the scope of audit.  If the agency does not have
20   authority to enter into a contract, the SAO would
21   delegate authority for the agency to do so.
22                  And lastly, I want to highlight a
23   provision in article nine that reduces the -- that
24   reduces agency's FTE position caps by two percent.
25   This provision allows the Legislative Budget Board and
0249
 1   the Governor's Office to consider agency requests for
 2   exemptions from this reduction.
 3                  The first called special session of the
 4   79th Legislature convened on Tuesday, June the 21st. A
 5   special session may last no more than 30 days, and we
 6   are tracking and monitoring bills filed with potential
 7   impact to the agency.  Also, today I provided you a
 8   copy of a legislative tracking report, listing several
 9   bills.  And I do want to highlight two bills on the
10   report, and that would be House Bill 5 and House
11   Bill 3.
12                  House Bill 5, by Representative Jim
13   Pitts, relates to certain fiscal matters affecting
14   governmental entities.  And this bill includes a
15   provision that would authorize an Indian tribe on the
16   Texas-New Mexico border to conduct bingo without state
17   licensing.  And this is similar language that we saw
18   in other bills during the regular session.
19                  Additionally, in Senate Bill 3, by
20   Senator Steve Ogden, this relates to the financing of
21   public schools in this state and reducing school
22   property taxes.  There -- there is a provision
23   included in this bill that authorizes electronic pull
24   tab bingo.  And this bill was just filed yesterday,
25   and so we as the staff are just going to start taking
0250
 1   a look at this language.  There appears to be similar
 2   language that was considered during the regular
 3   session.
 4                  Lastly, the House Licensing and
 5   Administrative Procedures Committee has scheduled a
 6   hearing for next Wednesday, June the 29th, at
 7   10:00 a.m., or upon adjournment of the House, in the
 8   Capitol Extension in room E2.010.  The committee has
 9   requested an appearance by the agency to address
10   various matters, and information has been requested
11   that -- by the committee.  And staff is working to
12   compile this information and provide it to the
13   committee staff prior to the committee hearing.
14                  And this concludes my report, and I'll
15   be happy to answer any questions.
16                  CHAIRMAN CLOWE:  Any questions?
17                  COMMISSIONER COX:  What was the one
18   about outside auditors and the State Auditor?
19                  MS. TREVINO:  Yes, sir.  This is --
20   article nine is a pretty lengthy section of the
21   appropriations bill.  And there is a provision, a -- a
22   new provision that was included in article nine of
23   Senate Bill 1.  And while staff is -- we're -- we're
24   still reviewing the specific language of the bill, but
25   it basically stipulates that an agency cannot use
0251
 1   appropriated funds to contract with an outside
 2   auditor; that agencies would either be required to
 3   enter into a contract with the State Auditor's Office,
 4   or the State Auditor's Office could delegate to the
 5   agency to contract out for those particular services.
 6                  COMMISSIONER COX:  Okay.  Of -- how
 7   many State agencies have outside auditors besides the
 8   Texas Lottery?
 9                  MS. TREVINO:  Commissioner Cox, I'm --
10   I don't know that I have the answer to that question.
11   I don't know if Catherine Melvin might, but I -- I
12   don't.
13                  MS. MELVIN:  Hello, Commissioners.  For
14   the record, my name is Catherine Melvin.  I'm the
15   Director of Internal Audit.
16                  I also don't know the answer to your
17   question, but I do know of some agencies that have
18   routinely an outside financial auditor that comes in
19   and evaluates their financial statements.  The
20   Teachers Retirement System is one.  However, more
21   recently, I believe the State Auditor's Office has
22   been doing their financial statement audit.  The
23   Employees Retirement System is another, and I think
24   traditionally they've had an external auditor, not the
25   State Auditor, audit their financial statements.
0252
 1                  COMMISSIONER COX:  Does -- Nelda, does
 2   this apply for the procurement that we just completed,
 3   or is it the next procurement that it applies?
 4                  MS. TREVINO:  I don't believe it
 5   applies for the procurement that they -- we are in the
 6   process of negotiating the contract.  This -- this
 7   would be for -- beginning with fiscal year 2006, so
 8   that would not begin until September.
 9                  COMMISSIONER COX:  Okay.  Thank you.
10                  CHAIRMAN CLOWE:  Thank you, ladies.
11                  Next, item 17, consideration of and
12   possible discussion and/or action on external and
13   internal audits and/or reviews relating to the Texas
14   Lottery Commission and/or the Internal Audit
15   Department's activities.
16                  MS. MELVIN:  Thank you, Commissioners.
17   I don't have much of an update other than to just
18   inform you that the Comptroller's Office has not
19   completed their post-payment audit yet.  I think I've
20   mentioned -- I provided updates in previous meetings.
21   As you are aware, this is a routine audit that they do
22   of State agencies.  And I believe the last time they
23   audited the Texas Lottery Commission was in 2002.
24   However, from our discussions with them, they have
25   completed their on-site work, but are working with
0253
 1   agency staff just to clean out some outstanding issues
 2   and get to our draft report.  Just as a review,
 3   their -- they, of course, focused on purchasing,
 4   travel, and payroll transactions.  And that's all I
 5   have to report at this time.
 6                  CHAIRMAN CLOWE:  Thank you, ma'am.
 7                  MS. MELVIN:  Thank you.
 8                  CHAIRMAN CLOWE:  Next, item 18,
 9   consideration of and possible discussion and/or action
10   on the Broadcast Studio and Production Services
11   procurement.
12                  MS. ZGABAY-ZGARBA:  For the record, my
13   name is Angela Zgabay-Zgarba, Contract and Procurement
14   Specialist for the agency.
15                  This is a current open procurement that
16   is still pending.  We received proposals last week,
17   and they are under committee review at this time.
18                  Any questions?
19                  CHAIRMAN CLOWE:  Thank you, ma'am.
20                  MS. ZGABAY-ZGARBA:  Thank you.
21                  CHAIRMAN CLOWE:  Next, item 21,
22   consideration of the status and possible entry of
23   orders in cases represented by the letters A through
24   K.  Mr. White, are you going to present those?
25                  MR. WHITE:  Yes, sir.  For the record,
0254
 1   my name is Stephen White.  I'm the Chief of
 2   Enforcement.
 3                  Under that tab, you have starting five
 4   proposals for decisions involving lottery retailer
 5   sales agents.  All of these retailers had insufficient
 6   funds in their accounts to cover the sale of lottery
 7   tickets four times in one year or less than four times
 8   but have never made good on those insufficient funds.
 9   The administrative law judge in each of those five
10   cases recommended -- found violations and recommended
11   revocation of their licenses.  And the staff would
12   recommend that you adopt the proposal for decisions of
13   the administrative law judge.
14                  We have two bingo proposals --
15                  CHAIRMAN CLOWE:  Now, those would be
16   cases represented by the letters A through E?
17                  MR. WHITE:  Yes, sir.
18                  CHAIRMAN CLOWE:  Okay.
19                  MS. KIPLIN:  No.  A through F.
20                  CHAIRMAN CLOWE:  A through F.  Thank
21   you.
22                  MR. WHITE:  Additionally, there are two
23   bingo proposals for decisions.  One, Pantego Volunteer
24   Fire Department, failed to timely pay/submit prize
25   fees and interest and have never made -- paid those
0255
 1   prize fees and -- or interest or -- and penalties.
 2   The administrative law judge in that case also
 3   recommended revocation of their license.
 4                  The second case involved a volunteer
 5   fire -- Veterans of Foreign War Post 4135, and they
 6   failed to timely submit and pay prize fees three times
 7   within one year and, in the last case, still have not
 8   paid those prize fees.  And, again, the administrative
 9   law judge recommended revocation of their license, and
10   the staff would recommend that you adopt those
11   proposals for decisions as well.
12                  CHAIRMAN CLOWE:  Okay.
13                  MR. WHITE:  There are also three
14   contested orders --
15                  MS. KIPLIN:  Consent orders.
16                  MR. WHITE:  Consent orders -- excuse
17   me.  The first one involved LULAC 649.  The issues
18   there were unreasonable, unnecessary bingo expenses,
19   failure to disburse 35 percent of gross receipts to
20   charitable purposes, and failure to timely remit the
21   prize fees.  In that case, a negotiated agreed order
22   was -- was negotiated to include a requirement that
23   the organization redeposit 2,935 dollars, that they
24   make an additional 5,440 dollars in charitable
25   disbursements, and that they pay a -- a 500 dollar
0256
 1   administrative penalty from non-bingo funds.
 2                  The second agreed order involved Arc of
 3   Texas.  And that involved -- that involved a -- Arc of
 4   Texas conducted a bingo occasion outside of licensed
 5   times.  They submitted a request for a -- a temporary
 6   license at 4:59 on a Friday and conducted a bingo
 7   occasion that next Saturday morning.  Obviously, it
 8   wasn't approved.  They conducted the bingo anyway.
 9   And in that case, the agreement calls for Arc of Texas
10   to pay 500 dollar administrative penalty from
11   non-bingo funds.
12                  The last case involved an -- an
13   individual by the name of Ramon Zuniga, to remove him
14   from the approved workers list.  He also was
15   engaged -- he was an operator, and he conducted bingo
16   outside -- or without a license, essentially, on two
17   occasions.  In one case, a similar situation, an
18   organization had submitted an application for a -- for
19   a temporary license, but it was not approved.  The --
20   they conducted bingo anyway.  That time, the second
21   occasion, involved the same organization.  Their
22   license had expired and they did not renew it, but
23   Mr. Zuniga went ahead and conducted the bingo anyway.
24   And in that case, the -- Mr. Zuniga agreed to have
25   himself removed from the approved workers list -- list
0257
 1   and also to pay a 1500 dollar administrative penalty
 2   from his own funds.  And staff would recommend that
 3   you adopt these agreed orders.  These are by agreement
 4   to -- the parties have agreed to -- to pay these
 5   penalties from non-bingo funds.
 6                  MR. ATKINS:  And I just want to point
 7   out, Commissioners, the case involving Ramon Zuniga
 8   does involve the assessment of administrative
 9   penalties against an individual for violations of the
10   Act.  And they have agreed to that through this order.
11                  CHAIRMAN CLOWE:  And he's going to pay
12   that out of his own pocket?
13                  MR. ATKINS:  Well, non-bingo revenue.
14                  MS. KIPLIN:  He is not -- he is -- it's
15   not a charitable organization.  He is an individual.
16                  MR. ATKINS:  But he has held in the
17   past a lessor's license.
18                  MR. WHITE:  Yes, sir.  And that -- that
19   license was --
20                  CHAIRMAN CLOWE:  Any questions or
21   comments, Commissioner Cox?
22                  COMMISSIONER COX:  No, sir.
23                  CHAIRMAN CLOWE:  I move the adoption of
24   the staff recommendation on dockets as represented on
25   the agenda by the letters A through K.
0258
 1                  COMMISSIONER COX:  Second.
 2                  CHAIRMAN CLOWE:  All in a favor, please
 3   say aye.  Opposed, no.  The vote is two-zero in favor.
 4                  We will take a minute to sign these
 5   orders, and then I will call on Executive -- Executive
 6   Director Greer for item number 22, the report by the
 7   Executive Director and/or possible discussion and/or
 8   action on the agency's operational status and FTE
 9   status.  If you'll give us just a minute, Reagan,
10   we'll sign these orders and then be ready to hear from
11   you.
12                  MR. GREER:  Yes, sir.
13                  CHAIRMAN CLOWE:  Okay.  Reagan, I think
14   we're ready, please, sir.
15                  MR. GREER:  Yes, sir.  Commissioners,
16   item number 22, there is information in your books in
17   reference to our FTE status and interest pertinent to
18   that, but I did want to make you aware of three things
19   that have happened here recently.  We did have some
20   winners.  The June 15th date here at the Lottery was a
21   date that was shared with the Lucky Postal Five
22   Partnership out of North Richland Hills.  They
23   purchased a ticket on the Lotto Texas game on May
24   21st.  It was a 66 million dollar jackpot.  They went
25   cash option and took away 41,425,071.  They bought the
0259
 1   ticket at a Sack 'n Save, which is eligible to receive
 2   a bonus check of 500,000 dollars.  And as a group they
 3   were a happy bunch, needless to say.  They came
 4   together, and we were happy to share that day with
 5   them.
 6                  We've also had a number of winners
 7   recently on our instant tickets.  We had a winner come
 8   in from the Dallas area on our Set For Life game that
 9   won 5,000 a week for up to 20 years.  We had a
10   winner -- two winners, actually, in the same day, from
11   Pflugerville, one that won on Monthly Bonus and one
12   that won on Million Dollar Club, another scratch game.
13                  And Robert mentioned earlier, but I
14   wanted to reinforce the fact that we have been working
15   diligently with the other Mega Millions states and
16   successfully can tell you that the launch of the State
17   of California into the Mega Millions game went well.
18   They started selling tickets on Wednesday the 22nd,
19   and as mentioned prior, the drawing will be held this
20   evening in Hollywood, California.  And the current
21   Mega Millions jackpot is at 42 million.
22                  And that's all I have, sir.
23                  CHAIRMAN CLOWE:  Very good.  Any
24   questions?  Thank you, Reagan.
25                  Next, we will go to item 13 -- 23,
0260
 1   report by the Charitable Bingo Operations Director and
 2   possible discussion and/or action on the Charitable
 3   Bingo Operations Division's activities.  Billy.
 4                  MR. ATKINS:  Thank you, Commissioners.
 5   We are in the process of conducting interviews for the
 6   vacant positions in the Dallas audit regional office.
 7   We have concluded interviews for the vacancy in the
 8   accounting services position here in Austin.
 9   Recommendation has been made, and that is pending the
10   background investigation.  The next regularly
11   scheduled meeting for the BAC -- or the next
12   tentatively scheduled meeting is August 3rd.  Also, I
13   would just advise the Commission that the Bingo
14   Advisory Committee rule has an August 31st expiration
15   date for the Commissioners, so we will be bringing
16   that back to the Commission for your consideration at
17   your next meeting.
18                  Quarterly reports for the second
19   quarter of 2005, were mailed out on June 17th.  They
20   are due July 25th.
21                  We've made enhancements to the Web site
22   to the extent that at the May 25th meeting we took
23   photographs of all of the BAC members that were
24   present, and those are now located on the Web site to
25   help make them more known to the bingo industry.
0261
 1                  I have included with my report the
 2   bingo activity report, but one thing I didn't include
 3   this meeting -- I wanted to get feedback from you --
 4   was the bingo-related news articles.  Since we've
 5   begun posting those to the Web, we can continue to
 6   include those in your notebook if you would like.  We
 7   had thought that if -- that just may be one tree
 8   saving measure that we could do.
 9                  COMMISSIONER COX:  Save the tree.
10                  MR. ATKINS:  Save the tree.  Okay.
11                  If I could touch on one thing dealing
12   with Ms. Taylor's report earlier today.  I did go and
13   look.  The minutes are on the Web site.  They were
14   posted on the 22nd.  And in reading that dialogue, I
15   think that Ms. Lauder's comments were more along the
16   lines of not fully understanding the exchange that
17   took place between Mr. Fenoglio and the BAC.  Her
18   comments were along the lines of, if this is something
19   you can't be doing, then it sounds like, you know,
20   it's not something that will be useful to the
21   Commissioners.  So she was attempting to facilitate in
22   that way.  She did not make the recommendation that
23   they not consider the administrative penalty rule.
24                  COMMISSIONER COX:  Well, Billy, is -- I
25   guess maybe, then, I don't understand her role.  To
0262
 1   me, a facilitator is someone who participates in the
 2   form but not the -- not the substance of the meeting.
 3   And that sounds to me like it has to do with
 4   parliamentarian kind of rules.
 5                  MR. ATKINS:  And, Commissioner Cox, I
 6   would say that Ms. Lauder has been doing kind of
 7   hybrid sort of facilitations.  We have had the
 8   opportunity with -- with Chairman Clowe to meet with
 9   her individually.  And, you know, that's what she, I
10   think, has been trying to do, is to just help them
11   function more efficiently.
12                  COMMISSIONER COX:  And I -- I applaud
13   her intent, but as to the parliamentarian role, I
14   really would like that to continue to be held by
15   Ms. Kiplin and her staff.  I think that's what I see
16   their participation there as being, is to keep things
17   on track, keep them working within their charter, that
18   kind of thing.  I don't think she knows enough about
19   what happens here and the way things work here and the
20   relationships here to take that role, but I think
21   counsel does have that knowledge.
22                  MR. ATKINS:  And -- and I understand
23   what you're saying, Commissioner Cox.  I just want you
24   to -- I just wanted you to know that she did not make
25   a recommendation to the BAC that they not consider
0263
 1   that item.
 2                  COMMISSIONER COX:  Okay.
 3                  MR. ATKINS:  And then, finally,
 4   Commissioners, I regret to report we have learned
 5   today that Robert Rhinehart, who was a member of the
 6   Bingo Advisory Committee during the 2000-2001 period,
 7   passed away last night.  And we extend our sympathies
 8   to his family and remember him for his service.  And
 9   that's all I have.
10                  CHAIRMAN CLOWE:  Any questions or
11   comments?
12                  COMMISSIONER COX:  No, sir.
13                  CHAIRMAN CLOWE:  Thank you, Billy.
14                  Item number 24, public comment.  Is
15   there anyone wishing to make comment to the Commission
16   at this time?
17                  MR. GRIEF:  Mr. Chairman, I'm -- I'm
18   not a member of the public, but I do have one other
19   item I --
20                  CHAIRMAN CLOWE:  Yes, sir.  You -- you
21   are recognized.
22                  MR. GRIEF:  We -- we would like to do a
23   better job in getting the Commissioners your notebooks
24   in a more timely fashion so you can have the time to
25   review important documents prior to the meeting.  I've
0264
 1   had a brief opportunity to talk to staff about that.
 2   And I recall that some time ago it became the
 3   Commission's routine, at the end of each Commission
 4   meeting, to try to schedule a tentative date for the
 5   next Commission meeting.  And I'll just bring that to
 6   your attention.  That -- that type of routine would be
 7   very helpful to staff in trying to prepare that
 8   information in those notebooks and get them to you
 9   more timely.  I just put that before you for your
10   consideration.
11                  CHAIRMAN CLOWE:  Well, Gary, I am sorry
12   to say, nice try, but I'm not buying that at all.  The
13   Commissioners, in my recollection, have been very
14   flexible about their meeting dates.  The
15   responsibility for the meeting date lies with Mary
16   Beth.  I think she's the one who usually calls me.
17   And we have moved Commission meeting dates to suit
18   deadlines which the divisions had.  I don't think the
19   Commissioners setting a date -- and we had to change
20   those dates from time to time -- really has that much
21   to do with books.  And I may be dead wrong.  But, as I
22   say, that's a nice try.  I'm just not buying it.  I
23   think there is a balance between getting the
24   Commissioners their books five working days before the
25   Commission meeting and giving them a book with a bunch
0265
 1   of blank pages.  That doesn't do us any good.  Let's
 2   just take a mature, proper judgment approach to this
 3   and just do better than Wednesday night before a
 4   Friday meeting.  We would agree, that's no good, is
 5   it?
 6                  MR. GRIEF:  Yes, sir.
 7                  CHAIRMAN CLOWE:  And it may be pushing
 8   you to get it five days out ahead, but, you know, I
 9   think the Commissioners will be reasonable about this.
10   But it is extremely difficult for us to get these
11   books on short notice and read this material and come
12   prepared to do a proper job.  And I -- I don't know --
13   when Commissioner Olvera is here next month we'll
14   discuss whether we want to try setting the dates ahead
15   of time.  If that'll help, I'm not against it.  But I
16   think the staff needs to make a strong effort to get
17   the books out earlier.
18                  MR. GRIEF:  We'll do just that.
19                  CHAIRMAN CLOWE:  Okay.
20                  MS. KIPLIN:  Can I chime in?
21                  CHAIRMAN CLOWE:  After Commissioner
22   Cox.
23                  MS. KIPLIN:  Sure.
24                  COMMISSIONER COX:  Gary, I would say
25   further to that that this book is not the only way we
0266
 1   have of communicating.  We get a weekly packet, and I
 2   don't remember it ever having anything of substance in
 3   it.  It's got magazines and copies of correspondence
 4   from people who are applying for jobs, and, from time
 5   to time, a report that I have asked for.  But it
 6   doesn't have any information of what is going on over
 7   here and what is going to happen at the next meeting
 8   or the like.  That's another opportunity.  And we've
 9   had commitments to us from time to time that we would
10   get regular reports on things that have come for a
11   while and quit coming.  So let's don't look at this as
12   the way staff communicates with the Commissioners.
13   Let's look at other ways that we should be
14   communicating with the Commissioners.
15                  MR. GRIEF:  Yes, sir.
16                  CHAIRMAN CLOWE:  I want to -- yes,
17   Counselor.
18                  MS. KIPLIN:  No.  No.  I'll -- I'll
19   wait.
20                  CHAIRMAN CLOWE:  I was going to go to
21   another subject.  Go ahead.
22                  MS. KIPLIN:  Well, actually, I'll --
23   I'll fade the heat.  I was the one that asked Gary to
24   bring that issue up.  So I don't want to leave --
25                  COMMISSIONER COX:  There you have it.
0267
 1                  MS. KIPLIN:  No, I don't want to leave
 2   him hanging out there.  But it -- it is -- it is
 3   helpful.  And I'm reminded of other agencies that have
 4   routine days that they set, you know, like the first
 5   blank of the month or whatever, or some, of course,
 6   that aren't even a fair comparison that are weekly.
 7   But it is helpful to have, I guess, longer -- in --
 8   in -- in terms of knowing a date that staff can really
 9   focus in on and have the time to begin to prepare
10   documents, because y'all really -- you meet more than
11   you -- more than you're required to by law; you meet
12   monthly.  But in terms of getting the -- the meetings
13   notice prepared and also having the staff be able to
14   look towards dates and note of -- of deadlines that
15   are coming, in terms of preparing.
16                  CHAIRMAN CLOWE:  I'm sure that's right.
17   And I'm not saying that's not the case, but I am
18   saying that, in my recollection, the Commissioners
19   have been very flexible about having meetings when the
20   staff said they needed to have meetings.  The latest
21   instance of that comes to my mind relative to the Mega
22   Millions issue.  You know, we -- we set meetings
23   exactly to the date that the staff asked for so that
24   that rule could be approved and be effective, and --
25   and we could begin with Mega Millions if everything
0268
 1   went well on the 27th.  So, you know, you -- you get
 2   what you ask for.  If you really want to the
 3   Commissioners to set a date, Commissioner Cox and I
 4   will pull out our calendars right now and set it for
 5   July, and we'll make that subject to Commissioner
 6   Olvera's being able to attend.  But if we start that,
 7   and you come back to us and say, well, now we want to
 8   meet at a different time, shame on you, and you --
 9   then you lock yourself down to we'll have the books
10   ready, and the other form of communications from
11   Commissioner Cox.  So tell us what you want.  Do you
12   want to set a date in July right now?
13                  MR. GRIEF:  I would rather keep the
14   flexibility.
15                  CHAIRMAN CLOWE:  We'll work with you
16   whatever way you want to make it.
17                  MR. GRIEF:  I retract my statement.
18                  CHAIRMAN CLOWE:  And you came back from
19   your vacation just for this?  And, Gary, I did want to
20   acknowledge the fact that you are on vacation.  And I
21   know that you were at a remote location, and you've
22   come back and been here in attendance today.  And I,
23   for one, express my appreciation for your interest and
24   your doing that.
25                  COMMISSIONER COX:  Yeah.  Thank you.
0269
 1                  MR. GRIEF:  Thank you.
 2                  CHAIRMAN CLOWE:  Sorry you had to
 3   retract your statement.  We appreciate it.
 4                  There being no further business before
 5   the Commission at this time, we will be adjourned.
 6   The time is 3:59 p.m.  Thank you all very much.
 7   
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0270
 1                  REPORTER'S CERTIFICATION
 2   
 3   STATE OF TEXAS       )
 4   COUNTY OF TRAVIS     )
 5   
 6               I, BRENDA J. WRIGHT, Certified Shorthand
 7   Reporter for the State of Texas, do hereby certify
 8   that the above-captioned matter came on for hearing
 9   before the TEXAS LOTTERY COMMISSION as hereinafter set
10   out, that I did, in shorthand, report said
11   proceedings, and that the above and foregoing
12   typewritten pages contain a full, true, and correct
13   computer-aided transcription of my shorthand notes
14   taken on said occasion.
15               Witness my hand on this the 5TH day of
16   JULY, 2005.
17   
18   
19   
                      BRENDA J. WRIGHT, RPR,
20                    Texas CSR No. 1780
                      Expiration Date:  12-31-06
21                    WRIGHT WATSON & ASSOCIATES
                      Registration No. 225
22                    1801 N. Lamar Boulevard
                      Mezzanine Level
23                    Austin, Texas  78701
                      (512) 474-4363
24   
     JOB NO. 050624BJW
25