0001 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 JUNE 28, 2006 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 BE IT REMEMBERED that the TEXAS LOTTERY 18 COMMISSION meeting was held on the 28TH of JUNE, 2006, 19 from 9:00 a.m. to 1:55 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 Chairman: Mr. C. Tom Clowe, Jr. 3 Commissioners: 4 Mr. James A. Cox, Jr. 5 General Counsel: Ms. Kimberly L. Kiplin 6 Acting Executive Director: 7 Mr. Anthony J. Sadberry 8 Charitable Bingo Executive Director: Mr. Billy Atkins 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX - June 28, 2006 2 PAGE 3 Appearances.................................... 2 4 AGENDA ITEMS 5 Item Number I.................................. 6 The Texas Lottery Commission will call the 6 meeting to order 7 Item Number II................................. 6 Report, possible discussion and/or action on 8 lottery sales and revenue, game performance, new game opportunities, market research, and trends 9 Item Number III................................ 21 10 Report, possible discussion and/or action on transfers to the State and/or the agency's 11 budget 12 Item Number IV................................. 26 Report, possible discussion and/or action on the 13 procurement of advertising services Committee 14 Item Number V.................................. 26 15 Report, possible discussion and/or action on the Mega Millions game and/or contract 16 information 17 Item Number VI................................. 35 Report, possible discussion and/or action on 18 GTECH Corporation, including proposed acquisition of GTECH 19 Item Number VII................................ 35 20 Consideration of and possible discussion and/or action on the lottery operator contract, including 21 whether the negotiation of the lottery operator's contract in an open meeting would have a detrimental 22 effect on the Commission's position in negotiations of the lottery operator contract 23 24 25 0004 1 INDEX - CONTINUED - June 28, 2006 2 PAGE 3 Item Number VIII............................... 35 Report, possible discussion and/or action on the 4 agency's contracts 5 Item Number IX................................. 37 Report, possible discussion and/or action on the 6 79th Legislature 7 Item Number X.................................. 38 Report, possible discussion and/or action on 8 the agency's Strategic Plan for 2007-2011 of GTECH 9 Item Number XI................................. 50 10 Consideration of and possible discussion and/or action on the agency's personnel handbook 11 Item Number XII................................ 61 12 Consideration of and possible discussion and/or action on external and internal audits and/or 13 reviews relating to the Texas Lottery Commission and/or on the Internal Audit Department's 14 activities 15 Item Number XIII............................... 63 Consideration of and possible discussion and/or 16 action on the appointment and employment of an Executive Director 17 Item Number XIV................................ 73 18 Consideration of the status and possible entry of orders in: 19 A. Docket No. 362-06-1241 - Quick Food Mart #1 20 Item Number XV................................. 75 Report by the Acting Executive Director and/or 21 action on the agency's operational status, and FTE status 22 Item Number XVI................................ 75 23 Report by the Charitable Bingo Operations Director and possible discussion and/or action on 24 the Charitable Bingo Operations Division's activities 25 0005 1 INDEX - CONTINUED - June 28, 2006 2 PAGE 3 Item Number XVII............................... 84 4 Public Comment 5 Item Number XVIII.............................. 107 Commission may meet in Executive Session 6 Item Number XIX................................ 108 7 Adjournment 8 Reporter's Certificate......................... 109 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0006 1 JUNE 28, 2006 2 3 CHAIRMAN CLOWE: Good morning. It is 4 9:00 a.m. Today is June 28, 2006. Commissioner Cox 5 is here. My name is Tom Clowe. We'll call this 6 meeting of the Texas Lottery Commission to order. 7 We'll begin with item two on the 8 agenda, report, possible discussion and/or action on 9 lottery sales and revenue, game performance, new game 10 opportunities, marketing research, and trends. 11 Ms. Pyka, Mr. Tirloni. Good morning. 12 MS. PYKA: Good morning, Commissioners. 13 My name is Kathy Pyka, Controller for the Texas 14 Lottery Commission. And with me to my right is Robert 15 Tirloni, our Products Manager. 16 Our first chart this morning reflects 17 revenue from sales and net revenue to the State 18 through the week ending June 17, 2006. Total sales 19 through this 42-week period amounted to 3.1 billion, 20 while estimated net revenue to the State for this 21 period was 807.8 million. Our fiscal year 2006 sales 22 to date reflect a 111.6 million increase over sales in 23 fiscal year 2005. And, finally, our net revenue to 24 the State reflects a 3.4 percent increase, as compared 25 to the 781 figure for the same period in fiscal year 0007 1 2005. Our prize expense as a percent of sales is 2 reflected as 62.7 percent this period, which is a 3 minimal increase over the same period in fiscal year 4 2005. 5 Our next slide this morning includes 6 fiscal year 2006 through date sales by game. As noted 7 on the slide, 75.5 percent of sales, or 2.3 billion, 8 was from instant tickets, with 7.7 percent of sales 9 for 236.8 million for Pick Three, then followed by 6.4 10 percent of sales, or 196.5 million for Lotto Texas, 11 and 5-1/2 percent of sales and 168.8 million for 12 Mega Millions. 13 And then our next slide simply provides 14 you the graphical presentation of the three-million 15 dollar figure. That's year to date sales by game. 16 MR. TIRLONI: Good morning, 17 Commissioners. For the record, my name is Robert 18 Tirloni. I am the Products Manager for the 19 Commission. 20 This slide shows us the 2.3 billion 21 dollars year to date instant sales, broken down by 22 price point. There is not much change from what we've 23 looked at over the past few months. The five-dollar 24 price point continues to -- continues to be the 25 leading price point, followed by the two, and then the 0008 1 ten, and then the one. Again, not much difference 2 from what we've been experiencing. Last month at 3 the -- 4 COMMISSIONER COX: Robert? 5 MR. TIRLONI: Yes, sir. 6 COMMISSIONER COX: Let me stop y'all 7 for just a second. 8 MR. TIRLONI: Do you want me to go 9 back, Commissioner? 10 COMMISSIONER COX: Yeah, let's go back 11 to the slide previous to the one you just talked 12 about. 13 MR. TIRLONI: Okay. 14 COMMISSIONER COX: Okay. Now, Robert 15 and Kathy, if -- if we looked at that historically and 16 we added Lotto Texas and Mega Millions together, would 17 we find that the two of them had about the same share, 18 historically, that they now have separately? In other 19 words, has Mega Millions totally cannibalized Lotto 20 Texas? 21 MS. PYKA: I have a comparison, looking 22 back to one year ago today. And in looking at that, 23 Lotto Texas included 8.5 percent of sales; whereas, 24 today we're looking at 6.4 percent of sales. So it's 25 about a 55 million dollar difference. 0009 1 COMMISSIONER COX: Yeah. 8.5, Kathy, 2 but at that time, we had Mega Millions, didn't we? 3 MS. PYKA: We did. 4 COMMISSIONER COX: Okay. 5 MS. PYKA: And so then as we look at 6 Mega -- and I'm going to give you Mega without the 7 Megaplier -- one year ago, we were looking at 4.8 8 percent of total sales, and today, 19 percent of 9 sales. So there is a 27 million dollar gain on Mega 10 from a year ago today. 11 COMMISSIONER COX: Not 19 percent. I 12 see five percent up there. So you said 4.8 percent? 13 MS. PYKA: I'm sorry. You're correct. 14 I'm looking at the percent of change already. 15 COMMISSIONER COX: So the Mega Millions 16 is up only slightly. Lotto Texas is down from last 17 year. 18 MS. PYKA: Right. 19 COMMISSIONER COX: And, of course, I'm 20 going to ask you in a few minutes, what about the new 21 matrix and how is that doing, if you don't already -- 22 if you haven't already covered that. But if you 23 looked just back to -- as far back as would be 24 relevant -- say, 1999 -- would you see Mega Millions 25 and Lotto Texas holding about the same share that 0010 1 Lotto Texas held alone? 2 MS. PYKA: I would like to go back. 3 Now, I've got the -- the detail by on-line and 4 instant. I need to go back and break that out for 5 you. 6 COMMISSIONER COX: Okay. 7 MS. PYKA: In looking at the on-line by 8 game, and I'll go back to the beginning of time and -- 9 and do that exercise for you. 10 COMMISSIONER COX: I think that would 11 be good. 12 MS. PYKA: Okay. 13 COMMISSIONER COX: Particularly, I'm 14 interested in seeing how Pick Three has done 15 historically. Is it a growing game? It -- it looks 16 kind of like a star when you look at these numbers, 17 but -- and if it's just because we've bifurcated Lotto 18 Texas, then maybe it wouldn't be quite so appealing. 19 MR. TIRLONI: And -- and Pick Three has 20 grown every single year since its introduction in -- 21 in '93. It's been slow growth, but it has been 22 consistent over the entire life of the game. 23 COMMISSIONER COX: Okay. 24 MR. TIRLONI: So, yes, it -- it is the 25 leading -- it's the leading on-line game right now 0011 1 and -- and has been for a while, especially with 2 the -- the climate we've seen with Lotto over the past 3 few years, which has moved into that number one slot. 4 COMMISSIONER COX: Do you have anything 5 particular that you would attribute that to, Robert? 6 MR. TIRLONI: I think Pick Three as an 7 on-line game is closest to -- or provides the player 8 with as close of a playing and winning experience as 9 an instant game does. 10 COMMISSIONER COX: Okay. So I guess 11 it's close to instant gratification? 12 MR. TIRLONI: Because there are two 13 drawings a day -- 14 COMMISSIONER COX: Two drawings a day. 15 MR. TIRLONI: -- and you -- you can 16 play in the morning. There is the noon -- there is 17 the 12:27 p.m. drawing. You can see if you've won, 18 and if you'd like, you can then play for the evening 19 draw. I -- I -- that's feedback that I have received 20 from retailers and from players, that because of the 21 frequency of drawings, it's as close to an instant 22 experience as possible. 23 COMMISSIONER COX: Yes. 24 MR. TIRLONI: On the on-line side. 25 Whereas, you know, on Lotto, if you buy a ticket 0012 1 today, there is a drawing tonight. But, you know, if 2 you bought your ticket on Sunday, you've waited four 3 days to find out if you've won. 4 COMMISSIONER COX: Yes. Thank you. 5 CHAIRMAN CLOWE: In that regard, 6 Robert, I think there was coverage on the instant 7 ticket growth nationally on a nationwide TV program 8 yesterday. 9 MR. TIRLONI: Yes, sir. 10 CHAIRMAN CLOWE: And my understanding 11 is that Bobby Heith was interviewed on that program. 12 What was the bottom line of the report -- 13 MR. TIRLONI: The -- 14 CHAIRMAN CLOWE: -- in that regard? 15 MR. TIRLONI: The report that you're 16 referring to was on NBC's Today Show, and they -- they 17 did interview Bobby. The -- the overall, I guess, 18 goal of the story was talking about how lotteries 19 were -- or -- or the industry -- or the focus, I 20 guess, was on-line. And they referred to Power Ball, 21 and they referred to the big jackpot games, and -- and 22 that's what caused the excitement for players. But a 23 switch has occurred. And -- and the switch has been 24 to the instant games. And they talked about how 25 instant games have increased. And I don't remember 0013 1 the time period that they exactly referred to in the 2 piece, but they talked about phenomenal growth with 3 the instant product. Besides interviewing Bobby here 4 in Texas, they interviewed some lottery officials, I 5 believe, in Minnesota and maybe one other state. They 6 reported the same results with -- with great success 7 with the -- with the instant product. And a lot of 8 people talked about what we just talked about. People 9 like the idea of walking into a store, making a 10 purchase and within, you know -- and depending on how 11 many games are on the ticket, within a few minutes, 12 knowing if they've won right there on the spot. 13 The other aspect of the story dealt 14 with the price points on the scratch off tickets. So, 15 you know, if you go back -- even in our history, if 16 you go back into the early to mid '90s, we had one, 17 two, five, three-dollar price points. Texas, as well 18 as a lot of other states, have grown the price points 19 all the way up to what we have now, this 30-dollar 20 ticket. And they talked about how, as the price 21 points have grown, so have the top prizes that have -- 22 that are offered on those tickets. And, for example, 23 our 30 -- one of our 30-dollar tickets has a three 24 million dollar top prize. 25 So those were a lot of the different 0014 1 things that were talked about in the piece, but the 2 underlying message was the -- the switch in excitement 3 from the big jackpot games to the instant scratch off 4 games pretty much nationwide. 5 CHAIRMAN CLOWE: And, Robert, are there 6 other states that the instant sales tickets are 75 and 7 a half percent of their total sales? 8 MR. TIRLONI: I don't know that -- I 9 don't know that there is a state that has the 75/25 10 mix that -- that we're experiencing right now. I 11 could find -- I could definitely find that out for 12 you. I don't know if it's -- if it's this -- I don't 13 know if it breaks down exactly like this in other 14 states. 15 COMMISSIONER COX: No, that -- I think 16 that would be real interesting to know. Our 17 perception is that Massachusetts has a higher 18 percentage of instants than we do, but I don't know 19 that. I would like to see that. 20 MR. TIRLONI: I -- in a -- I agree with 21 you. I think they do. I just don't know if it's -- 22 if it's 75/25. But we'll -- we'll find out. We can 23 do -- we can do some slides for you next month on 24 that. 25 CHAIRMAN CLOWE: I think particularly, 0015 1 Massachusetts, New York and California and Florida and 2 maybe Georgia would be states of interest. We would 3 like to see if their instant tickets are doing what 4 ours are doing. 5 Bobby, I see you in the audience. Do 6 you have anything to add to what Robert has told us 7 about your interview yesterday? 8 MR. HEITH: No. 9 CHAIRMAN CLOWE: You're shaking your 10 head no. Okay. That's fine. 11 Go right ahead. 12 MR. TIRLONI: Okay. We'll get that -- 13 we'll get that information from those states and see 14 if there are any other states that pop out when 15 we're -- when we're looking at those numbers for you 16 all. 17 CHAIRMAN CLOWE: Very good. 18 MR. TIRLONI: Commissioners, last month 19 we talked about some jackpot wins that occurred. 20 Chairman, you were interested in the Mega Millions -- 21 the Mega Millions ticket that was sold in Texas and 22 I'll cover that in one second. 23 We did have a 36 million dollar Lotto 24 Texas jackpot for the April 29th drawing. This was 25 the first win under the 6 of 54 matrix, the revised 0016 1 Lotto Texas matrix. That was claimed on June 9th. It 2 was a cash value option that was worth approximately 3 20.9 million dollars. This was the ticket that was 4 sold in Lubbock. It was claimed by a legal entity, 5 and they did do full publicity. 6 Mega Millions, we had the 94 million 7 dollar jackpot win for the May 16th drawing. And, 8 Chairman, you were curious if it was a Texas resident 9 or if it was somebody from one of our bordering states 10 that purchased that ticket. It was an El Paso 11 resident who purchased that ticket. It was claimed on 12 June 13th, and the CVO, or the cash value option, for 13 that ticket was approximately 53.1 million. 14 Kind of deja vu. When we were sitting 15 here last month, we had had the Mega Millions jackpot 16 win the night before. I figured I would just let you 17 know that there was a Mega Millions ticket sold last 18 night in Ohio. The jackpot was 23 million. Since we 19 sold that 94 million dollar jackpot ticket, there have 20 been three wins, three jackpot wins in 21 Mega Millions -- one in New Jersey at 47 million, one 22 in California at 34 million, and then the one that I 23 just referred to a second ago in Ohio. 24 COMMISSIONER COX: Robert, with those 25 relatively low jackpots, three hits in a row, what 0017 1 kind of coverage percentage are we looking at? 2 MR. TIRLONI: The -- I don't know what 3 the coverage was right now. I know our coverage in 4 Texas for last night's drawing was .5 percent. 5 COMMISSIONER COX: .5 percent. 6 MR. TIRLONI: For Texas only. 7 COMMISSIONER COX: And nationally it 8 probably wasn't ten times that, was it? 9 MR. TIRLONI: I don't think so, not -- 10 based -- based on the jackpot level, I would not 11 imagine so. When we get the total sales report in for 12 Mega Millions today, that will give us the sales from 13 all the states. There is a formula I have that can 14 approximate the coverage. 15 COMMISSIONER COX: They're having kind 16 of a -- Mega Millions is having the kind of run of bad 17 luck we had with the old Lotto Texas matrix. 18 MR. TIRLONI: It -- it seems that way. 19 We made the matrix change just about a year ago or 20 just a little over a year ago, and these three wins in 21 a row at -- at these levels are somewhat 22 disappointing. We -- we were certainly hoping for a 23 large jackpot on Mega Millions before the end of the 24 fiscal year. And if I -- if I get that -- those sales 25 from all of the participating states before the end of 0018 1 the meeting today, I can get that coverage number for 2 you. 3 COMMISSIONER COX: Great. 4 MR. TIRLONI: And, Commissioners, 5 Acting Executive Director Sadberry is going to give 6 you an update on some of the Ipsos Reid data we 7 collect monthly for you. 8 MR. SADBERRY: Good morning, 9 Commissioners. For the record, my name is Anthony 10 Sadberry, Acting Executive Director. 11 I have for you this morning the latest 12 survey information from Ipsos Reid, regarding the 13 public perception of the Texas Lottery. This 14 information was compiled in the month of May. 15 The first slide addresses the question, 16 how do you describe your overall -- how would you 17 describe your overall opinion of the Texas Lottery. 18 As shown, the percentage of negative responses to this 19 question decreased from April to May, from 46 percent 20 to 39 percent. And positive responses increased from 21 37 percent to 42 percent over the same time period. 22 Neutral responses increased from 17 percent to 19 23 percent. 24 The second slide addresses the 25 statement, the Texas Lottery is operated fairly and 0019 1 honestly. From April to May, the percentage of 2 respondents who disagreed with this statement 3 decreased from 35 percent to 28 percent. This -- this 4 is the lowest percentage in this category for the past 5 year, while those who agreed with this statement 6 increased from 43 percent to 51 percent. Those 7 neutral with the statement decreased from 22 percent 8 to 21 percent. 9 I will continue to provide you with 10 this information on a monthly basis, and I would be 11 happy to answer any questions. 12 COMMISSIONER COX: Anthony, do -- do we 13 know what is statistically significant on this? How 14 much of a change it has to be before we can say, wow, 15 something changed? 16 MR. SADBERRY: Commissioner, that ties 17 into the discussion that we had a few meetings back 18 about the -- the percentage of error margin and the 19 other variable factors, as well as the size of the 20 survey participants, as to when we can place some 21 significance to the -- to the -- the trend that we 22 have heard -- appear to see. I think on the surface, 23 not being a statistician, I can say that we are 24 pleased to see the trend that appears to be going in, 25 but don't know yet what we can make of that in terms 0020 1 of an overall assessment. 2 And we did have, Commissioners, a 3 segmentation study we had for you -- was present with 4 us as we mentioned in a previous meeting, and I've 5 asked for a follow-up meeting with the group of this 6 agency who participated in that study. And those are 7 the types of things that I intend to address so that 8 we can bring that to you. And that will also give us 9 a chance to analyze current data. And -- and, 10 hopefully, we can make some assessments. At this time 11 I'm not in a position to do so and do not believe the 12 staff is, but I will certainly yield to staff. 13 Doctor Sizemore is here in the audience and might want 14 to speak to that question. 15 COMMISSIONER COX: No, I -- I'm really 16 thinking more generally than that, Anthony. And I 17 know that y'all are looking at all of these things. I 18 continue to be concerned, I guess, that it looks like 19 we're doing something right, but we don't know what it 20 is. 21 MR. SADBERRY: Well, that's right. And 22 we want to know that, in both respects, whether it's 23 negative or positive. And that's the -- that's the 24 point of our continued study, and we will keep your 25 interest in that regard in mind as we continue to 0021 1 analyze this data. 2 COMMISSIONER COX: Thank you. 3 MR. TIRLONI: And that's the end of our 4 report for today, but we would certainly be happy to 5 answer or address any other questions that you may 6 have. 7 CHAIRMAN CLOWE: Thank you both very 8 much. 9 MR. TIRLONI: Thank you, Commissioner. 10 CHAIRMAN CLOWE: Next, item three, 11 report, possible discussion and/or action on transfers 12 to the State and/or the agency's budget. Ms. Pyka. 13 MS. PYKA: Thank you. Again, for the 14 record, my name is Kathy Pyka, Controller for the 15 Lottery Commission. 16 Tab three includes information on the 17 agency's financial status. 18 The first report in your notebook 19 reflects transfers and allocation to the Foundation 20 School Fund and the allocation of unclaimed prizes as 21 of June 2006. Total transfers to the State amounted 22 to 797 million through June, and this does represent a 23 minimal increase over the same amount transferred in 24 June of 2005. 25 The second page of your notebook 0022 1 reflects the detailed information on the monthly 2 transfers. 3 COMMISSIONER COX: I have a question. 4 When we talk about how much money we have transferred 5 to the State in support of education, do we include 6 the transfers to the multi category called Teaching 7 Hospital? 8 MS. PYKA: No, we do not. We separate 9 the unclaimed prizes separate from the actual 10 transfers to the Foundation School Fund. So as you 11 look at the next document in your notebook, you'll see 12 the column of the Foundation School transfers separate 13 and apart from the unclaimed prizes. And then on the 14 final document we show the cumulative amount 15 transferred to general revenue separate from those 16 dollars transferred to the Foundation School Fund. 17 COMMISSIONER COX: Okay. And I can see 18 that -- that that is the case, but where I was getting 19 with that is, why do we make the distinction? That is 20 money from the lottery that is going in support of 21 education. Not that I'm about hyping the numbers, but 22 it seems like a distinction that might not have a 23 difference attached to it. 24 MS. PYKA: I think the difference is -- 25 is when you look at the general revenue dollars and 0023 1 the general appropriation and the general statutory 2 authority that allows it to be trans -- or used at the 3 will of the legislature, and you look at the history 4 there and you look at the different purposes the 5 dollars in -- that have been delivered to GR have been 6 used for. It's been a variety of things when you go 7 back and look at the history, maybe not a hundred 8 percent education. 9 COMMISSIONER COX: That has changed, 10 hasn't it? 11 MS. PYKA: It has. 12 COMMISSIONER COX: So while we could 13 add a little digit on the right-hand side, maybe, it 14 wouldn't be worth muddying the water for. 15 MS. PYKA: Right. And like this is the 16 year to be -- I guess, as we look at this fiscal year 17 alone, we've already made the 10 million dollar 18 transfer over to the multi-categorical teaching. And 19 then the balance that we're transferring today is all 20 going straight into general revenue, and so when we 21 look at that general revenue, it's going to the -- the 22 pure GR pool at the State Comptroller's Office. So I 23 think that that's the difficulty in maybe tying that 24 exactly to a link of education. 25 COMMISSIONER COX: Thank you. 0024 1 MS. PYKA: Sure. 2 So as we look at that next document, we 3 do see that 758 million has been transferred to date 4 to the Foundation School Fund and 38.8 is associated 5 with the unclaimed prizes, for a total of the 797 6 million dollar transfers in total. 7 And then the next document in your 8 notebook simply provides you the calculation that we 9 utilize in -- in developing the transfer amount. 10 With the final document showing us our 11 cumulative transfers from 1992 to date. On this 12 document, we note the cash basis transfers to the 13 Foundation School Fund through June of this year, 14 758.1 million, with the cumulative transfer to the 15 Foundation School Fund now of 8.4 billion. 16 Commissioner, just above that line 17 you'll see the general revenue, which is at that 4.9 18 billion. And that's because from 2000 -- or, excuse 19 me -- 1992 to 1997. Remember, we were still 20 transferring everything into general revenue. 21 And then the next document behind your 22 pink tab focuses on our Commission's operating budget. 23 So we've got the fiscal year 2006 method financing 24 summary for the period ending May 31 of 2006. And 25 we'll focus first on the Lottery Commission budget, 0025 1 funded out of the lottery dedicated account fund 5025, 2 which has a budget of 182.3 million. Through May, 3 we've expended 124.3 million or 68 percent of the 4 total operating budget. And at the bottom of the 5 page, we note the Bingo budget, funded out of the 6 general revenue fund, at 13.5 million. And as of 7 May 31, we've expended 74.5 percent of that budget. 8 COMMISSIONER COX: And if our 9 expenditures were linear, what percent would we have 10 spent behind at? 11 MS. PYKA: At 75 percent. 12 COMMISSIONER COX: So we're okay on 13 both of these? 14 MS. PYKA: We're okay on both -- 15 COMMISSIONER COX: From that test, at 16 least? 17 MS. PYKA: Right. And as we look at 18 the lottery account, of course, where our focus is 68 19 percent, and you look at the line items in which we 20 maybe haven't spent 75 percent, it's a lot of the 21 contractual line items, when you look at the 30-day 22 delay in the billing of invoices. So we have analyzed 23 each line item, and we're in good shape. 24 CHAIRMAN CLOWE: That has changed a lot 25 in the last eight years. I asked that number eight 0026 1 years ago, and it had to be dug for. And there wasn't 2 the kind of answer that you just got to that question. 3 COMMISSIONER COX: Yes, sir. 4 CHAIRMAN CLOWE: A lot of changes here 5 I like. It gives me comfort. 6 MS. PYKA: That concludes my 7 presentation. I'll be happy to answer any of your 8 questions. 9 CHAIRMAN CLOWE: Thank you. 10 MS. PYKA: You're welcome. 11 CHAIRMAN CLOWE: Next, item four, 12 report, possible discussion and/or action on the 13 procurement of advertising services. Mr. Jackson. 14 MR. JACKSON: Good morning, 15 Commissioners. For the record, my name is Tom 16 Jackson. I'm the Purchasing and Contracts Manager for 17 the agency. 18 Agenda item number four was included as 19 a placeholder for any questions you may have regarding 20 the advertising RFP. The RFP continues, but if you 21 have any general questions, I would be happy to 22 respond. 23 CHAIRMAN CLOWE: Thank you, 24 Mr. Jackson. 25 Next, item five, report, possible 0027 1 discussion and/or action on the Mega Millions game 2 and/or contract. Mr. Sadberry. 3 MR. SADBERRY: Good morning, 4 Commissioners. Again, Anthony Sadberry, Acting 5 Executive Director. 6 Last month, I reported on the 7 Mega Millions directors meeting, hosted by the 8 Massachusetts Lottery on May 4, and the discussions at 9 that meeting concerning the varying interpretations 10 and possible conflicting language in the Mega Millions 11 agreement. 12 I am here today to inform you of a new 13 development in this matter. Earlier this month, the 14 California Lottery informed the Mega Millions party 15 lotteries that a Sacramento court had rejected a 16 challenge to California's authority to participate in 17 the Mega Millions game. As you may recall, an 18 anti-gaming group filed a lawsuit last year, seeking 19 to invalidate California's participation in the game. 20 I have reviewed the Court's decision and noted, in 21 particular, the Court relied on Section 22, which is 22 also referred to as the entireties clause, in deciding 23 the California Lottery had not impermissibly delegated 24 or contracted away Mega Millions operations and 25 administration to the other party lotteries. The 0028 1 Court found, quote, most matters of significance are 2 covered, end quote. In the Mega Millions agreement, 3 the Mega Millions finance and operations procedures, 4 official game rules, and drawing procedures, which 5 require agreement and execution by each party lottery 6 and preclude a majority of party lotteries from 7 imposing their views and positions on a minority of 8 party lotteries is agreeing with those positions. 9 That's quoted language from the opinion. 10 The Court's interpretation of the 11 entireties clause in the Mega Millions agreement is 12 entirely consistent with that previously offered by 13 Texas in the position paper we provided to the other 14 Mega Millions party lotteries in January, but 15 contrary -- is contrary to the amendment offered by 16 the California Lottery and voted upon by the 17 Mega Millions directors in Boston last month. 18 In short, what the Court found and what 19 Texas has said since we joined the game in the fall of 20 2003, is Section 22 means what it says, that is, the 21 Mega Millions agreement and the documents incorporated 22 by reference therein may be amended only by written 23 instrument executed by all of the party lotteries. 24 That's quoted language from the agreement. 25 It is also worth noting the Court 0029 1 ordered the California Lottery to remedy a minor 2 inconsistency regarding different claim periods for 3 Mega Millions prizes among the Mega Millions states. 4 The California Lottery is trying to 5 schedule a directors meeting to discuss the ruling. 6 To my knowledge, this meeting has not occurred and it 7 is -- it is unclear what matters may be discussed. I 8 sent a letter to my fellow Mega Millions directors 9 last week, restating Texas' position and the 10 interpretation and application of the entireties 11 clause. And I look forward to participating in a full 12 discussion of this issue with the directors at the 13 earliest opportunity. 14 I will continue to keep you informed of 15 new developments and would be happy to answer any 16 questions. 17 COMMISSIONER COX: Anthony, do you -- 18 do you believe that what California is saying is that 19 if they change that entireties clause such that only a 20 majority of the vote will be required for those 21 things, that California would have to pull out of the 22 Mega Millions? 23 MR. SADBERRY: Well, not having heard 24 their comments, they merely have asked for a meeting 25 to discuss it, I would presume, based upon my study of 0030 1 the matter and my prior report to you, that it would 2 cause concern for the opinion of the California court, 3 who has ruled in favor of California's participation 4 in the game, to rely, and I sense in a significant 5 way, on the entireties clause, Section 22, for that 6 clause to have a question surrounding it as to whether 7 the vote of the directors had the effect as was 8 intended by those favoring that vote of amending the 9 agreement to change that clause. Again, I cannot 10 speak for California or anticipate their action or 11 concern in that regard, but I believe the request to 12 discuss it is consistent with the observation that it 13 may be problematic in connection with the Court's 14 opinion. My sense is they wish to stay in the 15 Mega Millions game and that their discussion on that 16 point would be how to reconcile the action or the 17 ruling. 18 COMMISSIONER COX: Do you anticipate 19 that the courts or the attorney general would have the 20 same kind of problem with Texas' participation, should 21 the entireties clause be changed? 22 MR. SADBERRY: Commissioner, that is 23 one of the points that we strongly advocated in the 24 May meeting, that we would have concern from Texas' 25 standpoint, should we be a party to the agreement and 0031 1 have the agreement not have the entireties clause as 2 we insisted upon it being included upon our entry into 3 the game. We have vetted our position with the State 4 Attorney General's Office, and we believe it to be 5 consistent with our position statements paper, 6 presented in January, where we reiterated that it is 7 important. In fact, we require that that clause be 8 kept intact, as stated in the agreement. And I, by 9 the way, have seen nothing come across my desk or 10 otherwise to indicate that there has been any action 11 taken by you since that vote to give any effect to the 12 vote. 13 COMMISSIONER COX: Well, what I think I 14 just heard you say was the entireties clause was 15 created at Texas' insistence and was a condition to 16 our entering Mega Millions? 17 MR. SADBERRY: That's my understanding. 18 My understanding was stated at the meeting, and those 19 in attendance at the meeting concurred that was their 20 understanding as well. 21 COMMISSIONER COX: Thank you. 22 CHAIRMAN CLOWE: Along those lines, I 23 think you are making an excellent point, Commissioner 24 Cox. And my question is one going forward. Is 25 Mega Millions going to observe this Court ruling, and 0032 1 are they going to conduct their business in the manner 2 prescribed by this Court? And I think, Anthony, 3 you're telling us that is yet to be determined? 4 MR. SADBERRY: That's correct, 5 Chairman. 6 CHAIRMAN CLOWE: My sense of it, from a 7 business aspect, is that Mega Millions has a history 8 of strong leadership in certain directions, and that 9 may have been satisfactory up to a point, similar to a 10 proprietorship that is successful. But at a point in 11 time, successful companies go public. And when you 12 become a publicly-owned entity, as I see Mega Millions 13 in their current status, you have to go by a different 14 set of rules. And we joined that entity with the 15 understanding that we would be protected, insofar as 16 our interests, by this clause. 17 I'm pleased that the California Court 18 has ruled as it has because I think it sends an 19 indication that what Texas asked for is a good thing 20 and a right thing. And I'm hopeful that you'll follow 21 this very closely and continue to be a strong advocate 22 of the maintenance of this clause and the idea that 23 there has to be uniformity in the decisions that are 24 made in Mega Millions for the protection of all the 25 member states. There are certain states, in my 0033 1 long-distance view, that have strong opinions that 2 seem to prevail at some juncture, but each of the 11 3 states, in my mind, should have equal weight in 4 decision-making. And I think that's what this clause 5 calls for. I think it's a hope that Mega Millions 6 will, in the future, be run more like a publicly-held 7 corporation and will adhere to the rules of 8 incorporation and the bylaws, and not only will this 9 clause be preserved and followed, and although it's in 10 place, I'm not sure it's been followed in the past, 11 but I would like to see this type of operation applied 12 to other issues, such as the common membership of 13 states in Mega Millions and Power Ball. 14 We have seen in our situation in this 15 state -- and it goes to the question we asked 16 Robert -- what is the instant ticket growth in the 17 other principal states? And I think we named five in 18 addition to ourselves. These on-line games, with the 19 exception of a game like Pick Three, which has 12 20 drawings a week, until the jackpots get substantially 21 increased, are losing attractiveness to the gaming 22 dollar. And with -- it's within our statute to join 23 both games, that may be something that would attract 24 the people who have gaming dollars in this state. 25 When we joined this game, we agreed in 0034 1 the public meeting, and we didn't get everything we 2 wanted, but that we would go along with it. And we 3 were going to -- to a certain extent lose control of 4 being one of ten at the time. Now we're one of 11. 5 But I think I've been less than satisfied with some of 6 the decisions that I have reported to me and the 7 protocol that has been followed in meetings. And I 8 think we need to continue to state our desires and our 9 wants, as long as they're legal, ethically and morally 10 correct. And I think we've done that. You've done a 11 good job of that. Our operations people, our audit 12 function, our legal group have been an influence on 13 Mega Millions, and I think we should continue to do 14 that. And I refer to the job that I think was done on 15 the examination of the Lottomatica acquisition of 16 GTECH -- or the reverse acquisition, that, you know, 17 it's been a very businesslike approach. And we want 18 to maintain that. 19 We're serious about how we conduct 20 these operations. So along the lines that 21 Commissioner Cox asked you, those questions, I think, 22 were right on point. Continue to pursue this on our 23 behalf if you will. 24 MR. SADBERRY: Thank you, Chairman. 25 Rest assured it -- it will be our intent to do so, and 0035 1 we'll keep you advised. 2 CHAIRMAN CLOWE: Next, item six, 3 report, possible discussion and/or action on GTECH 4 Corporation, including proposed acquisition of GTECH. 5 Mr. Sadberry. 6 MR. SADBERRY: Commissioners, I have 7 nothing to report at this time. 8 CHAIRMAN CLOWE: Any questions on that, 9 Commissioner Cox? 10 COMMISSIONER COX: No, sir. 11 CHAIRMAN CLOWE: And, Mr. Sadberry, I 12 would assume, then, you would want to pass item seven. 13 Is that correct? 14 MR. SADBERRY: That is correct, 15 Chairman. 16 CHAIRMAN CLOWE: Okay. We'll go on to 17 number eight, report, possible discussion and/or 18 action on the agency's contract. Mr. Jackson. 19 MR. JACKSON: Good morning, 20 Commissioners. Again, for the record, my name is Tom 21 Jackson. 22 In your notebooks under agenda item 23 number eight is a report on prime contracts that have 24 been updated for your review. If you have any 25 questions, I would be happy to respond. 0036 1 COMMISSIONER COX: No, sir. 2 CHAIRMAN CLOWE: Mr. Jackson, I think 3 we have an audit coming up by the State Auditor's 4 Office on our procurement practices. Will you be 5 involved in being responsive to that audit, or is it 6 underway now? 7 MR. JACKSON: Yes, sir, it's underway 8 right now, and we are responding to the -- the 9 auditors. They're on-site at this time. 10 CHAIRMAN CLOWE: How long has that been 11 in progress? 12 MR. JACKSON: Field work started a 13 couple of weeks ago and is to be completed, I believe, 14 by the end of -- end of August. 15 CHAIRMAN CLOWE: End of August? 16 MR. JACKSON: Yes, sir. 17 CHAIRMAN CLOWE: Who else is -- 18 MR. JACKSON: Field work should be done 19 by the end of July. 20 CHAIRMAN CLOWE: All right. Who else 21 is participating in the audit with you on our staff? 22 MR. JACKSON: That would be -- the 23 contracts part, Kathy Pyka's group is involved in it 24 somewhat on the payment of the purchase orders. Our 25 internal audit is involved in that. They have -- are 0037 1 following up on that. 2 CHAIRMAN CLOWE: Good. And you're 3 giving them everything they're asking for and being 4 fully responsive to their requests? 5 MR. JACKSON: Yes. That's correct. 6 CHAIRMAN CLOWE: Good. Good. Thank 7 you. 8 Next, item number nine, report, 9 possible discussion and/or action on the 79th 10 Legislature. Ms. Trevino. Good morning. 11 MS. TREVINO: Good morning, 12 Commissioners. For the record, I'm Nelda Trevino, the 13 Director of Governmental Affairs. 14 Included in your notebook is a copy of 15 the agenda for the May 26th committee hearing of the 16 House Appropriations Subcommittee on General 17 Government. The subcommittee held this hearing to 18 hear invited testimony from various agencies, 19 including the Texas Lottery Commission, on the 20 committee's interim charge number one. This interim 21 charge states, monitor the performance of State 22 agencies and institutions, including operating budgets 23 and plans to carry out legislative initiatives, 24 caseload projections, performance measure attainment, 25 and other matters affecting the fiscal condition of 0038 1 the agencies and the State. 2 As noted on the agenda in your 3 notebook, staff from the Legislative Budget Board and 4 the State Auditor's Office provided testimony relevant 5 to each of the agencies invited to appear before the 6 subcommittee. With regard to the Lottery Commission, 7 the LBB's staff provided an overview of the agency's 8 budget and performance measures, and the staff from 9 the State Auditor's Office provided an overview of 10 their recently issued State -- State -- excuse me -- 11 security audit report. As you are aware, in addition 12 to informational material the agency provided the 13 subcommittee, testimony was provided by Anthony 14 Sadberry and Phil Sanderson. Additionally, the agency 15 provided some supplemental information to the 16 committee in response to questions that were raised 17 during the hearing. 18 The Governmental Affairs staff will 19 continue to monitor House and Senate interim committee 20 hearings and will keep you posted on developments 21 related to these legislative interim activities. This 22 concludes my report, and I'll be happy to answer any 23 questions. 24 CHAIRMAN CLOWE: Thank you, ma'am. 25 Next, item ten, report, possible 0039 1 discussion and/or action on the agency's Strategic 2 Plan for 2007 through 2011. Mr. Grief, are you going 3 to head this up? 4 MR. GRIEF: Yes, sir. Good morning, 5 Commissioners. For the record, I'm Gary Grief, Deputy 6 Executive Director for the Texas Lottery Commission. 7 Commissioners, this morning we are 8 seeking your formal approval of the agency's Strategic 9 Plan for fiscal years 2007 through 2011. As you know, 10 the Strategic Plan is a document that is required by 11 the legislature from all State agencies every two 12 years, and it's intended to be a long-term formal plan 13 that communicates the agency's goals, directions, and 14 outcomes to a wide variety of audiences, including the 15 Governor's Office and the legislature, the client and 16 constituency groups of the agency, general public, as 17 well as the employees of our agency. The document 18 serves as the foundation for our agency's strategic 19 planning process and budget structure, through which 20 the agency will ultimately develop a Legislative 21 Appropriations Request later this year, and that 22 document will reflect all of our decisions regarding 23 allocation of fiscal resources within the agency. 24 The Strategic Plan outlines our agency 25 goals and objectives and produces strategies for the 0040 1 agency to follow in order for us to achieve those 2 goals. 3 Our Strategic Plan is the result of a 4 team effort that has spanned the last several months 5 and has involved staff from every area within our 6 organization. We have had designated liaisons in each 7 division who have been responsible for providing 8 information related to their department. And earlier 9 this year, I designated Robert Elrod from our Media 10 Relations department as our project manager for the 11 development of the Strategic Plan. And Robert has 12 done an exceptional job in putting together a detailed 13 work plan, timeline, and, in general, managing this 14 project, agency-wide. 15 What you have before you today is the 16 result of a lengthy process that has included several 17 formal meetings that were convened as part of our 18 long-range planning process, along with several 19 smaller work group meetings that were focused more on 20 particular areas of expertise within the agency. 21 We've had several drafts of the document produced and 22 those have had numerous edits and reviews by agency 23 management, including by Acting Executive Director 24 Sadberry and myself. And ultimately, we forwarded the 25 draft to the Commissioners for your review on May the 0041 1 25th. 2 As we worked through the process, we 3 were very mindful of our agency's business plan, 4 which, unlike the Strategic Plan that is required to 5 be produced by the legislature, was originally 6 developed in concert with a recommendation from the 7 Sunset Commission. And we have once again ensured 8 that there is consistency between the agency's 9 Strategic Plan and our business plan. 10 In addition, we have also incorporated 11 into the Strategic Plan the budget structure that has 12 been approved by the Governor's Office and Legislative 13 Budget Board. 14 Our expectation is that the Strategic 15 Plan, in combination with the agency's business plan, 16 will serve as our road map for future agency 17 activities and provide assurance to the public that 18 those activities ultimately support the vision and the 19 goals of the State of Texas. 20 I do need to advise the Commission of 21 some revisions that have been made to the final 22 version of this Strategic Plan, and you should have a 23 document in front of you this morning. There are 24 updates to the version that was previously provided to 25 you. Due to timing and our desire to have a version 0042 1 of the plan available for your review well in advance 2 of this meeting, the recent organizational change that 3 was related to making Enforcement a stand-alone 4 division rather than a department within the Legal 5 Services Division, was not in the original version 6 that you received. We felt it was important to 7 include this organizational change in the final 8 document, and we have done so in the revised document 9 that you have today. We also have a cover page for 10 you that points out those major revisions. 11 In addition, Ms. Kathy Pyka, our 12 controller, is here to brief you on a few other 13 revisions that have been made to the document. 14 MS. PYKA: Commissioners, earlier this 15 week, we received edits from the Governor's Office and 16 the Legislative Budget Board that our budget structure 17 change request that we had submitted on April 7th of 18 this year had been approved. But it has been approved 19 with a couple of modifications that we had to 20 incorporate in the Strategic Plan, and I wanted to 21 outline those modifications for you. And there are 22 three, and they're -- they're very minor. 23 The first item is, we requested the 24 deletion of output performance measure 1411, number of 25 lottery investigations initiated. This request for 0043 1 deletion was not approved, and so we have placed this 2 measure back in the Strategic Plan. It's been 3 incorporated on pages 93 in the overall budget 4 structure, as well as on page 123, with the definition 5 change. 6 The other two changes that they 7 requested were minor wording modifications. I just 8 wanted to highlight them for you. On page 118, 9 measure A-11-A, they modified the term "cost" to 10 "expense." And then on page 126, measure A-14-A, they 11 modified the term "within the quarter" to "within the 12 time period." 13 So these three changes, along with 14 noting the Enforcement Department as Enforcement 15 Division within the performance measure definitions 16 have been incorporated in the final document before 17 you this morning. 18 MR. GRIEF: Commissioners, staff's 19 request this morning is that the Commission formally 20 approve this Strategic Plan today with a -- with the 21 qualified changes that we have put on the record. We 22 are looking for a formal vote by the Commission on 23 this regard to approve the Strategic Plan. And if you 24 so approve this morning, I have a number of 25 transmittal letters that will need to be signed by the 0044 1 Chairman, along with a cover page that will need to be 2 signed by both the Chairman and the Acting Executive 3 Director. 4 Kathy and I, and along with Robert 5 Elrod, are here today to answer any questions you 6 might have. 7 COMMISSIONER COX: Well, Gary, this is 8 quite a document. Not having compared it with the 9 previous similar document, I have one question, and 10 that is, what does this indicate, if anything, as far 11 as a change in the way we're going to do business? 12 MR. GRIEF: There is -- there are 13 numerous changes that we have made to the document, 14 but I think overall, Commissioner, you will see a 15 different management approach, a more open management 16 style. Mr. Sadberry has had a big impact into many of 17 the organizational changes that we have made since he 18 has come on board, and we have noted all of those and 19 explained our reasoning and our rationale behind those 20 changes in the document, which, of course, made it 21 important for us to get that last organizational 22 change that was made in Enforcement in the document. 23 I think, on the whole, that would be the biggest 24 change you might see in the tone in the document. 25 COMMISSIONER COX: Specifically, are 0045 1 there changes here that have been made as a result of 2 the work that we've been doing with the State 3 Auditor's Office? 4 MR. GRIEF: There are comments in the 5 document that are specific to our discussions that we 6 have had with the State Auditor's Office. Yes, sir. 7 COMMISSIONER COX: And that continues 8 to be a constructive process? 9 MR. GRIEF: Very constructive. Yes, 10 sir. 11 COMMISSIONER COX: Good. 12 CHAIRMAN CLOWE: Thank you, 13 Commissioner Cox. 14 Gary, in regard to the comment that you 15 made regarding the security department, am I correct 16 in looking at what I have in my copy as that 17 referenced on page 25? 18 MR. GRIEF: No, sir. That would be the 19 security department within Lottery Operations. 20 CHAIRMAN CLOWE: Guide me to the page 21 that is applicable to your remarks, then, please. 22 MR. GRIEF: There are numerous ones, 23 Mr. Chairman, but probably the best example would be 24 page 20, the bottom of the page, right-hand column. 25 CHAIRMAN CLOWE: I think I'm working on 0046 1 an old copy. What page, Gary? Pardon me. 2 MR. GRIEF: Page 20, towards the bottom 3 of the page, in the right-hand column. Making this 4 change from an enforcement department within Legal 5 Services to an Enforcement Division led us to have 6 numerous word changes throughout the document, 7 splitting that out. But this is probably the -- the 8 best example that shows the difference in the 9 stand-alone division. 10 CHAIRMAN CLOWE: Commissioner Cox, 11 since our last meeting, and you have no way of being 12 aware of this, Gary and Kathy and, I think, Acting 13 Executive Director Sadberry sat in on the briefing. I 14 underwent an extensive briefing on this document, and 15 I was impressed with it and, along with you, want to 16 express my appreciation and admiration for the work 17 that you all and the others that you have named, 18 Robert Elrod, and I know a number of others 19 participated in this. 20 In regard to this section right here 21 that I have referred to, on page 20, Acting Executive 22 Director Sadberry and I made a visit over the last two 23 weeks to Colonel Davis at the Department of Public 24 Safety. And at that meeting, the lieutenant colonel, 25 who is, I believe, the deputy executive director in 0047 1 that organization, in that nomenclature at our agency, 2 and two other individuals that Colonel Davis asked to 3 be at that meeting were in attendance. And we covered 4 with the colonel a number of items that were covered 5 in our security audit by the State Auditor's Office in 6 a hope to not only fulfill the management responses 7 that were made in that audit, but to call on what we 8 considered to be the premiere police force in the 9 state, one that has an exemplary record of outstanding 10 performance, to help us. And we were reaching out to 11 them to examine our -- our practices and procedures, 12 and we invited their comments and invited their 13 suggestions. I think that we can improve in what we 14 do here. And they were responsive to that. They 15 agreed to set individuals in place to meet with Acting 16 Executive Sadberry and other members of his staff, and 17 I don't know whether you're aware of this or not, but 18 I want to make you aware of it in this forum and ask 19 your agreement, informally, to this practice. I think 20 that to call on the Texas Department of Public Safety 21 to help us with security and other related issues and 22 have them examine what we're doing and give us 23 comments that can improve our performance are not only 24 in line with the State Auditor's Office and the audit 25 that they've given us, but will help us to achieve our 0048 1 level of good practice. Are -- are you in agreement 2 with that? 3 COMMISSIONER COX: Absolutely. And 4 I -- I did not know that you had done that. I had 5 some indication that you were planning to do it, 6 through Director Sadberry, and I applaud that. I 7 think the more we can open what we're doing up to that 8 kind of expertise and get guidance from those kinds of 9 folks, the better this agency is going to be. 10 CHAIRMAN CLOWE: I'm glad to hear that, 11 and I appreciate that response. 12 Mr. Sadberry, would you add anything 13 for Commissioner Cox's benefit? 14 MR. SADBERRY: I would concur and add 15 to those comments made by the chairman, Commissioner 16 Cox, that it is our expectation and anticipation that 17 the combined resources and the expertise that the DPS 18 bring to the agency and the staff that we have at the 19 agency and using those to the highest complement and 20 synergies, we can achieve the standards that are hoped 21 for that go along with the security -- the Enforcement 22 Division being a stand-alone division with a head that 23 reports to my office. And that enables the agency, 24 through my office, to know immediately of the 25 activities and developments in that division and to be 0049 1 able to assist in the achievement of their goals and 2 their success. That's well along the way, and from 3 our standpoint, staff is engaged in that, and we're 4 having weekly reports from the division that show a 5 positive movement in that division and shows the 6 structure that is in place. They have been productive 7 and constructive. We've seen this, Mr. Chairman, 8 earlier in the synergistic work in the Lottomatica 9 transaction and that is a good indicator of how we can 10 utilize resources and the expertise that is at our 11 disposal within our state and governmental structure 12 to the greatest benefit for this agency and thereby 13 for the people of the state. 14 COMMISSIONER COX: Thanks. 15 CHAIRMAN CLOWE: Anything further, 16 Gary? 17 MR. GRIEF: No, sir. 18 CHAIRMAN CLOWE: Commissioner, do you 19 have a motion? 20 COMMISSIONER COX: The formal motion 21 would be that we approve the submission of this 22 agency's Strategic Plan, and do we also approve your 23 signing this on behalf of the Commission? 24 CHAIRMAN CLOWE: I think your initial 25 motion covers everything. And I second that motion. 0050 1 All in favor, please say aye. Opposed, no. The vote 2 is two-zero in favor. 3 Thank you both very much and the other 4 members of our staff who participated in this good 5 work. And you have formal copies, I guess, to bring 6 forward to be signed? 7 MR. GRIEF: Would you like those at 8 this time? 9 CHAIRMAN CLOWE: We'll sign them. 10 We'll go on to item number 11, 11 consideration, possible discussion and/or action on 12 the agency's personnel handbook. Mr. Sadberry. 13 MR. SADBERRY: Thank you, Chairman. 14 Commissioners, you may recall that at your meeting on 15 April 19th, 2006, I sought your guidance about the 16 role you would like to play and would like staff to 17 play in the development and adoption of a new agency 18 personnel handbook. You indicated that you saw your 19 role as providing general policy guidance and that the 20 staff should be responsible for determining the 21 specific details of the policy. You also indicated 22 fairness as the overarching policy goal. We have kept 23 that goal at the forefront of our minds in developing 24 the handbook that you now have in front of you. 25 If you turn to the first page, you will 0051 1 see that the handbook sets out the Commission's core 2 values. Then on the following pages you see that the 3 table of contents includes a general policy statement 4 in connection with each chapter. 5 Although the staff is not requesting 6 that the Commission take action on the handbook as a 7 whole, we are requesting that you review the general 8 policy statements and take some action in regard to 9 those statements. 10 In regard to the handbook as a whole, 11 my plan, subject, of course, to your action and your 12 direction, is to announce to the staff as soon as 13 possible that the 1997 handbook has been superseded 14 and replaced by this handbook. The staff will post 15 the handbook on the agency intranet so that it is 16 readily available to the entire agency. I've also 17 asked the staff to develop a procedure for updating 18 the handbook as the need arises and for alerting all 19 agency staff members to any changes. 20 In most respects, this handbook is not 21 a dramatic change from the 1997 handbook. One 22 significant difference is that this handbook contains 23 a procedure for general employee complaints and a 24 procedure for grievances about adverse employment 25 actions. We used the current policies of certain 0052 1 State offices and agencies as the model for these 2 procedures. It also contains a new procedure for 3 addressing possible conflicts of interest. 4 I would be happy to answer any 5 questions you may have. Sarah Woelk is also here and 6 available to answer questions about the development of 7 and the content of the handbook. 8 COMMISSIONER COX: The -- several 9 months ago, I sat down with Gary, I guess, and tried 10 to describe the way I thought this would look. And he 11 has done a much better job of making it look that way 12 than I -- than my description. I think this is just 13 perfect, Anthony, as far as form. I do have a couple 14 of questions as far as substance. 15 MR. SADBERRY: Certainly. 16 COMMISSIONER COX: Looking on, I guess, 17 what would be page three or four, under chapter two, 18 general policies. 19 MR. SADBERRY: Yes, I have that. 20 COMMISSIONER COX: The policy statement 21 says, all employees of the Texas Lottery Commission 22 will be subject to policies that are applied 23 consistently and fairly. 24 I certainly agree that application -- 25 consistent and fair application is appropriate. My 0053 1 question is, should we also talk about the fairness of 2 those policies, as well as the fairness and 3 consistency of their application? 4 MR. SADBERRY: Commissioner, I think 5 that's pertinent and on point and an appropriate 6 comment. And, obviously, this is the -- the 7 Commissioners' discretion in terms of what this 8 statement should be. I would offer in -- as guidance, 9 for your consideration, to be -- to implement that 10 supplement to the general statement, something along 11 the lines of language that would state our policies 12 should be fair and in compliance with the law, or 13 words to that effect. Am I -- am I -- 14 COMMISSIONER COX: We have those words 15 back in one of the other sections. 16 MR. SADBERRY: That's -- that's right. 17 COMMISSIONER COX: I think if -- if you 18 saw fit to do that, that that would address my 19 question here. 20 And the other question I have is on 21 chapter four, Employee Compensation and 22 Classification, Commission Policy Statement: All 23 employees of the Texas Lottery Commission will be 24 compensated commensurate with job performance. 25 I totally agree with that, and I 0054 1 believe that that -- that job performance is the 2 ultimate determinant of compensation adjustments. But 3 I wonder whether compensation, at least as initially 4 set out in a starting salary, is commensurate not only 5 with performance -- in fact, not with performance, but 6 with qualifications and experience? 7 MR. SADBERRY: And I think that is a 8 concept that we should adopt or consider adopting, of 9 course, subject to your deliberations on that. I will 10 tell you that we have given thought of that within the 11 agency and review and study of this process consistent 12 with the classification effort and other matters that 13 have been undertaken by agency staff. And we're to 14 ask -- direct, in fact, that this be included in the 15 policy statement here. I'm -- I would say to you that 16 is consistent with the focus that the agency has 17 already taken and to be able to (inaudible) consistent 18 with your input. 19 COMMISSIONER COX: Well, Mr. Chairman, 20 other than that, I think this is an excellent 21 document. 22 CHAIRMAN CLOWE: I agree. And I think 23 it does what your questions asked be done. And there 24 is good work here. You made a comment about form and 25 substance, and I think this is good form. And I'm 0055 1 also interested in the substance of what this creates. 2 And Gary made comments earlier on the prior agenda 3 item about a culture of openness and better 4 communications. And I think that that is the 5 substance that the Commissioners are looking to you to 6 continue to support and create, which will be 7 beneficial in the result of the work of the agency. 8 And although you may have it planned at a later time, 9 I think this is an excellent time for you to introduce 10 to the Commissioners the new director of the Human 11 Resources Division. And we could hear from her at 12 this time, if we may. 13 MR. SADBERRY: Thank you, Chairman. 14 That's -- that's excellent. Janine, I do note, is in 15 the audience and would ask that she come forward, if 16 you would, please, and be formally introduced to the 17 Commissioners. I will say, Chairman, that Ms. Graves 18 was introduced -- Janine Graves was introduced at the 19 June all-staff meeting, to the staff, that occurred 20 earlier this month after she had, to our great 21 delight, accepted our offer of employment in the 22 capacity of director of Human Resources Division. She 23 began her tenure here Monday of this week, and we were 24 pleased to have her introduced informally to certain 25 staff members, and then she participated in our 0056 1 directors meeting yesterday, in fact, where this 2 personnel handbook that's before you today was still 3 in its -- its stages of formation and completion, and 4 was able to make valuable comment to us, not only on 5 the substance and form of the document, but in 6 application, which is equally, if not more so, 7 important on how it works. It's not just going to be 8 a document to be put on the shelf, but it's going to 9 have a real and practical application in our 10 day-to-day activities here. 11 So with that I would -- I would 12 certainly like to introduce our new director of Human 13 Resources. We are very pleased to have Janine. If 14 you have any comments to the Commissioners at this 15 time, I would invite that for you. 16 MS. MAYS: Good morning. 17 COMMISSIONER COX: Good morning. 18 CHAIRMAN CLOWE: And we would like for 19 you to tell us a little bit about your history and -- 20 and how you came to this position. 21 MS. MAYS: I have joined the Texas 22 Lottery Commission from the Railroad Commission -- 23 MR. SADBERRY: Correction. I said 24 Graves. Mays. I'm sorry. Ms. Mays. 25 MS. MAYS: I got that. 0057 1 I come from the Railroad Commission. 2 And Tom Clowe and I had a big discussion about all his 3 fans there this morning as we walked in. I was 4 actually the EEO director at the Railroad Commission 5 and handled all of the employee relations issues and 6 served as the assistant director of HR and the HR 7 director in the absence of my boss. So I come to the 8 Lottery Commission with a lot of employee relations 9 experience, and this particular document was very 10 important to me. We had a lot of discussion on it 11 yesterday and how it will be applied. Most 12 importantly, that it will be active and that it will 13 be ongoing. And because of how it's structured and 14 with the leadership of the group that's here, before I 15 got here, they've created a document that we can 16 continuously address and add to and adjust 17 accordingly. So I think that's the start to some of 18 your goals of communication and getting the group a 19 little more cohesive, addressing some of the employee 20 relations issues that you have. I'm very direct, so 21 I'll just say everything that you have is fixable. 22 And like I told the group early on, that if it's not, 23 I have happy pills. I've come from Austin State 24 Hospital as well, and I can mix it in the water if 25 need be. So I'm excited to be here. Nice to meet you 0058 1 both. 2 CHAIRMAN CLOWE: I met this lady this 3 morning for the first time and learned a little bit 4 about her history and her past, and she comes from an 5 agency that has an excellent director of Human 6 Resources, Mark Bogan. I've worked with him in years 7 past, and he has done a marvelous job at that agency. 8 And under his mentoring, I'm sure that she has 9 acquired many of his skills and will, in fact, bring 10 those to bear at this agency. 11 I would like to add a word in regard to 12 this spirit of culture change and openness and better 13 communications that we're striving for in this agency. 14 We've been criticized in the past because of a lack of 15 that and perhaps a lack of empathy in regard to 16 individual wants and needs. And I hope, with your 17 experience and your knowledge and your background, 18 that you can take a good look at that and, under the 19 direction of Anthony Sadberry and Gary Grief, with the 20 help of other members of the team in this agency, be a 21 part of improving our performance in those areas. I 22 think that the morale and the attitude of employees in 23 any business organization is of primary importance. 24 We all want to see that the best job is done. And in 25 order to do that, I think you have to have a team that 0059 1 is trusting and is confident and is motivated to do 2 their best work. And I think you can play a key role 3 in that. You just came to work this week. We're 4 starting you at a fast pace, but it will be a fast 5 pace. There is no question about that. And I want to 6 welcome you and tell you that not only do you have the 7 leadership support but you have the support of the 8 Commissioners as well. 9 MS. MAYS: Thank you. 10 CHAIRMAN CLOWE: And we look forward to 11 having a positive impact as a result of you being 12 here. 13 MS. MAYS: Thank you. 14 CHAIRMAN CLOWE: Commissioner Cox. 15 COMMISSIONER COX: Typically when a 16 process begins -- when we begin a process of 17 correction, we tend to go too far in the other 18 direction. And I have been very pleased with 19 everything I've seen from Director Sadberry, that he 20 is not moving us, as a pendulum, would to another 21 extreme, but rather is moving us to the center. And I 22 just want to encourage the continuance of that 23 process. To -- we have been perhaps too difficult for 24 our employees to deal with, but that doesn't mean that 25 we should become too easy. We should move to the 0060 1 position of fairness and compliance, rather than a 2 position of bending over backwards to be sure that we 3 don't possibly offend anyone at any time. Fairness 4 and consistency is what I believe we should be looking 5 for, and I think that's where Mr. Sadberry has us 6 headed. 7 MS. MAYS: One of the good things that 8 I have noticed, and probably the most difficult thing 9 when culture is being addressed, is the need for 10 change. And because you all acknowledge the need for 11 change, I think that's the most difficult thing. And 12 now that we've acknowledged that need, then we can 13 move into actually making that change and giving that 14 balance, I think is what the focus is now, is making 15 that balance that, like you said, the pendulum is the 16 in the middle and not swings extremely to the other 17 way. But the fact that the Commission recognizes that 18 change is the start to fixing things, to healing 19 things, and to bringing some sense of consistency and 20 balance and fairness. So that's our goal. 21 COMMISSIONER COX: Excellent. 22 CHAIRMAN CLOWE: Thank you, and welcome 23 aboard. 24 MS. MAYS: Thank you. 25 CHAIRMAN CLOWE: Commissioner Cox, I 0061 1 think that Mr. Grief wanted and asked for a motion to 2 approve this part of the personnel handbook relative 3 to that item -- or those items, rather, that we've 4 covered. Would you -- 5 COMMISSIONER COX: And, Mr. Chairman, 6 with the -- with the understanding I have from 7 Director Sadberry that there will be a couple of 8 changes as we discussed, I move that we approve this 9 document. 10 CHAIRMAN CLOWE: I second that. All in 11 favor, please say aye. Opposed, no. The vote is 12 two-zero in favor. 13 Does that take care of what you needed, 14 Mr. Grief? I see you nodding your head yes. 15 Next, item 12, consideration, possible 16 discussion and/or action on external and internal 17 audits and/or reviews relating to the Texas Lottery 18 Commission and/or the Internal Audit Department's 19 activities. Ms. Melvin, good morning. 20 MS. MELVIN: Good morning, 21 Commissioners. For the record, my name is Catherine 22 Melvin. I'm the Director of the Internal Audit 23 Division. 24 I have a very brief update on the State 25 Auditor's Office audits. 0062 1 The management responses to both the 2 Lotto Texas and the human resources audits are due to 3 the State Auditor this week. The auditors are 4 planning for a July 11th public release date for both 5 reports. If the reports are released on this date, 6 the auditors from both audits plan to attend the next 7 Commission meeting to present and discuss their 8 results with you. 9 And, Chairman, you asked Mr. Jackson 10 about the procurement audit that the State auditors 11 are doing. As he stated, those auditors are currently 12 on-site conducting field work, and they have indicated 13 that they are planning for an August 31st public 14 report release date for that project. 15 And that concludes my presentation 16 unless you have any additional questions. 17 CHAIRMAN CLOWE: And, Ms. Melvin, would 18 your answers be the same to the questions I asked 19 Mr. Jackson about the responsiveness of the staff in 20 providing those audit members with everything that 21 they're requesting in a timely and prompt manner? 22 MS. MELVIN: Yes, sir. I would agree. 23 You should -- commissioner -- or Chairman, you should 24 know that we do have a process in place where we are 25 able to formally sit down with the auditors at a 0063 1 minimum of twice a week. Depending on what issues 2 apprise, we either have those meetings or not. But 3 at -- at a minimum, I touch base with the auditors and 4 ask them if they are getting everything they need and 5 they have any concerns. And to date, they have 6 been -- their responses have been very favorable 7 regarding management and staff's responses to their 8 requests. 9 CHAIRMAN CLOWE: Very good. Thank you, 10 ma'am. 11 MS. MELVIN: Okay. Thank you. 12 CHAIRMAN CLOWE: This would be a good 13 time to take a short recess, please. 14 (RECESS.) 15 CHAIRMAN CLOWE: We'll come back to 16 order. 17 Next is item number 13, consideration 18 of, possible discussion and/or action on the 19 appointment and employment of the Executive Director. 20 Mr. Shaw, in your role as acting 21 director of the Human Resources Division last week, I 22 believe you convened a meeting of the executive 23 director search committee, and that group met. Would 24 you report to us on that activity, please. 25 MR. SHAW: Yes, Mr. Chairman. For the 0064 1 record, my name is John Shaw. I did serve as Acting 2 Human Resources Division Director in the interim, 3 while we were waiting for Ms. Mays to get here. In 4 that capacity, I did assist the executive director 5 search committee to -- to organize a meeting last 6 Thursday, the 22nd of June. They met here at 7 headquarters for the purpose of interviewing 8 Mr. Anthony Sadberry, who tendered his application for 9 the position on June the 2nd. Six members of the 10 committee interviewed Mr. Sadberry and then 11 deliberated, regarding their recommendation as a 12 result of their interview. 13 Mr. Chairman, I have the -- the 14 statement here, the recommendation by Mr. John 15 Edwards, who served as committee chairman, if you 16 would like me to read that. 17 CHAIRMAN CLOWE: Please. 18 MR. SHAW: The -- the statement is as 19 follows: The committee, after interviewing 20 Mr. Sadberry and reviewing his application, 21 unanimously and enthusiastically recommends that the 22 Commission interview him. We believe him to be the 23 best qualified candidate we have interviewed in this 24 process. That's signed by Mr. John Edwards, chairman 25 of the executive director search committee. 0065 1 CHAIRMAN CLOWE: Anything further, 2 John? 3 MR. SHAW: No, sir. 4 CHAIRMAN CLOWE: Thank you very much. 5 Commissioner Cox, I was in attendance 6 at that meeting and expressed your appreciation for 7 the work that that group had done because I knew that 8 you were out of the city, and had you been in the 9 city, you would have appeared as you have in the past. 10 COMMISSIONER COX: Thank you. 11 CHAIRMAN CLOWE: So I tried to 12 represent, as best I could, your feelings about that. 13 At this time I want to express again to all of those 14 members of the search committee our appreciation for 15 the good work that was accomplished. I see -- I 16 thought I saw -- Gerald Busald is here, and then 17 Leticia Vasquez. Was she -- she was here. She came 18 in and -- oh, there she is. Two members of the search 19 committee that are here. John Shaw has mentioned that 20 John Edwards, the Executive Director of the Texas 21 State Bar, chaired the group. There were members who 22 were present. I won't name those who were and 23 weren't, but we had a very good representation of the 24 members of that committee and, again, we appreciate 25 their work. 0066 1 Mr. Sadberry, you have been recommended 2 to the Commissioners for interview for this position. 3 And I think it's fair to say that you and I have had 4 extensive interviews, and I assume the same thing 5 would be true with Commissioner Cox. At this point in 6 time, I would like to hear from you. Commissioner Cox 7 may have some questions for you, but I would 8 particularly like to hear at this time how you feel 9 about what you have accomplished since you came into 10 this position, and what your hopes and aspirations 11 might be for the future, should the Commissioners 12 deliberate this and take some action in regard to your 13 application. 14 MR. SADBERRY: Thank you, Chairman, 15 Commissioner. Well, I stated today and offered the 16 current position of acting executive director, I 17 stated to you that I gladly and willingly accepted 18 that challenge to serve in that capacity. That has 19 remained my mantra, if you will, my theme each day I 20 work here. I came to work every day with the idea of 21 getting a job done and not particularly being 22 concerned for myself or what title I would get, 23 whether that was an acting capacity or not. And that 24 job was to take this agency, which by the way, I have 25 to say I found an excellent staff here. I have so 0067 1 stated to you, as you know. I've stated in every 2 opportunity I've had, most recently in a program we 3 were invited to participate in, the excellent staff 4 that I found at the Lottery Commission to work with 5 and the task of taking what is -- is at -- in front of 6 us, the -- recognizing the challenges that we have to 7 achieve the goals I think we already addressed at this 8 meeting earlier today and -- and previously of 9 openness, fairness, accountability, balance, good 10 government, and a Lottery Commission that serves 11 the -- the core values, serves the goals and 12 objectives, and moves us forward to a point where, 13 ultimately, go to the -- the ultimate question is 14 where we can be and where we should be and where we 15 will be, and that is, when this agency is -- is 16 mentioned in any context, it's mentioned as the Texas 17 Lottery Commission, and there be no necessity for 18 adjectives or descriptions to accommodate that, but 19 it's the agency of the State which is responsible for 20 operating the games with integrity and fairness and to 21 treat the playing public who participate in our games 22 fairly and to give them the best games possible, and 23 also to have those people who make that all possible, 24 the staff of this agency, feel that they work in a 25 good place and that they are fairly treated, they are 0068 1 expected to perform their work and do their jobs 2 properly, and to be held to accountability in the 3 discharge of their responsibility without there being 4 any concern as to the fairness, the safety of the 5 workplace in which they come to do this work. 6 I, after some time on the job, and 7 after seeing both the appropriateness and need for 8 certain structural changes, and that's all they've 9 been, as you well know, within the agency framework, 10 to utilize the resources that we have on a 11 going-forward basis, the most efficient and 12 effectively possible. And after working here in that 13 capacity for a representative period of time so that 14 you get a chance to see me -- I get a chance to see 15 you -- in this role -- these respective roles, and I 16 get a chance to work with staff -- staff gets a chance 17 to work with me -- if it's a working combination, if 18 it's worth the effort of going forward to hopefully 19 make more permanent and even more progressive this 20 combined mutual effort on our parts, to look at my 21 perhaps serving in this capacity, having it be a 22 permanent position. With that in mind, and having 23 consulted appropriately with you in that regard 24 individually, did submit the application to -- so that 25 we can move forward if -- should you so desire and -- 0069 1 and elect to do so, without having -- move past that 2 point in the process. To go forward, in my mind, to 3 do just what I've always done, and that's come to work 4 every day with the task in mind. We look at the 5 problems and we know there are going to be problems. 6 That's inherent in the process. But we look at the 7 problems as they are, look them face to face, and deal 8 with them head-on in a straightforward manner, and 9 then solve them, and move forward, and to bring with 10 that process inclusion, balance, fairness, and good 11 working relationships. 12 What I see -- we -- we, obviously, know 13 we've talked already. We're in the audit process, and 14 other things that are important to the agency are -- 15 are ongoing. What I see is a continuation of that 16 process and reaching the goal of stability that is 17 also addressed in many respects. And once we're being 18 reviewed by -- and other things, and having the type 19 of teamwork that I talked to you about the first day 20 that yields the best result, where it's not about one 21 person -- it's not about one office and one 22 position -- where I -- where I see it. It's about the 23 agency. And in the agency we are a collection of the 24 whole, where each component plays a part that's 25 significant. And I -- I have enjoyed the opportunity 0070 1 that you have given me and am honored by it, to play 2 the part that I've played, and send a message that I 3 believe in it and that I'm for it and -- and intend to 4 be there over the long haul should you -- you so 5 desire. Putting in my application is the intent to 6 send that message to you, to the staff, and to all 7 the -- the members and the employees of the agency, 8 and the people of the state, that I'm in it for the 9 long haul to achieve a good result. 10 CHAIRMAN CLOWE: Any comments or -- 11 COMMISSIONER COX: No. I -- I -- well, 12 I do have a comment or two. When we began this 13 process, I told you, and through my questioning of all 14 the candidates that we've talked to, I've made it 15 clear that what I was looking for here was someone who 16 exemplified the core values of the Texas Lottery 17 Commission. And those core values, for the record, 18 are integrity, responsibility, innovation, fiscal 19 accountability, customer responsiveness, teamwork, and 20 excellence. And I see all of these things in Anthony 21 Sadberry. I -- I think he exemplifies these core 22 values better than we could have dreamed when we 23 started out looking for a candidate for this position. 24 CHAIRMAN CLOWE: I agree. 25 Would you care to make a motion? 0071 1 COMMISSIONER COX: I move that -- I 2 guess, given that he has made the application, it 3 would be appropriate to say that we appoint Anthony 4 Sadberry as the Executive Director at the maximum 5 compensation permitted by the appropriate rules in 6 place. 7 CHAIRMAN CLOWE: And that would be -- 8 give us the exact number if you have it, Anthony. 114 9 thousand -- 10 MR. SADBERRY: 900 and something. It's 11 not 115,000, is what I recall, but other than that, 12 I -- see who has that number. 13 CHAIRMAN CLOWE: I saw the figure 14 earlier this morning. Let's be precise in our motion. 15 Do you have that, John, from -- 16 MR. SHAW: No, sir, I do not. 17 MR. GRIEF: Bobby Heith has that. 18 CHAIRMAN CLOWE: I know Bobby has it, 19 but I don't see Bobby. There -- Bobby, what's the 20 number? 21 MR. HEITH: 114,996. 22 CHAIRMAN CLOWE: 114,996 dollars 23 annually. Is that your motion, Commissioner Cox? 24 COMMISSIONER COX: With the hope that 25 that amount will be increased by the appropriate folks 0072 1 in recognition of the great skills and ability that 2 Director Sadberry brings to this position. 3 CHAIRMAN CLOWE: Okay. I -- we'll make 4 that an extra comment, but not part of the motion, if 5 that's all right. I think that might be seen by some 6 as a little bit of a reach on our part, and I don't 7 want to put that in the motion, if that's all right 8 with you. 9 COMMISSIONER COX: Of course. 10 CHAIRMAN CLOWE: I would second that 11 motion and point out that the Commissioners have 12 listened to the executive search committee. The 13 endorsement they gave Mr. Sadberry was unanimous and 14 resounding. And, again, I want to say how much we 15 appreciate the work that that group did in this 16 effort. It really helped the Commissioners, in my 17 opinion, come to the point that we're at today. 18 Having seconded that motion, I'll call 19 for the vote. All in favor, please say aye. Opposed, 20 no. The vote is two-zero. 21 Congratulations or condolences, 22 either -- 23 MR. SADBERRY: Well, I'll take it as 24 congratulations. I'm pleased and I'm honored. Thank 25 you very much. 0073 1 (Applause). 2 CHAIRMAN CLOWE: Anything further you 3 want to add, Director Sadberry? 4 MR. SADBERRY: Again, I'm honored, I'm 5 challenged, and I'm ready to keep going to work. 6 CHAIRMAN CLOWE: Very good. 7 Next, item 14, consideration of the 8 status and possible entry of orders in Docket No. 9 362-06-1241. Ms. Kiplin. 10 MS. KIPLIN: Commissioners, at the last 11 Commission meeting, you took up this contested case 12 matter. It was a lottery retailer who had a proposal 13 for decision on a disqualifying criminal conviction. 14 There were questions that the Commission had. And at 15 that time, you directed that this matter be remanded 16 back to the State Office of Administrative Hearings 17 for further review of the proposed findings of facts 18 and, if necessary, correction of those findings. And 19 what the staff has in your notebook is that remand 20 order, and that is what actually needs to be signed to 21 have the State Office of Administrative Hearings, if 22 you will, take back that -- that particular case. And 23 so the staff is recommending that you sign -- you vote 24 to approve the remand order and you sign it. It is 25 consistent with the discussion that you had at the 0074 1 June 7th Commission meeting. 2 CHAIRMAN CLOWE: Any questions? 3 COMMISSIONER COX: No, sir. I've -- 4 I've read it, and I believe it is consistent. 5 CHAIRMAN CLOWE: So moved. 6 COMMISSIONER COX: Second. 7 CHAIRMAN CLOWE: All in favor, please 8 say aye. Opposed, no. The vote is two-zero in favor. 9 Commissioner Cox, while we are in the 10 area of the general counsel, she has requested, for 11 clarification, that the motion to approve the 12 personnel handbook clearly relates to those items 13 which were presented this morning, and not to the 14 entire document; and, further, that they include those 15 suggestions or changes which you made and were 16 accepted. So on that basis, for clarification, I will 17 move that motion. 18 COMMISSIONER COX: So specifically, 19 we're looking at the italicized information, the 20 policy statements, and not the listing of potential 21 topics, policies, procedures -- or procedures, et 22 cetera? 23 CHAIRMAN CLOWE: I think that is 24 subject to change, and furthermore, the body of the 25 document is not the subject of this motion. 0075 1 COMMISSIONER COX: Exactly. 2 CHAIRMAN CLOWE: And so that would be 3 my motion. 4 COMMISSIONER COX: Second. 5 CHAIRMAN CLOWE: All in favor, please 6 say aye. Opposed, no. The vote is two-zero in favor. 7 Next, report -- number 15, report by 8 the -- now, the Executive Director, and/or possible 9 discussion and/or action on the agency's operational 10 status and FTE status. 11 MR. SADBERRY: Commissioners, you have 12 information in your hand -- your notebooks under this 13 item for your review and information. Other than 14 this, I have nothing to report. 15 CHAIRMAN CLOWE: Are there any 16 questions? 17 COMMISSIONER COX: No, sir. 18 CHAIRMAN CLOWE: Thank you. 19 Next, item number 16, report by the 20 Charitable Bingo Operations Director, possible 21 discussion and/or action on Charitable Bingo 22 Operations Division's activities. Mr. Atkins. 23 MR. ATKINS: Commissioners, the one 24 item that I wanted to expand on in my report that is 25 contained in your notebook is to give you an update on 0076 1 the annual conference of the North American Gaming 2 Regulators Association, which was held in Scottsdale, 3 Arizona, June 11th through the 14th. As you know, 4 NAGRA brings together agencies that regulate gaming 5 activities and provides a forum for the mutual 6 exchange of regulatory information and techniques. 7 The organization collects and disseminates regulatory 8 and enforcement information, procedures, and 9 experiences from all jurisdictions, and provides 10 ongoing gaming education and training for its members. 11 Attending this year's conference were 12 myself; Phil Sanderson, assistant director of the 13 Charitable Bingo Operations Division; Sandy Joseph, 14 assistant general counsel from the Legal Services 15 Division; and Scott Hudson, investigator with the 16 Enforcement Division. At this conference, as you 17 know, I concluded my term as past president of the 18 association, and Phil Sanderson continues to serve as 19 co-chair of the Charitable Gaming Committee and served 20 as moderator for two of the Charitable Gaming 21 Committee sessions. Those were charitable gaming 22 compliance audits and charitable gaming compliance 23 inspections. 24 This year's conference included many 25 interesting and timely sessions and speakers. One of 0077 1 the unique aspects of NAGRA conferences is that the 2 opening session traditionally begins with a 3 presentation by the host jurisdiction regarding gaming 4 activities in their specific state or province. Due 5 to the prominence of Indian gaming in Arizona, the 6 panel included the director of the Arizona Department 7 of Gaming and the executive director of the Gila River 8 Tribal Gaming office. They provided a detailed 9 discussion of how state and tribal governments conduct 10 their regulatory activities in Arizona. The panel 11 also included the director of the Arizona Department 12 of Racing, who discussed several issues facing the 13 racing industry in Arizona, including the stiff 14 competition from tribal casinos. 15 NAGRA conferences also begin with 16 break-out sessions specific to the various types of 17 gaming that NAGRA covers. Again, Phil Sanderson 18 co-chaired the session for charitable gaming. In this 19 session, each jurisdiction is invited to update other 20 members on recent legislative changes or other 21 important issues in their jurisdictions. And I always 22 find it interesting to note in these sessions how 23 similar the problems are among the various 24 jurisdictions. Many of the issues currently being 25 faced in Texas, such as low attendance, shrinking 0078 1 gross receipts, increased competition, and different 2 enforcement issues are also common throughout all of 3 North America. 4 During this conference, the Charitable 5 Gaming Committee sponsored sessions on, as I mentioned 6 earlier, charitable gaming compliance audits, as well 7 as bingo and pull-tab trends and an analysis of the 8 NAGRA pull-tab standards, all of which were well 9 received and well attended. 10 Another popular session included 11 presentation on the results of a survey of NAGRA 12 members on Texas Hold 'Em poker games being conducted 13 in North America. The survey was a joint effort 14 between the Charitable Gaming and Investigators 15 Committee, and they represent some of the most seminal 16 research that has been done on this subject to date. 17 Another session was on background 18 investigations of companies involved in gaming, which 19 was sponsored by the Casino and Investigators 20 Committee. This focused on conducting thorough 21 background investigations on gaming vendor applicants 22 to ensure that unsuitable individuals or businesses 23 are not involved in gaming. 24 Finally, there were two very 25 interesting general sessions on subjects with broad 0079 1 appeal. The first was on the status of Internet 2 gaming, which was presented by I. Nelson Rose, who is 3 a well-known scholar on gaming law. And the second 4 was a detailed presentation on the status of research 5 related to problem and compulsive gambling. Several 6 of the presenters on this panel were associated with 7 the Harvard Medical School Division on Addiction. 8 There were additional break-out and 9 general sessions conducted that I haven't summarized 10 in this report. However, many of the presentations 11 that I have discussed this morning, as well as others, 12 will be available for viewing on the NAGRA Web site 13 within the next month. 14 NAGRA's next conference is currently 15 planned for June 10 through the 13th in 2007, in 16 Kansas City, Missouri. 17 And that concludes my report, and I 18 would be happy to answer any questions you may have. 19 COMMISSIONER COX: Billy, it sounds 20 like that there were a lot of very timely topics 21 discussed there and some real experts there. Did you 22 bring back any ideas for things that we should be 23 working on? 24 MR. ATKINS: I have, Commissioner Cox. 25 And, in fact, just as recently as this week, have 0080 1 begun discussions on some of those. One item that was 2 very timely in one of the presentations that the 3 Charitable Gaming Committee sponsored dealt with 4 common complaints and investigative issues that -- 5 this specific presenter was from the state of 6 Kentucky. And one of the items that they raised that 7 they indicated they have begun to notice, and just 8 coincidentally, when we came back, it was raised here 9 as a possibility, was the fact that through the advent 10 of technology, two-way pagers or even cell phones, 11 that there have been allegations that people in bingo 12 halls have been texting bingo callers with numbers 13 that they may need in order to achieve a bingo. So 14 that was a discussion that began at NAGRA that we have 15 been able to continue here. 16 Additionally, as a result of some 17 discussions that I had with members from the British 18 Columbia gaming agency, I have been able to tie them 19 up with some of our investigators on some similar 20 issues that have been raised that they've been -- been 21 looking at. 22 So there was -- and there always seems 23 to be, Commissioner Cox, information that we're able 24 to -- to bring back and incorporate here. 25 COMMISSIONER COX: Good. And I 0081 1 encourage you too, to the extent that any of this is 2 applicable to the lottery side, that you brief 3 Director Sadberry on things that you learned. 4 MR. ATKINS: Sure. 5 CHAIRMAN CLOWE: Billy, as a matter of 6 clarification, how would a bingo caller manage making 7 balls fall that were selected for that purpose of 8 filling the card? Was that explained? 9 MR. ATKINS: Well, it's not necessarily 10 that they make that specific ball drop, but what they 11 will do -- or what the allegation is that's been 12 raised is that as balls are drawn, they are -- are put 13 into a master board that has a sensor in there that 14 then lights up the flashboard that's available for 15 view to all of the organizations. 16 COMMISSIONER COX: Right. 17 MR. ATKINS: So the allegation is, is 18 that what the caller may do is they may take the ball 19 and actually place it in the holder for the specific 20 number that's being requested even though it's not the 21 number that was drawn. So that on the -- on the 22 flashboard, for all of the players to observe, is the 23 number. So that when the -- when the organization 24 goes back in order to verify the card, the numbers 25 that are called out appear on the flashboard. 0082 1 COMMISSIONER COX: So there is not a 2 ball set such that only B 15 will activate the number 3 if it's put in the B 15 slot? 4 MR. ATKINS: That's correct. 5 CHAIRMAN CLOWE: But isn't there always 6 a check, when a player calls bingo, where the card is 7 matched to the actual numbers? 8 MR. ATKINS: Generally, the card is 9 matched to the numbers that appear on the flashboard. 10 Now, there is a provision in the rules that any player 11 can call for a verification of the balls that are 12 actually contained in the -- in the master board. 13 But, you know, in actuality, I don't know that, you 14 know, any -- any players do that with any type of -- 15 of regularity. 16 CHAIRMAN CLOWE: That's interesting. 17 Every -- every hall that I have observed play in 18 always does a check against the master board of the 19 paper or the electronic device against the actual 20 balls. That seems to me to be good practice here. 21 COMMISSIONER COX: Sure. 22 CHAIRMAN CLOWE: You know, to take what 23 the master board shows and not check it is like 24 counting currency and not seeing whether it's a 5 or a 25 20 to me. You have got to -- you have got to make 0083 1 that verification. That seems simple to correct, is 2 my reaction. 3 MR. ATKINS: And those are -- those are 4 the type -- 5 CHAIRMAN CLOWE: And the reason for 6 that -- excuse me. I just wanted to add a thought. A 7 caller can inadvertently place a ball in the wrong 8 slot in the master board, and that's the check against 9 that happening. 10 MR. ATKINS: Well, it can -- yes, it 11 can be inadvertent, or it can be intentional. 12 CHAIRMAN CLOWE: Yeah. 13 MR. ATKINS: And, again, there is the, 14 you know, provision for the players to, you know, 15 request that verification if they so choose to. That 16 is one of the things that we're looking at as we go 17 through our continual review process and -- to whether 18 make -- to make that a requirement in each game. 19 CHAIRMAN CLOWE: It's certainly good 20 practice. 21 MR. ATKINS: Yes, sir. 22 CHAIRMAN CLOWE: Anything further, 23 Commissioner? 24 COMMISSIONER COX: No, sir. 25 CHAIRMAN CLOWE: Thank you, Billy. 0084 1 At this time we'll move to item number 2 17, public comment. Mr. Gerald Busald is here and has 3 filed a request to appear. Will you come forward, 4 please, sir? 5 MR. BUSALD: If I could, Commissioners, 6 I have a handout for you and for Executive Director 7 Sadberry. 8 CHAIRMAN CLOWE: Sure. Sure. Do you 9 have one for the reporter? 10 MR. BUSALD: I have one in my chair I 11 can -- does she need it now? 12 CHAIRMAN CLOWE: She needs -- she can 13 have it after you have finished your comments, but she 14 does need one, please. 15 MR. BUSALD: All right. Good morning, 16 Commissioners. For the record, my name is Gerald 17 Busald. I'm a mathematics professor at San Antonio 18 College. Only part of what I say has anything to do 19 with San Antonio College. 20 It's been my privilege to serve on the 21 executive director search committee, and I think that 22 the very best possible result has happened. And I 23 have confidence in Executive Director Sadberry, and I 24 think it really helps in changing the culture that I 25 have complained about. And so I'm very enthusiastic 0085 1 about that. 2 I wanted to revisit first -- there is 3 two areas. One, is a technical thing. On 4 February 28th of 2005, which was through 129 drawings, 5 my statistics class looked at the Megaplier and how 6 that program was performing or not performing. As you 7 recall at that time, I said there was a great chance 8 that the program was not responding correctly. 9 Through last night's drawing, drawing number 268 -- 10 and, of course, I don't show all the drawings on this 11 sheet that I've handed you, but once again, the number 12 two is not being drawn at the frequency that the 13 legislation says it should be, the -- the correct 14 proportion. And the number four and the number three 15 are being drawn more frequently. As I stated 16 previously, this means that probably we -- the game is 17 overpaying players who happen to win. So it's not a 18 matter of -- of money, it's a matter of the 19 performance of the program. 20 I performed a standard -- I don't have 21 the statistics class at this time, so I performed a 22 standard Chi-squared goodness of fit test, which says, 23 how does what has happened compare to what you would 24 expect to happen, based on the probabilities. And we 25 come up with a p value of .0904. And you could 0086 1 interpret that to say that there is about a 9 percent 2 chance I'm wrong when I say, the program is not 3 working as the legislation says it should. That means 4 there is a 91 percent chance the program is not 5 working correctly. 6 Frankly, I'm a little surprised at this 7 continuation of the problem. I don't know what 8 research was done, if the program was audited, but I 9 find the performance of the program rather shocking. 10 And I'm very suspicious of the program, as I've been 11 suspicious of many programs that generate numbers. 12 As you're aware, the -- the implication 13 of this, as you are aware, for a while -- I don't know 14 if it was the end of last year or the beginning of 15 this year, the Pick Three quick picks were suspended 16 temporarily. And at that time, after that happened, 17 the statement was that there was no harm done because 18 it didn't affect who would -- it didn't affect a 19 chance of winning because those numbers were drawn 20 separately. And I agree with that statement. 21 However, if the program that picks the numbers, if it 22 were picking another game, and it did not work 23 correctly, it would mean some people who have a set of 24 numbers they always play would actually have less of 25 a -- they would not have a fair chance of winning the 0087 1 game because the program was not performing correctly. 2 So I guess I'm doing this partly to see 3 if the staff can research this further. I don't know 4 that it has been researched. I've not been informed, 5 and I don't know that I should be, but since I'm the 6 one who brought the concern, and the concern now is 7 through 268 drawings instead of 129. And so I think 8 there is a problem with the program. At least this 9 test shows it. And -- you know, and there -- there is 10 a 9 percent chance it's working perfectly. But that's 11 not a very good probability. I would -- I would be 12 concerned. So, anyway, I guess it's just to confirm 13 my opposition to doing computerized drawings on any of 14 the games. And my suggestion actually is, later on, 15 that we switch this game to a ball drawing, where 16 there is no concern of what is happening inside of the 17 computer. I know this is the only game we do that 18 way, and I have some concerns about it. 19 The next area -- 20 CHAIRMAN CLOWE: Yeah. Hold on a 21 minute. I think Commissioner Cox has a question. 22 MR. BUSALD: Yes. Uh-huh. 23 COMMISSIONER COX: I have some -- 24 did -- did you test this as though they had equal 25 probability of being selected? 0088 1 MR. BUSALD: No -- no. As -- as the -- 2 as I remember, the twos are -- the probability is 3 supposed to be 2 out of 21. The probability of the 4 fours is -- let's see. The probability of threes is 7 5 out of 21, which is -- that's not right. I've got to 6 go backwards. 7 The probability of the threes is 7 out 8 of 21, and then the probability of fours is 12 out of 9 21. So I used the appropriate probabilities. That's 10 why the expected frequencies, 25.52, 89.33, 153.14, 11 are different for the different numbers. 12 COMMISSIONER COX: Okay. So -- 13 MR. BUSALD: So, no, I -- I realize -- 14 COMMISSIONER COX: I see what you're 15 doing. 16 MR. BUSALD: Yeah. 17 COMMISSIONER COX: So you know it's 18 biased toward the higher numbers? 19 MR. BUSALD: Correct. Yes. Uh-huh. 20 And it's actually more biased than it should be, 21 apparently. 22 COMMISSIONER COX: Okay. 23 MR. BUSALD: And, once again, so -- 24 COMMISSIONER COX: Mr. Chairman, I -- I 25 was wondering if -- if Gary, Michael, Robert had 0089 1 any -- anything to say about this. 2 CHAIRMAN CLOWE: I think Michael is 3 indicating he does. Is Doctor Sizemore still here? 4 Come forward, Michael, if you will, and let's hear 5 your comments. 6 MR. ANGER: Good morning, 7 Commissioners. For the record, my name is Michael 8 Anger, and I'm the Lottery Operations Director. 9 We would be happy to take the 10 information that Professor Busald has put together and 11 take a look at that. The information that you brought 12 forward previously, we shared with Doctor Randy 13 Ewbank. Doctor Ewbank conducted an analysis and 14 validated it. And a part of -- of the review that we 15 do, not just of the Megaplier, but of all of the 16 drawings, the weighing of the balls and all the 17 information related to the drawings, we run that 18 through the contracted statistician, Doctor Randy 19 Ewbank. And so we would be happy to go back and -- 20 and revisit that information. He does perform 21 Chi-squared tests and -- and does goodness of fit 22 and -- and uses those forms of measure. And so we 23 would be happy to share these results with him and get 24 some feedback from him as well. 25 COMMISSIONER COX: Mr. Chairman, I 0090 1 wonder whether it would be possible that 2 Professor Busald have access to Doctor Ewbank as this 3 work is done or after it's done so that he could 4 discuss any concerns directly with -- statistician to 5 statistician. 6 CHAIRMAN CLOWE: Sure. So they could 7 confer with each other. I think you ought to give 8 Doctor Ewbank the opportunity to hear directly from 9 Professor Busald, and that way he can most accurately 10 state his concerns and his contentions, and then give 11 Doctor Ewbank the opportunity to do his research and 12 review, and then let them consult with each other. 13 And then possibly they can both come back to us in the 14 meeting. Then we could get the best handle on what 15 they're commenting. 16 And, Professor Busald, my understanding 17 is that you're concerned about the use of a random 18 number generator, which is computer-generated numbers, 19 as it's applicable to the multiplier. And does that 20 concern also apply to the picking of numbers for -- 21 for example, Mega Millions or Lotto Texas by a quick 22 pick methodology? 23 MR. BUSALD: You know, it's very 24 difficult for me to analyze that information because I 25 don't have the data available. There might be a 0091 1 problem with those generators. Apparently there was 2 with the quick three program. And my program -- my 3 concern is not so much with the generators as it is 4 with the programs that use the generators. 5 Programmers, I -- I am a -- a CDP -- I have a CDP, a 6 Certificate in Data Processing. That's where I came 7 through. And programmers make errors. And they 8 appear -- that's why Arizona had a program that 9 couldn't pick nines for its Pick Three game, as we 10 heard last time. So it's more the program itself, I 11 feel, is in need of audit. You know, someone who 12 understands the program and looks at the program. No, 13 I'm concerned about the integrity of the program. 14 CHAIRMAN CLOWE: Are you aware that we 15 have looked into this at one point in great detail and 16 actually had the originator, I think it was, of these 17 programs that we're using make a lengthy presentation? 18 Were you present when that occurred? 19 MR. BUSALD: No, and I don't know the 20 date of that. I would be happy to look at it in the 21 record. I am -- I can -- must not have looked at the 22 transcript of that particular meeting. 23 CHAIRMAN CLOWE: Michael, let's try to 24 pinpoint that meeting and point Professor Busald to 25 that transcript so he can be aided by that 0092 1 information. 2 MR. ANGER: I -- I'll be happy to do 3 that. And one of the things that they spoke to was 4 that the system that's currently being used also does 5 its own audit. It's actually conducting pre- drawings 6 or pre-test drawings in advance of the actual drawing 7 taking place to identify on its own any anomalies. 8 And I believe that he spoke to that in the 9 presentation that he made when he came in to talk 10 about the system. So I'll be happy to pull that 11 transcript and identify that -- share that with you. 12 MR. BUSALD: And -- and, once again, 13 that was through 129 drawings, not 268. Okay? So 14 we're more than double the number of drawings, and we 15 are still seeing the same results. So, you know, 16 that's my concern. 17 CHAIRMAN CLOWE: I think his comments 18 were about the random number generator program in 19 general. It was not directed at the Megaplier. Am I 20 correct in that, Mike? 21 MR. ANGER: The presentation that was 22 made, sir? 23 CHAIRMAN CLOWE: Yes. 24 MR. ANGER: It -- it was about the 25 system and how it's constructed. It was to the random 0093 1 number generator itself. 2 CHAIRMAN CLOWE: Yes. 3 MR. ANGER: He is also responsible for, 4 as Professor Busald alluded to, the software 5 application that works in conjunction with the random 6 number generator to create the -- the numbers 7 selected. 8 CHAIRMAN CLOWE: Okay. That's very 9 good. 10 COMMISSIONER COX: Now, have we had -- 11 if I remember right, the fellow who appeared before us 12 was the vendor, the -- the one who provided us with 13 the program. Is that correct? 14 MR. ANGER: That's correct. 15 COMMISSIONER COX: Have we had an 16 independent audit of that program? 17 MR. ANGER: We -- we have an 18 independent audit of the results conducted. We 19 have -- 20 COMMISSIONER COX: I know we have that. 21 MR. ANGER: Yes, sir. 22 COMMISSIONER COX: But what I heard 23 Professor Busald asking for was a review of the 24 program to see, not whether the results were -- 25 they're probably just like he says, but is it capable 0094 1 and can we say, it's only a 90 percent chance, but, by 2 golly, it works. Have -- 3 MR. ANGER: The software code. 4 COMMISSIONER COX: Have we had someone 5 who is independent of the vendor look at that program 6 and say, by golly, this should work? 7 MR. ANGER: I'll go back and look into 8 that. I -- I don't want to speak to the initial 9 launch when we initially purchased it. I'm not 10 certain if that may have occurred at that time. But 11 we'll certainly look into that. And if that has not 12 taken place, we'll pursue that. 13 COMMISSIONER COX: I -- I totally agree 14 with the professor that we should be looking not only 15 at Doctor Ewbank's statistical analysis, but we should 16 be going inside that software and seeing if it's 17 designed correctly. 18 MR. ANGER: We'll pursue that. 19 COMMISSIONER COX: Thank you. 20 CHAIRMAN CLOWE: Proceed, please. 21 MR. BUSALD: Thank you very much, 22 Commissioners, for your openness. And -- and it's the 23 thing that I have been hoping from the Commission. 24 I'm just very pleased with that response. 25 The next thing, I have a couple of 0095 1 advertising things. Last fall I was asked -- I was an 2 invited speaker to do a presentation in Washington, 3 D.C., comparing and contrasting the various state 4 lotteries and some of their practices. The title of 5 the presentation is, What Are the Odds That They'll 6 Tell You the Odds. And not everyone tells you the 7 odds quite the same way. So I was looking at the best 8 practices of some of the states. Some of the best 9 practices are in Texas, but some best practices are in 10 other states. 11 And I'm very much for openness and 12 disclosure to the players. I know it makes absolutely 13 no difference in whether or not they play the games, 14 as we discovered when the scratch off tickets were 15 changed. Even though staff initially was against that 16 change, it had no effect on sales. And we now see 17 scratch offs at 75 percent of sales. So I'm all for 18 revealing as much as possible. 19 A couple of things and I -- I pulled 20 this off the NASPL Web site, North American 21 Association of State and Provincial Lotteries. And I 22 was interested particularly in the advertising 23 standards. And one of the things is that the 24 advertising standards, the members of the NASPL have 25 agreed to abide by those standards. And then I have 0096 1 some of the standards. And I don't have all the 2 standards. I edited it to make it not quite so 3 lengthy. And I wanted to point out a couple of things 4 that I think are better practices in other states. 5 And the things I have highlighted, 6 really, are the last two things on there, the game 7 information. Those are the two things I want to 8 concentrate on. And I think that the lottery could do 9 a better job than it's doing of presenting these two 10 things: One, the odds of winning must be readily 11 available to the public and be clearly stated. And 12 I'll have some -- following this, I have some 13 demonstrations of that from other states. Advertising 14 should state alternative cash and annuity values where 15 reasonable and appropriate. Now, understand the word 16 reasonable, and I'll talk about that. Okay? 17 So the first thing I have, and I guess 18 I would like to describe it because it's kind of 19 difficult to talk about without describing it. This 20 was sent to me. It's a -- a picture that -- of a 21 billboard sent to me by the Virginia Lottery. And 22 they operate and they are also a member of 23 Mega Millions, and they have a billboard, stating the 24 32 million dollar. Notice a couple of words on here. 25 One, the estimated annuitized jackpot, because it's 0097 1 probably unreasonable to try and state the cash value 2 on that billboard. I understand that would be very 3 difficult to do. But the word annuitized makes it 4 clear what it really is. The second thing is, in 5 Virginia, their legislature has required -- and I 6 think it's a fair thing to do -- that's just my 7 opinion -- that the top prize chances are 1 in 176 8 million. Notice it doesn't say, overall odds 1 in 44 9 or 1 in 82 or whatever the odds are for that game. Of 10 course, I believe this was required by the Virginia 11 legislature. And, you know, I would like to see us 12 institute that without being required by the 13 legislature. And I have a kind of a summary. But I 14 wanted to show you. This was a -- a best practice 15 that I saw that I believe Texas could adopt without -- 16 certainly without hurting sales, because I know that's 17 an emphasis. But I don't think telling people what it 18 is ever hurts sales unless it's something that they 19 shouldn't be buying. Okay? 20 The next page I have is just a couple 21 of examples of disclosure of the cash value option. 22 Notice I don't have Texas on this page because I don't 23 believe Texas does a good job of this currently on its 24 Web page, and I believe the Web page can be improved. 25 I have a couple of examples. And you know that it is 0098 1 possible in Texas to find out the cash value on the 2 Lotto Texas game if you know the secret of finding 3 that information. I don't think the average person 4 who goes to the Web page knows what to do to find that 5 information, but it is there on the sheets that are 6 signed off by the executive director. But it's really 7 difficult to find. Notice in North Dakota, they have 8 a game, Power Ball. They show the jackpot estimate 28 9 million and the cash option 12.6. Same thing on their 10 Lotto game -- jackpot estimated at 3.5 or 3.6. The 11 cash option is the 2.04. From Ohio, which doesn't do 12 a good job -- well, they do a halfway job. And from 13 Ohio, I had a very difficult time from their Web site 14 off of -- of pulling from their Web site an actual 15 picture, but I did get this information from their Web 16 site. It showed that the 3,300,000 was their Lotto 17 game. The 23 million was the Mega Millions game. And 18 it shows the Mega Millions cash option value at -- you 19 know, very precise figure, 12,943,158, 12 million 9 20 hundred 43 thousand, a little over 50 percent. We 21 know that we're over 50 percent right now on the cash 22 option because of interest rates. So Ohio goes 23 halfway. They don't do it on their lottery game. As 24 far as I know, this is the only state in Mega Millions 25 that discloses this information on their Web site, at 0099 1 least readily and available. 2 Minnesota, you look at their thing. I 3 mean, it's up there for everybody to see, right at the 4 very top of their Web page has Power Ball -- annuity, 5 cash; Lotto -- annuity, cash. It's right there for 6 people to see. I went to the Power Ball Web site 7 itself. Power Ball shows annuity, cash, right on 8 their Web site. It's right there available. It's at 9 the bottom of that page. Do you see that? So I think 10 that's something that should be done. 11 The next page is really difficult. I 12 had trouble pulling up information from the 13 Mega Millions Web site, but suffice it to say, they 14 show the jackpot. Mega Millions does not show the 15 cash value options on the Web site -- the 16 Mega Millions organization itself. 17 One last little suggestion I had was, 18 to really make this possible, I -- I did a ticket -- I 19 had two tickets there. The Lotto game shows the cash 20 value option is now currently printed on the ticket. 21 My suggestion is that if you buy a ticket, because 22 that is in rather large print, you could do the print 23 a little bit smaller and have the top line say cash 24 value option and under it have the estimated cash 25 value option. That could easily be put on the ticket 0100 1 by GTECH so it's right there so that there is no 2 question. You know, I don't see any reason for not 3 disclosing that. Now, I know that the -- the emphasis 4 is on advertising the amount, but -- the top value or 5 the annuitized amount, that's the one that is always 6 advertised, but I think the cash value option should 7 be there readily available. I just think it's a 8 matter of disclosure. 9 And I want -- next time I do a 10 presentation, I want to be able to say that Texas does 11 all the best things. That's why I'm here for, not to 12 criticize. It's just some of these things, I'm sure, 13 maybe some of the staff haven't thought about. 14 My final sheet is a couple of things, 15 some recommendations that I would like to make. Well, 16 of course, my recommendation right now is to replace 17 the Megaplier program, but you've addressed that, so 18 we'll see what happens. I think that the Lottery 19 should state the odds of winning the top prize on the 20 tickets, as I've demonstrated on that little thing I 21 did to a ticket, on the Web site, and in their 22 advertising, as Virginia does. It's all right to say 23 the overall odds, as long as you give the top prize 24 odds because, if you don't, it's kind of like bait and 25 switch advertising because you promote the top prize. 0101 1 That's what is promoted. And to give overall odds is 2 not what is relevant. And I know people realize this. 3 It's just a matter of saying it so that it's there. 4 It's open, and there can be no question. 5 So -- and I also believe that that 6 ought to be on instant tickets, winning the top prize, 7 not just the overall odds of winning a prize, as is 8 now stated. I think the odds of winning the top prize 9 should be stated on the instant ticket. It's right 10 there. As I've said, just stating the overall odds is 11 kind of bait and switch, and I really don't like that. 12 You could continue to advertise the overall odds as 13 long as you do the other -- that's -- I mean, you can 14 do whatever you want. This is my suggestion. Okay. 15 I'm not here to tell you what to do. I'm here to make 16 some suggestions I think will make the Texas Lottery 17 better. And so that's why I'm here. 18 The cash value, as I say, should be on 19 the Lotto tickets, the Mega Millions tickets, and I 20 really believe the cash value should be on annuity 21 type instants because we have annuity type instants 22 where we promote the annuity value, so much a month 23 for so long, but we really don't say, well, what's 24 that really worth -- how much am I really winning in 25 today's dollars. That's the cash value option. The 0102 1 same as it is for an on-line game, in my opinion. So 2 I think that should be on the Web site and on the 3 tickets. The annuity value is not currently on the 4 Web site. 5 Incidentally, the Web site has done an 6 excellent job of changing the information that is on 7 the scratch off tickets right now. It's there, but I 8 think they've done a good job on that. 9 Now, in my opinion, and you -- I know 10 y'all have visited this, but I believe you would do a 11 tremendous boost to player confidence. It would be at 12 some cost, at some printing cost, that has to be 13 factored into the percentage of payback, but -- I know 14 you visited this issue, but I, once again, recommend 15 that you remove instant tickets as soon as all top 16 prizes are gone. As you know, other states do it. 17 And I believe if you don't, the ticket itself is 18 advertising a prize because it states that prize, and 19 if that prize is not available, it's questionable what 20 are you stating the odds for. What is -- you know, 21 you're advertising something that's not there. To say 22 it's about the game in general, well, the game in 23 general is not necessarily what is promoted in the 24 name, and the name is part of the advertising. That 25 is what the players see as they look at those tickets 0103 1 on the rack. 2 I would like to see that the Texas 3 Lottery help inform the Mega Millions group to put the 4 cash value on their Web site. I think that's a -- a 5 move in the right direction that somehow we can at 6 least suggest that maybe Mega Millions should be as 7 open as Power Ball. I don't understand why they're 8 not, but it seems to me it should. 9 And we're not practical to put the cash 10 value on billboards. I understand it's not practical 11 to put the cash value on TV and radio ads. I would 12 like to see the word of -- the use of the word 13 annuitized prize. 14 That's my -- kind of a summary of my 15 suggestions of things I think would make the Texas 16 Lottery even better. And I -- I really think we're on 17 the right -- we're moving in the right direction, and 18 I would like to see just a little bit more movement on 19 some of these. If any of them become reality, I'll be 20 pleased. But at least they're out there on the 21 record, and I know that it's available for you to make 22 those decisions as you do through staff. And I have 23 some confidence -- I have a great deal of confidence 24 now in the attitude of what we're going to do. So 25 I -- I -- that's a summary of my comments. 0104 1 CHAIRMAN CLOWE: I would like to hear 2 from Mr. Sadberry, if that's all right with you. I 3 think, Anthony, I would be interested in your reaction 4 to the comments. Just a minute. General counsel has 5 a word. 6 MS. KIPLIN: Commissioners, I -- I'm -- 7 looking at the agenda, this -- 8 CHAIRMAN CLOWE: You're -- you're 9 right. You're right. We had better not -- we had 10 better not get into a discussion. It's not fair to 11 those who were not notified that something like this 12 might come up. In diffidence to the general counsel 13 protecting the agenda, let me thank you for your 14 comments, and we'll take them under consideration and 15 ask Director Sadberry to look at them. At a future 16 meeting we'll have this on the agenda, and we'll have 17 an opportunity then to perhaps get some reactions and 18 some discussion. 19 MR. BUSALD: Yeah. I -- thank you very 20 much. I -- 21 CHAIRMAN CLOWE: That's the best we can 22 do right now. 23 MR. BUSALD: No. I understand, and 24 I'm -- 25 CHAIRMAN CLOWE: Okay. 0105 1 MR. BUSALD: -- very confident in the 2 direction that things are going. And so I'm very 3 happy for that reaction. Thank you very much. 4 CHAIRMAN CLOWE: Good. 5 COMMISSIONER COX: Thank you. 6 CHAIRMAN CLOWE: Michael, I meant to 7 ask a question when Ms. Pyka and Mr. Tirloni were 8 making their presentation. It's a question I've asked 9 before, and I think I'll keep asking it. How many 10 games on the instant scratch offs do we have currently 11 on the street? 12 MR. ANGER: I'm looking back to 13 Mr. Tirloni, but I believe we have in the neighborhood 14 of about 75 games currently active. 15 CHAIRMAN CLOWE: 75 active games? 16 MR. TIRLONI: 75 to 80 active. Yes. 17 Not all available for distribution. There is not 80 18 games available to be shipped out to retailers, but if 19 you went around to every retail location and counted 20 and made sure you didn't duplicate, you would probably 21 come up with about 75 to 80 games. 22 CHAIRMAN CLOWE: And how many would you 23 say the average retailer has on their counter, just an 24 estimate? 25 MR. TIRLONI: I -- I wanted to confirm 0106 1 the number I had in my mind. It's about 16 -- 16 2 dispensers. 3 CHAIRMAN CLOWE: 16? 4 MR. TIRLONI: Uh-huh. That's correct. 5 Obviously, there are some retailers, some of your 6 higher volume retailers, have -- have way more. I 7 recently went to a retailer meeting in Sherman, where 8 we have some very high volume retailers that are close 9 to the border. Some of those retailers carry upwards 10 of 40 to 50 games. So it -- of course, it's dependent 11 on the -- the retailer sales and how many they -- 12 CHAIRMAN CLOWE: And the volume of 13 their shelf space. 14 MR. TIRLONI: And how many they're 15 comfortable carrying -- 16 CHAIRMAN CLOWE: Sure. 17 MR. TIRLONI: -- in terms of financial 18 responsibility for having that much inventory. 19 CHAIRMAN CLOWE: Sure. Anything? 20 Thank you, gentlemen. 21 Commissioner, we have concluded the 22 public agenda at this point in time, and if you're 23 agreeable, I would like to move we go into executive 24 session. 25 COMMISSIONER COX: Yes, sir. 0107 1 CHAIRMAN CLOWE: At this time I move 2 the Commission meet in Executive Session: 3 To deliberate the appointment, 4 employment, and evaluation and duties of the Executive 5 Director and/or Deputy Executive Director, pursuant to 6 Section 551.074 of the Texas Government Code; 7 To deliberate the duties and evaluation 8 of the Internal Audit Director, pursuant to Section 9 551.074 of the Texas Government Code; 10 To deliberate the duties and evaluation 11 of the Charitable Bingo Operations Director, pursuant 12 to Section 551.074 of the Texas Government Code; 13 To deliberate the duties of the General 14 Counsel, pursuant to Section 551.074 of the Texas 15 Government Code; 16 To receive legal advice regarding 17 pending or contemplated litigation and to receive 18 legal advice pursuant to Section 551.071(1)(A) or (B) 19 of the Texas Government Code and/or to receive legal 20 advice, pursuant to Section 551.071(2) of the Texas 21 Government Code, including but not limited to: 22 GameTech International et al. versus 23 Greg Abbott et al.; 24 Cynthia Suarez versus Texas Lottery 25 Commission; 0108 1 Sheldon Charles versus Texas Lottery 2 Commission and Gary Grief; 3 Stephen Martin versus Texas Lottery 4 Commission; 5 Employment law, personnel law, 6 procurement and contract law, evidentiary and 7 procedural law, and general government law. 8 Is there a second? 9 COMMISSIONER COX: Second. 10 CHAIRMAN CLOWE: All in favor, please 11 say aye. The vote is two-zero. The time is 12 11:25 a.m. Today is June the 28th, 2006. 13 (EXECUTIVE SESSION.) 14 CHAIRMAN CLOWE: The Texas Lottery 15 Commission is out of executive session. The time is 16 1:47 p.m. Is there any action to be taken as a result 17 of the executive session? If not, I believe we have 18 concluded the items on our agenda. Commissioner Cox, 19 do you have anything further? 20 COMMISSIONER COX: No, sir, I do not. 21 CHAIRMAN CLOWE: Does anyone have 22 anything to bring before the Commission before we 23 adjourn? We are adjourned. Thank you all very much. 24 25 0109 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, 2006. 17 18 19 BRENDA J. WRIGHT, RPR, 20 Texas CSR No. 1780 Expiration Date: 12-31-06 21 WRIGHT WATSON & ASSOCIATES Registration No. 225 22 Expiration Date: 12-31-07 1801 N. Lamar Boulevard 23 Mezzanine Level Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 060628BJW