1 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 JULY 23, 2002 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 18 19 BE IT REMEMBERED that the TEXAS LOTTERY 20 COMMISSION meeting was held on the 23RD of JULY, 2002, 21 from 8:30 a.m. to 2:35 p.m., before Brenda J. Wright, 22 RPR, CSR in and for the State of Texas, reported by 23 machine shorthand, at the Offices of the Texas Lottery 24 Commission, 611 East Sixth Street, Austin, Texas, 25 whereupon the following proceedings were had: 2 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Ms. Elizabeth D. Whitaker Mr. James A. Cox, Jr. 6 General Counsel: 7 Ms. Kimberly L. Kiplin 8 Executive Director: Ms. Linda Cloud 9 Charitable Bingo Operations Director: 10 Mr. Billy Atkins 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 3 1 INDEX 2 3 Appearances...................................... 2 4 AGENDA ITEMS 5 Item Number 1.................................... 4 6 Item Number 2.................................... 54 Item Number 3.................................... 58 7 Item Number 4.................................... 6 Item Number 5.................................... 62 8 Item Number 6.................................... 62 Item Number 7.................................... 62 9 Item Number 8.................................... 45 Item Number 9.................................... 58 10 Item Number 10................................... 98 Item Number 11................................... 110 11 Item Number 12................................... 111 Item Number 13................................... 113 12 Item Number 14................................... 119 Item Number 15................................... 120 13 Item Number 16................................... 165 Item Number 17................................... 166 14 Item Number 18................................... 121 Item Number 19................................... 134 15 Item Number 20................................... 149 Item Number 21................................... 167 16 Item Number 22................................... 167 17 Reporter's Certificate........................... 169 18 19 20 21 22 23 24 25 4 1 JULY 23, 2002 2 3 CHAIRMAN CLOWE: Good morning. I have 08:40 4 8:40 a.m., and we are not experiencing the James Cox 08:40 5 memorial pause, in a new Commissioner's honor. The 08:40 6 court reporter was not here timely, not due to her 08:40 7 fault, but an administrative boggle. So for a very 08:40 8 unusual occurrence, we're starting late this morning. 08:40 9 It is July the 23rd and I'll call this 08:40 10 meeting of the Texas Lottery Commission to order. 08:40 11 We are very pleased this morning to 08:40 12 have Mr. Jim Cox as our new commissioner. Mr. Cox is 08:40 13 an accountant by training and by profession. He is 08:40 14 very, very knowledgeable, having a tremendous amount 08:40 15 of experience in the gaming industry, and I will leave 08:40 16 that to him to tell you as much or as little as 08:40 17 that -- about as that as he would like for you to 08:41 18 know. But I've known him for a couple of years and 08:41 19 have found him to be a resource and a source of 08:41 20 knowledge that is very, very beneficial. Our personal 08:41 21 acquaintance is now adjourned and we will have a 08:41 22 commissioner's relationship, which means that we 08:41 23 cannot communicate and cannot meet for lunch any more. 08:41 24 But my loss is the Commission's gain. 08:41 25 And I want to call on Commissioner Cox 08:41 5 1 in just a moment, but before I do that, I would like 08:41 2 to ask Commissioner Whitaker if she has any remarks, 08:41 3 and I would also like to tell you that she is recently 08:41 4 elected as the president of the Texas Bar Association, 08:41 5 a very prestigious position, and this Commission is 08:41 6 now staffed by at least two Commissioners who have 08:41 7 very outstanding credentials. I lost my chance last 08:42 8 Sunday to win the British Open, so I'll just have to 08:42 9 be a commissioner. 08:42 10 Commissioner Whitaker. 08:42 11 COMMISSIONER WHITAKER: So you're the 08:42 12 slacker in the bunch? 08:42 13 CHAIRMAN CLOWE: That's right. 14 COMMISSIONER WHITAKER: Well, I would 08:42 15 just say, welcome aboard, Joe. You're going to have a 08:42 16 very interesting time on the Commission. I am 08:42 17 continually amazed at the sheer range of issues that 08:42 18 we deal with from meeting to meeting. I have heard 08:42 19 wonderful things about you. I, of course, had not had 08:42 20 a chance to meet you because, again, of the whole 08:42 21 process, but I'm looking forward to working with you 08:42 22 on the Commission. 08:42 23 COMMISSIONER COX: Thank you very much. 08:42 24 Tom and Betsy, thank you. It's a pleasure to join 08:42 25 you. I've been working for about a month with the 08:42 6 1 various members of the staff and the leadership of the 08:42 2 Lottery Commission and at Gtech, and have found a 08:42 3 wealth of talent and a lot of dedicated folks that are 08:42 4 doing a good job and trying to do a better and job and 08:42 5 it's an honor to work with you all. 08:42 6 CHAIRMAN CLOWE: Great. Thank you. 08:43 7 We'll go right to the agenda now, and 08:43 8 it's my understanding that we have members of the 08:43 9 public here to make a presentation. And that's under 08:43 10 item number four, report, possible discussion and/or 08:43 11 action on Lotto Texas matrix. 08:43 12 Linda, are you going to handle that? 08:43 13 MS. CLOUD: Yes, sir. I'm going to 08:43 14 introduce Larry King with the Gtech team to put on a 08:43 15 presentation to respond to some questions the 08:43 16 Commissioners have asked them to come back to the 08:43 17 table with. 08:43 18 CHAIRMAN CLOWE: Thank you. Good 08:43 19 morning. 08:43 20 MR. KING: Good morning, Commissioners. 08:43 21 For the record, I'm Larry King, the account general 08:43 22 manager for Texas. I have two individuals with me. 08:43 23 They'll introduce themselves, and we're here today to 08:43 24 talk about the Lotto Texas matrix and some questions 08:43 25 that were raised several months ago or several 08:43 7 1 meetings ago. And we've also tacked on the end of 08:43 2 this presentation, a few slides on Internet gaming, 08:43 3 and an update on that. 08:44 4 MR. CADIGAN: Good morning. For the 5 record, my name is John Cadigan. I'm vice-president 08:44 6 of marketing for Gtech Corporation. 08:44 7 MR. SADRI: Good morning. For the 08:44 8 record, my name is Amir Sadri. That's S-a-d-r-i, and 08:44 9 I'm director of on-line game development for Gtech 08:44 10 Corporation. 08:44 11 MR. CADIGAN: First of all, on behalf 08:44 12 of Gtech Corporation, Mr. Cox, welcome aboard. We're 08:44 13 looking forward to your expertise in gaming, I hope. 08:44 14 Okay. We're here to talk about Texas 08:44 15 Lotto Texas and Internet. Those are the two big 08:44 16 topical areas we'll cover. Lotto Texas from 1992 to 08:44 17 present, and we'll provide a report on Internet 08:44 18 gaming. Perhaps a word missing there, Internet 08:44 19 illegal gaming. The question put forth here several 08:44 20 sessions ago from the Commission was, how is Internet 08:45 21 gaming affecting Texas revenue streams? So we'll take 08:45 22 a look at that. 08:45 23 Here you have, since its launch, 08:45 24 Texas -- Lotto Texas, and these are draw sales. Okay? 08:45 25 Sales Wednesday to Saturday, Sunday through Tuesday. 08:45 8 1 Okay? Or Sunday through Wednesday, actually, and 08:45 2 Thursday through Saturday. Here you have the game 08:45 3 launched in 1992. When I look at this particular 08:45 4 trend line, there are three things I find noticeable. 08:45 5 Number one, over its history, Lotto Texas has 08:45 6 performed very well, certainly when you relate it back 08:45 7 to other large state -- in-state Lotto games. 08:45 8 Secondly, I would note here that this 08:45 9 game has done well despite -- and I'm going to be 08:45 10 frank here, despite a lot of support that we normally 08:45 11 see with Lotto games in this country. You see that we 08:46 12 picked up Quick Pick, early after the game's launch. 08:46 13 That's not considered a major enhancement to a Lotto 08:46 14 game. We came several years later with a cash option, 08:46 15 again, not considered a major enhancement. And 08:46 16 finally, two years ago, about this time, we took the 08:46 17 matrix from six of 50 up to six of 54. That is 08:46 18 considered a major enhancement because, as we know, 08:46 19 the larger your matrix, generally speaking, the higher 08:46 20 your jackpots. 08:46 21 Okay. When we compare Lotto Texas to 08:46 22 other states, we use per capita figures to make the 08:46 23 numbers relative for comparative purposes. Okay? And 08:46 24 you can see here, and this data is ranked on 2002 -- 08:46 25 excuse me. Right there. And you can see that Texas 08:46 9 1 currently ranks third with a 57-cent weekly per cap 08:46 2 with California performing currently at 84 cents. 08:47 3 They've just changed their matrix recently, and 08:47 4 Florida with a 92 weekly cent per cap. 08:47 5 CHAIRMAN CLOWE: How did they change 08:47 6 their matrix, please, John? 08:47 7 MR. CADIGAN: In California? 08:47 8 CHAIRMAN CLOWE: Yes. 08:47 9 MR. CADIGAN: California went from a 08:47 10 six of 52 Lotto game, a straight Lotto game, to a five 08:47 11 of 47, one of 27 matrix; that is, one field with a 08:47 12 five -- drawing five numbers from a field of 47 08:47 13 numbers; the second field is 27 numbers, and you draw 08:47 14 one. So if I'm a California Lotto player and I want 08:47 15 to play Lotto tonight, I will go in and pick five 08:47 16 numbers, one, two, three, four, five, from field one 08:47 17 and pick a single number from field two. 08:47 18 CHAIRMAN CLOWE: On the entry level 08:47 19 draw, what did that change the odds from to? 08:47 20 MR. CADIGAN: We will now know why I 08:47 21 brought Amir. 08:48 22 MR. SADRI: The odds of the current 08:48 23 matrix are one in 41 million, so the chances of 08:48 24 winning the top prize with the current matrix is one 08:48 25 in 41 million. The overall odds of the game, they 08:48 10 1 made it significantly easier than what it was before, 08:48 2 and also, it added several other prize divisions to 08:48 3 the game as well. 08:48 4 MS. CLOUD: I think it's important to 08:48 5 add here, Amir, the population of California. 08:48 6 MR. SADRI: California population is 08:48 7 about 35 million right now, and when they -- well, 08:48 8 we're going to get into it, and so -- when they made 08:48 9 the change, what happened. 08:48 10 MR. CADIGAN: Okay. Any other 08:48 11 questions on this? 08:48 12 Okay, Amir. Let's take a look at six 08:48 13 of 54 performance, and three things we're going to 08:48 14 focus in on here. Number one, two years ago or two 08:48 15 and a half years ago when we came down here, we talked 08:48 16 about a projection. What would happen if we went to 08:48 17 the six of 54 from six of 50. So three points here in 08:48 18 this segment: How did the game change affect sales, 08:49 19 actual versus predicted. We'll also take a look at 08:49 20 the effect of annuities, annuity rates on jackpots. 08:49 21 And, thirdly, we'll take a look at, perhaps more 08:49 22 importantly, what would have happened had we not 08:49 23 changed the game from six of 50. 08:49 24 So first off, actual versus forecast. 08:49 25 Two and a half years ago, we forecasted -- and this is 08:49 11 1 this line right here -- we forecasted that for years 08:49 2 one and two, we would average ten hits between draws 08:49 3 one and four, we would average for the two years, for 08:49 4 each year, eight hits draws five through eight, four 08:49 5 hits in draws nine through 12, and we would even get, 08:49 6 per year, one hit -- or one hit between draws 13 and 08:49 7 15. We were forecasting then 23 hits per year, and we 08:49 8 estimated that in each of those two years, we would 08:50 9 get, or an average about 736 million. 08:50 10 Here is what happened. In the first 08:50 11 year, we had six hits in draws one through four; six, 08:50 12 five through eight; six, nine through 12; and we did 08:50 13 not get that big hit or roll into draws 13 through 15. 08:50 14 And yet we were pretty much on target with the revenue 08:50 15 forecast at 714. Okay? Statistically, that's 08:50 16 pretty -- pretty darn close when you're forecasting 08:50 17 this type of data. 08:50 18 This year that we just closed, the 08:50 19 second year of the new game, we got hit, down in here, 08:50 20 draws one through four, 12 times; eight, five through 08:50 21 eight; two, nine through 12; and again, we did not 08:50 22 experience a hit or a roll into, more correctly, draws 08:50 23 13 through 15. And we finished the year just roughly 08:51 24 approximately around 601 million dollars. 08:51 25 As you know, we just had a jackpot in 08:51 12 1 excess of 70 million dollars. If we had rolled into 08:51 2 one more roll into -- it would have been draw 12, we 08:51 3 would have done considerably better in sales and that 08:51 4 number of 601 would be much better than it is now, 08:51 5 relative to what was forecast. 08:51 6 Any questions? 08:51 7 The effective annuity. Two years ago, 08:51 8 when we looked at the future and we forecasted 08:51 9 performance of the changed matrix up to six of 54, we 08:51 10 were using, which was correct to use at that point, an 08:51 11 annuity of 1.8 -- correction -- 1.96, and we were 08:51 12 projecting out on that annuity factor. And as an 08:52 13 example here, I'm showing -- and this is an example. 08:52 14 For a jackpot of 20 million dollars, if you have -- if 08:52 15 that's the prize money available, 20 million dollars 08:52 16 in your jackpot pool, if have you have an annuity 08:52 17 factor of 1.96, you can advertise, okay, almost 40 08:52 18 million dollars as a jackpot. 08:52 19 Today, currently, on average, over the 08:52 20 last several months, we're using an annuity factor of 08:52 21 1.8. And you can see the impact of what annuities can 08:52 22 have on an advertised jackpot. It's considerable. 08:52 23 And this is exaggerated, this difference here is 08:52 24 exaggerated or extended as you get up in higher areas 08:52 25 of jackpot pooled money, the effect of annuity. Go 08:52 13 1 ahead. 08:52 2 Now, I said a few minutes ago, perhaps 08:53 3 more importantly, and I think I would like to spend a 08:53 4 minute on this. What would have happened if we had 08:53 5 stayed with the six of 50 instead of going to six of 08:53 6 54, two years ago. And this is -- this slide attempts 08:53 7 to deal with that question. We have gone back and 08:53 8 looked at the six of 50 run rate at the time two years 08:53 9 ago and applied current sales trends to it. And our 08:53 10 models are suggesting that had we stayed with the six 08:53 11 of 50 matrix two years ago, we would have experienced 08:53 12 this type of -- this type of hit pattern that is 21 08:53 13 hits, one through four, over those two years, each 08:53 14 year, seven in this particular draw range, two here. 08:53 15 We would not have climbed into this range, 30 hits. 08:53 16 Our largest jackpot over the two years or each year on 08:53 17 average would have been about 60 million, and we would 08:54 18 have done about 563 million each year for the last two 08:54 19 years. Okay? Instead of the first year or last year 08:54 20 of over 700 million and this year around -- well, here 08:54 21 you have it right here. As opposed to what we just 08:54 22 did, 714, which I showed you a minute ago, and 601. 08:54 23 So the decision to go to the six of 54 08:54 24 was meritorious two years ago for sure. We picked up 08:54 25 an additional 182 in gross revenue over those two 08:54 14 1 years. Quite frankly, we had suggested two and a half 08:54 2 years ago to go to a bigger matrix, perhaps a six of 08:54 3 56, or a two-field Lotto game. But in discussions 08:54 4 with our partners at the Lottery, we made the decision 08:54 5 on six of 54, and once that decision was reached by 08:54 6 the Lottery, we got behind it. Again, I think the 08:54 7 main take away here, all in all, not a bad performance 08:55 8 over the last two years. Could it have been better? 08:55 9 I suggest it could have been if we had gone to a 08:55 10 bigger matrix then and a two-field style Lotto game. 08:55 11 Questions? 08:55 12 Mr. Cox, I believe they're all waiting 08:55 13 for you to ask the question. 08:55 14 Okay. Potential options. We've 08:55 15 examined how the game has done over the last -- since 08:55 16 its inception, we've taken a look at how the game has 08:55 17 performed, six of 54 over the last two years. What 08:55 18 are some potential options we have before us today? 08:55 19 There is an obvious one and that is, to maintain the 08:55 20 course, the current matrix, monitor the results 08:55 21 closely over the next year or so, and see what happens 08:55 22 there. We've got a projection on that happening and 08:55 23 we'll take a look at that in a minute. Or basically, 08:55 24 the second major option is to optimize the current 08:55 25 matrix, either by increasing the odds -- that would be 08:56 15 1 a traditional matrix increase here -- perhaps a six of 08:56 2 56, whatever, or go to a two-field Powerball style 08:56 3 game. When I say Powerball, that is the perhaps most 08:56 4 widely known two-field game in the United States 08:56 5 today, serving almost 20 states, and with a population 08:56 6 approaching -- well, soon to be about a hundred 08:56 7 million people. That's a multi-state game. Okay? 08:56 8 And players like that play style there. 08:56 9 Maintaining current -- okay. I thought 08:56 10 there was a slide in there, another slide, but I guess 08:56 11 not. 08:56 12 If we maintain the current Lotto 08:56 13 matrix, this is where you started, year one, two, 08:56 14 three, four, five, whatever. Okay? And this is what 08:56 15 we just did this year. Remember that number of a 08:56 16 little over 600 million? It's not the Lottery fiscal 08:56 17 year, not a calendar year, it's basically the end of 08:57 18 June. Okay? We have projected that if we stay with 08:57 19 the current matrix of six of 54, this is what we're 08:57 20 likely to expect to see over the next 12 months, a 08:57 21 slight continued degradation of sales, not a 08:57 22 precipitous decline, but certainly one that would be 08:57 23 worth our attention soon. 08:57 24 COMMISSIONER WHITAKER: Let me ask you 08:57 25 this question. That would mean that we would never 08:57 16 1 have hit what y'all projected would be the revenue 08:57 2 we'd get from this matrix change, because in the first 08:57 3 year, we got 714, which you had projected like 730 -- 08:57 4 MR. CADIGAN: Right. 5 COMMISSIONER WHITAKER: So you're 08:57 6 basically saying that all the projections we're told 08:57 7 never panned out. Why? 08:57 8 MR. CADIGAN: Well, I think we can say 08:57 9 that in the first year, when we eclipsed the 700 08:57 10 million mark, and were just short by some 20, 30 08:57 11 million dollars that the projection was dead on. Last 08:58 12 year -- 08:58 13 COMMISSIONER WHITAKER: Is it 08:58 14 statistically -- I don't know enough about statistics, 08:58 15 but is that variance within what would be perceived to 08:58 16 be statistically, whatever? 08:58 17 MR. CADIGAN: Significant, yes. Yes, 08:58 18 Commissioner. Definitely. You're on a projection of 08:58 19 several hundred million dollars and you're off by 20 08:58 20 or 30 million, that's within a very, very acceptable 08:58 21 range of accuracy. 08:58 22 COMMISSIONER WHITAKER: Okay. 08:58 23 MR. CADIGAN: Just one thing on the 08:58 24 projection of Lotto. It's as scientific as we can 08:58 25 make it, but let's never forget. You're dealing with 08:58 17 1 a large odds game here. It's not a Pick 3 game. It's 08:58 2 large odds, and thank God we've got the random 08:58 3 selection of the winning numbers. So with random 08:58 4 selection and large odds, we can get -- we could today 08:58 5 be in the first of the beginning of a series that will 08:58 6 get you over a hundred million dollar jackpot. Okay? 08:58 7 But -- or, theoretically, you could get hit for the 08:58 8 next 15 draws in a row. Is that likely to happen? 08:59 9 No. But -- 08:59 10 COMMISSIONER WHITAKER: What is the 08:59 11 margin, plus or minus, that you would consider to be 08:59 12 statistically significant as having met the 08:59 13 projections? Is it plus or minus, what? 20 million, 08:59 14 50 million? 08:59 15 MR. CADIGAN: I will say this and -- 08:59 16 before I -- you would correct me, Amir. 08:59 17 MR. SADRI: Well, in the real world, 08:59 18 and especially if you're talking about a high-odds 08:59 19 game, really, if you fall between ten and 15 percent 08:59 20 of what you have forecasted, it's been a very good 08:59 21 forecast. You know, that 714 could easily be, let's 08:59 22 say, 780, but, you know, it ended up to be at the 08:59 23 lower end. Nevertheless, statistically speaking, it's 08:59 24 a very good forecast. 08:59 25 COMMISSIONER WHITAKER: Okay. 08:59 18 1 MR. CADIGAN: And let me just add here. 08:59 2 Again, when we were over 70 million, the jackpot of 08:59 3 over 70 million, one more roll would have gotten you 08:59 4 to 100 million. 08:59 5 COMMISSIONER WHITAKER: Yeah. What I'm 08:59 6 focusing on, though, is your projections for the -- 08:59 7 for every year, basically, that we're forecasting, 09:00 8 we're not forecasting ever hitting it other than the 09:00 9 first year, and even then it was on the low side. So 09:00 10 I'm just trying to -- 09:00 11 MR. CADIGAN: Right. We are not -- 09:00 12 that is correct. We are not projecting, based on 09:00 13 current sales levels, that we will get up to that 09:00 14 original projection of 730. 09:00 15 COMMISSIONER WHITAKER: So going back 09:00 16 in time to when we were considering the matrix change, 09:00 17 and we were -- I understand, statistics is not -- 09:00 18 there is a science to the whole thing. What would 09:00 19 you -- why would you -- what would explain the fact 09:00 20 that we are not achieving what we were hoping to 09:00 21 achieve? 09:00 22 MR. CADIGAN: Certainly, a slight 09:00 23 decline in Lotto sales at base levels. We did bring 09:00 24 in Texas Two Step and that slowed down some of the 09:00 25 sales at base levels. And, again, there is the random 09:00 19 1 selection. I don't want to say we were unlucky. 09:01 2 Players were more lucky than us. But there was 09:01 3 certainly a degradation of sales at base levels. 09:01 4 MR. SADRI: If I may add to that. Is 09:01 5 the forecast that is based, is based on the current 09:01 6 parameters that exist. When the forecast was made two 09:01 7 years ago or three years ago on what the Lotto was 09:01 8 going to do, it was based on interest rates, it was 09:01 9 based on Lottery sales trend, jackpots, and other 09:01 10 variables. These variables are put into models, if 09:01 11 you will, different sort of statistical model, time 09:01 12 series using different statistical packages. And the 09:01 13 interest rates have changed today. And sales are 09:01 14 there if the jackpots are there, and jackpots are 09:01 15 there if the sales are there. If the interest rates 09:01 16 drop, then, by definition, the jackpots cannot be 09:01 17 advertised as high as they could have been advertised 09:01 18 or were advertised in the past. That is going to 09:01 19 impact sales. So one of the reasons, you know, 09:02 20 important reasons as to why we see the sales today 09:02 21 as -- and, you know, or three years from now or two 09:02 22 years from that 555, it's due to the -- one of the 09:02 23 reasons, interest rates that exist today. If, let's 09:02 24 say, that changes and your annuity increases and the 09:02 25 annuity goes back to two from 1.96, then we'll be able 09:02 20 1 to advertise higher jackpots. 09:02 2 COMMISSIONER WHITAKER: Have you done 09:02 3 any statistical analysis to see whether that is, in 09:02 4 fact, the one significant factor for explaining this? 09:02 5 MR. SADRI: That is, actually. 09:02 6 COMMISSIONER WHITAKER: That is it? 09:02 7 MR. SADRI: Yes, that is one 09:02 8 significant -- 09:02 9 COMMISSIONER WHITAKER: That is the 09:02 10 significant factor? 09:02 11 MR. SADRI: One. One. There are -- 09:02 12 COMMISSIONER WHITAKER: What are the 09:02 13 others? 09:02 14 MR. SADRI: Well, the others, I guess 09:02 15 they're all -- you know, relate to each other. I 09:02 16 don't think we can, you know, make them independent of 09:02 17 each other. But, you know, they're -- you know, 09:02 18 interest rates or annuity factors impacts jackpots, 09:02 19 jackpots impacts sales, sales impacts initial sales, 09:02 20 initial sales impacts, you know, how we roll and how 09:02 21 much we can increase the jackpots by. So it's not 09:02 22 really one reason or the reason, it's multiple reasons 09:02 23 as to why jackpots and sales behave the way they do. 09:03 24 COMMISSIONER WHITAKER: And I can 09:03 25 understand the interest. I can see how that impacts 09:03 21 1 the size of the jackpot which, in turn, could 09:03 2 influence sales. So I can see that connection. But 09:03 3 what are other tangible reasons other than just the 09:03 4 interconnection of those factors? 09:03 5 MR. CADIGAN: Certainly I would add 09:03 6 here, getting hit at that lower levels. We can't 09:03 7 program this, thankfully, when it rolls. And when you 09:03 8 do get hit at lower levels, that is going to preclude 09:03 9 a potential serious run. I will also add in here -- 09:03 10 COMMISSIONER WHITAKER: The reason that 09:03 11 that bothers me a little bit, though, is you're 09:03 12 forecasting for the next three years that we won't get 09:03 13 hit at those levels. I'm trying to understand the 09:03 14 future piece of it and why in the future we're not 09:03 15 going to get back to what was forecasted. And I 09:03 16 understand interest, because you're forecasting the 09:03 17 interest rates are going to stay low. Right? 09:03 18 MR. SADRI: Right. That -- if your 09:03 19 question is, if the question is, are we going to see 09:03 20 the big jackpots that we forecasted three years ago, 09:04 21 the answer to that is, based on the current annuities 09:04 22 and based on the current sales of the game, it is 09:04 23 difficult to get to those level jackpots. Thus, it 09:04 24 should impact sales. A very -- an example of that is, 09:04 25 we had an 85 million dollar level jackpot last year 09:04 22 1 with ten rolls; we had a 72 million dollar or 70 09:04 2 million dollar level jackpot today, or not long ago, 09:04 3 with ten rolls. 09:04 4 MR. CADIGAN: You might want to put 09:04 5 that first line back. It's showing a very good point. 09:04 6 MR. SADRI: The previous slide? 09:04 7 MR. CADIGAN: The third slide or so. 09:04 8 I was going to make this point earlier 09:04 9 and I failed to. This sales level was achieved, okay, 09:04 10 in ten rolls. Ten rolls and you got to this sales 09:04 11 spike here, and you were able to advertise an 85 09:04 12 million dollar jackpot, or in excess of 80 million. 09:04 13 Same ten rolls just recently. Ten rolls, and all we 09:05 14 could muster was a jackpot in excess of 70 million. 09:05 15 That's why our concern -- our projections over the 09:05 16 next three years are as conservative as they are. 09:05 17 It's basically maintaining sales in that 550, 60 09:05 18 million dollar range. 09:05 19 COMMISSIONER WHITAKER: Okay. 09:05 20 MR. CADIGAN: Okay. Optimizing the 09:05 21 matrix. I don't have a slide which would speak to the 09:05 22 traditional optimization tack, and that would be to go 09:05 23 from six of 54 to, say, six of 56. Okay? What I 09:05 24 skipped to here is an example of a jurisdiction in the 09:05 25 state of California which has done a very good job of 09:06 23 1 enhancing its game over the life of its main on-line 09:06 2 game, Super Lotto, which has now been renamed to Super 09:06 3 Lotto Plus. Here you see the game launching back in 09:06 4 '89. A matrix increase here brought it up to six of 09:06 5 53. They did lower the matrix here in '92, and the 09:06 6 game sort of just pushed along, nothing spectacular in 09:06 7 terms of jackpots. Annuity increase of 25 years and 09:06 8 cash options, things that you've done to this, and it 09:06 9 did pick it up a bit. 09:06 10 But back in 2000, about the time we 09:06 11 changed our game, California went to that -- went away 09:06 12 from six of 53. I may have said six of 52 earlier, 09:06 13 or six of 51. They went away from six of 51 and came 09:07 14 in with a two-field style Lotto game, a five of 47, 09:07 15 which I had mentioned before, and the second field 09:07 16 being one of 27. And that game has exploded over the 09:07 17 last two years. I believe you may have told them that 09:07 18 the odds on that is -- 09:07 19 MR. SADRI: One in 41 million or so. 09:07 20 MR. CADIGAN: And they've had great 09:07 21 success with that. So here you see a state which has 09:07 22 touched its Lotto game and this bit more aggressively 09:07 23 than we have done here, and they do have some nice 09:07 24 dividends to show for it over the last two years. 09:07 25 MR. KING: John, is this also a case 09:07 24 1 where we forecasted sales for California and they 09:07 2 exceeded the forecast? 09:07 3 MR. CADIGAN: Yes. Definitely. Yeah. 09:07 4 I forget what their recent -- was it 135 million, 09:07 5 Amir? 09:07 6 MR. SADRI: 139. 09:07 7 MR. CADIGAN: Okay. And that sort of 09:07 8 went off the charts as far as we were concerned. But 09:07 9 a very successful game and one for us to sort of look 09:08 10 at, this two-field Lotto game with higher odds than we 09:08 11 currently have now, and something to consider going 09:08 12 forward. The subject of this discussion is not to 09:08 13 make a recommendation, it's something -- the purpose 09:08 14 of me raising this is food for thought for the future, 09:08 15 if we want to optimize the current matrix. 09:08 16 MS. CLOUD: Commissioners, I would like 09:08 17 to just remind you that initially when we started 09:08 18 thinking about changing our Lotto game, we did go to a 09:08 19 Powerball-type game structure. That was -- we had a 09:08 20 lot of comments from the public. The Commissioners 09:08 21 put that on hold. Did have hearings across the state 09:08 22 and decided against pursuing that at that time. And 09:08 23 so our initial step in trying to change Lotto was in 09:08 24 that direction. And when we came back, when we came 09:08 25 back with a game very similar to what the players were 09:09 25 1 used to playing, so that we could change the matrix, 09:09 2 because it had to be changed. And this was maybe 09:09 3 not -- and we're finding out now, not what we should 09:09 4 have done. We should have gone ahead with the 09:09 5 Powerball type structure. Change is hard sometimes 09:09 6 and players take a real interest in our games. 09:09 7 MR. KING: I might add, Linda, if I 09:09 8 may, Mr. Chairman. Three years ago, I think we all 09:09 9 decided that the timing of a radical change like that 09:09 10 may have been too much for the players. Since then, 09:09 11 we've introduced Texas Two Step, which is a mini 09:09 12 Powerball-style two-field matrix, and I think that's 09:09 13 taken well with the players. And as they have seen 09:09 14 jackpots with Powerball and other multi-state 09:09 15 lotteries on both borders, we feel like that players 09:09 16 are more receptive to this type of matrix now than 09:10 17 they were three years ago. 09:10 18 CHAIRMAN CLOWE: Do you have a slide 09:10 19 that could show us New York and Massachusetts, what 09:10 20 their experience has been similar to California? 09:10 21 MR. CADIGAN: No, we don't, 09:10 22 Commissioner, but we could provide you that 09:10 23 information. Texas -- if I may add here, New York did 09:10 24 not go to a two-field Lotto game. They currently have 09:10 25 a single-field Lotto game. What they have introduced 09:10 26 1 recently is the Mega Millions, formerly known as the 09:10 2 Big Game, and as we know, Mega Millions is a two-field 09:10 3 game. Very successful in the state of New York. 09:10 4 Massachusetts, originally -- one of the 09:10 5 original Big Game states, again today called Mega 09:10 6 Millions, introduced -- well, came in with the Big 09:10 7 Game several years ago, a very successful game up in 09:10 8 Massachusetts. But we will provide you that 09:10 9 information, sir. 09:11 10 CHAIRMAN CLOWE: Okay. 09:11 11 COMMISSIONER WHITAKER: Could I ask you 09:11 12 this -- your turn. 09:11 13 COMMISSIONER COX: Could we go back to 09:11 14 the slide that showed the per capita of sales? 09:11 15 MR. CADIGAN: There you go. 09:11 16 COMMISSIONER COX: Okay. Now, we're 09:11 17 showing from 2000, when the change was implemented, 61 09:11 18 cents, pretty flat with the two previous years. And 09:11 19 then 69, then 84. So the trend in sales per capita is 09:11 20 kind of straight up, as your green lines showed. 09:11 21 MR. CADIGAN: Right. You're talking 09:11 22 about California, of course. 09:11 23 COMMISSIONER COX: Yes. 09:11 24 MR. CADIGAN: Yes. Their per cap -- 09:11 25 they introduced their change in 2000, and that has 09:11 27 1 been their per capita trend. 09:11 2 MS. CLOUD: And it's been in the last 09:11 3 couple of years that they've had major jackpots. 09:11 4 They've had 190 million and 140 million dollar 09:12 5 jackpots. So that has been a real shot in the arm for 09:12 6 their game. 09:12 7 COMMISSIONER COX: Have their jackpots 09:12 8 been within the matrix you set up of where they might 09:12 9 fall, or are they above that or below that? 09:12 10 MR. SADRI: No, they fall where we have 09:12 11 forecasted. The jackpot falls in that. 09:12 12 MS. CLOUD: But you didn't forecast the 09:12 13 190. That's above what your forecast shows. 09:12 14 MR. SADRI: Well, that's true. What 15 we forecast is, we give a range, and then, obviously, 16 to get to -- you know, a lot of people are getting to 09:12 17 that level and so it becomes a smaller -- but, you 09:12 18 know, they fell within that range. But the 190, 09:12 19 it's -- you know, was above our expectation. 09:12 20 MR. CADIGAN: Okay? 09:12 21 COMMISSIONER COX: Thank you. 09:12 22 MR. CADIGAN: Commissioner Whitaker, 09:13 23 did you have a question? 09:13 24 COMMISSIONER WHITAKER: Yeah. Back to 09:13 25 California. So we have the same interest rate 09:13 28 1 affecting them as us. Right? Same annuities? 09:13 2 MR. SADRI: Pretty much so, yes. 09:13 3 COMMISSIONER WHITAKER: So I'm -- other 09:13 4 than the fact that they've got a two-field game, what 09:13 5 other explanation are you finding for that? That just 09:13 6 the luck of the draw gave them the mega jackpots that 09:13 7 we just haven't been able to get with luck of the 09:13 8 draw? Is that what the -- 09:13 9 MS. CLOUD: The odds are higher. 09:13 10 MR. KING: The odds are much higher. 09:13 11 MR. CADIGAN: That two-field game also 09:13 12 gives a lot of additional play -- payout levels. And 09:13 13 really, gives the players payout -- numbers of 09:13 14 payouts -- prize levels, excuse me. Prize levels that 09:13 15 they don't see with a straight six of 51 or six of 54 09:13 16 game. That being, you know, six of 54, you've got 09:13 17 payouts at six, five, and four. Sometimes three. So 09:14 18 there is a perceived added entertainment value in 09:14 19 playing a two-field game. And certainly, with the 09:14 20 success of Mega Millions and the success of Powerball, 09:14 21 the players in this state read about it, players in 09:14 22 California read about those games, and they're taking 09:14 23 to them when they're introduced. California, as we 09:14 24 see, has really taken to its game, two-field game. 09:14 25 MR. KING: John, how many rolls did it 09:14 29 1 take to get to the 197? Do we know that? 09:14 2 MR. SADRI: I cannot recall, but 16 or 09:14 3 so. 09:14 4 MR. KING: And we were at ten rolls at 09:14 5 70, so it rolled six more times? 09:14 6 MR. CADIGAN: Up to the 190. 09:14 7 MR. KING: Right. 8 MR. CADIGAN: Well, rather than throw a 09:14 9 number out that we think is correct, why don't we 09:14 10 provide the Commission with that -- why don't we 09:14 11 provide, as an action item, the roll pattern for that 09:14 12 run up. 09:15 13 CHAIRMAN CLOWE: And also give us the 09:15 14 number of players in California that are of legal age 09:15 15 to play. 09:15 16 MR. SADRI: Sure. 09:15 17 MR. CADIGAN: Amir, you take that one. 09:15 18 Well, we can look at the population. I 09:15 19 think the question -- California does have a large 09:15 20 population that the Census Bureau does not know about, 09:15 21 for sure. But we can look at the population provided 09:15 22 by the census above the age of 18. Okay? 09:15 23 MS. CLOUD: Commissioners, New York, 09:15 24 having gone to the Mega Millions multi-state game, 09:15 25 their sales are averaging eight million dollars a week 09:15 30 1 just for that game. And it has -- it has had an 09:15 2 impact on their Lotto game, but their Lotto game was 09:15 3 suffering pretty bad at the time when they went with 09:15 4 Mega Millions. 09:15 5 MR. CADIGAN: That's -- New York 09:15 6 they've -- if and when we get to a two-field 09:15 7 multi-state game, okay? If you're talking about Mega 09:15 8 Millions in New York, Ms. Cloud. New York has done it 09:16 9 in a very correct way in terms of supporting its 09:16 10 in-state game when they flipped or added into Mega 09:16 11 Millions. They've had some slight decrease -- it's 09:16 12 only been slight decrease in their in-state game and 09:16 13 they've netted out positively very significantly so. 09:16 14 So it's a good model for us to look at when we get to 09:16 15 that point of adding a multi-state game. 09:16 16 Now, this is not a recommendation, but 09:16 17 Amir here has provided us with what would happen if -- 09:16 18 and you've seen this number, the 565. If we stay the 09:16 19 course over the next year of 104 draws of six of 54, 09:16 20 as you saw, we're expecting to get hit 21 times and we 09:16 21 would net out, at the end of that year, about 565 09:16 22 million. This is our projection that we showed you a 09:17 23 bit earlier. And we've thrown in here a game -- it's 09:17 24 not a recommendation by any stretch of the 09:17 25 imagination. We haven't been working with the Lottery 09:17 31 1 on such a game yet, a two-field game, and we came up 09:17 2 with a five of 42, and a one of 42. Again, drawing 09:17 3 five numbers from this field, one number from this 09:17 4 field. And the model suggests, given the odds of that 09:17 5 game, that we would eclipse the 700 million mark and 09:17 6 experience sales in that level, with only 17 hits 09:17 7 versus 21. 09:17 8 And, again, as we've discussed, people 09:17 9 in the state of Texas are more than familiar with the 09:17 10 two-field game at this point. So it's something to 09:17 11 consider. And when it's appropriate to work with the 09:17 12 Lottery on variations of a two-field game, we will 09:17 13 commence so. 09:18 14 Now, Internet gaming report. And I 09:18 15 think I mentioned that earlier. This should really 09:18 16 read, the Internet illegal gaming report. I'll let 09:18 17 you read those words. The highlight or the headlines 09:18 18 from this chart are basically -- and again, let's not 09:18 19 forget the question. The question before us was, how 09:18 20 is the illegal wagering done on the Internet today 09:18 21 affecting revenue streams for Texas. And when you 09:18 22 look at this or read it, the headline is simply, 09:18 23 illegal gaming on the Internet is taking off -- has 09:18 24 taken off and is continuing to grow at a phenomenal 09:18 25 rate. Three billion this year or last year, expecting 09:18 32 1 to double over the next two years. 09:18 2 And these sites, these 1400 sites are 09:18 3 broken out in terms of sites that offer casino-style 09:19 4 games, primarily found in the Caribbean, as you'll see 09:19 5 here in a minute. Sites that focus in on sports 09:19 6 betting, that's the preponderance of those sites, 09:19 7 1200-plus sites out of the 1400. And you can see the 09:19 8 rest of them are casino sports-betting combinations 09:19 9 and really noise at this level here. 09:19 10 MR. ATKINS: On your previous slide, 09:19 11 what was the source for the number of sites? 09:19 12 MR. CADIGAN: Go forward, Amir. I 09:19 13 believe -- can you go forward. I believe it was the 09:19 14 same group. But we will document that for you and 09:19 15 provide that. 09:19 16 MR. ATKINS: And you know that all of 09:19 17 those sites are actually active gaming sites or just 09:19 18 sites that come up on a, say, search of gambling? 09:19 19 MR. CADIGAN: Those are sites that have 09:19 20 been identified by the River City Group. I don't 09:20 21 know, Billy, if we have the answer to that question. 09:20 22 One thing let's keep in mind up here, ladies and 09:20 23 gentlemen, we're talking about an illegal business 09:20 24 here. And we can't go to a body or a -- or an 09:20 25 oversight board and ask for information. How the 09:20 33 1 River City Group has gathered its information, I know 09:20 2 not. But, again, we're dealing with illegal entities 09:20 3 and there is no use even asking them, if you could get 09:20 4 to them, for their information. And we're going to 09:20 5 take that into Texas here in a minute, when we get to 09:20 6 the difficulty of answering the original question. 09:20 7 Go ahead. 09:20 8 Again, this -- another group providing 09:20 9 information. Here is how you've seen the revenue 09:20 10 streams for these illegal sites. And there is a 09:20 11 smattering of legal Internet sites here, especially 09:21 12 from northern Europe. Scandinavians do use the 09:21 13 Internet to wager, legally, so there is a smattering 09:21 14 of legal sites here. And we've documented the 09:21 15 three-one trip doubling up over the next two years to 09:21 16 6.3 billion. 09:21 17 This slide here, who is gambling on 09:21 18 the -- who is gambling on line should perhaps be 09:21 19 titled, what language are they using when they do so. 09:21 20 It's not to say that the preponderance of those 09:21 21 gambling are from English-speaking countries, but they 09:21 22 do play on Internet sites that use English as the main 09:21 23 language. Okay? So most of these sites are sold 09:21 24 using English. I can't explain this other than there 09:21 25 is a great propensity to game in the -- not the UK. 09:21 34 1 In Russia. And you can see the rest of the languages 09:22 2 used, only one percent down here, but in -- when you 09:22 3 see an additional slide here in a bit, Japanese and 09:22 4 Asians really account for a good portion of the amount 09:22 5 of money wagered, that is estimated. 09:22 6 Additionally, the demographic profile 09:22 7 is largely male. And the age breakout is largely 09:22 8 under 44, in fact, significantly so. And where are 09:22 9 they coming from. So this is where they -- hits on 09:22 10 these sites are coming from, as best as this group can 09:22 11 identify. A lot of it is in the United States. 09:22 12 That's where the money is. And a preponderance of 09:22 13 these sites, I think I may have mentioned earlier, are 09:22 14 in the Caribbean, and they're going after, not 09:23 15 Caribbean dollars as much as they are going after U.S. 09:23 16 dollars. Hence, the use of English. And you can see 09:23 17 the growth in nonJapan Asia as well as in Japan. And 09:23 18 Latin America to some degree. 09:23 19 I think I've mentioned this. Latest 09:23 20 developments. It's obviously a lot of it is offshore, 09:23 21 and Britain -- if you have a question on this, I hope 09:23 22 I have an answer for you. But I'll ask the question. 09:23 23 Is that linked with the Lottery on Internet sports 09:23 24 wagering? I believe so. Now, when I say Internet 09:23 25 sports wagering, it's not going to be the type of 09:23 35 1 wagering that you can perhaps do in Vegas on a 09:23 2 particular game, but over a series of what they call 09:23 3 in Europe football cards, which are soccer matches. 09:23 4 And betting on soccer in Europe, for that matter, just 09:23 5 about anywhere else in the world, is legal, and it's 09:23 6 done through the Lottery and its payouts are similar 09:24 7 to Lottery payouts, 60 percent and what have you. So 09:24 8 Britain is toying with the idea of selling on-line 09:24 9 wagering on football in the future. 09:24 10 Conclusion. It is impossible to 09:24 11 accurately quantify how much money is leaving Texas 09:24 12 going into these illegal wagering sites. And if we 09:24 13 chose to go out and conduct a survey in Texas to 09:24 14 gather that information, I think it perhaps would be a 09:24 15 waste of our research precious dollars, asking 09:24 16 somebody, how much do you wager illegally on anything 09:24 17 illegal, you're not going to get a straight answer. 09:24 18 COMMISSIONER WHITAKER: Self 09:24 19 confession. 09:24 20 MR. CADIGAN: You've got to also keep 09:24 21 in mind here one thing when you talk about the 09:24 22 potential for dollars leaving the state. On-line 09:25 23 casino games run at 90, 95 percent payouts. Okay? 09:25 24 Are attracting a different type player. Casino 09:25 25 players are different from our Lotto players or our 09:25 36 1 Pick 3 players. Okay? Those tend to be more loyal to 09:25 2 those games. And these high-prize payout games 09:25 3 attract people who like to play casino games. I don't 09:25 4 think that you have degradation of revenue stream here 09:25 5 in this state because of illegal casino-type games run 09:25 6 in places like Antigua. That's my perception. 09:25 7 If I may close with a sort of a wrap on 09:25 8 this segment of the discussion, plus the prior 09:25 9 discussion on Lotto. If it were my lottery here in 09:25 10 the state and I was worried about money leaving the 09:25 11 state and going to places on the illegal sites, on 09:25 12 casino-style games, I would rather be worried about 09:25 13 the dollars I can quantify that are leaving the state 09:26 14 every day and going to places like Louisiana and New 09:26 15 Mexico, playing Powerball. That we can quantify, and 09:26 16 it is significant. And that would be the way I would 09:26 17 look at the transfer of dollars out of Texas, the 09:26 18 immediacy of what is happening regularly into those 09:26 19 states and the fix we can apply to preventing it. 09:26 20 But questions? 09:26 21 COMMISSIONER WHITAKER: I really 09:26 22 appreciate you doing this, Larry. I know it was in 09:26 23 response to my request. And I -- this is very 09:26 24 interesting and I'm going to study it for a while. 09:26 25 I'm interested that you would say that 09:26 37 1 you don't think that this shows the dollars are going 09:26 2 away from our lottery, or at least your instinct is 09:26 3 that it's not. 09:26 4 MR. CADIGAN: Not significantly so. No 09:26 5 doubt there are people in this state who were once 09:26 6 playing Lotto or our cash game here or Two Step or 09:26 7 Pick 3, who one day flipped on and said, I'm going to 09:27 8 do this even though I'm breaking the law. 09:27 9 COMMISSIONER WHITAKER: I notice that 09:27 10 some of these are lotteries, like 28 sites. 09:27 11 MR. CADIGAN: Right there. 09:27 12 COMMISSIONER WHITAKER: Yeah. Do you 09:27 13 know anything about where those lotteries are or the 09:27 14 nature of them? 09:27 15 MR. CADIGAN: Again, those would be 09:27 16 predominantly in Europe that are using -- they're 09:27 17 Scandinavian lotteries for the most part that are 09:27 18 using sites to have players come in, German lotteries 09:27 19 that offer their -- their current games, they have 09:27 20 lottery games on the Internet. Okay? There is 09:27 21 something -- you know, and they're not very 09:27 22 successful, I can guarantee you that. Offering a 50 09:27 23 percent or a 60 percent lottery game on the Internet, 09:27 24 especially if you're asking somebody to sign on and 09:27 25 buy a ticket on the Internet and wait to see on 09:28 38 1 Saturday night, quite frankly, how fast they can lose 09:28 2 is not the purpose of the Internet. I mean, that's 09:28 3 not why people get on the Internet. They want to get 09:28 4 on the Internet and gamble, those who choose to do so, 09:28 5 because they can hit that send key as many times -- as 09:28 6 fast as they can, and experience a 95 percent payout. 09:28 7 So lotteries that are selling their current portfolio 09:28 8 of 50 percent daily or weekly draw games, they're 09:28 9 doing it as a convenience, more so than as a revenue 09:28 10 stream. 09:28 11 COMMISSIONER WHITAKER: Larry, what is 09:28 12 your take on this? 09:28 13 MR. KING: Well, that's why I brought 09:28 14 these guys in to explain it all after being put on the 09:28 15 hot seat. 09:28 16 I think one of the most significant 09:28 17 numbers, when I saw this data, is that 80 percent of 09:28 18 the players that are playing Internet gaming are under 09:28 19 the age of 45. 09:28 20 COMMISSIONER WHITAKER: That is 09:28 21 interesting. 09:29 22 MR. KING: And I think that there is 09:29 23 nothing and there is no data, even if we could 09:29 24 quantify it, to say, if they weren't spending it on 09:29 25 the Internet, would they spend it on a Lotto ticket. 09:29 39 1 I don't think we can draw that conclusion. So, to me, 09:29 2 it's a different segment of the population that's 09:29 3 playing the Internet. It's -- as John said, they want 09:29 4 the fast-paced action. They probably, you know, go to 09:29 5 the casinos a couple of times a year, if you could 09:29 6 gather the data. I don't think it's a typical lottery 09:29 7 player. 09:29 8 COMMISSIONER WHITAKER: What percentage 09:29 9 of our players are 45 and over? 09:29 10 MR. KING: I don't have it at my 09:29 11 fingertips, but -- 09:29 12 MR. CADIGAN: We have that on record, 09:29 13 so -- 09:29 14 COMMISSIONER WHITAKER: Just a 09:29 15 ballpark. 09:29 16 MS. CLOUD: We can get that for you 09:29 17 before the end of the meeting. 09:29 18 MR. CADIGAN: Yeah. I would prefer you 09:29 19 get that off your system. 20 MS. CLOUD: Liz has that information. 21 COMMISSIONER WHITAKER: Again, I really 09:29 22 appreciate you doing this. 09:29 23 MR. KING: You're welcome. 09:29 24 MR. CADIGAN: There was one other point 09:29 25 I wanted to make in the conclusion. And, Larry, thank 09:29 40 1 you for tripping it on -- getting me to think about 09:30 2 it. You know, another way to ensure that we have a 09:30 3 successful lottery venture going forward is to get to 09:30 4 this segment now with entertaining games. With a 09:30 5 two-field Lotto game, with a multi-state game and that 09:30 6 jackpot. Because once they see -- once they see the 09:30 7 lights of the Internet wagering, once it becomes 09:30 8 legal, it's going to be hard to draw those players 09:30 9 back into a 50 percent payout mentality. That was one 09:30 10 other point I wanted to include. 09:30 11 So other comments? 09:30 12 COMMISSIONER COX: I had one question, 09:30 13 Mr. Chairman. 09:30 14 CHAIRMAN CLOWE: Yes. 09:30 15 COMMISSIONER COX: The possibility of a 09:30 16 changed matrix that you suggested was, I believe, five 09:30 17 of 42 and one of 42. 09:30 18 MR. CADIGAN: Five of 42 and one of 42. 09:30 19 Yes, sir. 09:30 20 COMMISSIONER COX: What are the -- what 09:30 21 is the expected value of that? What odds are those? 09:30 22 MR. SADRI: One in 36 million. About 09:30 23 one in 36 million. 09:31 24 COMMISSIONER COX: So if I remember 09:31 25 these numbers more or less right, the original matrix 09:31 41 1 in Texas was one in six million or so. That was the 09:31 2 six of 50. 09:31 3 MS. CLOUD: One in 16. 09:31 4 COMMISSIONER COX: 16. Okay. Then the 09:31 5 six of 54 took it up into the 20's? 09:31 6 MR. SADRI: 25. 09:31 7 MS. CLOUD: 25.8. 09:31 8 COMMISSIONER COX: And this one is in 09:31 9 the 30s, and California is in the 40s. 09:31 10 MR. SADRI: Correct. 09:31 11 COMMISSIONER COX: How far does 09:31 12 experience take us with this curve to tell us at what 09:31 13 point we've reached the marginal utility level and at 09:31 14 what point it might even become counterproductive? 09:31 15 MR. CADIGAN: As far as odds are 09:31 16 concerned? 09:31 17 COMMISSIONER COX: Yes. 09:31 18 MR. CADIGAN: I suppose some might say 09:31 19 the sad news and the good news is, that point doesn't 09:31 20 exist. People in this country, when Lotto was 09:31 21 introduced back in '86, were playing for games one in 09:31 22 14 million, and they were producing jackpots of 40 09:31 23 million dollars. Headlines in the New York Daily 09:32 24 News, 40 million dollar jackpot. 09:32 25 Mega Millions today is running at one 09:32 42 1 in 35 million -- one in 135 million. Powerball will 09:32 2 go to a one in 135 million. This is the -- the 09:32 3 discussion my colleagues and I have had for some time 09:32 4 now. When we went from one in 80 million in Mega 09:32 5 Millions to one in 135 million, how much can the 09:32 6 public take or a person? They don't look at the odds. 09:32 7 They look at the excitement of the jackpots. And as 09:32 8 I've said down here, I think the last time I spoke, 09:32 9 you will see a Mega Millions jackpot in the vicinity 09:32 10 of a half a billion dollars within some period of 09:32 11 time. They were one roll away from it recently. The 09:32 12 public wasn't talking about the odds at one in 135; 09:32 13 they were talking about the jackpots, or that jackpot 09:32 14 there. 09:33 15 So my opinion, sir, the odds -- this 09:33 16 country has left that -- that discussion behind. 09:33 17 Players are looking at big jackpots. 09:33 18 COMMISSIONER COX: So your view would 09:33 19 be that this is linear, that it increases in its 09:33 20 intensity as you go up, or that at some point it 09:33 21 levels off or -- so far you just don't see any decline 09:33 22 at all? 09:33 23 MR. SADRI: Decline in sales you mean? 09:33 24 COMMISSIONER COX: Yes. The 09:33 25 relationship between -- or the inverse relationship, I 09:33 43 1 guess, that we see between the likelihood of winning 09:33 2 and the revenue that it raises. 09:33 3 MR. CADIGAN: There is definitely 09:33 4 decline. And, Amir, you can add in here if I miss it. 09:33 5 There is definitely decline. Sales at 09:33 6 a 70 million dollar jackpot, in the Mega Millions game 09:33 7 today, recently -- let's pick 100 million. I live in 09:33 8 Massachusetts. That's a state that offers Mega 09:33 9 Millions. Had a hundred million dollar jackpot. 09:33 10 Nobody was talking about it. Nobody. It wasn't on 09:34 11 the news, it wasn't in the stores. It was just a 09:34 12 ho-him hundred million dollar jackpot. It wasn't 09:34 13 until it got up to 150, 60, that it made the news. So 09:34 14 there is definitely what we call jackpot fatigue and a 09:34 15 degradation of sales. People will now get in at 09:34 16 higher and higher levels. I'm suggesting to you that 09:34 17 eventually you'll see a game of 150 million. Who 09:34 18 knows? 200 million. People will choose to get in 09:34 19 further and further up that ladder. 09:34 20 For a state like Texas the good news 09:34 21 is, as we're seeing in New York. New York just put in 09:34 22 Mega Millions. Their biggest jackpot prior to Mega 09:34 23 Millions was about an 80 million dollar jackpot. 09:34 24 People took to that 100. They really went after the 09:34 25 100 million. They'd never seen one before. Okay? 09:34 44 1 Now, the next time that flips to a hundred million, 09:34 2 there will be lower sales. 150, lower sales. 09:34 3 MR. KING: Commissioner Whitaker, if I 09:35 4 may add. Toni just handed me the demographic -- the 09:35 5 latest demographic study. It looks like 44 percent of 09:35 6 the population here in Texas is over the age of 45 -- 09:35 7 the player base, I'm sorry -- and 66 under the age 09:35 8 from 18 to 45. So a little bit off from the 80/20 09:35 9 that we saw with the Internet. 09:35 10 MR. CADIGAN: I'm done. 09:35 11 CHAIRMAN CLOWE: Any questions? 09:35 12 MR. KING: I think we've used all our 09:35 13 time and then some. 09:35 14 CHAIRMAN CLOWE: All right. Thank you, 09:35 15 gentlemen. We appreciate the presentation on both 09:35 16 issues very much. 09:35 17 Colin, I think Nelda has stepped out of 09:35 18 the room, and I would like to say to you that I think 09:35 19 it would be very beneficial. There you are, Nelda. 09:35 20 To incorporate salient points from the Internet 09:35 21 illegal gambling presentation in your next legislative 09:36 22 review. I think the legislators need to see this 09:36 23 information and be aware of it as we are becoming 09:36 24 aware of it. 09:36 25 MS. TREVINO: I'll put that in my 09:36 45 1 legislative briefing. 09:36 2 CHAIRMAN CLOWE: Thank you. 3 Could we have the lights back on, 09:36 4 please. 09:36 5 MS. KIPLIN: Commissioners, just as a 09:36 6 matter of housekeeping. The discussion on the 09:36 7 Internet gaming or illegal Internet gaming, I think is 09:36 8 more pertinent under the Lottery sales agenda item. 09:36 9 CHAIRMAN CLOWE: Thank you. We're not 09:36 10 quite ready to go to that item yet. We have a number 09:36 11 of other items that I want to handle. 09:36 12 And next on that is where we have a 09:36 13 person from outside of the Commission, and that is the 09:36 14 chair of the Bingo Advisory Committee, Ms. Virginia 09:36 15 Brackett. Would you come up, please, and make your 09:36 16 report under item eight, report by the Bingo Advisory 09:37 17 Committee Chairman, possible discussion and/or action 09:37 18 regarding the Bingo Advisory Committee's activities, 09:37 19 including the June 28, 2002 committee meeting. 09:37 20 Good morning. 09:37 21 MS. BRACKETT: Good morning. 09:37 22 CHAIRMAN CLOWE: Thank you for being 09:37 23 here. 09:37 24 MS. BRACKETT: Well, I'm glad to be 25 here. 46 1 My name is Virginia Brackett. I'm 09:37 2 chairman of the Bingo Advisory Committee. And you 09:37 3 have a report, I think, in your book that I hastily 09:37 4 prepared and sent to you, and I have the wrong date 09:37 5 for the meeting on that. We met on the 28th, as you 09:37 6 said. And, also, I wish that in that report I had 09:37 7 said that we're planning a planning session, not a 09:37 8 work session, because we're really just wanting to set 09:37 9 up a map to follow for the year and keep ourselves 09:37 10 focused and accomplish some goals and things. 09:37 11 But at our 28th meeting, there were -- 09:37 12 we have eight members on the advisory committee. Five 09:37 13 of them new. So a lot of our meeting was taken up 09:38 14 with orientation-type things and where do we go from 09:38 15 here. And we really appreciate Chairman Clowe's time 09:38 16 and the comments that he made to us. We talked about 09:38 17 the -- or he talked about and pointed out to us that 09:38 18 we need to continue to think about the shrink in 09:38 19 discretionary recreation dollars and the shrinking 09:38 20 market, the age of bingo players. There is lot of 09:38 21 concern over that. And the environment of bingo 09:38 22 halls. A lot of bingo halls have a lot of smoking and 09:38 23 it might not be too inviting for the new, nonsmoking 09:38 24 younger people. And also that we do need more games 09:38 25 and more jackpots and that the industry needs to be 09:38 47 1 focused on what it is that we want to accomplish. 09:38 2 Also, he reminded us that as members of Bingo Advisory 09:38 3 Committee and the public that was there, that we need 09:38 4 to be the change-makers and take charge and that is 09:38 5 the bingo industry that needs to be doing this and not 09:38 6 the Lottery Commission. 09:38 7 So we will be planning and creating a 09:39 8 plan to follow to accomplish the things that we want 09:39 9 to do. 09:39 10 Along the lines of considering the 09:39 11 tools in the bingo market, we had a video pull tab 09:39 12 reader demonstration, and we're hoping that things of 09:39 13 this type can be adopted and that they will be 09:39 14 competitive with the eight-liners, which are popping 09:39 15 up everywhere, all over Texas and in shopping centers. 09:39 16 I know in my community that the eight-liners are 09:39 17 advertising more and more, and some are even 09:39 18 advertising that they do have smoke, and -- because we 09:39 19 have a new smoking ordinance in the community, that 09:39 20 they have an adult video game room and they put an 09:39 21 exclamation mark by adult game room, and that they are 09:39 22 matching -- if you bring in your ad for the 09:39 23 eight-liners, you get five dollars off and they will 09:39 24 match your play -- your five-dollar play with five 09:39 25 dollars. Those are things that we're kind of very 09:40 48 1 concerned about that might be very attractive to a lot 09:40 2 of people. 09:40 3 We will continue to remain informed on 09:40 4 the eight-liners. And we will continue to pursue the 09:40 5 advertising, statewide advertising for the great game 09:40 6 of bingo, too. 09:40 7 Then among the agenda items proposed 09:40 8 for our August 23rd meeting is to consider and adopt a 09:40 9 plan, as I mentioned, and to have Keith Elkins of the 09:40 10 Lottery Commission speak to us about bingo 09:40 11 advertising. And then we'll have a demonstration of 09:40 12 seal cards and event cards, which are new things on 09:40 13 the horizon for us. 09:40 14 And that concludes my report. 09:40 15 COMMISSIONER WHITAKER: Virginia, thank 09:40 16 you for coming. It's nice to put a face to a name. 09:40 17 I notice in your report, you talked 09:40 18 about the consequences on bingo about for 09:40 19 eight-liners. What do you consider to be the impact 09:40 20 on bingo from eight-liners? 09:40 21 MS. BRACKETT: The people are spending 09:41 22 their money on eight-liners and they're not coming to 09:41 23 bingo. Perhaps maybe we're getting addicted to 09:41 24 pulling -- you know, the quick thing, whereas bingo is 09:41 25 slower. The payout in nothing, though, whereas in 09:41 49 1 bingo we have very good payout. But the payout in 09:41 2 nothing. They get gift certificates; they don't get 09:41 3 cash. 09:41 4 COMMISSIONER WHITAKER: Is the 09:41 5 proximity of the eight-liners to bingo halls a factor 09:41 6 in your opinion? And if so, how? 09:41 7 MS. BRACKETT: Probably in some 09:41 8 communities because I understand that there are lots 09:41 9 of shopping centers and they're very easy to get to. 09:41 10 Also, I don't think they have any restriction on 09:41 11 them -- well, I know they don't have any restriction 09:41 12 on the amount of time that they can be open. They can 09:41 13 be open, I guess, probably 24 hours a day if they want 09:41 14 to be. And also, the main thing is, it's totally 09:41 15 ungoverned. It's up to your local law enforcement if 09:41 16 they choose to do anything about it or not. So if you 09:42 17 have a criminal district attorney that is interested 09:42 18 in going in and hauling off machines, then you're 09:42 19 probably in good shape. But if you don't have that, 09:42 20 then you don't. 09:42 21 COMMISSIONER WHITAKER: Thank you. 09:42 22 MS. BRACKETT: Especially in the Dallas 09:42 23 area. I think the people in the Dallas area feel very 09:42 24 hard-hit by the eight-liners. 09:42 25 COMMISSIONER WHITAKER: People. Who? 09:42 50 1 MS. BRACKETT: The people in Dallas, 09:42 2 the bingo operators feel very hard hit by eight-liners 09:42 3 taking customers. 09:42 4 COMMISSIONER WHITAKER: What is your 09:42 5 understanding of the current attitude of the D.A. in 09:42 6 Dallas? 09:42 7 MS. BRACKETT: I have no idea. 09:42 8 COMMISSIONER WHITAKER: Thank you. 09:42 9 COMMISSIONER COX: Virginia, thank you 09:42 10 very much for being here. 09:42 11 On the one hand, when you describe the 09:42 12 eight-liner competition, you say that it's -- the 09:42 13 payouts are very low, which would possibly put it 09:42 14 within the law as an amusement device, and then you 09:42 15 talk about illegal activity. Do you believe that 09:42 16 these are -- these devices are being operated within 09:42 17 the law, the ten times wholesale value or five 09:42 18 dollars, whichever is greater, or are the payouts 09:43 19 greater than that? 09:43 20 MS. BRACKETT: I can't answer that 09:43 21 question. I really don't know. And I really feel 09:43 22 like it's very different from community to community. 09:43 23 So -- and I don't know if Billy has any information on 09:43 24 that or not, on the eight-liners. 09:43 25 MR. ATKINS: No, sir. 09:43 51 1 CHAIRMAN CLOWE: Thank you again for 09:43 2 being here. I want to congratulate you on your first 09:43 3 meeting. I think you did a superb job of chairing 09:43 4 that meeting. It was very productive and set a tone, 09:43 5 which I hope will go forward this year and have that 09:43 6 organization help us in working with the bingo 09:43 7 industry. 09:43 8 I want you to know that we met 09:43 9 preliminarily with the Sunset staff, and my 09:43 10 recollection is, five of the ten recommendations that 09:43 11 they made have to do with the bingo industry. So I 09:43 12 think they are listening and they have heard much of 09:44 13 the commentary members of the industry have given 09:44 14 them. I'm going to ask Billy to give you their 09:44 15 recommendations. It's in draft form; it's not 09:44 16 finalized at this point in time. And I hope that 09:44 17 you'll go back to the Bingo Advisory Committee and 09:44 18 brief them or ask Billy to brief them and consider 09:44 19 that as part of your activity with Sunset for this 09:44 20 agency, through the legislative term coming up. I 09:44 21 think that you really need to establish a relationship 09:44 22 with the legislature about items that you have a 09:44 23 concern about. And we talked at length about that. 09:44 24 Additionally, I think your next meeting 09:44 25 is set for August the 23rd? 09:44 52 1 MS. BRACKETT: Yes. 09:44 2 CHAIRMAN CLOWE: And will that be here 09:44 3 in Austin? 09:44 4 MS. BRACKETT: Yes. 09:44 5 CHAIRMAN CLOWE: And I would like to 09:44 6 tell you that I have a prior commitment on that date 7 so I'll be unable to attend, and perhaps either 09:44 8 Commissioner Cox or Commissioner Whitaker might be 09:45 9 able to attend depending on their schedules, and it 09:45 10 would be, I think, a beneficial thing for them and for 09:45 11 members of the committee. 09:45 12 MS. BRACKETT: All right. Well, thank 09:45 13 you for the confidence and we really appreciate your 09:45 14 interest and your regular attendance, too. 09:45 15 CHAIRMAN CLOWE: Great. Thanks for 09:45 16 flying in. 09:45 17 MR. ATKINS: Mr. Chairman, I wanted to 09:45 18 point out, it's my understanding that the information 09:45 19 we've been provided from Sunset regarding the issues 09:45 20 that they're looking at are still in a draft format, 09:45 21 and that they've asked that those not be released at 09:45 22 this time. 09:45 23 CHAIRMAN CLOWE: Oh, I knew they were 09:45 24 in draft, but I thought if they would tell me, they 09:45 25 would tell anybody. 09:45 53 1 MR. ATKINS: Well, they're in the 09:45 2 audience and they're shaking their head no, so... 09:45 3 CHAIRMAN CLOWE: They're shaking their 09:45 4 head no, what? 09:45 5 MS. KIPLIN: No, we can't release them 09:45 6 outside of the agency. 09:45 7 CHAIRMAN CLOWE: Okay. Well, I'm 09:45 8 sorry, Virginia. I guess I do know a secret after 09:45 9 all. I'll limit my comments about that, then, to the 09:45 10 extent that I think they did hear a great deal of what 09:46 11 was said in the meetings that they've attended, and 09:46 12 I'm very pleased with the progress they've made. And 09:46 13 at the point in time where that report is ready to be 09:46 14 released and made available to you, I'll then ask 09:46 15 Billy to make sure that it's conveyed and that you are 09:46 16 aware of it and involved in it. 09:46 17 MS. BRACKETT: All right. One thing 09:46 18 that I failed to mention is that the public and the 09:46 19 advisory committee are very, very excited about having 09:46 20 a meeting outside of Austin, so that we can get to 09:46 21 more of the public. So a lot of -- we're going to be 09:46 22 discussing that, too, and planning that meeting. 09:46 23 CHAIRMAN CLOWE: That's great. 09:46 24 MS. BRACKETT: And everybody wants it 09:46 25 in their community, so we might be able to take bids 09:46 54 1 or something. 09:46 2 MS. KIPLIN: Ms. Brackett, just for my 09:46 3 understanding, because I'm the one who will be 09:46 4 drafting that notice, the next meeting, August 23rd, 09:46 5 plans are to have it here in Austin? 09:46 6 MS. BRACKETT: Yes. 09:46 7 MS. KIPLIN: Okay. 09:46 8 CHAIRMAN CLOWE: Thank you so much. 09:47 9 MS. BRACKETT: Thank you. 09:47 10 CHAIRMAN CLOWE: We'll now go to back 09:47 11 to agenda item two, report, possible discussion and/or 09:47 12 action on lottery sales and trends. 09:47 13 Linda, that's you and Toni Smith. 09:47 14 MS. SMITH: Good morning, 09:47 15 Commissioners. For the record, my name is Toni Smith 09:47 16 and I'm marketing director of the Texas Lottery 09:47 17 Commission. 09:47 18 To look at fiscal year-to-date sales 09:47 19 for week ending July 20th, 2002, total sales to date 09:47 20 are $2,639,191,531. This is up 3.8 percent from 09:47 21 fiscal year '02 total sales to date of $2,542,587,998. 09:47 22 Our current weekly sales average is 56,153,011. 09:47 23 And on a positive note, just to share 09:47 24 some year-to-date sales comparison by product, our 09:47 25 instant product currently is at $1,713,675,322, which 09:48 55 1 is an 11.58 percent increase over last year. 09:48 2 Lotto Texas, on the other hand, we're 09:48 3 currently at $537,578,074, which is down 16.11 09:48 4 percent. But I would like to note that with our 09:48 5 current Pick 3 sale -- change of a midday draw, we now 09:48 6 have 12 weeks worth of sales for week ending 7-20, and 09:48 7 the 12-week average before the day draw launch was 09:48 8 $4,587,540, and the 12-week average after the addition 09:48 9 of the midday draw is $5,032,551. So on an average, 09:48 10 we're experiencing about 500,000 dollars more per week 09:48 11 with the addition of the midday draw for Pick 3. 09:48 12 COMMISSIONER WHITAKER: What did we 09:48 13 predict would be the increase? 09:49 14 MS. CLOUD: Six percent. 09:49 15 COMMISSIONER WHITAKER: And it's -- 09:49 16 MS. CLOUD: And it's almost 12 -- 09:49 17 almost 13 percent now. Right, Robert? 09:49 18 COMMISSIONER WHITAKER: Larry is 09:49 19 smiling. 09:49 20 MS. SMITH: And then also, in what I've 09:49 21 handed you, Commissioners, are some updates on Lotto 09:49 22 Texas and Texas Two Step draw patterns. I won't go 09:49 23 into that, but if you have any questions, I know 09:49 24 that's information you've asked for in the past. 09:49 25 That's all I have on sales. I would be 09:49 56 1 happy to answer any questions. 09:49 2 CHAIR CLOWE: On that subject, Bart, 09:49 3 would you come up and introduce yourself to 09:49 4 Commissioner Cox and give us, at the current running 09:49 5 rate, what you estimate the estimate the gross revenue 09:49 6 of the Lottery Commission in this current fiscal year. 09:49 7 MR. SANCHEZ: Good morning, 8 Commissioners, Chairman Clowe. My name is Bart 09:49 9 Sanchez. I'm the financial administration director. 09:49 10 And the projection for sales, as I see it, it's going 09:49 11 to be a little bit over 2.94 billion. So the BRE, 09:49 12 which is the biennial revenue estimate, which was 09:50 13 revised from the Comptroller. I think they had 770 09:50 14 million. I think we're going to project exceeding 09:50 15 last year's revenue transfer to the Foundation School 09:50 16 Fund about 800 -- I think, 836 million. We're going 09:50 17 to be over that 850 million. That's also not 09:50 18 including the unclaimed prize money that's transferred 09:50 19 to the multi-categorical fund and the tertiary fund. 09:50 20 So I think I pretty well think we're going to exceed 09:50 21 the amounts that were transferred last year. 09:50 22 CHAIRMAN CLOWE: And what was the 09:50 23 original projection? 09:50 24 MR. SANCHEZ: From the Comptroller or 09:50 25 from -- 09:50 57 1 CHAIRMAN CLOWE: From the Comptroller. 09:50 2 MR. SANCHEZ: I think the original 09:50 3 projection was 813 million. 09:50 4 CHAIRMAN CLOWE: Good. 09:51 5 MS. CLOUD: Our goal we set for 09:51 6 ourselves, Commissioner, was 3.75 million -- I mean, 09:51 7 3.75 billion. 09:51 8 MR. SANCHEZ: In sales. 09:51 9 MS. CLOUD: In sales. And we're still 09:51 10 going to make that. I'm optimistic we're going to 09:51 11 make it. We're not going to hit 2.9, we're going to 09:51 12 go to three billion. 09:51 13 MR. SANCHEZ: I'm the financial -- 09:51 14 COMMISSIONER WHITAKER: And that's a 09:51 15 guarantee, I understand. Is that right? 09:51 16 MS. CLOUD: Well, we're going to do our 09:51 17 best anyway. That's still our goal. 09:51 18 MR. SANCHEZ: I will certainly cover 09:51 19 the Lottery's budget with my projection. 09:51 20 CHAIRMAN CLOWE: I understand all that. 09:51 21 I identified the different sources. I've been in this 09:51 22 spot before. Okay. Thanks, Bart. I don't know 09:51 23 whether you met Commissioner Cox, but I wanted you to 09:51 24 know him. 09:51 25 And Bart is a key person in logic and 09:51 58 1 budgetary exercises here and our internal money 09:51 2 matters. 09:51 3 Thank you, Toni, and we'll also ask you 09:51 4 about item income three, advertising, promotion. Do 09:51 5 you have anything to report to us on that? 09:52 6 MS. SMITH: Just that we just completed 09:52 7 production of an advertising cam -- two different 09:52 8 advertising campaigns to support our new Cash 5 game 09:52 9 enhancement, and they will all air beginning July 09:52 10 29th. So that's all I have. 09:52 11 MS. CLOUD: This bring out the Cash 5 09:52 12 changes and the roll out of the new matrix for Cash 5. 09:52 13 CHAIRMAN CLOWE: Great. Thank you very 09:52 14 much. 09:52 15 We also have members of the public who 09:52 16 want to appear before the Commission under item number 09:52 17 nine, consideration of and possible discussion and/or 09:52 18 action on the Commission's Mentor Protege program. 09:52 19 Robert Hall. Good morning, Robert. 09:52 20 MR. HALL: Good morning, Mr. Chairman. 09:52 21 Good morning, Commissioners. Once again, Minority 09:52 22 Development Services is coming to the Commission today 09:53 23 requesting consideration of and possible discussion 09:53 24 and/or action on the Commission's Mentor Protege 09:53 25 Program. In accordance with the Texas Government 09:53 59 1 Code, Section 2161.065, all State agencies with a 09:53 2 biannual budget over ten million dollars are required 09:53 3 to have a Mentor Protege Program. The purpose of the 09:53 4 Mentor Protege Program is to foster long-term business 09:53 5 relationships between prime contractors and 09:53 6 historically underutilized businesses, or HUBs. The 09:53 7 ultimate goal of the program is to provide the 09:53 8 governmental assistance to HUBs that will potentially 09:53 9 increase their ability to contract directly with the 09:53 10 State, and/or obtain subcontract opportunities under 09:53 11 the State's contracts. 09:53 12 At the April 25th Commission meeting, 09:53 13 the Commission approved seven Mentor Protege 09:53 14 relationships. Since that time, staff has been 09:53 15 working with additional mentors, and we have approved 09:53 16 one additional new mentor, resulting in having six 09:53 17 approved mentors under our program. We've also worked 09:53 18 with mentors and the proteges that have been approved 09:53 19 by staff, to develop two new relationships. At this 09:54 20 time, I want to defer to our Executive Director, Ms. 09:54 21 Linda Cloud, to identify the mentors and proteges in 09:54 22 the room today and sign each mentor protege 09:54 23 relationship. 09:54 24 MS. CLOUD: Commissioners, we have 09:54 25 Oberthur Gaming Technologies as the mentor and we have 09:54 60 1 their mentor protege, Business Assets, Inc., and if 09:54 2 they would come forward. And thank y'all very much. 09:54 3 Kim is going to bring it over. 09:54 4 The second mentor protege agreement 09:54 5 today is with The King Group, and their protege is 09:54 6 Mailing Consultants. And thank y'all very much. 09:55 7 MR. HALL: Commissioners, I think it's 09:55 8 important to note, the Texas Lottery Commission is a 09:55 9 leader among State agencies in having sponsored now 09:55 10 nine mentor protege relationships. For your review, I 09:55 11 have included in your notebooks a list of the mentor 09:55 12 protege agreements that have been recorded by other 09:55 13 state agencies and approved by the Texas Government 09:55 14 Procurement Commission as of July 1st. 09:55 15 In addition to that, in closing, all 09:55 16 mentors and proteges have agreed that the 09:55 17 relationships among themselves as well as by the 09:55 18 sponsoring agency are all voluntary. And that their 09:55 19 participation in the mentor protege program in neither 09:55 20 a promise or guarantee for business nor a contract. 09:55 21 I would like to say thank you for your 09:56 22 continued support of minority level services and this 09:56 23 program, and I'll be happy to answer any other 09:56 24 question that you may have at this time. 09:56 25 CHAIRMAN CLOWE: To the mentors and the 09:56 61 1 proteges, we thank you all for your participation in 09:56 2 this program. And, Robert, we congratulate you on 09:56 3 your work, you and your staff. Is the total now nine, 09:56 4 did I hear you say? 09:56 5 MR. HALL: Yes, sir. 09:56 6 CHAIRMAN CLOWE: That's excellent, and 09:56 7 we want to continue the support and this good work in 09:56 8 this area and bring these companies in to the spectrum 09:56 9 of competitors for Texas State business, particularly 09:56 10 here at the Texas Lottery Commission. This is a 09:56 11 tangible example of our activities in this area and 09:56 12 you are right, Robert, we are a leader in this 09:56 13 activity and we want to continue to be so. So thanks 09:56 14 to all of you for your participation in this program 09:56 15 and thank you for being here this morning. 09:56 16 COMMISSIONER WHITAKER: Thank y'all for 09:57 17 coming. We consider this to be very important, and I 09:57 18 personally am very proud of the fact that our record 09:57 19 is looking so good in this area. In fact, the total 09:57 20 is on this page. Is that correct? 09:57 21 MR. HALL: Yes. 09:57 22 COMMISSIONER WHITAKER: So out of 21, 09:57 23 we have nine out of the 30. Right? Almost a third. 09:57 24 That's remarkable. 09:57 25 MS. CLOUD: We're setting the standard 09:57 62 1 for Texas like we have with the national lottery 09:57 2 market. We're the Texas model. 09:57 3 COMMISSIONER WHITAKER: When will we 09:57 4 have a chance to get feedback about how it's going? 09:57 5 MR. HALL: Good question. We just had 09:57 6 our quarterly review on all of the agreements that 09:57 7 were approved on April 25th, and we met with all the 09:57 8 approved mentors and proteges to see how it was going. 09:57 9 We've documented all of that information, just 09:57 10 recently, just last week. We're sending out that 09:57 11 report back to all of the mentors and proteges, which 09:57 12 is summarizing what we met on. And we'll provide a 09:57 13 copy to our executive director as well as yourselves. 09:58 14 Chairman Clowe had requested that they 09:58 15 come at some point after about six months and give an 09:58 16 update, so we're looking at between September and 09:58 17 October to do that. 09:58 18 CHAIRMAN CLOWE: Great. Thank you all 09:58 19 very much. 09:58 20 MR. HALL: Thank you, sir. 09:58 21 CHAIRMAN CLOWE: We now have three 09:58 22 items on the agenda, items number five, six, and 09:58 23 seven, which relate to the Texas ethics laws, the 09:58 24 Texas Open Meetings and Public Information Act, and 09:58 25 the Administrative Procedures Act regarding -- Act 09:58 63 1 regarding this agency. This is a standard practice 09:58 2 for us, significantly, when a new commissioner attends 09:58 3 that commissioner's first meeting. It is a training 09:58 4 session, in fact, for that commissioner to assist that 09:59 5 person in the execution of his or her duties. It is a 09:59 6 refresher for the sitting commissioners, in regard to 09:59 7 the ethics laws, the Open Meetings Act, and the 09:59 8 Administrative Procedures Act. And it is also a 09:59 9 refresher for all of the employees of the Texas 09:59 10 Lottery Commission. So by way of saying that this is 09:59 11 scheduled primarily for Commissioner Cox's benefit, I 09:59 12 want all of the rest of us to keep our minds on and 09:59 13 open, and take Dewey and Sarah's advice and be 09:59 14 reminded of the things that we must do and those 09:59 15 things which we must not do. Sounds like the 09:59 16 Episcopal prayer book, doesn't it? 09:59 17 Okay. Kim, are you going to take us 09:59 18 into this? 09:59 19 MS. KIPLIN: Yes, I'll be happy to. 09:59 20 I've asked -- and you laid it out really well, 10:00 21 Mr. Chairman, so thank you. But I've asked Sarah 10:00 22 Woelk, who is with the Ethics Commission, to come over 10:00 23 again and go through general ethics laws and to the 10:00 24 extent that we have differences that pertain to the 10:00 25 Lottery Commission. 10:00 64 1 Diane Morris is an Assistant General 10:00 2 Counsel, and she's also very heavily involved in 10:00 3 ethics of the agency and she is -- between the two of 10:00 4 them, they train the agency annually, and so she's 10:00 5 here to also provide information. 10:00 6 After that, Mr. Helmcamp, with the 10:00 7 Attorney General, Texas Attorney General's Office, he 10:00 8 is an Assistant Attorney General, Commissioners, in 10:00 9 the Administrative Law Division, and is our primary 10:00 10 lawyer representing us on matters. And he is very 10:00 11 much aware of this agency's practice and environment 10:00 12 and is board certified in administrative law and 10:00 13 represents many different licensing agencies. And he 10:00 14 is here to talk about the Administrative Procedures 10:01 15 Act and, in particular, the -- those aspects that 10:01 16 pertain to the contested case proceedings. And is 10:01 17 here to provide information on the contested case 10:01 18 process and, most importantly, when those cases come 10:01 19 to you all for decision, what your parameters are. 10:01 20 And to try to give you information on what is has 10:01 21 occurred before it comes here. 10:01 22 And then Diane Morris is also here to 10:01 23 provide information on Open Meetings and Open Records, 10:01 24 because, as you know, a three-member commission, we 10:01 25 must comply with the Open Meetings Act when we have a 10:01 65 1 quorum and so she'll visit with you about those 10:01 2 issues. And then also Open Records. And as you know, 10:01 3 as you're writing things even here today, you're 10:01 4 creating a record. And so she'll go into that as it 10:01 5 pertains to the three-member commission and those 10:01 6 relationships. 10:01 7 So we very much appreciate your 10:01 8 indulging the lawyers to come over. It's an 10:01 9 opportunity that we like to take advantage of. 10:02 10 Sarah? 10:02 11 MS. WOELK: Hi. I'm with the Texas 10:02 12 Ethics Commission, and because you have filed personal 10:02 13 financial statements for a number of years, all of 10:02 14 you, you're familiar with that probably sort of 10:02 15 unpleasant point of view. We do a number of things, a 10:02 16 lot of things that are filing things. We also do 10:02 17 education and enforcement of various ethics laws that 10:02 18 apply to all State employees and State officers. We 10:02 19 handed you a little guide that is called A Guide for 10:02 20 Employees of Lottery Commission. Although you're not 10:02 21 employees, you're officers, the same standards apply 10:02 22 to you. And the reason there is a special guide for 10:02 23 you is that all although you are subject to the 10:02 24 general laws that apply to all State officers and 10:02 25 employees, are you subject, particularly in the area 10:02 66 1 of gifts, to several rules that are much stricter. So 10:02 2 it's important to forget what you knew as a member of 10:02 3 another board about what gifts are acceptable and be 10:02 4 aware of the much stricter rule that applies to you as 10:02 5 a member of this board. 10:03 6 The first aspect of the ethics laws 10:03 7 that are already aware of is the requirement that you 10:03 8 file a personal financial statement annually that -- 10:03 9 the annual deadline is April 30th. You can -- if you 10:03 10 ask by the April 30th deadline, can you get a 60-day 10:03 11 extension. If you file it late, you have to pay a 10:03 12 100-dollar penalty. The ethics commission staff is 10:03 13 available to help answer questions, although to the 10:03 14 extent that you have a very complicated financial 10:03 15 situation, the categories can be somewhat confusing 10:03 16 and hard -- as people's financial arrangements get 10:03 17 more complex, the categories that the legislature 10:03 18 established in 1972 are sometimes a little harder 10:03 19 to -- to work with. But we will try to help you and 10:03 20 make it as easy as possible to fill out. And if you 10:03 21 sort of try to remember that the point of it is so the 10:03 22 public would know about any financial interests you 10:03 23 might have that would color the way you view your 10:03 24 decisions here, that sometimes helps you think, well, 10:04 25 I don't know if I'm really supposed to put this here, 10:04 67 1 but it sounds like the kind of thing that the public 10:04 2 ought to know about, so -- I did tell that once to a 10:04 3 member of the legislature. I said, in the interest of 10:04 4 disclosure, you might want to put that, and he said he 10:04 5 had no interest in disclosure. So if you're really 10:04 6 interested in drawing the line, we can help you with 10:04 7 that. Otherwise, we encourage you to go overboard. 10:04 8 The one sad bit of news you've probably 10:04 9 already heard is that you can't play the Lottery or 10:04 10 share in Lottery winnings. That is no longer a rule 10:04 11 that applies to any other State employer or officer. 10:04 12 That applies only to you. 10:04 13 You are subject to the general bribery 10:04 14 law, which every State officer and employee -- which 10:04 15 means you can't take any kind of gift for making a 10:04 16 certain decision or failing to make a certain 10:04 17 decision. Where you get off into your own little 10:04 18 territory is the rule of gifts. If you've been around 10:04 19 State government for a while, you've probably 10:04 20 incorporated the idea that it's always okay to let 10:04 21 people feed you if they're there, that there is a 10:04 22 50-dollar gift threshold, so little items are okay to 10:05 23 pick up. 10:05 24 You are subject to a much stricter rule 10:05 25 in regard to any source that does business with the 10:05 68 1 Lottery Commission or is a winner. The legal language 10:05 2 of that prohibition is in the back of the little 10:05 3 handout we gave you. So you are subject to a rule 10:05 4 that was probably difficult to comply with in certain 10:05 5 social settings. You do have to remember that people 10:05 6 who aren't your old friends or your family can't give 10:05 7 you anything. And I think the employees here have a 10:05 8 lot of experience in dealing with that. But it's a 10:05 9 very strict rule. There is an exception for people 10:05 10 with whom you have an independent relationship. So if 10:05 11 your mother or best friend from college does business 10:05 12 with the Lottery, you can still take Christmas gifts 10:05 13 from them. But, otherwise, it's a very strict rule. 10:05 14 There is a separate rule, the 10:05 15 honorarium rule that applies to any source. So if you 10:06 16 should happen to do public speaker in your status as a 10:06 17 Commissioner. For example, if a nonprofit 10:06 18 organization asks you to come speak, you may not take 10:06 19 any kind of fee or payment for a service you provide 10:06 20 because of your job. So that's -- and that goes to 10:06 21 the whole world, not just the people that do business 10:06 22 with the Lottery. 10:06 23 There is separately a lobby law that 10:06 24 puts some gift restrictions on you. I think if you 10:06 25 sort -- deal with everybody here, anybody you deal 10:06 69 1 with in your job, that you can't take anything from 10:06 2 them is probably the easiest rule to follow rather 10:06 3 than trying to do a background check on everybody to 10:06 4 see if they're within the covered class. But it is a 10:06 5 quite strict rule. And it is not an Ethics Commission 10:06 6 rule, so we don't have opinions or enforcement 10:06 7 authority or, really, any expertise. The only real 10:06 8 enforcement mechanism for that rule would be a 10:06 9 prosecutor. And, luckily, in the ten years of 10:06 10 Lottery's existence, we haven't seen any prosecution 10:06 11 in that area. 10:07 12 The other sort of major area of ethics 10:07 13 laws is misuse of government resources. And in this 10:07 14 context, you're subject to the same rules as everybody 10:07 15 else. Because you're only here occasionally, you 10:07 16 don't have necessarily the opportunities to misuse 10:07 17 resources that staff does, but it's important to 10:07 18 remember, you can't have staff walk your dog or do 10:07 19 your laundry while you're here. 10:07 20 A particularly sensitive area is, 10:07 21 although most people on State boards are politically 10:07 22 active in their private lives, you can't use State 10:07 23 resources to -- to participate in an election or try 10:07 24 to affect the outcome of an election. There is a 10:07 25 provision that says you can't use your position to try 10:07 70 1 to affect the outcome of an election. As cautious 10:07 2 advice, we think that means, if you ever are being 10:07 3 active politically in any kind of public context, you 10:07 4 not do anything to suggest that you're speaking for 10:07 5 the Lottery Commission. For example, I would suggest 10:07 6 you not wear campaign buttons at a public meeting even 10:07 7 if you want to put them on as soon as you go out the 10:08 8 door. 10:08 9 The one bit of good news is, to the 10 extent you approve frequent flier credit for flying 10:08 11 back and forth from Austin, the State law does allow 10:08 12 you to keep that credit. So that's the bit of good 10:08 13 news. 10:08 14 There is an another provision in the 10:08 15 ethics laws regarding recusal, which can be a 10:08 16 problematic rule for a three-member board. It 10:08 17 requires that you recuse yourself if you have a 10:08 18 personal or private interest in a matter that comes 10:08 19 before this agency. The law says the term "personal 10:08 20 or private interest" means the same thing it does in 10:08 21 the section of the Texas Constitution, and there is no 10:08 22 definition of it there either. The Ethics Commission 10:08 23 has issued some opinions about what that means. 10:08 24 It's -- for most people we say, if you're at all 10:08 25 concerned, do the cautious thing and recuse yourself. 10:08 71 1 That can be problematic advice for a three-member 10:08 2 board sometimes, because it means they can't act if 10:08 3 certainly two of you have to recuse yourselves on 10:08 4 something. So the Ethics Commission can't issue 10:09 5 opinions about recusal. I mean, we can talk to you 10:09 6 about where we think the actual legal line is, if that 10:09 7 comes up. 10:09 8 There is a common law rule that's not 10:09 9 in the statute that you can't contract with this board 10:09 10 or you can't have an interest in a business that 10:09 11 contracts with this board. I don't know if that's 10:09 12 ever come up for this board. So that -- but you need 10:09 13 to be aware of that. But the recusal statute, there 10:09 14 are areas where recusal isn't enough. There are 10:09 15 certain things you just can't do. Basically, you 10:09 16 can't contract with this board. 10:09 17 One other area of ethics law that 10:09 18 hopefully you won't need to know about for a while is 10:09 19 the revolving door law. You are subject to a specific 10:09 20 revolving door law in the Lottery statute that is not 10:09 21 the same as the revolving door law that other states' 10:09 22 board members are subject to. So once you are 10:09 23 leaving, you should make sure you are aware of the 10:09 24 current version of the revolving door law. 10:09 25 An issue that comes up that's not 10:09 72 1 covered by our laws, though, is also the issue of 10:09 2 lobbying of the legislature by this agency. There is 10:10 3 a provision in the law that says, State resources 10:10 4 can't be used to try to effect legislation. What that 10:10 5 means is these -- the staff can provide information to 10:10 6 the legislature, but staff -- paid staff can't act as 10:10 7 advocates for a particular outcome of the legislature. 10:10 8 Because you're not paid on your own time, you may act 10:10 9 as advocates for a certain position. But if you're 10:10 10 doing so, you need to be cautious not to be using 10:10 11 State resources to do that. The line between what is 10:10 12 providing information and what is advocating is -- is 10:10 13 not always an easy one to find, but you have people 10:10 14 over here who have a lot of experience dealing with 10:10 15 the legislature, and it's good to be well informed 10:10 16 about this sort of etiquette in dealing with the 10:10 17 legislature on your issues. 10:10 18 In closing, I'll just point out that 10:10 19 although we have lots of ethics laws, most of the 10:10 20 issues that have come up for State agencies in the 10:11 21 years I've been doing this job aren't necessarily 10:11 22 legal issues as much as appearance issues, when people 10:11 23 have used bad judgment in a way that makes it look 10:11 24 like an agency's decisions might be being made for 10:11 25 some private benefit rather than for the interest of 10:11 73 1 the agency at large. So although most of us here are 10:11 2 lawyers, I would say, try not to be a lawyer in 10:11 3 thinking about these laws and just use some general 10:11 4 common sense about performing the job in a way that, 10:11 5 in reality and in appearance, indicates you're acting 10:11 6 in the interest of the Lottery Commission. 10:11 7 The Ethics Commission is always -- our 10:11 8 staff is always available for telephone advice, we 10:11 9 issue advisory opinions, and I have a lot of contact 10:11 10 with Kim and Diane and Billy. And you can call us 10:11 11 directly if you want to circumvent them and if you're 10:11 12 tired -- or if you're tired of listening to what they 10:11 13 have to say. They're usually a pretty good source. 10:11 14 So if you have any questions, we would be glad to help 10:11 15 you. 10:11 16 CHAIRMAN CLOWE: Thank you, Sarah. 10:11 17 MS. KIPLIN: I guess I would chime in 10:11 18 on the bottom line advice and recommendations to avoid 10:12 19 even the appearance of impropriety. And that -- I 10:12 20 think that's the closing remarks that Sarah was 10:12 21 making. And that is a cautious approach, but it has 10:12 22 tended to be the more prudent approach, I believe. 10:12 23 CHAIRMAN CLOWE: Very good. Dewey, are 10:12 24 you up next? 10:12 25 MR. HELMCAMP: It's a pleasure to be 10:12 74 1 back before the Commission again, Mr. Clowe and 10:12 2 Ms. Whitaker. And welcome to you, Mr. Cox, for your 10:12 3 appointment. I'm going to be somewhat briefer, I 10:12 4 think, than I was last time because I know both of the 10:12 5 Commissioners have heard my presentation about the 10:12 6 contested case process. But as Kim indicated, I am 10:12 7 one of your prime representatives in the Attorney 10:12 8 General's Office. I do not do all of your litigation, 10:12 9 but I do a substantial portion of it. It depends, I 10:12 10 guess, on the nature. Particularly, what I will do 10:12 11 for you is, once you have completed a contested case 10:13 12 and issued a final Commission order, which has become 10:13 13 final, if the person, your licensee, is dissatisfied 10:13 14 with the decision or the Commission's order, they may 10:13 15 then file suit in Travis County for judicial review of 10:13 16 that order. That's where I come in, in a good many of 10:13 17 your cases. 10:13 18 As a kind of a side-bar, I also 10:13 19 represent you, almost exclusively, in the defense of 10:13 20 your agency rules. What I'm here today to talk about, 10:13 21 primarily, as Kim indicated, the contested case 10:13 22 process and what you do, your role, when those matters 10:13 23 come before you. 10:13 24 In a few simple words, the contested 10:13 25 case is a hearing much like a civil trial. It is 10:13 75 1 conducted in accordance with the Rules of Evidence and 10:13 2 the rules of the State Office of Administrative 10:13 3 Hearings. Typically, the case arises because one of 10:13 4 your licensees is alleged to have violated some 10:13 5 provision of the Lottery Act, the Bingo Enabling Act, 10:14 6 or perhaps the Lottery rules. You are represented 10:14 7 ably by your staff. I do not do those contested case 10:14 8 hearings for you because you have in-house attorneys 10:14 9 and staff that present the case before the State 10:14 10 Office of Administrative Hearings. 10:14 11 The State Office of Administrative 10:14 12 Hearings assigns an administrative law judge, or ALJ, 10:14 13 to preside over the case. And, Mr. Cox, or 10:14 14 Commissioner Cox, you may not be aware of this, but 10:14 15 SOAH, as we call it, is an independent State agency, 10:14 16 and all of the administrative law judges are assigned 10:14 17 to it. So they are not rated by, paid by, or have any 10:14 18 connection with any State agency whatsoever. 10:14 19 As I said, this is basically like a 10:14 20 mini civil trial. Witnesses are called, evidence is 10:14 21 presented. At the conclusion of this, the 10:14 22 administrative law judge will prepare what is called a 10:14 23 proposal for decision. The proposal for decision is 10:15 24 simply a recitation of the general facts of the case 10:15 25 and then includes finding of fact and conclusions of 10:15 76 1 law prepared by the administrative law judge, and 10:15 2 typically, it will include a recommendation. If the 10:15 3 administrative law judge finds that a violation has 10:15 4 occurred, typically, the ALJ will recommend a sanction 10:15 5 to be imposed. That sanction could include revocation 10:15 6 of the license, it might include an administrative 10:15 7 penalty, perhaps a suspension, various different kinds 10:15 8 of punishments or discipline that can be imposed under 10:15 9 the law. And particularly, I mean either the Lotto 10:15 10 Act or the Bingo Enabling Act, one of the two, 10:15 11 depending on the nature of the allegation violation. 10:15 12 This is where you really -- excuse 10:15 13 me -- get into your role. Once that is done, either 10:15 14 side may formally take exception to it, and that's 10:15 15 just sort of a ministerial step, but then it comes to 10:16 16 you for consideration. And the decision of the 10:16 17 administrative law judge will then be presented to you 10:16 18 at a Commission meeting like this one. In fact, I 10:16 19 looked at your agenda. I think you have some number 10:16 20 of these cases that you will take up this afternoon. 10:16 21 Your role in this capacity or in this function is much 10:16 22 like that of an appellate court in a way. You are 10:16 23 acting as the final decision-maker reviewing this 10:16 24 little trial, this contested case hearing that has 10:16 25 been conducted and held before the State Office of 10:16 77 1 Administrative Hearings. Your role is not to try to 10:16 2 supplant the judgment of the administrative law judge, 10:16 3 but to hear the case as it is presented. 10:16 4 Typically, the affected licensee will 10:16 5 have the opportunity -- or they're afforded the 10:16 6 opportunity to come before the Commission and present 10:16 7 some matters. What I want to stress really to you now 10:16 8 as to your role is what I call one of fundamental 10:17 9 fairness as it pertains to the ex parte communication 10:17 10 prohibition. And this sort of dovetails, I think, 10:17 11 nicely with Sarah's presentation about ethics. 10:17 12 Because what I want to leave you with is the notion, 10:17 13 as this sort of appellate body representing the 10:17 14 Commission and its interests, you need to be, as Kim 10:17 15 said, above reproach and you need to not only have the 10:17 16 actuality but the perception of fairness. 10:17 17 The prohibition against ex parte 10:17 18 communications is designed specifically to prevent 10:17 19 decision-makers for the agency, such as yourself, from 10:17 20 receiving information from a party to the contested 10:17 21 case outside of the presence or without the knowledge 10:17 22 of the other side. The idea is that when you make 10:17 23 your decision, your decision should be based on the 10:17 24 matters of record which are officially presented to 10:17 25 you. 10:18 78 1 You can obviously see the danger that 10:18 2 arises if you allow someone, say, the licensee, to 10:18 3 approach you at a party and start whispering in your 10:18 4 ear about, well, the Lottery Commission railroaded me, 10:18 5 they didn't consider this and they didn't do that. 10:18 6 You're now privy to information that may or may not be 10:18 7 accurate, but the Commission may or may not have the 10:18 8 opportunity to correct or rebut. So when the case 10:18 9 comes to you as these later today and at subsequent 10:18 10 meetings will, you should make your decision on the 10:18 11 basis of the evidence that is presented, the findings 10:18 12 of the fact, and the conclusions of law that the 10:18 13 administrative law judge has prepared, and the advice 10:18 14 of your staff and counsel. 10:18 15 And, again, from time to time, you will 10:18 16 have presentations or -- by the affected licensee to 10:18 17 try to point out some matter that they feel where 10:18 18 error occurred. And then at the conclusion of that, 10:18 19 if you feel that you are not satisfied, the proper 10:18 20 function is to remand that case to the State Office of 10:19 21 Administrative Hearings for further proceedings. What 10:19 22 you're not really to do is to try to make those 10:19 23 factual determinations and decisions yourself. If you 10:19 24 think there may have been, for example, some 10:19 25 evidentiary point that was not developed or that some 10:19 79 1 error occurred that can be corrected, then it's 10:19 2 appropriate to send it to SOAH on a remand. 10:19 3 You have an excellent legal staff here. 10:19 4 I work with them very closely. They're very 10:19 5 knowledgeable. I simply urge you to listen to their 10:19 6 advice. Remember, do these things as if you were 10:19 7 sitting out here on this side of the table. In other 10:19 8 words, treat everyone that comes before you with that 10:19 9 fundamental fairness, listen carefully, decide, then, 10:19 10 based on the evidence presented to you in the proposal 10:19 11 for decision, whether or not you believe the contested 10:19 12 case has been proven. And if so, what is an 10:19 13 appropriate sanction or discipline. 10:20 14 I will close, I think, with one comment 10:20 15 about the sanction itself. I mentioned to you that 10:20 16 the administrative law judge will typically include a 10:20 17 recommendation for the sanction, the discipline, or 10:20 18 the punishment, whatever you want to call it. It is 10:20 19 just that. It is a recommendation. Changing, on the 10:20 20 other hand, the findings of fact or the conclusions of 10:20 21 law is a very, very difficult, very, very tricky 10:20 22 process and, basically, can only be done for reasons 10:20 23 of policy, or if the administrative law judge has 10:20 24 misapplied the law very clearly. I doubt very 10:20 25 seriously that you will have many of those cases, but 10:20 80 1 if you do, your General Counsel or counsel that 10:20 2 presents the case will point that out and suggest the 10:20 3 procedures. 10:20 4 On the other hand, if you are 10:20 5 dissatisfied with the recommendation -- let me give 10:20 6 you an example. The administrative law judge 10:20 7 determines that the licensee did, in fact, commit a 10:21 8 violation of the Act. There is no question, the 10:21 9 findings are good, the conclusions of law are good, 10:21 10 but the administrative law judge has only recommended 10:21 11 that there be, say, no penalty. You, on the other 10:21 12 hand, in the exercise of your public function and 10:21 13 carrying out the public trust, feel that some sanction 10:21 14 or discipline is, in fact, warranted, then you may, in 10:21 15 fact, do that. That is one of those rare areas where, 10:21 16 in the contested case proceeding, you are the final 10:21 17 decision maker as to the appropriateness of the 10:21 18 sanction, the penalty, the discipline that is to be 10:21 19 imposed. 10:21 20 But otherwise, I suggest you will be 10:21 21 best served by trusting, in 99.99 percent of the 10:21 22 cases, the integrity of the administrative law judge 10:21 23 and the integrity of the process that brings the cases 10:21 24 to you. 10:21 25 It's a pleasure and honor for me to 10:21 81 1 represent the Commission. If you have any questions 10:22 2 of any nature, I'll be happy to answer them at this 10:22 3 point. Thank you so much. 10:22 4 MS. KIPLIN: Commissioners, if I could 10:22 5 just follow up on one matter and emphasize this. 10:22 6 Because this Commission, as you know, has afforded 10:22 7 people the opportunity to come before you all and to 10:22 8 present information on contested case proceedings as 10:22 9 well as other items. I'm going to limit my discussion 10:22 10 to the contested case proceedings. And from time to 10:22 11 time, I will interject and say, Commissioners, I don't 10:22 12 believe the information is part of the record. I am 10:22 13 not doing that to try to cut somebody off, to 10:22 14 frustrate them, but mainly what I'm trying to do is 10:22 15 keep a clean record for appeal purposes in the event 10:22 16 that we find ourselves in that situation. 10:22 17 Evidence is really not here for you all 10:22 18 to develop because you've got people that are coming 10:22 19 before you who have not been sworn to testify, there 10:23 20 has been no opportunities for cross examination, 10:23 21 things that occur in an evidentiary proceeding. And 10:23 22 so when there are people who may want to come forward 10:23 23 on a contested case proceeding, I will generally say, 10:23 24 Commissioners, let me remind you that their only 10:23 25 purpose really is to try to make oral arguments, not 10:23 82 1 to come before you and put facts before you that were 10:23 2 not part of the record that was made at SOAH. 10:23 3 And likewise, you may find that there 10:23 4 is a question that you have. A general question would 10:23 5 be to turn to Mr. Atkins or one of the attorneys and 10:23 6 say, you know, I want to know what this licensee's 10:23 7 record with this Commission is. What is the record. 10:23 8 Generally, that is information is -- the staff does 10:23 9 try to develop at the time of the evidentiary hearing. 10:23 10 But if for some reason it's not part of the record, I 10:23 11 will interject and indicate that it's really not 10:23 12 appropriate for Mr. Atkins or another staff member to 10:23 13 respond to that and give you information that is not 10:23 14 part of the record. The answer would be, I'm sorry, 10:24 15 Commissioners, that's not part of the record. If 10:24 16 that's information you really want and you want it as 10:24 17 part of the record, then the solution, of course, is 10:24 18 to -- is to remand it back to SOAH to develop that 10:24 19 information. So there is some interplay that occurs 10:24 20 when you have people that come before you, and 10:24 21 particularly, those that may not be represented by 10:24 22 counsel, because they frankly don't -- they don't 10:24 23 really have that tremendous familiarity with the 10:24 24 administrative process, and it can be an intimidating 10:24 25 process to people would are representing themselves 10:24 83 1 and don't have counsel who have been before SOAH and 10:24 2 understand that process. And so I will from time to 10:24 3 time interject. And I just want to let y'all know 10:24 4 that. And Commissioner Cox, this is really more for 10:24 5 your benefit, because the other two Commissioners have 10:24 6 seen me do that. 10:24 7 Does that prompt any questions from any 10:24 8 of the three of you? If not, I appreciate 10:24 9 Mr. Helmcamp and Ms. Woelk's attendance, and I don't 10:24 10 know if you all want to leave. Diane Morris is the 10:25 11 Assistant General Counsel, and she is going to go into 10:25 12 those aspects of the Open Meetings and Open Records 10:25 13 that pertain to the three-member commission. 10:25 14 MR. HELMCAMP: With your permission, I 10:25 15 do need to return to the office. Thank you. It's a 10:25 16 pleasure. Commissioner Cox, I wish you great success. 10:25 17 I know you've got a good group of people to work with. 10:25 18 MS. KIPLIN: Thank you, Dewey. 10:25 19 Appreciate it. 10:25 20 MS. MORRIS: My name is Diane Morris. 10:25 21 I'm an Assistant General Counsel. I want to first go 10:25 22 back to the ethics as far as, specifically, the Texas 10:25 23 Lottery Commission. I think that you had some papers 10:25 24 delivered to include under this tab. One of them was 10:25 25 an ethics policy of December 2001 signed by Billy 10:25 84 1 Atkins and Linda Cloud. 10:25 2 Commissioner Cox, what I've handed the 10:26 3 Commissioners are three pieces of paper paper-clipped 10:26 4 together, and I'm going to ask you to go to the third 10:26 5 piece of paper. It is the December 2001 ethics memo, 10:26 6 signed by both Linda Cloud and Billy Atkins. It's the 10:26 7 next document. There you go. 10:26 8 I think what I would focus on right now 10:26 9 in a short period of time is the leadership role that 10:26 10 Linda and Billy have taken here at the Commission. 10:26 11 You won't find many State agencies that have the 10:26 12 Executive Director and the Director of Charitable 10:26 13 Bingo that are heads of the agencies, writing and 10:27 14 putting in writing more to an ethics policy than the 10:27 15 general ethics guidelines that all State employees are 10:27 16 required to comply with. This role -- and I'm 10:27 17 thinking it's been at least three, perhaps four years 10:27 18 now, maybe going on five, that we have had annual 10:27 19 ethics training. I have to say, when I first started 10:27 20 it, it was difficult. I had Linda's assistance, but a 10:27 21 lot of the employees, it was new to them. They were 10:27 22 employees of other State agencies, and it was 10:27 23 difficult. We are different. We hear that all the 10:27 24 time. But the Lottery, Linda and Billy have embraced 10:27 25 it. We are different and we so preach it. I think 10:27 85 1 we've gotten to a point now where a lot of the 10:27 2 employees are bringing information to our attention 10:27 3 that we couldn't have even predicted a question to get 10:27 4 an answer to. At this point, the ethics policy of 10:27 5 this agency is more of an open questioning point. 10:28 6 The memo has laid out general 10:28 7 guidelines. There is an ethics committee, Linda, 10:28 8 Billy, Kim, and Jim Richardson, the Director of Human 10:28 9 Resources, serve on the committee. Employees are 10:28 10 allowed to ask questions. They can be what-if 10:28 11 questions. They don't even have to give their names. 10:28 12 People bring me questions, slide them under my door. 10:28 13 Sometimes they e-mail me questions, and I'll take the 10:28 14 questions to the ethics committee. We try to get 10:28 15 employees answers. We're getting more to the point 10:28 16 now of more predictable type questions and so that's 10:28 17 good. But every so often we have some pretty good 10:28 18 questions come up. It's an open door, if you will, 10:28 19 for the decision-makers to look at the questions and 10:28 20 try to reconcile with our State laws. 10:28 21 The ethics policies as to the employees 10:28 22 of this agency that I'm really talking about are more 10:29 23 management decisions. Very rarely is it a violation 10:29 24 of law that we are even talking about. Linda and 10:29 25 Billy have taken it further. They have imposed 10:29 86 1 standards that are well beyond the requirements of the 10:29 2 State law. They're allowed to do so, and so they have 10:29 3 done so. The three Commissioners before you have 10:29 4 reviewed these policies, they have voted on them, we 10:29 5 have adopted them, we have proceeded with these 10:29 6 policies. It's so under the guidance and the 10:29 7 leadership of the members of the Commission, and then 10:29 8 Billy and Linda. As we say in the ethics training, it 10:29 9 is a guideline that we all believe we're responsible 10:29 10 to. 10:29 11 One of the most important things we 10:29 12 talk about is in the openness of the reporting and the 10:29 13 acknowledgment and the realization of ethics laws. 10:29 14 There should be no retaliation against an employee 10:29 15 that might report something. How fundamentally unfair 10:29 16 for us to have standards and then not to want to know 10:30 17 about any possible questions or violation, or to 10:30 18 punish a person who would bring it forward. 10:30 19 I want to call mainly to your 10:30 20 attention, Commissioner Cox, on page one, the 10:30 21 prohibition against the relationships, if you will, 10:30 22 with Commission vendors. We're patterning after our 10:30 23 law, but it is extended, a little bit more stringent. 10:30 24 Number one and two. Number one, all employees of this 10:30 25 building -- of the Lottery Commission, I'm sorry, 10:30 87 1 including the Bingo Division, are required to meet in 10:30 2 this building unless their job requires otherwise. I 10:30 3 know that the folks from Gtech are here, they can tell 10:30 4 you that they've got to come here. The marketing 10:30 5 people, they have to come here. We don't meet 10:31 6 somewhere else unless we have to. 10:31 7 Number two, do not accept or take 10:31 8 anything of value from a vendor or a vendor employee. 10:31 9 Every time we do ethics training, either Linda or 10:31 10 Billy or both of them come down and speak to the 10:31 11 employees before we have a two-hour training session. 10:31 12 And I've heard Linda say that when she visits a 10:31 13 vendor, she doesn't even take a cup of coffee from 10:31 14 them. 10:31 15 COMMISSIONER COX: I've seen that. 10:31 16 MS. MORRIS: As far as Commission 10:31 17 licensees or potential licensees, they've set up very 10:31 18 much the same kind of standards. Do not take anything 10:31 19 of value. 10:32 20 One of the better things I can report 10:32 21 on is -- as far as lottery tickets are concerned or 10:32 22 sharing in lottery prizes, not only you, Commissioner, 10:32 23 but members of your family or anybody living in your 10:32 24 household should not be buying lottery tickets. I 10:32 25 always say, that's what keeps my mother-in-law away. 10:32 88 1 If you have any questions, feel free to 10:32 2 ask us. We do annual ethics training. It's usually 10:32 3 in January. I think that as far as our ethics are 10:32 4 concerned here at the Lottery, I was at the Office of 10:32 5 the Attorney General for 11 years before I came here, 10:32 6 and represented many State agencies, served as 10:32 7 in-house counsel for agencies that did not have 10:32 8 in-house counsel. It is remarkable what the 10:33 9 Commissioners and what Linda and Billy have imposed. 10:33 10 It is something to be truly proud of. 10:33 11 CHAIRMAN CLOWE: Thank you. 10:33 12 Any comments or questions on these 10:33 13 items? 10:33 14 MS. MORRIS: Plus, she wanted me to go 10:33 15 over -- before Kim left, and I think she wanted me to 10:33 16 go over it, was Open Meetings and Open Records as 10:33 17 well. 10:33 18 CHAIRMAN CLOWE: Very well. 10:33 19 MS. MORRIS: Sarah is leaving unless 10:33 20 you had any more questions. 10:33 21 CHAIRMAN CLOWE: Thank you, Sarah. 10:33 22 MS. MORRIS: The Office of the Attorney 10:33 23 General has handbooks, Commissioner Cox, and if you 10:33 24 don't have these yet, we will certainly get you 10:33 25 copies. But they're also on the Web, on the Office of 10:33 89 1 the Attorney General web. One under Open Records and 10:33 2 one under Open Meetings. Open Meetings is by far the 10:33 3 smaller developed case law and Open Records is very 10:33 4 well developed. 10:33 5 Generally, we're subject to the Open 10:33 6 Meetings Act. That means that the items that you will 10:34 7 be considering in your open meeting must be posted, 10:34 8 and must be posted well in advance of the meeting 10:34 9 itself. That's compiling the agenda and posting it 10:34 10 for the public. So approximately ten days, 11 days 10:34 11 before the open meeting, the agenda is being built, 10:34 12 preparing to be posted. That's for the public. The 10:34 13 public has a right to know what you intend to talk 10:34 14 about. Items are put on an agenda. The public has a 10:34 15 right to know and that's -- and flipped, what you're 10:34 16 not going to be talking about, because they're not 10:34 17 going to come to Austin to hear you on this one. 10:34 18 They're going to be looking down your agenda and if 10:34 19 you don't plan to talk about Pick 3, or whatever, 10:34 20 they're not going to be come to listen. 10:34 21 That concept is fundamental to, that's 10:34 22 why the posting is there. The public has a right to 10:34 23 know, to be here and to possibly add public comment to 10:34 24 an agenda item. So when you look down the agenda, and 10:34 25 if there is not an item on the agenda that you might 10:35 90 1 have realized, oh, I really wanted to talk about that, 10:35 2 most likely what you're going to hear, that if it's 10:35 3 not already posted in the sense that it's not already 10:35 4 within an item already on the agenda that could be 10:35 5 fairly understood by the public to give them notice 10:35 6 that you might be talking about it, what you should 10:35 7 expect to hear, perhaps from the chair, perhaps from 10:35 8 legal counsel, is, I don't think this subject is on 10:35 9 the agenda. That's not a sword, it's not to be used 10:35 10 to make you stop talking about the item, but it is to 10:35 11 make the discussion cease for that meeting. The next 10:35 12 thing that you would expect to hear would be, let's 10:35 13 add it to next meeting's agenda. 10:35 14 There are very few reasons that the 10:35 15 public does not get to hear the deliberation, the 10:35 16 talking amongst yourselves. Those are called 10:36 17 executive sessions. They're laid out in the Open 10:36 18 Meetings law. The General Counsel reviews the agenda 10:36 19 before it's even published and assures herself that 10:36 20 the reasons as given would properly support the law. 10:36 21 You should feel some comfort in that you have, in that 10:36 22 sense, received legal advice that you are properly in 10:36 23 an executive session when the meeting day comes. 10:36 24 Likewise, in executive session, if 10:36 25 there were ever a time that it -- conversation could 10:36 91 1 stray, you will definitely hear, if that ever were to 10:36 2 happen, your General Counsel or the Chair or the other 10:36 3 Commissioner, amongst yourselves you may hear, wait a 10:36 4 minute. Where are we? 10:36 5 The public wants to sit and listen. 10:36 6 They want to hear the discussion. Now, that doesn't 10:36 7 mean that you are forced to talk to each other. If 10:36 8 you don't have anything to say, you don't have to say 10:37 9 anything. There are times that you'll see papers 10:37 10 delivered to Chairman Clowe; those are members of the 10:37 11 public asking to speak on an agenda item, public 10:37 12 comment. I have to say that sometimes members of the 10:37 13 public, it's frustrating, because they would love to 10:37 14 come up here and question you. They don't really have 10:37 15 that right to demand you to answer their questions. 10:37 16 They do, of course have the right under public comment 10:37 17 to make their public comment. And sometimes it can be 10:37 18 perceived as questioning or challenging. Certainly, 10:37 19 the public is such an important component to the 10:37 20 public body that you want to hear what they have to 10:37 21 say. You want to have the ability to have that 10:37 22 exchange. 10:37 23 I don't know if you have any other 10:38 24 questions on open meetings. Okay. 10:38 25 COMMISSIONER WHITAKER: Diane, I have 10:38 92 1 one question. How do e-mails play into this? 10:38 2 MS. MORRIS: Under open meetings? 10:38 3 COMMISSIONER WHITAKER: Especially 10:38 4 one-way e-mails. 10:38 5 MS. MORRIS: Well, this is a board of 10:38 6 three Commissioners. Your quorum is two. So there 10:38 7 should be no e-mails back and forth between the two of 10:38 8 you that are deliberating, if you will, public 10:38 9 business. 10:38 10 COMMISSIONER WHITAKER: What about 10:38 11 one-way e-mails? 10:38 12 MS. KIPLIN: Let me give you an 10:38 13 example. It would be no different than a memo that 10:38 14 goes to the Commissioners in an overnight package 10:38 15 that's the three member -- the three names and it's 10:38 16 from, you know, a staff employee that says, attached 10:38 17 is the, you know, draft rule. 10:38 18 MS. MORRIS: Oh, I don't think that is 10:38 19 violative of the Open Meetings requirement. 10:38 20 COMMISSIONER WHITAKER: What if it were 10:38 21 a letter, say, from Chairman Clowe to a third party 10:38 22 and we get a copy of it? 10:39 23 MS. MORRIS: That's the same difference 10:39 24 of, if you were to get a letter overnight from 10:39 25 Chairman Clowe to a third party advising them of 10:39 93 1 something and you received a copy of it. 10:39 2 COMMISSIONER WHITAKER: And then last 10:39 3 hypothetical. Chairman Clowe writes me a letter and 10:39 4 doesn't ask for a response, and I don't give him one. 10:39 5 MS. MORRIS: I don't think you have 10:39 6 deliberated yet. 10:39 7 MS. KIPLIN: I think -- let me just 10:39 8 follow up. If Chairman Clowe is sending you a letter 10:39 9 in his capacity as a Lottery Commissioner to you in 10:39 10 your capacity as a Lottery Commissioner, I think that 10:39 11 is -- if it's not violative of the Open Meetings Act, 10:39 12 that is the -- a situation that I think is the 10:39 13 appearance of impropriety at best, and at worst, it 10:39 14 could be violative. And my advice would be, from a 10:39 15 prudent perspective, not to engage in that kind of 10:39 16 activity. If it has to do with Commission business. 10:39 17 COMMISSIONER WHITAKER: Then the last 10:40 18 step is that I respond. And at that point in time, 10:40 19 you're saying -- 20 MS. MORRIS: Please don't do that. 10:40 21 COMMISSIONER WHITAKER: In your 10:40 22 opinion, that's -- 10:40 23 MS. MORRIS: And that's where -- not 10:40 24 even knowing the substance of the conversation, the 10:40 25 e-mail -- telephone, hallway. I mean, the e-mail 10:40 94 1 didn't really make a difference to me. You caught me 10:40 2 there for a second, but fundamentally, it's the 10:40 3 communication. Certainly, you are three. At this 10:40 4 point, you should not be talking between the two of 10:40 5 you on Commission business whatsoever, outside of the 10:40 6 posted open meeting or the proper executive session. 10:40 7 MS. KIPLIN: And let me just take that 10:40 8 a step further. There is also part of the Open 10:40 9 Meetings Act that does talk to having intervenors or 10:40 10 intermediaries, I guess, who act as conduits. And if 10:40 11 it's -- if that action is occurring with the intent to 10:40 12 counter the Open Meetings Act, that is violative. 10:41 13 That conduct is violative. So there may be -- and, of 10:41 14 course, we're dealing with a three-member commission, 10:41 15 so two is a quorum. In other agencies where you have 10:41 16 five members, it's not an issue. But to say, well, 10:41 17 what is commissioner -- what has Commissioner X said 10:41 18 to you about this, or what does Commissioner X think, 10:41 19 and to have a staff member say, Commissioner X said 10:41 20 blank or Commissioner X thinks Y, that also is 10:41 21 problematic under the Open Meetings Act. 10:41 22 MS. MORRIS: Okay. Open Records. Open 10:41 23 Records is the other part of the Sunshine laws. When 10:41 24 the Open Meetings and Open Records came into law in 10:41 25 the 1970s, Open Records is the other half of it. The 10:41 95 1 concept is that we don't own this building. All us 10:41 2 employees, we are just here as public servants. The 10:42 3 public owns the place. The public owns the Lottery. 10:42 4 And in that sense, the knowledge and the information 10:42 5 and what we are doing is subject to public scrutiny. 10:42 6 Fundamentally, the presumption is that 10:42 7 all information of the governmental body is public. 10:42 8 There are some exceptions to that. There is some 10:42 9 information that the agency could claim should not be 10:42 10 available to the public. They are limited. Sometimes 10:42 11 one day they are and the next day they're not, due to 10:42 12 circumstances, such as litigation or attorney-client 10:42 13 or law enforcement or audit. There are some times, 10:42 14 however, that information is requested. Maybe the 10:42 15 Lottery would prefer that they're not happy with it 10:42 16 yet, they're not done with it yet. But if there is 10:42 17 really no exception, then we do make it available. I 10:43 18 know that I have had conversations with Linda Cloud 10:43 19 and Billy Atkins, each of them, when they have made 10:43 20 information available, that we have carefully looked 10:43 21 at the Open Records Act and they follow the law. If 10:43 22 you hear of information that was made available and 10:43 23 you think, why did they do that? They're following 10:43 24 the law. 10:43 25 So it may seem kind of a disconnect, 10:43 96 1 but please understand. There are only certain 10:43 2 limitations and the information is public and it's 10:43 3 available. We're not a private business. There is 10:43 4 some information that if you were in a private 10:43 5 business, why, you would just -- you couldn't 10:43 6 understand why Linda would agree. If we do have 10:43 7 information that we think should be protected, we have 10:43 8 ten business days to seek an Attorney General's 10:43 9 opinion. We do not sit as judge and jury and decision 10:43 10 maker. If we believe information would be protected, 10:44 11 we have to seek an AG opinion. So personally, I would 10:44 12 tell you this, Commissioner. That if by any chance 10:44 13 you ever hear from me or another member of the legal 10:44 14 division, saying these magic words, we have an Open 10:44 15 Records request, please do a reasonable search. Look 10:44 16 through your records, what you may have, and forward 10:44 17 the information to me, so we can forward it to the 10:44 18 Attorney General's Office. We are not trying to pass 10:44 19 the buck to the AG. We're not trying to not make a 10:44 20 decision. In fact, that's the process we must follow. 10:44 21 We have ten working days. We are in a hurry. We try 10:44 22 to get it over to the Attorney General's Office even 10:44 23 before the deadline. 10:44 24 There is some information that we have 10:44 25 no control over whether we would like it available to 10:44 97 1 the public, no matter how much we would like the 10:44 2 information out there, it's called third party. 10:44 3 Members of Gtech know that they provide us with a lot 10:45 4 of information that they under the law have a right to 10:45 5 claim is proprietary, commercial or trade secret. 10:45 6 Sometimes, as much as we don't think the information 10:45 7 is troubling, if you will, it doesn't matter. The 10:45 8 third party has a right to claim that they're troubled 10:45 9 with that being released to the public due to their 10:45 10 commercial or financial interests. We seek Attorney 10:45 11 General opinions on that. We're following the law. 10:45 12 Sometimes we can be criticized, but it's not our 10:45 13 decision to make. There are penalties under the law 10:45 14 if we release information that is confidential by law. 10:45 15 So we're walking that tight rope. 10:45 16 Are there any questions? Again, I 10:45 17 would like to say for the members of the public that, 10:45 18 thank you. Thank you for serving on the board. Thank 10:45 19 you for being willing to be under the scrutiny that 10:45 20 you will be. The public has a right to know. They 10:45 21 are the owners of the Texas Lottery Commission, and 10:46 22 you will be questioned. Thank you. 10:46 23 CHAIRMAN CLOWE: Thank you, Diane. 10:46 24 We'll be in recess for ten minutes. 10:46 25 (RECESS.) 98 1 CHAIRMAN CLOWE: We'll come back into 10:59 2 session now and take up item number ten, report, 10:59 3 possible discussion and/or action on agency activities 10:59 4 to increase public awareness of the Texas Lottery. 10:59 5 Good morning. 10:59 6 MS. KALERGIS: Thank you, Commissioner. 10:59 7 My name is Karen Kalergis. I'm the 10:59 8 external communication manager with the communications 10:59 9 division here. 10:59 10 Chairman Clowe, a couple of months ago 10:59 11 you had asked how we were doing with getting the 10:59 12 television stations to pick up our drawings with the 10:59 13 new times. We thought we would like to take the 10:59 14 opportunity to respond to your question and also let 10:59 15 the Commission know of some other areas that we've 10:59 16 been working on to increase public awareness about the 10:59 17 Texas Lottery. 11:00 18 Perhaps with this being Commissioner 11:00 19 Cox's first meeting, it will also kind of give him an 11:00 20 overview of some of the things that we've worked on. 11:00 21 I have handed to you and put in front of your places 11:00 22 two little diagrams that we have prepared for your 11:00 23 consideration, and I would also draw your attention to 11:00 24 the map. 11:00 25 Two Commission actions I think have 11:00 99 1 really helped to increase public awareness about the 11:00 2 Texas Lottery and its games. First of all, it's the 11:00 3 decision to move the broadcast studio on-site and 11:00 4 locate it here on Sixth Street, in the heart of the 11:00 5 capital of Texas. One of the advantages that has come 11:00 6 by having the drawing studio right out there is, we 11:00 7 have foot traffic almost every night of every draw. 11:00 8 Certainly, it boosts up when we have 74 million dollar 11:00 9 jackpots, but it gives the drawings a very high 11:00 10 visibility. 11 And Commissioner Cox, one of the 11:00 12 reasons why that is really important is that we have 11:00 13 learned from our research that players and even 11:00 14 nonplayers of the Texas Lottery believe it's very 11:00 15 important for those games, for the drawings to be 11:01 16 televised. It helps to increase the integrity and 11:01 17 credibility of the games, even if they don't play or 11:01 18 even if they don't watch. Just that they know they 11:01 19 are there. So having that studio, having that window 11:01 20 right there on Sixth Street certainly helps to enhance 11:01 21 that. 11:01 22 The other thing that we did to try to 11:01 23 get more live coverage of our drawings was to change 11:01 24 the draw time from 9:59 p.m. to 10:12 p.m., and that 11:01 25 change went into effect on May 27th. And this map 11:01 100 1 over here with the little Texas Lottery logos, 11:01 2 represents the 30 stations in the state of Texas that 11:01 3 carry our drawings live. Those 30 stations represent 11:01 4 stations that carry either the Pick 3 day drawing or 11:01 5 the Lotto Texas drawing on Wednesdays and Saturdays. 11:01 6 Now, there are a number of other 11:01 7 stations in the state that will carry what we call 11:01 8 just a graphic or just give the numbers in the course 11:01 9 of their news casts, but these stations are those that 11:01 10 are dedicating anywhere from 30 seconds to a full 11:02 11 minute and a half to actually take the feed that we 11:02 12 send out of that broadcast drawing studio and air it 11:02 13 live for their viewers. What is exciting about those 11:02 14 30 stations is that we have at least one station in 11:02 15 eight of the top ten markets, and because of the 11:02 16 penetration of where those markets are, we reach or 11:02 17 have the potential of reaching 89 percent of the 11:02 18 people in the Texas. 89 percent of the households in 11:02 19 Texas have access to watch our drawings live, and we 11:02 20 think that's very exciting. 11:02 21 This little handout that you have has 11:02 22 an actual list of the stations that carry us. We do 11:02 23 our best to make that information available to the 11:02 24 public. In fact, we have a spot on our website. It's 11:02 25 very visible on the home page of our website that if 11:02 101 1 you want to find your television station, you click 11:02 2 there and then you go to a map of Texas and click on 11:02 3 your city and find out what station carries you. And 11:02 4 we're very appreciative of those television stations 11:02 5 that give their time for this public service. 11:03 6 The -- the big news that came about in 11:03 7 really helping to have us reach that 89 percent 11:03 8 penetration was that, as a result of the discussions 11:03 9 and the media attention surrounding that 74 million 11:03 10 dollar jackpot, as can you imagine, we had a number of 11:03 11 television stations out there the night of that 11:03 12 drawing, because the drawing itself was news. And the 11:03 13 Houston CBS affiliate, KPRC, was one of those stations 11:03 14 that carried it as a news story and then cut live to 11:03 15 the drawing so that people could see this as it 11:03 16 actually happened. And since that time, KPRC is now 11:03 17 carrying our drawings in both the noon drawing and the 11:03 18 evening drawing. And that gives us the number two 11:03 19 market in the state. So we're very, very excited and 11:03 20 our communications director, Keith Elkins, has been 11:03 21 working very hard on getting the television stations 11:03 22 to be able to carry our drawings. And I think that 11:03 23 has given us a big boost, Chairman Clowe, to answer 11:04 24 your question about how that switch has worked. And I 11:04 25 think it has worked not only in terms of exposing the 11:04 102 1 drawings results, but then also just the news itself 11:04 2 that it's a '74 million dollar jackpot has been very 11:04 3 exciting. 11:04 4 One other area that we've been working 11:04 5 on is improvements to the website to make it easier, 11:04 6 faster and better for people to get to the website. 11:04 7 And that second little drawing that you have in front 11:04 8 of you kind of goes through just a synopsis, and I 11:04 9 won't go through them all, but some of the initiatives 11:04 10 that we've taken in the last year to enhance that 11:04 11 website. I think one of the things that is 11:04 12 interesting about the diagram that was developed by 11:04 13 our webmaster, David Glasgow, is that it doesn't 11:04 14 appear that the traffic to the website is affected by 11:04 15 the size of the jackpot. Because you can see, we have 11:04 16 an 85 million dollar jackpot that generated almost as 11:04 17 much traffic as a recent 40 million dollar jackpot. 11:04 18 What we think is driving people to our website is to 11:05 19 find out the results of the game. About 89 percent of 11:05 20 the people who go to the website, go for drawings 11:05 21 results. And also, we are seeing real increased 11:05 22 traffic there as well for our on-line, our streaming 11:05 23 video. We had a lot of records set in June with that 11:05 24 record jackpot. We had 17,201 visits to the streaming 11:05 25 video, either on-line, or on-demand, and that's almost 11:05 103 1 double what it was the month before. In the month of 11:05 2 June, we had more than a million visitor sessions, 11:05 3 which was the biggest month ever for our website. We 11:05 4 had 1.3 million visitors. And a new high for the day, 11:05 5 and I challenge you to guess which day was a new high. 11:05 6 June 23rd, we when had 114,000 visitors, probably 11:05 7 wanting to find out what those numbers were from June 11:05 8 22nd because they didn't watch TV the night before. 11:05 9 So we're very excited in seeing that as 11:05 10 we make these changes to the website, the public seems 11:05 11 to be responding, and we're putting the information 11:06 12 out there that is valuable to them. We are now going 11:06 13 out for an RFP for a new website host, and one of the 11:06 14 things that we're looking at is being able to 11:06 15 anticipate this increased traffic that our website is 11:06 16 generating and being able to make sure that we can 11:06 17 accommodate all of our visitors. During the peak of 11:06 18 all the people coming to the website for the 74 11:06 19 million dollar jackpot, we anticipated that we weren't 11:06 20 going to be able to handle all of the incoming traffic 11:06 21 and actually went to a text-only website so that 11:06 22 people could get in and get the information quicker. 11:06 23 One of the things we're looking at with a different 11:06 24 RFP is being able to not have that traffic jam, 11:06 25 basically. 11:06 104 1 The last area that I wanted to talk to 11:06 2 you about is our Latin Lotto public awareness 11:06 3 campaign. In -- and this started just about the time 11:06 4 that I came on board, about a year ago. Our executive 11:06 5 director and security director were very concerned 11:07 6 about reports we've heard of people in Texas, 11:07 7 primarily elderly Hispanics, who were being approached 11:07 8 by these con artists telling them that they had a 11:07 9 winning Lottery ticket, but because they were illegal 11:07 10 in this country, they couldn't claim it. And if this 11:07 11 person would only take the ticket for them, pay the 11:07 12 down -- you know, the deposit that the lottery insists 11:07 13 on getting, then they would share the winning lottery 11:07 14 ticket with them. And we heard stories, anywhere from 11:07 15 people losing a thousand dollars to the high of 24,000 11:07 16 dollars to that scam. So in March of this year, we 11:07 17 initiated a public awareness campaign that had two 11:07 18 main targets. One was the public and, particularly, 11:07 19 the elderly Hispanics, and the other was the law 11:07 20 enforcement community so that they could recognize 11:07 21 that when this happens in their community, it's not an 11:07 22 isolated incident. That we're very confident that 11:07 23 some of the same people are taking part in this. 11:07 24 We did four news conferences with the 11:08 25 executive director, got tremendous media coverage 11:08 105 1 about it. We've done four academies, training 11:08 2 academies with law enforcement around the state. I 11:08 3 have a copy of the materials that we make available to 11:08 4 those law enforcement officers, which also includes 11:08 5 pictures of the suspects. And it's real interesting 11:08 6 because those training sessions become -- I've learned 11:08 7 a new word -- intelligence sharing sessions. Where 11:08 8 those law enforcement officers can talk about cases 11:08 9 that they've worked and they've had in their 11:08 10 community. And there was -- I remember one discussion 11:08 11 in Pearland where they talked about the suspect having 11:08 12 a limp. And the fellow from Alvin said, our guy had a 11:08 13 limp, too. Did you get a picture of them? And, of 11:08 14 course, neither one of them got the picture. But now 11:08 15 trying to exchange and create that exchange is one of 11:08 16 the things that has come about because of our public 11:08 17 awareness campaign. 11:08 18 We've had at least eight arrests that 11:08 19 have taken place as a result of that. We have three 11:08 20 suspects awaiting deportation. And I think that the 11:08 21 best impact of the story is the -- is the person who 11:09 22 didn't fall for it. There was a man in Carrollton who 11:09 23 was approached by the con artists, went to his home to 11:09 24 get the 5,000 dollars that he kept there that he was 11:09 25 going to give to this con artist. And his son was at 11:09 106 1 his home and his father is telling him this great 11:09 2 story about how he is going to buy a winning lottery 11:09 3 ticket for only 5,000 dollars. And his son had heard 11:09 4 our public awareness campaign when we were up there in 11:09 5 Dallas doing the news conference, and so instead of 11:09 6 going back and meeting the con artists, they called 11:09 7 the police and we were able to -- the Carrollton 11:09 8 police arrested four suspects as a result of that. So 11:09 9 we want to hear more of those stories, of stories of 11:09 10 people who got away. We know the con is still 11:09 11 working. One of the changes that we've heard recently 11:09 12 here even in Austin was that the con artists seem to 11:09 13 have changed their pitch just a little bit. It always 11:09 14 was that there were two males who approached the 11:09 15 victim and there was a female who drove the getaway 11:10 16 car. In two recent cases we heard about in Sugar 11:10 17 Land, outside of Houston, and here in Austin, just a 11:10 18 week or so ago, the people who were approaching the 11:10 19 victims initially are now women. Now, we don't know 11:10 20 if that's because of our public awareness campaign and 11:10 21 our public service announcements that show that it's 11:10 22 two men, or if it's just equal opportunity and it's 11:10 23 the gals' turn to be out in front. But we're going to 11:10 24 keep putting the word out there. We've got hundreds 11:10 25 of thousand of flyers that we're making available to 11:10 107 1 senior centers and Hispanic groups, and just recently 11:10 2 we submitted an article to the Texas Bankers 11:10 3 Association because we found the key point is when 11:10 4 that victim comes to the bank to withdraw their life 11:10 5 savings. And if we could perhaps have a teller behind 11:10 6 that bank counter, particularly somebody who has a 11:10 7 good relationship with that bank customer, and say, 11:10 8 well, gee, I hope you're not taking out all this money 11:10 9 because you're doing this Latin Lotto thing, or let me 11:11 10 give you this. So we're trying to get the word out as 11:11 11 many places as we can. We've got three more 11:11 12 academies. 11:11 13 And I'm going to wrap this up by 11:11 14 bringing this all together and telling you that we 11:11 15 expect to see more public awareness about the campaign 11:11 16 and more success about it. We recently got a phone 11:11 17 call from a national news network who is interested in 11:11 18 doing a story on the Latin Lotto scam nationally. And 11:11 19 so we're hoping that that will not only draw attention 11:11 20 to our efforts, but also stop more people from falling 11:11 21 victim to this crime. 11:11 22 CHAIRMAN CLOWE: Good. 11:11 23 Any questions? 11:11 24 COMMISSIONER WHITAKER: I was 11:11 25 interested about the last entry on this increase of -- 11:11 108 1 to the website, new section launching this week. Tell 11:11 2 me about that. 11:11 3 MS. KALERGIS: Commissioner Whitaker, 11:11 4 I'm so glad you brought that up because David is so 11:11 5 proud of that. And that was going to be one of my 11:11 6 high points, so I'm glad you brought that up. 11:11 7 One of the things we've been trying to 11:11 8 do with the website is to be responsive to what people 11:11 9 ask us to do with it. And one of the main areas of 11:11 10 questions we always get is, can't I just enter my 11:12 11 numbers and see if I won last night, or see if I have 11:12 12 ever won? And we've been testing that in-house and 11:12 13 it's working, and David is getting ready -- I'm sure 11:12 14 it's coming on the website tomorrow, a week or so? 11:12 15 MR. GLASGOW: The next few days. 11:12 16 MS. KALERGIS: In the next few days. 11:12 17 And that will be a tremendous enhancement. That's one 11:12 18 of the things that winners really like, people who 11:12 19 want to be winners, and our players really want to do. 11:12 20 You'll be able to enter your numbers and see if those 11:12 21 are the numbers that came up last night. So thank 11:12 22 you, Commissioner Whitaker, for bringing that up 11:12 23 because that is really very exciting news and the 11:12 24 latest development. 11:12 25 CHAIRMAN CLOWE: Very good. Karen, I 11:12 109 1 think we would like to ask you and Keith to work with 11:12 2 Nelda in regard to the coverage that you've achieved 11:12 3 by the television stations and incorporating that with 11:12 4 future legislative briefings. That was an issue of 11:12 5 great interest in this last session of the 11:12 6 legislature. And the improvement that has been 11:12 7 achieved, I think, is something that ought to be 11:13 8 reported through those briefings. 11:13 9 MS. KALERGIS: We'll be glad to do 11:13 10 that. 11:13 11 MS. CLOUD: And Commissioners, I would 11:13 12 just like to add one thing. I had a phone call last 11:13 13 week from the New Mexico lottery director. And they 11:13 14 had -- this scam is a national scam. And they had an 11:13 15 issue in their state just a week before, where a woman 11:13 16 had exactly 28,000 dollars in her bank account. And 11:13 17 these scam artists asked for 28,000 dollars for their 11:13 18 paying -- giving her their Lotto ticket. And he is 11:13 19 interested -- and, Mike, I hadn't passed this to you 11:13 20 yet. He thinks maybe there is someone within the 11:13 21 banks that could be working with these guys. So I 11:13 22 don't know if that's a possibility or not, but this is 11:13 23 happening all over the U.S., and they have been very 11:13 24 aggressive in New Mexico in arresting and watching for 11:13 25 the scam artists as well. 11:14 110 1 MS. KALERGIS: And one of the things 11:14 2 that we've done through Linda's leadership on NAFTM, 11:14 3 on the lottery association, is to make all of our 11:14 4 materials, the public service announcement, the troop 11:14 5 reports that we have, we've made those available to 11:14 6 the other lotteries in the country in case they want 11:14 7 to do a similar public awareness campaign. 11:14 8 CHAIRMAN CLOWE: Very good. 9 MS. KALERGIS: So once again, Texas is 11:14 10 leading the way. 11:14 11 CHAIRMAN CLOWE: Thank you. We'll go 11:14 12 now to item 11, consideration of and possible 11:14 13 discussion and/or action, including adoption, on new 11:14 14 Rule 16 TAC 401.104 relating to contract monitoring 11:14 15 roles and responsibility. 11:14 16 MS. KIPLIN: Commissioners, as you 11:14 17 recall, in a previous meeting you voted to publish 11:14 18 this new rule for public comment. And it was 11:14 19 published for public comment and there were no 11:14 20 comments that were received. The reason that the 11:14 21 Commission is moving forward to adopt this rule is to 11:14 22 comply with a provision in the Government Code, 11:14 23 Section 2261.202 of the Government Code, which 11:15 24 requires that agencies that make procurements under 11:15 25 that particular chapter to establish and adopt by rule 11:15 111 1 a policy that clearly defines the roles of the key 11:15 2 staff. And this rule is designed to accomplish that 11:15 3 statutory requirement. With that, the staff would 11:15 4 recommend that you vote to adopt this rule as 11:15 5 published and without changes from when it was 11:15 6 published in the June 14th, 2002 issue of the Texas 11:15 7 Register. 11:15 8 I will be happy to answer any questions 11:15 9 that you have. 11:15 10 CHAIRMAN CLOWE: There were no 11:15 11 comments? 11:15 12 MS. KIPLIN: There were no comments 11:15 13 received. 14 CHAIRMAN CLOWE: Is there a motion? 11:15 15 COMMISSIONER WHITAKER: So moved. 11:15 16 CHAIRMAN CLOWE: Is there a second? 11:15 17 COMMISSIONER COX: Second. 11:15 18 CHAIRMAN CLOWE: All in favor, please 11:15 19 say aye. Opposed, no. 11:15 20 The vote is three-zero in favor. We'll 11:15 21 sign the order. 11:15 22 Next is item number 12, consideration 11:15 23 of and possible discussion and/or action on State 11:15 24 Auditor's Office and/or Internal Audit reports 11:15 25 relating to the Texas Lottery Commission and/or the 11:15 112 1 Internal Audit Department's activities. 11:15 2 Debra McLeod. Good morning. 11:16 3 MS. McLEOD: Good morning, Mr. 11:16 4 Chairman. Good morning, Commissioners. 11:16 5 As you can tell by the status report, 11:16 6 we've been very, very involved in audits here at the 11:16 7 Lottery Commission. There is a follow-up audit to the 11:16 8 National Controls Bingo Division that was forwarded on 11:16 9 to Commissioners last week for your review. We have 11:16 10 some pending investigations that we're still working 11:16 11 with legal's direction. We have several audits. 11:16 12 Three State Auditor performance audits that we're 11:16 13 working on follow up. And another report should be 11:16 14 going to management this week on the follow-up audit 11:16 15 to telecom purchases. Two other audits are field 11:16 16 works complete and just pending exit conference. 11:16 17 From external audits, we also have two 11:16 18 audits. One is just completed. That's on the audit 11:16 19 of petty cash and travel advances. They are to 11:16 20 provide a written report to management the first week 11:16 21 in August, and management will provide a written 11:16 22 response back within two weeks. 11:17 23 The second audit the State auditors 11:17 24 will be starting August 19th, has to do with an audit 11:17 25 of financial profiles. Now, this audit is not only on 11:17 113 1 the Lottery Commission, they're doing it on several 11:17 2 State agencies. I have outlined in the work plan what 11:17 3 they had decided that they were going to look at. It 11:17 4 looks at a comparison between USAS and what has been 11:17 5 reported in our financial statements. The lottery is 11:17 6 one of few State agencies that has an independent CPA 11:17 7 firm that comes in and does our audited financials at 11:17 8 the end of the year. I feel that we would be sitting 11:17 9 very well with whatever issues that are presented with 11:17 10 the State auditors on this one. 11:17 11 Concurrently, we also have McConnell & 11:17 12 Jones, the external CPA firm, doing their annual 11:17 13 financial audit, and over at Gtech, looking at 11:18 14 computer controls is Ernst & Young. So there is a lot 11:18 15 of activity going on in this agency from an audit 11:18 16 perspective. 11:18 17 And I'll be happy to take any 11:18 18 questions. 11:18 19 CHAIRMAN CLOWE: Any questions? Thank 11:18 20 you, Debra. 11:18 21 We're now ready to go to item 13, 11:18 22 report, possible discussion and/or action on the 11:18 23 Sunset process involving the agency. Gary Grief. 11:18 24 Good morning, Gary. 11:18 25 MR. GRIEF: Good morning, 11:18 114 1 Commissioners. And for the record, my name is Gary 11:18 2 Grief and I'm director of lottery operation for the 11:18 3 Lottery Commission, and I'm also serving as the Sunset 11:18 4 project manager. 11:18 5 Before I start on my report, if the 11:18 6 chairman would allow me, I would like to clarify 11:18 7 something that was discussed earlier. I think the 11:18 8 chairman made reference to some recommendations made 11:18 9 by the Sunset Commission staff, and I wanted to 11:18 10 clarify that actually there have been no 11:18 11 recommendations made. I believe what the chairman was 11:18 12 referring to were some general discussions that we've 11:18 13 had with Sunset staff about some broad areas of 11:19 14 interest that they have been looking into. And they 11:19 15 have made it very plain to us that that list of areas 11:19 16 of interest is subject to change before the final 11:19 17 report is issued. 11:19 18 We are still continuing to get requests 11:19 19 from Sunset staff for various information regarding 11:19 20 our operations, and we're doing our very best to 11:19 21 respond to those requests and questions as quickly and 11:19 22 as accurately as we can. Senior agency management, as 11:19 23 well as our chairman, have met with Sunset staff in 11:19 24 the past two weeks to receive briefings as to where we 11:19 25 are in the process. I feel like these meetings have 11:19 115 1 gone well. And we anticipate receiving a draft report 11:19 2 from the Sunset staff approximately the first week of 11:19 3 August. Once we receive that draft report, we will 11:19 4 have approximately one week to respond with our 11:19 5 initial comments regarding only any factual errors or 11:19 6 inaccuracies. And we have already scheduled an exit 11:20 7 conference meeting with the senior agency staff and 11:20 8 Sunset Commission staff for August 12th. 11:20 9 The final Sunset report on our agency 11:20 10 will be released around August 23rd, and our official 11:20 11 written agency response must be filed with the Sunset 11:20 12 Commission by around September 13th. I will be 11:20 13 setting up a series of internal meetings to draft our 11:20 14 written response, and I'll use a similar process that 11:20 15 I used in developing the SER document. Once drafted, 11:20 16 I anticipate working through the executive director's 11:20 17 office to obtain commission input and approval of that 11:20 18 final written agency response. 11:20 19 The Sunset public testimony hearing for 11:20 20 our agency is scheduled for the week of September 11:20 21 23rd. And the chairman may wish to address how he 11:20 22 wants to Commissioners' attendance at that meeting. 11:20 23 The final hearing on our agency in 11:20 24 which Sunset Commission decisions will be handed down 11:21 25 will take place the week of November the 11th. And 11:21 116 1 that concludes my report this morning. I would -- I 11:21 2 will continue to keep the Commissioners and the 11:21 3 Executive Director informed as to further developments 11:21 4 in the project. Sunset team members are here in 11:21 5 attendance today. I'm sure they would be available 11:21 6 for questions, and I would also be happy to answer any 11:21 7 questions that you might have. 11:21 8 COMMISSIONER WHITAKER: I would just 11:21 9 like to ask the Sunset team members, is there anything 11:21 10 that you would like to bring to our attention, or are 11:21 11 you getting the information you need? Anything we can 11:21 12 do to facilitate your work? 11:21 13 MS. LATTA: We've been getting the 11:21 14 information we need. 11:21 15 COMMISSIONER WHITAKER: Okay. 11:21 16 MS. KIPLIN: Just for the record, I 11:21 17 believe that was Karen Latta with the Sunset 11:21 18 Commission. 11:21 19 CHAIRMAN CLOWE: She would like for the 11:21 20 chairman to stop talking about the -- 11:21 21 COMMISSIONER WHITAKER: Well, I wasn't 11:21 22 going to say it. 23 CHAIRMAN CLOWE: And I will, Karen. 11:21 24 In regard to Gary's comment about 11:21 25 attendance of the Commissioners at the hearings that 11:21 117 1 are coming up. We certainly hope that all three 11:22 2 Commissioners will be able to attend those sessions. 11:22 3 I think the Sunset Committee wants that and would 11:22 4 appreciate that. 11:22 5 And Kim, where are we on the legal 11:22 6 necessities in that regard? 11:22 7 MS. KIPLIN: Well, Commissioners, 11:22 8 insofar as the -- a quorum of the Lottery Commission 11:22 9 appearing at a properly-noticed Sunset Commission 11:22 10 meeting, you know, with their Commissioners that -- 11:22 11 you're fine. There was a bill that was filed and 11:22 12 adopted last session that was specific to legislative 11:22 13 committees and legislative committee meetings, and 11:22 14 that would eliminate the requirement of individual 11:22 15 agencies having a quorum to actually have to notice up 11:22 16 a meeting of that agency. 11:22 17 With regard to briefings of the staff, 11:22 18 the Sunset staff, that is -- that would be 11:22 19 problematic. That did not -- the bill did not cover 11:23 20 things outside the scope of a properly-noticed 11:23 21 legislative committee meeting or hearing. So if there 11:23 22 was a quorum that wanted to attend a briefing, then I 11:23 23 would have to notice that up for an open meeting. 11:23 24 CHAIRMAN CLOWE: Well, my suggestion 11:23 25 is, then, that we try to have full attendance at the 11:23 118 1 hearings. We're okay on that. In regard to 11:23 2 briefings, let's do that, coordinating through Gary 11:23 3 and try not to have two Commissioners in a quorum 11:23 4 there so we have to convene a meeting. I don't think 11:23 5 that's really what we want to have. But if a 11:23 6 commissioner wants to go and attend those briefings, 11:23 7 Gary, you'll coordinate that so we won't inadvertently 11:23 8 form a quorum. 11:23 9 MR. GRIEF: Yes, sir, I will. 11:23 10 CHAIRMAN CLOWE: And you've announced 11:23 11 now the next meeting as August the 12th, I think, 11:23 12 didn't you? 11:23 13 MR. GRIEF: Correct. I understand you 11:23 14 might be planning on attending. 11:23 15 CHAIRMAN CLOWE: I would, but only -- 11:24 16 I'll defer to any other commissioner who wants to 11:24 17 attend. So if nobody else is available or can't 11:24 18 attend, I'll plan on it. 11:24 19 COMMISSIONER WHITAKER: And what are 11:24 20 the dates of the hearings again? 11:24 21 MR. GRIEF: The first public testimony 11:24 22 hearing is scheduled for the week of September 23rd, 11:24 23 Commissioner Whitaker. I think my understanding is 11:24 24 there will be two days of hearings that week. As we 11:24 25 get closer to that, I'll be working with Karen Latta 11:24 119 1 to determine which day would be the best to put on 11:24 2 your schedule. 11:24 3 The final hearing, the decision-making 11:24 4 hearings will occur the week of November the 11th, and 11:24 5 I'll do the same. The same process for that. 11:24 6 CHAIRMAN CLOWE: Great. Thank you, 11:24 7 Gary. 11:24 8 The next item is number 14. Rob, this 11:24 9 is your item. Is this the report that I had read and 11:24 10 asked you to present to the Commissioners? 11:24 11 MR. KOHLER: Yes, sir, it is. 11:24 12 CHAIRMAN CLOWE: Would I have your 11:24 13 permission to pass this item this morning and pick it 11:24 14 up, hopefully, in our August meeting? 11:24 15 MR. KOHLER: You bet, sir. 11:24 16 CHAIRMAN CLOWE: We've had so many 11:25 17 public presentations and some of the commissioners 11:25 18 have some obligations later in the day. Your report, 11:25 19 I know, is not a time-sensitive issue. 11:25 20 MR. KOHLER: No, sir. That's correct. 21 CHAIRMAN CLOWE: And if that's all 11:25 22 right with you, I would like to do that. 11:25 23 MR. KOHLER: Yes, sir. 11:25 24 CHAIRMAN CLOWE: Thank you very much. 11:25 25 We'll then go to item 15, 11:25 120 1 consideration, possible discussion and/or action on 11:25 2 the agency's fiscal year 2004-2005 legislative 11:25 3 appropriation request. Bart Sanchez. 11:25 4 MS. CLOUD: Commissioners, we -- I'm 11:25 5 sorry, Bart. I didn't mean to interrupt you. Go 11:25 6 ahead. 11:25 7 MR. SANCHEZ: Well, you certainly can 11:25 8 pass on mine, also. 11:25 9 MS. CLOUD: We had anticipated that we 11:25 10 would have the LAR ready for this meeting, and we're 11:25 11 not quite ready. So we still have briefings with each 11:25 12 commissioner, so we would defer this to the next 11:25 13 commission meeting. But Bart may have some -- 11:25 14 MR. SANCHEZ: That's all I was going to 11:25 15 say, that the status of the legislative appropriations 11:25 16 request -- we had already scheduled a meeting last 11:25 17 Friday with Commissioner Whitaker. We're scheduling 11:25 18 another briefing meeting with -- the first meeting 11:26 19 with Commissioner Cox this Friday, and yourself on 11:26 20 Monday the 29th. 11:26 21 CHAIRMAN CLOWE: I think that's 11:26 22 excellent. And I think, then, we'll put that on the 11:26 23 next meeting's agenda and we'll be ready to brief. 11:26 24 MR. SANCHEZ: Okay. 25 CHAIRMAN CLOWE: Thank you, Bart. 121 1 With the Commissioners' permission, I 11:26 2 would like to continue the public docket and not go 11:26 3 into executive session and complete these public items 11:26 4 while everyone is assembled in this room before we go 11:26 5 into executive session. If there is no objection to 11:26 6 that, we'll then go to item 18, consideration of the 11:26 7 status and possible entry of orders. 11:26 8 Kim, will you help us with this, 11:26 9 please. 11:26 10 MS. KIPLIN: Yes, I'll be happy to. 11 Commissioners, you have several cases 11:26 12 that are before you today. These are the contested 11:26 13 case proceedings to which Mr. Helmcamp previously 11:26 14 referred that would come to you. Generally, 11:26 15 Commissioner Cox, we have contested cases noticed up 11:26 16 for every single commission meeting. It is my 11:26 17 understanding that on the first docket, docket number 11:27 18 362-02-2044.B, St. Helen's Catholic Church, the 11:27 19 respondent is represented here by a person who wishes 11:27 20 to address the commission. 11:27 21 Commissioners, as you know, your 11:27 22 practice has been to allow people to come before you 11:27 23 and to address the commission. I would -- I would 11:27 24 say, once again, and repeat the note of caution and 11:27 25 that is that this was an evidentiary proceeding, 11:27 122 1 evidence was developed, and an administrative law 11:27 2 judge has reviewed the evidence and has made their 11:27 3 determination, findings of facts, and conclusions of 11:27 4 law. It is my understanding the staff did file 11:27 5 exceptions, and there was a correspondence back from 11:27 6 the administrative law judge indicating no objection 11:27 7 to the modified finding in fact. No replies were 11:27 8 filed by the respondent, and it is ripe for your 11:27 9 consideration today for action. The recommendation, 11:28 10 as I understand it, from the administrative law judge 11:28 11 is to deny the renewal application license. 11:28 12 I would caution the parties that come 11:28 13 before you today, if that is the desire of the 11:28 14 Commission, to refrain from making any remarks that 11:28 15 are evidence or facts that are outside the record. 11:28 16 That would not be appropriate for your consideration 11:28 17 because it is -- that would be information that is 11:28 18 outside the record. 11:28 19 The subject of the -- the contested 11:28 20 case proceeding was a failure to timely file a renewal 11:28 21 application, as I understand it, for a commercial 11:28 22 lessor's license. No, pardon me. Pardon me. A 11:28 23 license, and my recall may not be that great, but it's 11:28 24 a bingo license, and the administrative law judge did 11:28 25 find that that license was not timely -- license 11:28 123 1 renewal application was not timely filed. There is no 11:28 2 grace period in the Bingo Enabling Act. There is no 11:29 3 way that the Commission is able to impose, for equity 11:29 4 reasons, a grace period and be able to go back in time 11:29 5 for this particular respondent. 11:29 6 MR. ATKINS: Ms. Kiplin, for the 11:29 7 record, this is a lessor's license. 11:29 8 MS. KIPLIN: I thought it was, but my 11:29 9 recall is not that good. 11:29 10 CHAIRMAN CLOWE: Is Ms. Schultz the 11:29 11 staff attorney? 11:29 12 MS. KIPLIN: Yes, sir, she is. 11:29 13 CHAIRMAN CLOWE: Would you come up, 14 please, Ms. Schultz, and Mr. Bill Davis, will you come 11:29 15 up. 11:29 16 Mr. Davis, we're happy to have you here 11:29 17 this morning and we'll be happy to hear from you. And 11:29 18 I just want to ask you, do you understand the need, in 11:29 19 your remarks, to stay within the record that's been 11:29 20 made about this case so the Commission can consider 11:29 21 your remarks? 11:29 22 MR. DAVIS: Yes, sir. 11:29 23 CHAIRMAN CLOWE: Very good. We would 11:29 24 like to hear from you first, then, if you would 11:29 25 address us, please, sir. 11:29 124 1 MR. DAVIS: First -- 11:29 2 CHAIRMAN CLOWE: Would you state your 11:29 3 name and -- 4 MR. DAVIS: First of all, I'm Bill 11:29 5 Davis. I represent St. Helen's Catholic Church. I'm 11:30 6 the business administrative and have been the business 11:30 7 administrator there since mid September of last year. 11:30 8 We do not dispute the fact that we did 11:30 9 not timely file our application. We -- all we are 11:30 10 asking for is some consideration from the Commission 11:30 11 on filing an administrative -- assessing an 11:30 12 administrative fine. Such as Sarah talked about, if 11:30 13 during your ethics procedure, filing financial 11:30 14 statements, if you're tardy in filing those, you are 11:30 15 assessed a hundred dollar fine. We are saying that, 11:30 16 yes, we made a mistake. We've been -- the Honorable 11:30 17 Michael Northland made a mistake on his finding of 11:30 18 fact on number two. Do y'all have these pieces of 11:31 19 paper? 11:31 20 CHAIRMAN CLOWE: Yes, we do. 11:31 21 MR. DAVIS: On number two, let's see, 11:31 22 by a letter dated January 30th of 2001. That letter 11:31 23 was dated 2002. And on number nine on finding of 11:31 24 fact, applicant's renewal application was received by 11:31 25 the Commission on October 19th of 2002. And we know 11:31 125 1 that's an error because that has not happened yet. 11:31 2 So all St. Helen's is asking for is, 11:31 3 we, like other people, have made a mistake, and we're 11:31 4 asking that the Commission, if it's within their 11:31 5 power, to assess an administrative fine and renew and 11:31 6 reinstate our bingo license. 11:31 7 CHAIRMAN CLOWE: Any questions? 11:31 8 COMMISSIONER WHITAKER: I would like to 11:31 9 hear the response. 11:31 10 CHAIRMAN CLOWE: Certainly. 11:31 11 Ms. Schultz, would you give us your comments? 11:31 12 MS. SCHULTZ: Thank you, Commissioners. 11:32 13 I'm Kaye Schultz, Assistant General Counsel. 11:32 14 The unfortunate thing about this 11:32 15 situation is, it was an untimely filing. There isn't 11:32 16 much latitude under the statute, the Bingo Enabling 11:32 17 Act. A bingo license is valid for one year from the 11:32 18 date its issued. As the evidence in this case showed, 11:32 19 the licensee in this case -- and Ms. Kim Kiplin was 11:32 20 right. I tried to correct her and I shouldn't have 11:32 21 because this is a commercial lessor license. 11:32 22 Licensees are notified some 40 days in 11:32 23 advance by the fact that they're sent a renewal 11:32 24 application telling them when their license renewal is 11:32 25 due. In this particular situation, this license had 11:32 126 1 been on what's called administrative hold. In other 11:32 2 words, the lessor had not been using the license. And 11:32 3 the evidence showed that about a year prior to this 11:33 4 hearing, the lessor had requested that the license be 11:33 5 canceled or was going to surrender its license. 11:33 6 However, the staff member who testified at the 11:33 7 hearing, testified that she had pointed out to them 11:33 8 that this is what is called a grandfathered lessor 11:33 9 license, which are not issued any more but are more 11:33 10 valuable or considered transferrable and are valuable 11:33 11 in that they can have more conductors under them than 11:33 12 the current type of lessor license. 11:33 13 As the evidence showed, the 11:33 14 organization then decided, instead of surrendering the 11:33 15 license, to place it on administrative hold. They 11:33 16 were notified then that they would have to renew the 11:33 17 license, even though it was on hold by letter, and 11:33 18 they were notified again approximately 40 days before 11:33 19 the expiration date that they were due to file a 11:33 20 renewal application. Unfortunately, that was due to 11:34 21 either be postmarked under our regulations or -- 11:34 22 COMMISSIONER WHITAKER: Kaye, could you 11:34 23 address his issue, which is the administrative fine? 11:34 24 I mean, he is saying he's late and he's not really 11:34 25 contesting that. I don't see in here anything 11:34 127 1 mentioned about fine in dollars. Where is the 11:34 2 dollars? 11:34 3 MS. SCHULTZ: There is a provision 11:34 4 under the Bingo Enabling Act for administrative 11:34 5 penalties, but I don't think that would have been 11:34 6 appropriate in this case. It's you either have a 11:34 7 license you or you don't. 11:34 8 COMMISSIONER WHITAKER: So what is the 11:34 9 contest here? I mean, if you're saying you don't want 11:34 10 to pay dollars, you're saying, no dollars are going to 11:34 11 be imposed, then aren't we in agreement? 11:34 12 MS. KIPLIN: No. Can I interject? 11:34 13 Here is the problem. This is not a matter that was 11:34 14 taken over for misconduct, where there would be a 11:34 15 range of penalties that you could impose for a range 11:34 16 of conduct. This is a situation where these are 11:34 17 annual licenses and they expire if they're not renewed 11:34 18 timely. This entity did not renewal timely, so that 11:35 19 license has expired. There is nothing to renew. This 11:35 20 entity is not precluded from applying for another 11:35 21 commercial lessor's license. 11:35 22 COMMISSIONER WHITAKER: And he's not 11:35 23 disagreeing with that, but he's talking about money. 11:35 24 So where is the money? 11:35 25 MS. KIPLIN: Well, there is no money. 11:35 128 1 This is not the kind of proceeding where -- where 11:35 2 imposing a 100-dollar penalty would allow for the 11:35 3 grandfathered commercial lessor's license to continue. 11:35 4 The grandfathered lessor's license was not renewed 11:35 5 timely; therefore, it has expired. 11:35 6 COMMISSIONER WHITAKER: I still don't 11:35 7 understand what the issue is that we're trying to -- 11:35 8 MS. KIPLIN: The issue is that the 11:35 9 entity wants to continue to retain the grandfathered 11:35 10 lessor's license, which doesn't exist. It was not 11:35 11 renewed timely; therefore, it expired. And there is 11:35 12 an AG opinion, frankly, that's on point that says 11:35 13 there is no grace period that can be allowed. 11:35 14 COMMISSIONER WHITAKER: Okay. I must 11:35 15 not have been listening, but I understood you to be 11:35 16 saying that you are understanding that it was late; 11:36 17 that the issue is not whether you have a license or 11:36 18 going to get a license; it's that you don't want to 11:36 19 pay a penalty. Is that a correct statement of the 11:36 20 issues? 21 No, I haven't been listening, then. 11:36 22 MR. DAVIS: No, ma'am. 11:36 23 COMMISSIONER WHITAKER: All right. 11:36 24 What are the issues again? 11:36 25 MR. DAVIS: I understand it's late, and 11:36 129 1 I'm saying that like other Texas agencies, there 11:36 2 should be a -- and there may be -- this is a 11:36 3 legislative type thing that I need to issue. But I 11:36 4 would be willing to pay a fine to get it reinstated. 11:36 5 Right now, the fact that I missed the filing date is a 11:36 6 matter of record. I mean, it's obvious. I admit to 11:36 7 it. On or about November 21st, Alice Banks called me 11:36 8 and asked me if I knew I missed it. And I said, yes, 11:36 9 ma'am. I'm sorry. And I -- and she says, do you 11:36 10 realize how important it is. 11:37 11 COMMISSIONER WHITAKER: Do you mind if 11:37 12 I interrupt you? 11:37 13 MR. DAVIS: Sure. 11:37 14 COMMISSIONER WHITAKER: Ms. Schultz, 11:37 15 are you saying we have no discretion? He is saying he 11:37 16 wants us to waive something. I understand you to say 11:37 17 we don't have the right to do that. 11:37 18 MS. SCHULTZ: Yes. That's correct. 11:37 19 And we have an Attorney General's opinion that says 11:37 20 once your license is expired, you cannot -- there is 11:37 21 no grace period. 11:37 22 COMMISSIONER WHITAKER: You disagree 11:37 23 with that law. How? What is your legal argument as 11:37 24 to how we have discretion? 11:37 25 MR. DAVIS: Well, I'm hoping that the 11:37 130 1 Commission has the discretion to assess an 11:37 2 administrative fine in the place of that. 11:37 3 COMMISSIONER WHITAKER: But you have no 11:37 4 legal authority to rely on? 11:37 5 MR. DAVIS: No, ma'am. 11:37 6 MS. SCHULTZ: If I may, Commissioner, 11:37 7 the recourse would be -- and it isn't really a 11:37 8 recourse, but the position of the staff would be that 11:37 9 this license did not exist. There was a late filing, 11:37 10 and so there was no license. If this order is signed, 11:37 11 unfortunately, the organization loses a grandfathered 11:38 12 license. The organization will be eligible, after it 11:38 13 sits out a one-year period, to reapply for an original 11:38 14 lessor license that will not have the grandfathered 11:38 15 provision in it. 11:38 16 COMMISSIONER WHITAKER: I understand. 11:38 17 What do we do at this point in time? If we have no 11:38 18 legal discretion, then I move -- 11:38 19 CHAIRMAN CLOWE: A motion is in order. 11:38 20 Could I ask if we could hear from Mr. Atkins before a 11:38 21 motion is made? 11:38 22 Do you have anything, Billy, on the 11:38 23 record as it exists now to add what to what has been 11:38 24 said? 11:38 25 MR. ATKINS: I don't. The only thing I 11:38 131 1 was going to do, Commissioners, was draw your 11:38 2 attention to the administrative law judge's, in his 11:38 3 analysis and recommendation, on page two, the last 11:38 4 sentence of the second paragraph from the bottom. The 11:38 5 law may seem harsh, but it's quite clear. 11:39 6 CHAIRMAN CLOWE: Okay. 11:39 7 COMMISSIONER WHITAKER: I would move 11:39 8 that we -- what is the motion? 11:39 9 MS. KIPLIN: Well, you would -- at this 11:39 10 point, you would move to adopt the findings of fact 11:39 11 and conclusions of law, but as modified. And you 11:39 12 should have received as part of the exceptions, I 11:39 13 think, a proposed order that modifies finding of fact 11:39 14 number eight. Because it did not include the 11:39 15 contemplation that you could hit the mark in terms of 11:39 16 timely renewals if it's postmark by the particular 11:39 17 date. 11:39 18 And I also appreciate the respondent's 11:39 19 representative pointing out the issue with finding of 11:39 20 fact number nine, and that will need to also be 11:39 21 corrected. So right now, during the break, I would 11:39 22 like for Ms. Schultz and Mr. Davis -- is that correct? 11:39 23 MR. DAVIS: Correct. 24 MS. KIPLIN: To be able to work out the 11:39 25 finding of fact number nine, and what I would like to 11:39 132 1 read into the record, if it's acceptable to the 11:39 2 parties, is finding of fact number nine, referring to 11:39 3 October 19th, 2002, is incorrect. Finding of fact 11:40 4 number nine is amended to read as follows: Quote, 11:40 5 number nine, the applicant's renewal application was 11:40 6 received by the Commission on October 19th, 2001. 11:40 7 And then finding of fact number ten is 11:40 8 adopted. 11:40 9 And those are -- that would be the only 11:40 10 change that I would think, in light of the information 11:40 11 that has come out just now, should be altered from the 11:40 12 draft proposed order you received from the staff as 11:40 13 part of the exceptions the staff filed in connection 11:40 14 with this process. 11:40 15 COMMISSIONER WHITAKER: Ms. Kiplin, 11:40 16 under proposed findings of fact number two, as 11:40 17 written, that is correct? 11:40 18 MR. DAVIS: That's correct. 11:40 19 COMMISSIONER WHITAKER: Well, then I 11:40 20 will move to adopt the proposal for decision of the 11:40 21 administrative law judge as amended. 11:40 22 CHAIRMAN CLOWE: I'll second. 11:40 23 All in favor, please say aye. Opposed, 11:40 24 no. The vote is three-zero in favor. 11:40 25 Do you want to change the order? 11:40 133 1 MS. KIPLIN: We will. We will get that 11:40 2 done and it will be available for you to sign after 11:41 3 the executive session, if that's acceptable to the 11:41 4 Commission. 11:41 5 CHAIRMAN CLOWE: That's fine. Let's 11:41 6 move on now to the other cases. 11:41 7 COMMISSIONER WHITAKER: Mr. Davis, I do 11:41 8 appreciate you coming in. 11:41 9 MS. KIPLIN: Commissioners, what you 11:41 10 have left is one other bingo case, and then the others 11:41 11 are remaining lottery cases. The Ahavath Shalom 11:41 12 Ladies Auxiliary, that is a recommendation by the 11:41 13 administrative law judge to revoke the license to 11:41 14 conduct bingo, and it's based for failure to comply 11:41 15 with bingo rules in attending bingo operator training 11:41 16 as required by the rule and also by the statute. 11:41 17 The other remaining cases, contested 11:41 18 case proceedings, are lottery cases. They are all 11:41 19 recommendations by the administrative law judge to 11:41 20 revoke the license based on insufficient funds at the 11:41 21 time that the lottery swept the retailer's account for 11:41 22 monies due the lottery. 11:42 23 One matter, Bedford Food Mart Number 1, 11:42 24 is an NSF due to an affiliate. That store is owned -- 11:42 25 it's got a common ownership and a generally common 11:42 134 1 account. And so the order will go against all -- all 11:42 2 locations that are held by that same owner and 11:42 3 account. 11:42 4 With that, the staff does recommend 11:42 5 that you do make a motion and a second and vote to 11:42 6 adopt the administrative law judge's recommendations, 11:42 7 findings of fact and conclusions of law and proposed 11:42 8 orders in all of the cases that I have just mentioned. 11:42 9 COMMISSIONER WHITAKER: So moved. 11:42 10 CHAIRMAN CLOWE: That would include 11:42 11 items, letter B through letter S. 11:42 12 MS. KIPLIN: Yes, sir, it would. 11:42 13 COMMISSIONER COX: Second. 11:42 14 CHAIRMAN CLOWE: All in favor, please 11:42 15 say aye. Opposed, no. 11:42 16 The vote is three-zero in favor. 11:42 17 We're now ready to move to item 19, 11:42 18 report by the Executive Director and/or possible 11:43 19 discussion and/or action on the agency's financial and 11:43 20 operational status, legislative briefings, HUB and/or 11:43 21 minority status, FTE status, and retailer forums. 11:43 22 Ms. Cloud. 11:43 23 MS. CLOUD: Excuse me. Yes, 11:43 24 Commissioners. I'm real proud to report that in July, 11:43 25 on the 15th of July we transferred to the State 11:43 135 1 treasury 84,612,854 dollars. That gives a total 11:43 2 transfer to the State for -- bringing us up to date of 11:43 3 8,865,399,021. 11:43 4 The item under legislative briefings is 11:43 5 just the past agenda items that we had in our last 11:43 6 session. I would like Robert Hall to come up and give 11:43 7 you his minority report. 11:44 8 MR. HALL: Good morning again, 11:44 9 Commissioners. My name is Robert Hall, director of 11:44 10 minority service, for the record. 11:44 11 Just keeping you up to date on the 11:44 12 status of our HUB, and also a minority participation 11:44 13 report. 11:44 14 We're right at 11.43 percent, I think 11:44 15 it is. Yes. 11.43 percent, where we've spent over 11:44 16 132 million dollars and approximately 15 -- over 15 11:44 17 million dollars was been spent right now with HUB 11:44 18 vendors. So we're on a pace right now to exceed what 11:44 19 we did last year in terms of total utilization. 11:44 20 And, Mr. Chairman, I'll be happy to 11:44 21 answer any questions that you may have. 11:44 22 COMMISSIONER WHITAKER: Where are you 11:44 23 seeing the big changes, Robert, and the big trends? 11:44 24 MR. HALL: We are constantly continuing 11:45 25 our effort we have had in direct spending. The King 11:45 136 1 Group is a major player, being that they have a direct 11:45 2 contract with us. And also, the subcontracting, and 11:45 3 our subcontracting has increased from last year at 11:45 4 this time. We have seen Gtech, one of the major 11:45 5 vendors, as well as Scientific Games recently, since 11:45 6 the first of the year, have been reporting additional 11:45 7 expenditures for us. One of the major reports for 11:45 8 Scientific Games is, they are using a paper vendor who 11:45 9 is a HUB vendor, who is being paid approximately about 11:45 10 40,000 dollars per month now. And that is a 11:45 11 tremendous expense for us. 11:45 12 In addition to that, Gtech is reporting 11:45 13 additional expenditures as part of conversion phase, 11:45 14 and we are receiving additional HUB participation in 11:45 15 those areas, particularly in the warehouse transition. 11:45 16 So those are some of the major majors that we're 11:45 17 seeing. We also have a HUB vendor that is performing 11:46 18 our financial integrated system, which is about a 11:46 19 700,000-dollar contract. And so we're continuing to 11:46 20 do our part to identify additional HUB vendors that 11:46 21 can be include, and contract opportunities where our 11:46 22 prime vendor is going to be looking for those. And 11:46 23 then, also, we are trying to assist vendors that are 11:46 24 not currently certified in becoming certified to 11:46 25 increase our numbers. I'm sorry. 11:46 137 1 COMMISSIONER WHITAKER: Go ahead. 11:46 2 MR. HALL: One additional thing to 11:46 3 share with you. We currently have a PC tech contract 11:46 4 through DIR, and we just recently learned that the 11:46 5 Department of Information Resources reports that 11:46 6 information to the Comptroller. And when they do 11:46 7 that, they actually identify HUB vendors that are 11:46 8 being used as part of that contract. And we're 11:46 9 receiving credit of that. We just received a recent 11:46 10 report, which I shared with Linda this past week, of 11:46 11 about 136,000 dollars that was unaccounted for at one 11:46 12 point is being accounted now, and we're tracking that 11:46 13 more extensively. So that is another contributing 11:47 14 factor to our utilization. 11:47 15 COMMISSIONER WHITAKER: Do we have any 11:47 16 way of going back -- and this is addressed to all of 11:47 17 you -- and looking at contracts where there is zero 11:47 18 contracting -- you know, zero HUB contracting and try 11:47 19 to analyze why it was zero? 11:47 20 Ms. Kiplin? Hello. And Billy, you 11:47 21 too. Is there any way we can -- we see all these 11:47 22 contracts of significant amounts where there is zero 11:47 23 numbers. Zero, zero, zero. Is there any way we can 11:47 24 go back after the fact and like gain knowledge from 11:47 25 that so that next time we don't have zeros? 11:47 138 1 MS. CLOUD: Commissioner, Robert is 11:47 2 doing -- has got an -- a new program that he has been 11:47 3 working with to help him track all purchases now that 11:47 4 being made and any HUB spending that comes out of 11:47 5 that. And he is going back, as part of his duties, 11:47 6 and trying to work with these vendors -- if I'm right, 11:48 7 Robert. You correct me if I'm wrong -- with these 11:48 8 vendors to try to find out why those numbers are zero. 11:48 9 COMMISSIONER WHITAKER: And almost like 11:48 10 raise their consciousness as to what they might have 11:48 11 done to change it, you know. 11:48 12 MS. KIPLIN: And I guess what I would 11:48 13 say is, remember that these are good faith efforts to 11:48 14 utilize minority-owned businesses and to spend money, 11:48 15 obviously, with minority-owned businesses. And so I 11:48 16 think the inquiry would be, what kind of good faith 11:48 17 efforts have you made over the last year that 11:48 18 regrettably resulted in zero dollars spent. And I'm 11:48 19 sure that Mr. Hall is working towards -- 11:48 20 MR. HALL: Well, to add to that. Linda 11:48 21 and Kim are both right. It is a good faith goal that 11:48 22 we're trying to have our vendor participate with. One 11:48 23 of the main things that we have tried to do is treat 11:48 24 it just like a checkbook. Linda was on the right path 11:49 25 of saying, we are tracking every purchase that comes 11:49 139 1 through our purchasing department and every contract, 11:49 2 we're hosting conference. There have been some 11:49 3 success stories. A good example is M&S Works where 11:49 4 they identified some subcontracting that was -- had no 11:49 5 HUB or minority participation included. After the 11:49 6 fact, after meeting with them after the contract was 11:49 7 awarded, they have since made a good faith effort to 11:49 8 include HUB participation. And even where they 11:49 9 identified a nominal dollar amount, they have far 11:49 10 exceeded that amount. So we work with the vendors. 11:49 11 We're constantly trying to identify new areas where 11:49 12 HUB vendors can participate and then try to set up 11:49 13 meetings with those vendors to talk with us and 11:49 14 contract with the vendor, how we can improve or have 11:49 15 levels of participation where there is none now. 11:49 16 COMMISSIONER WHITAKER: Thanks. 11:49 17 CHAIRMAN CLOWE: Thank you, Robert. 11:49 18 MS. CLOUD: Okay. Also, Commissioners, 11:49 19 because of -- we are winding down on our human 11:49 20 resource issue with our RIF, I've asked Jim Richardson 11:50 21 to come up and give you a final report on the outcome 11:50 22 of that. And we're very proud of these numbers. 11:50 23 MR. RICHARDSON: Good morning, 11:50 24 Commissioners. For the record, my name is Jim 11:50 25 Richardson and I'm the human resources director. 11:50 140 1 I have submitted to you an updated 11:50 2 version the last page of the FTE report, but the 11:50 3 bottom line is basically this: I'm very proud to 11:50 4 report to you today, Commissioners, that through a 11:50 5 phenomenal team effort, the lottery and bingo division 11:50 6 directors, managers, supervisors and staff, who 11:50 7 struggled swiftly through the recruiting, screening, 11:50 8 interviewing, and conducting of background 11:50 9 investigations, and also those employees who were 11:50 10 affected by the RIF, who have shown their courage and 11:50 11 professionalism to allow the restructuring process to 11:50 12 work, by July 31st, 2002, the TLC will have offered 11:50 13 jobs to and retained all RIF-affected employees who 11:51 14 chose to remain employed at the TLC. 11:51 15 MS. CLOUD: And what is interesting is 11:51 16 some of these people, even though the restructuring 11:51 17 was taking place and they may be going into different 11:51 18 areas, have -- some of them had as many as two to 11:51 19 three job offers. They had a choice. 11:51 20 MR. RICHARDSON: We have still one 11:51 21 pending with three offers. We had several people who 11:51 22 had two choices or three choices. Yes. 11:51 23 CHAIRMAN CLOWE: And you've had two 11:51 24 people who have declined to remain employed with the 11:51 25 Commission? 11:51 141 1 MR. RICHARDSON: Two positions were 11:51 2 declined. One of those persons -- but they accepted 11:51 3 positions in other divisions, but they did decline 11:51 4 positions in the divisions that they were in. 11:51 5 MS. CLOUD: You only had one person, 11:51 6 didn't you, Jim, that's decided not to retain 11:51 7 employment? 11:51 8 MR. RICHARDSON: So far only one has 11:51 9 decided that they're going to stay home and be a 11:51 10 parent. 11:52 11 CHAIRMAN CLOWE: So one of the two 11:52 12 declinees would be in the 33 filled? 11:52 13 MR. RICHARDSON: Those that have 11:52 14 declined accepted positions in other divisions, so 11:52 15 those people are still employed with the agency. 11:52 16 CHAIRMAN CLOWE: So you had one person, 11:52 17 then, leaving the agency? 11:52 18 MR. RICHARDSON: They weren't in the 11:52 19 decline status because they were not offered a job or 11:52 20 they did not apply for a position at all, so they did 11:52 21 not decline. 11:52 22 CHAIRMAN CLOWE: So you had just one 11:52 23 person leaving the agency? 11:52 24 MR. RICHARDSON: Yes, sir. 11:52 25 CHAIRMAN CLOWE: What was the impact of 11:52 142 1 this on the financial cost to the agency? 11:52 2 MS. CLOUD: I don't think there is much 11:52 3 change in the actual -- I know there is -- there have 11:52 4 been some promotions out of this which will have a 11:52 5 little bit of an increase in salary ranges on two or 11:52 6 three, four individuals, maybe, out of the whole 11:52 7 group. But basically it's the same -- pretty much the 11:52 8 same payroll expenditure that we were experiencing 11:52 9 before we went into the RIF. Although, because of the 11:53 10 RIF, there will be some positions open that we may 11:53 11 take and put in other areas where they're needed. 11:53 12 CHAIRMAN CLOWE: My recollection when 11:53 13 the questions were asked about this was that this was 11:53 14 a multi-purpose effort. One was to get proper job 11:53 15 classifications and get the organization chart 11:53 16 correctly structured. It was to put people in jobs 11:53 17 that were properly qualified for those jobs and to get 11:53 18 the correct job descriptions for positions that were 11:53 19 in the new organization. And then the fourth item was 11:53 20 to do with compensation and put that more in line with 11:53 21 those individuals, in their new jobs, performing what 11:53 22 was going to be their task in the new organization. 11:53 23 MR. RICHARDSON: This was -- the 11:54 24 project you're referring to is another project that 11:54 25 we're working on, a classification study that we were 11:54 143 1 doing. This project was the result of the 11:54 2 recommendations from The Moss Group. 11:54 3 CHAIRMAN CLOWE: Okay. That's the way 11:54 4 I remembered it. Is that incorrect? 11:54 5 MR. RICHARDSON: This was as a result 11:54 6 of the recommendations from The Moss Group and the 11:54 7 Council on Competitive Governments, and then the 11:54 8 executive director's guidance on seeing how we can 11:54 9 make the agency run more efficiently. 11:54 10 CHAIRMAN CLOWE: That's what I thought 11:54 11 we told members of the legislature when we were 11:54 12 questioned about this RIF was going to be outcome. 11:54 13 MS. CLOUD: Actually, what The Moss -- 11:54 14 and I think we pretty well stood on the grounds of the 11:54 15 recommendations made by The Moss Group, which was, we 11:54 16 had individuals in areas that The Moss Group felt like 11:54 17 needed to be in a -- positions in an area that needed 11:54 18 to be in a totally different environment, such as 11:54 19 customer service and marketing should have been in 11:55 20 communications so that one single message was going 11:55 21 out of the building. 11:55 22 CHAIRMAN CLOWE: That comes under my 11:55 23 thinking of reorganization. 11:55 24 MS. CLOUD: And that is. That's 11:55 25 basically what we've done. 11:55 144 1 CHAIRMAN CLOWE: And there was some -- 11:55 2 there were some employees who were not classified 11:55 3 properly under the old organization that had to be 11:55 4 reclassified in the new organization. 11:55 5 MS. CLOUD: The classification had -- 11:55 6 was not involved in this particular RIF project. It 11:55 7 was strictly how many individuals needed to be within 11:55 8 a certain group, based on study that -- the positions 11:55 9 that The Moss Group provided us on time studies and 11:55 10 positions we needed in areas, we didn't have them. 11:55 11 But we didn't have the FTE count to put -- take them 11:55 12 and put in those positions, such as financial and IT. 11:55 13 So this is going to allow us to make some of those 11:55 14 changes that was in that Moss study, but in doing so, 11:56 15 the people that were affected by the RIF, they're all 11:56 16 going to have jobs, and some of them will actually 11:56 17 change jobs by their own choice. 11:56 18 CHAIRMAN CLOWE: You haven't helped me. 11:56 19 MR. RICHARDSON: Okay. I think what -- 11:56 20 CHAIRMAN CLOWE: Just a minute. We 11:56 21 went over and met with members of the legislature. 11:56 22 The RIF was discussed. It was the result of the Moss 11:56 23 recommendations. My recollection is that we told them 11:56 24 it was a new organization, it was more correct job 11:56 25 descriptions, and it was correct pay scales for people 11:56 145 1 moving into the new jobs in the new organization. 11:56 2 MS. CLOUD: The job descriptions and 11:56 3 the pay scales, Commissioner, I don't remember that 11:56 4 part -- that we brought that up, because that was not 11:56 5 part of the Moss study. The -- I think Jim must be 11:56 6 working on another project that you've gotten 11:56 7 confused. 11:57 8 MR. RICHARDSON: I would not disagree 11:57 9 with the statement that you're making. Part of the 11:57 10 process in deciding how we were going to do the 11:57 11 restructuring was to look at people's current 11:57 12 positions that they're in and see if that matched with 11:57 13 the duties that we needed, say, in the communications 11:57 14 division or in lottery operations division. Part of 11:57 15 that process, then, was to see if we needed a new 11:57 16 classification at a higher level, then do we need to 11:57 17 look at their pay scales as well. So there was a 11:57 18 classification review, if you will, within the 11:57 19 restructuring, but it was not -- the sole purpose of 11:57 20 this was not to look at classification. And that -- 11:57 21 CHAIRMAN CLOWE: I understand that that 11:57 22 was one of the elements, the way I believed I was told 11:57 23 it was going to function. 11:57 24 MR. RICHARDSON: I think we're both 11:57 25 thinking the same thing. 11:57 146 1 CHAIRMAN CLOWE: Well, to me, it was a 11:57 2 beneficial activity, and I spoke to members of the 11:57 3 legislature saying, it was a better organization, it 11:57 4 was better job descriptions, and it was the correct 11:58 5 pay for the jobs that people were doing in the new 11:58 6 organization. And I am coming back now to ask, have 11:58 7 we accomplished that? Have we done what I thought we 11:58 8 told members of the legislature we were going to do? 11:58 9 MS. CLOUD: And, Commissioners, we have 11:58 10 done that indirectly, but that was not -- we've done 11:58 11 it indirectly because people going into a new job got 11:58 12 a new job description, and the classification was 11:58 13 looked at at the time of the position, so all that has 11:58 14 happened. And that is correct. I just don't 11:58 15 remember -- and I've asked Nelda and she didn't 11:58 16 remember, in the meeting that she was involved in, 11:58 17 that we brought the classification into this. But it 11:58 18 had to happen because the job descriptions had to be 11:58 19 accurate, the classification had to be right, the pay 11:58 20 ranges had to be according to the classification act, 11:58 21 and it was the position itself that the employees have 11:58 22 applied for and gone into. So all that has -- that 11:59 23 has happened, and it has made it -- it is going to 11:59 24 make for a better organization. Actually, we won't 11:59 25 realize the benefit, in some cases, until the first of 11:59 147 1 August when all the changes take place. 11:59 2 CHAIRMAN CLOWE: Well, there wasn't an 11:59 3 time limit on it. It was an ultimate result, and I 11:59 4 think -- you know, I'm very sensitive about 11:59 5 representations that we make to members of the 11:59 6 legislature, and I just wanted to go back and say -- 11:59 7 be able to say, we've done what we said we were going 11:59 8 to do, the way I remember it. And Nelda wasn't in the 11:59 9 meeting that I'm thinking about. It was you and Billy 11:59 10 and me. 11:59 11 MS. CLOUD: Well, and I'm not saying it 11:59 12 didn't happen. I'm just not recalling the 11:59 13 classification being part of the discussion. But it 11:59 14 did happen that way in the process. 11:59 15 CHAIRMAN CLOWE: Well, I have a memory 12:00 16 that's less than perfect. 12:00 17 MS. CLOUD: I'm not going to deny -- 12:00 18 CHAIRMAN CLOWE: But that's the way I 12:00 19 think we ought to approach these kinds of things. We 12:00 20 ought to examine the organization, we ought to make 12:00 21 sure the job descriptions and the number of jobs are 12:00 22 correct, and then we ought to have the most qualified 12:00 23 individual who applies for that position chosen to 12:00 24 serve in that role. And the compensation naturally 12:00 25 follows that it will be correct and proper within the 12:00 148 1 guidelines we have. And that is, to me, good 12:00 2 practice, which I like to see us follow with this 12:00 3 agency. 12:00 4 MS. CLOUD: Well, I think this has been 12:00 5 a very successful project. Initially, our employees 12:00 6 were very -- very concerned, as they would be if they 12:00 7 were in a RIF position. I think -- I've heard nothing 12:00 8 but compliments about the process itself, about how 12:00 9 human resources have done a good job in handling the 12:00 10 screenings and the application processing and getting 12:01 11 the interviews set up. And from what I can tell, it 12:01 12 has -- the RIF process has been very successful. And 12:01 13 we are proud to say that anybody that wanted to still 12:01 14 be a part of the Lottery Commission is still part of 12:01 15 the Lottery Commission. And we do have positions open 12:01 16 that we are posting that we'll have to go outside 12:01 17 because of not having people qualified for those 12:01 18 positions. And there is a number of those. Jim, do 12:01 19 you know how many open -- 12:01 20 MR. RICHARDSON: Not off the top of my 12:01 21 head. 12:01 22 Mr. Chairman, the part of the process 12:01 23 that we went through does accurately reflect what you 12:01 24 spoke with to the legislature, and we have 12:01 25 accomplished those things in the entire process. This 12:01 149 1 first phase that we're going through, if you will, was 12:01 2 to complete the process of reduction in force. Time 12:01 3 will tell whether it operates efficiently, but I 12:01 4 believe it will, based on the efforts that we put into 12:02 5 reorganizing the agency. 12:02 6 CHAIRMAN CLOWE: Okay. Thank you. 12:02 7 Any other questions? 12:02 8 What else, Linda? 12:02 9 MS. CLOUD: Okay. We have our next 12:02 10 town hall meeting in San Angelo, July the 30th. And 12:02 11 we have invited the leaders in that jurisdiction to 12:02 12 join us, as you -- as we always do. And that 12:02 13 concludes my report. 12:02 14 CHAIRMAN CLOWE: Any questions? Thank 12:02 15 you all. 12:02 16 Now we would like to hear from Billy 12:02 17 Atkins, director of the Charitable Bingo Division. 12:02 18 Billy, may we have your report under number item 20, 12:02 19 please. 12:02 20 MR. ATKINS: Thank you, Mr. Chairman, 12:02 21 members. The Charitable Bingo Division is now fully 12:02 22 staffed. We are awaiting one additional employee to 12:02 23 assume her responsibilities, but she has accepted the 12:03 24 position. As Virginia mentioned earlier, there is 12:03 25 currently an advisory committee meeting that's 12:03 150 1 tentatively scheduled for August 23rd. I have 12:03 2 included an update of the status of the charitable 12:03 3 bingo system redesign. There is also a tentative 12:03 4 meeting of all of the affected divisions on Thursday 12:03 5 to get an update on the current status of where we are 12:03 6 with that issue. 12:03 7 I had the opportunity to speak earlier 12:03 8 this month with The Exchange Club of Austin, a 12:03 9 nonprofit organization, here in Austin, to tell them 12:03 10 about charitable bingo as a fund-raising tool. And we 12:03 11 are also scheduled to provide a seminar to the Texas 12:03 12 Veterans of Foreign Wars this Friday here in Austin. 12:03 13 If any of you are interested in attending, we have 12:03 14 their request letter included in my report. 12:04 15 I've included the regular statistics 12:04 16 dealing with our licensing activities. And one last 12:04 17 thing that I would like to mention to you. As you 12:04 18 know, in the past month or so, we've had some various 12:04 19 serious -- very serious rains, and a lot of the area 12:04 20 in our San Antonio region experienced flooding that 12:04 21 was not uncommon to the type of flooding that we 12:04 22 experienced back in 1998. The staff in the San 12:04 23 Antonio regional office took the initiative and they 12:04 24 have contacted those organizations that suffered from 12:04 25 the 1998 flooding to check up on them. There were 12:04 151 1 only two organizations, the Knights of Columbus in San 12:04 2 Antonio and an American Legion in Canyon Lake, whose 12:04 3 facilities suffered very severe damage and have 12:04 4 indefinitely suspended their bingo operations for now 12:05 5 as result of that. We had approximately four other 12:05 6 organizations that didn't necessarily have any flood 12:05 7 damage at their location, but because of the flooding, 12:05 8 did have to temporarily suspend their operations due 12:05 9 to roads being flooded, et cetera. But for the -- for 12:05 10 the most part, the majority of the organizations that 12:05 11 were contacted did not suffer any damage either to 12:05 12 their halls, their facilities, or any of their bingo 12:05 13 equipment. 12:05 14 CHAIRMAN CLOWE: Any questions? 12:05 15 Billy, when the Bingo Advisory 12:05 16 Committee meets out of town, how many staff members 12:05 17 will attend that meeting? 12:05 18 MR. ATKINS: One factor of that, 12:05 19 Mr. Chairman, will depend on the agenda items, the 12:05 20 amount of staff that will -- that will need to attend. 12:06 21 If we're not getting reports from, say, other 12:06 22 divisions -- well, I don't know. A standing item is a 12:06 23 report from the security division. I would guess, 12:06 24 four to five. 12:06 25 CHAIRMAN CLOWE: You heard the chair 12:06 152 1 say that she anticipated quite a good turnout when 12:06 2 they had that meeting outside of Austin, and everyone 12:06 3 desires having them come to their area. I know that's 12:06 4 an expense item, but I think it's also an opportunity 12:06 5 to get feedback and to interface with the public, and 12:06 6 I think four or five sounds like a good number. I 12:06 7 would hope you could go with more than yourself and 12:06 8 maybe one other person. But four or five sounds like 12:06 9 a goodly number so that you can have people throughout 12:06 10 the room and they can interface and talk with members 12:06 11 of the public and have a good representation on behalf 12:07 12 of the division. 12:07 13 MR. ATKINS: And we can also, of 12:07 14 course, wherever we are, invite members of our 12:07 15 regional office to attend. 12:07 16 CHAIRMAN CLOWE: Sure. And that will 12:07 17 be a public meeting where you'll have a court 12:07 18 reporter. 12:07 19 In regard to the item that you've 12:07 20 alluded to, the charitable bingo system redesign, 12:07 21 you've given us that report. You didn't elaborate on 12:07 22 it. Within the scope of where you are, legally, what 12:07 23 additionally can you tell us? 12:07 24 MR. ATKINS: I am going to ask Kaye 12:07 25 Schultz to respond to that, if there is anything in 12:07 153 1 excess of what is already in my report. 12:07 2 MS. KIPLIN: This has to do with the 12:07 3 contract with Keene. 12:07 4 CHAIRMAN CLOWE: Let me tell you, Kaye, 12:07 5 where I am on this within what are the bounds of my 12:07 6 remarks. It appears to me that we're not getting what 12:08 7 we contracted for and we ought to. And I'm concerned 12:08 8 about that. And I would like to hear more about where 12:08 9 we are in the process of getting redress for that. 12:08 10 MS. SCHULTZ: Well, as Mr. Atkins 12:08 11 probably has already told you, we have not had any 12:08 12 performance under the contract since either late May 12:08 13 or early June. The Keene folks -- we're trying to 12:08 14 resolve this. There were approximately 20 issues 12:08 15 where there was a claim that this was outside the 12:08 16 scope of the contract. And the Lottery's position, 12:08 17 the Charitable Bingo Division's position was that it 12:08 18 was within the scope. We had negotiated those down to 12:09 19 approximately 12 issues. That if Keene agreed to 12:09 20 complete those 12 items, we were going to relieve them 12:09 21 of responsibility for the other eight items. The 12:09 22 items are fairly detailed and they were not considered 12:09 23 a significant portion of the contract. But we were 12:09 24 operating under the belief that when those 12 items, 12:09 25 if we could come to an agreement on that and those 12 12:09 154 1 items could be completed, then the contract would be 12:09 2 substantially performed and we would have a working 12:09 3 system. 12:09 4 Unfortunately, we were unable to reach 12:09 5 an agreement on those items and Keene made the 12:09 6 decision that without that agreement they weren't 12:09 7 going to continue performance. And I believe 12:09 8 unfortunately, since then, it's become more of an 12:09 9 issue that not only are the 12 items not done, but the 12:10 10 question is, do we have anything near a working 12:10 11 system. So the point where we are now is, we have 12:10 12 made a claim against the bond, the performance bond of 12:10 13 Keene, and we are providing documentation to the 12:10 14 bonding company to support that claim. 12:10 15 Simultaneously, Keene had filed a 2260 12:10 16 contract dispute procedure with the State Office of 12:10 17 Administrative Hearings, and they requested a hearing 12:10 18 on that. We forwarded that information to the State 12:10 19 Office of Administrative Hearings, and we haven't 12:10 20 gotten a hearing date yet, but they're in the process 12:10 21 of setting that up. Both sides will be required to 12:10 22 file a -- post a deposit or bond with the State Office 12:10 23 of Administrative Hearings, both the party that makes 12:10 24 the claim and the party that makes a counterclaim are 12:10 25 required to file, to cover the administrative expenses 12:11 155 1 of SOAH of conducting the hearing, conducting the 12:11 2 proceeding, and they base that on the value of the 12:11 3 claim. So I believe it will be approximately 5,000 12:11 4 dollars that the Commission Charitable Bingo will have 12:11 5 to post. 12:11 6 I know that Charitable Bingo is very 12:11 7 urgently in need of and seeking to have this completed 12:11 8 and we are working toward that. But unfortunately, 12:11 9 the project was already delayed at the point where we 12:11 10 got into this situation, and it isn't a matter of 12:11 11 staff or someone else being able to just come in and 12:11 12 pick up and finish those 12 items and it would be 12:11 13 done. It is currently a more serious situation than 12:11 14 that. 12:11 15 I can only draw an analogy. I've never 12:11 16 designed or worked on a software project, but I have 12:11 17 done a home remodeling project. And it's akin to, 12:12 18 halfway through the project, your electrician and your 12:12 19 plumber quitting in some huge dispute. And you strive 12:12 20 to get other estimates to -- for people to come in. 12:12 21 And I expect what may happen in a situation like that 12:12 22 would be similar to what happened. And the first 12:12 23 thing they do is criticize all the work that was done 12:12 24 by the other person, and then they give you an 12:12 25 estimate that is probably twice what was in the 12:12 156 1 budget. 12:12 2 We haven't assessed at this point 12:12 3 whether the amount of the performance bond and the 12:12 4 remaining amount of the monies that had not yet been 12:12 5 paid to Keene would be enough to complete or restart 12:12 6 and redevelop a charitable bingo system. That's 12:12 7 something that we need to be doing. But we did make 12:12 8 the claim on the bond. The bond is for 700,000 12:12 9 dollars, which was the amount of the contract. 12:13 10 MS. KIPLIN: Commissioners, if I could 12:13 11 just follow up. What triggered Keene filing the 12:13 12 contract claim against the agency, in my view, was the 12:13 13 notice that we intend to assess liquidated damages for 12:13 14 not timely performing on the contract. I think the 12:13 15 Bingo Division's position was that they were late in 12:13 16 meeting certain -- certain contract requirements. 12:13 17 That triggered, in my view, that -- the company filing 12:13 18 the Chapter 2260 claim. The agency did respond, file 12:13 19 an answer, and a counterclaim. That's why there is 12:13 20 the posting. We're -- we'll be required to post a 12:13 21 deposit. 12:13 22 This is a relatively new process under 12:13 23 State government. By statute, the Attorney General's 12:13 24 Office and Assistant Attorney General is actually the 12:13 25 one who will be representing the agency at the State 12:13 157 1 Office of Administrative Hearings. And like other 12:13 2 proceedings that we have where it's Assistant General 12:13 3 Counsel, it will be the AG. In this case, the 12:14 4 financial division -- pardon me, financial litigation 12:14 5 division of the Attorney General's Office has been 12:14 6 assigned to this case. Kerry Smith, who was formerly 12:14 7 with the AG's office, was the attorney. It has been 12:14 8 transferred to Linda Shaunessy, who is being kept 12:14 9 informed and involved in what is occurring 12:14 10 preliminarily before the 2260 matter is before the -- 12:14 11 before a State Office of Administrative Hearings 12:14 12 administrative law judge. 12:14 13 Like Kaye said, there has been a claim 12:14 14 that's been filed against the performance -- against 12:14 15 the bond, Keene's bond, and I'm -- and imagine that 12:14 16 Keene will respond in kind. We will use every avenue 12:14 17 that is available to the agency to satisfy the 12:14 18 agency's contract requirements. And I think there is 12:14 19 an evaluation of whether substitute performance is 12:15 20 going to be needed and how best to obtain that 12:15 21 substitute performance. 12:15 22 CHAIRMAN CLOWE: Are we aggressively 12:15 23 pursuing this? 12:15 24 MS. SCHULTZ: I believe that we are. 12:15 25 Keene has taken the position that because they filed a 12:15 158 1 2260 claim, nothing can happen with the bond until 12:15 2 that claim -- that dispute is resolved because, in 12:15 3 their view, if they have performed diligently under 12:15 4 the wording of the bond, then the bond is void. 12:15 5 I don't see how it can be construed in 12:15 6 any way, shape, or form as having performed diligently 12:15 7 when you walk the contract. The bonding company is 12:15 8 being provided with substantial amounts of 12:15 9 information, and one of the reasons for doing this -- 12:15 10 well, obviously, we wanted to do it while the bond was 12:16 11 still in place, but whether they would ask for 12:16 12 basically right of first refusal to come in and decide 12:16 13 whether they were going to make good on this. In 12:16 14 other words, hire someone to come and finish the 12:16 15 project or provide substitute performance. We have 12:16 16 not gotten a response from them on that because they 12:16 17 have not reviewed all of the information, but we are 12:16 18 getting that to them. 12:16 19 CHAIRMAN CLOWE: Well, I am empathetic 12:16 20 to your example of remodeling. I've been there and 12:16 21 done that. And there is one big difference here. 12:16 22 We're talking about the people's money, not our money. 12:16 23 And, you know, we went to the legislature and we asked 12:16 24 them to fund this. They funded it and we collected 12:16 25 it. We've got the money. We've spent, what? Nearly 12:16 159 1 85 percent of it? 12:16 2 MR. ATKINS: Approximately 500,000. 12:16 3 CHAIRMAN CLOWE: And we don't have a 12:16 4 product. We're still working under the old system. 12:16 5 And, you know, if I were a bingo operator out there in 12:16 6 the field, I would be asking us, where is the new 12:17 7 system? Why aren't we getting the benefit of it? And 12:17 8 I don't think we've been treated properly by this 12:17 9 company. And I think we're entitled to get a product 12:17 10 and put the new system in effect and give our 12:17 11 customers, who have paid for this, the benefit of it. 12:17 12 And I want aggressive pursuit of this and get this 12:17 13 system in place. 12:17 14 Has the new IT director been brought 12:17 15 into this and -- 12:17 16 MS. SCHULTZ: Yes, sir. 12:17 17 CHAIRMAN CLOWE: -- involved in it? 12:17 18 MS. SCHULTZ: Yes, sir. And he's had 12:17 19 some good thoughts and we will be discussing that 12:17 20 again tomorrow morning in a meeting. 12:17 21 CHAIRMAN CLOWE: And what is his 12:17 22 opinion? 12:17 23 MS. SCHULTZ: Well, the State is 12:17 24 entitled, when a contractor does not perform, to 12:17 25 report that lack of performance or underperformance to 12:17 160 1 the Building and Procurement Commission, to DIR. He 12:17 2 is in favor of doing that. He is in favor of -- and 12:18 3 we have discussed bringing in either the State 12:18 4 Auditor's Office, a branch of that, or some 12:18 5 independent party to examine the whole situation and 12:18 6 see exactly where the thing went south, so to speak. 12:18 7 We did, in a conversation I had with the bond company 12:18 8 attorney, yesterday, the bonding company expressed 12:18 9 some interest in perhaps doing that, sending in an 12:18 10 independent person to evaluate for them. So we need 12:18 11 to explore whether we need to do that or the bonding 12:18 12 company would be willing to do that. 12:18 13 We have taken a snapshot of everything 12:18 14 that was completed, the system as it was before Keene 12:18 15 left the premises, so we know exactly what was done 12:19 16 and what wasn't done. But what remains to be seen is, 12:19 17 an independent analysis would probably be beneficial. 12:19 18 But what exactly remains to be done, does it have to 12:19 19 be scrapped and started over completely, or is there 12:19 20 some usable product there. 12:19 21 CHAIRMAN CLOWE: Okay. I would like to 12:19 22 hear from you at the next meeting where we are on 12:19 23 this. 12:19 24 MR. ATKINS: All right, sir. 12:19 25 CHAIRMAN CLOWE: It looks like to me 12:19 161 1 they just walked off the job. 12:19 2 MR. ATKINS: Well, we considered that 12:19 3 they've abandoned performance. 12:19 4 CHAIRMAN CLOWE: Very good. Anything 12:19 5 further, Billy? 12:19 6 MR. ATKINS: No, sir. 12:19 7 CHAIRMAN CLOWE: Thank you, Kaye. 12:19 8 Linda, were you going to introduce the 12:19 9 new IT director as part of your report? 12:19 10 MS. CLOUD: Yes, sir, I will be glad to 12:19 11 do that. I did introduce him to each one of you 12:19 12 before the meeting, so that's why I didn't. But, 12:19 13 Mike, come up, please. 12:19 14 Commissioners, this is Mike Fernandez. 12:19 15 He is our IT director. We waited a long time to get 12:20 16 him. He is -- he has got 28 years experience in State 12:20 17 government before us, and I'm going to let you tell 12:20 18 them a little bit about yourself, Mike, instead of me 12:20 19 doing it for you, to the Commission. 20 MR. FERNANDEZ: I appreciate it, 12:20 21 Mr. Chairman, Commissioners, Ms. Cloud. 12:20 22 First, let me thank you for the 12:20 23 opportunity to be here. And also, my colleagues, the 12:20 24 other division directors, I've had a very warm 12:20 25 welcome. And right now I'm in overload, I guess, in 12:20 162 1 terms of the operation. But I'm very excited about 12:20 2 it. It's a new business. I started in IT over 30 12:20 3 years ago with Tracor Science Systems Group, and we 12:20 4 lived and died on federal contracts. And ultimately, 12:20 5 I found myself working in State government, and I have 12:20 6 had the opportunity to be in this field, not only on 12:20 7 the technical side, but on the user community. I ran 12:20 8 the State Occupational Information Board Committee for 12:21 9 seven years, from the data side of this picture, so 12:21 10 I've had the opportunity to work on contracts that, to 12:21 11 quote our counsel, that went south. So I'm not a 12:21 12 stranger to that. And that's not unique to this 12:21 13 agency. That does from time to time occur, and not 12:21 14 just here, but with American Airlines and other big 12:21 15 companies. 12:21 16 So I'm very excited about that. I 12:21 17 think that we have a lot of opportunities here, 12:21 18 certainly, in terms of the Internet. I think that 12:21 19 that's just a -- that's going to provide a lot of 12:21 20 opportunity for the Commission and -- to be able to 12:21 21 publicize the activities of the lottery. So I'm very 12:21 22 pleased to be here. I do think, not -- to elaborate a 12:21 23 little bit on what the counsel said, because I'm very 12:21 24 interested in that project. I've had the opportunity 12:21 25 to meet with the internal auditor, to meet with Billy, 12:21 163 1 and to meet with Kaye. And, you know, from time to 12:21 2 time, things happen in development efforts. And that 12:22 3 particular development effort may be a case study, 12:22 4 Commissioners. 12:22 5 There were four project managers, I 12:22 6 believe, changed from Keene on -- on the project 12:22 7 managing side of that. And in a 12-month project or 12:22 8 in a 24-month project, that's major changes in terms 12:22 9 of leadership and how that project is going to work. 12:22 10 They didn't do jazz sessions on the biggest part of 12:22 11 that, the licensing piece of that. You know, halfway 12:22 12 through the project we get a change in the scope of 12:22 13 work. You know, as a neutral observer -- or maybe not 12:22 14 a neutral observer, but certainly as a fresh look, it 12:22 15 looked to me like that they finally got in and really 12:22 16 understood what the scope of that was, and then came 12:22 17 back and wanted to get -- wanted to get Billy to sign 12:22 18 a new scope of work. 12:22 19 So from a development perspective, it 12:22 20 looks to me like there were some flaws in the process. 12:22 21 And, you know, my suggestion to both counsel's office 12:23 22 and to Billy and to the internal auditor is that we 12:23 23 get a third-party look. You know, having me stand up 12:23 24 in front of an -- in front of an administrative judge 12:23 25 or in a hearing, certainly, I represent the agency, so 12:23 164 1 I suspect that, you know, sometimes a prophet is 12:23 2 without honor in his hometown, but my recommendation 12:23 3 is that we bring in a neutral party. And, certainly, 12:23 4 in my past experience, I've had the opportunity to use 12:23 5 the State Auditor's Office, and they do have good 12:23 6 folks that are true IT auditors. The thing about that 12:23 7 is when they come in, they're going to give us a true 12:23 8 and unbiased opinion. So when we -- if we do choose 12:23 9 to go that direction, we're going to hear a pretty 12:23 10 straight-up answer. But I'm very interested in this 12:23 11 and I think that we can -- there has been a lot of 12:23 12 work done and it's certainly here already. I think 12:23 13 that we can take what there is and move forward. And, 12:23 14 certainly, all of us share your concern about rolling 12:23 15 out a product to the user community and, certainly, 12:24 16 honoring our commitment to the legislature. So I will 12:24 17 do everything I can to assist Billy and the staff in 12:24 18 making that happen. 12:24 19 But, again, thank you very much for 12:24 20 this opportunity. I'm very excited about it. 12:24 21 CHAIRMAN CLOWE: We're glad you're 12:24 22 here. 12:24 23 Anything further? Thank you, Mike. 12:24 24 MR. FERNANDEZ: Thank you. 12:24 25 CHAIRMAN CLOWE: Is there any public 12:24 165 1 comment to the Commission? If there is no other 12:24 2 business, then, I'm going to move for executive 12:24 3 session. 12:24 4 At this time, I move the Texas Lottery 12:24 5 Commission go into executive session to deliberate the 12:24 6 duties and evaluation of the Executive Director, 12:24 7 Internal Auditor and Charitable Bingo Operations 12:24 8 Director, pursuant to Section 551.074 of the Texas 12:24 9 Government Code; to deliberate the duties of General 12:24 10 Counsel and Security Director pursuant to Section 12:24 11 551.074 of the Texas Government Code; to receive legal 12:24 12 advice regarding pending or contemplated litigation 12:25 13 and/or to receive legal advice pursuant to Section 12:25 14 551.071 (1)(B)(A) or (B) of the Texas Government Code 12:25 15 and/or to receive legal advice pursuant to Section 12:25 16 551.071 (2) of the Texas Government Code, including 12:25 17 but not limited to: 12:25 18 TPFV Group, Inc. versus Texas Lottery 12:25 19 Commission; 20 Retired Sergeant Majors' Association et 12:25 21 al. versus Texas Lottery Commission et al.; 12:25 22 Loretta Hawkins versus Texas Lottery 12:25 23 Commission; 24 States of Minnesota et al versus NIGC et 12:25 25 al.; 12:25 166 1 Scientific Games and Pollard Banknote 12:25 2 versus Texas Lottery Commission and Linda Cloud, 12:25 3 Executive Director; 12:25 4 Ideas, Inc. and Associates in Implants 12:25 5 versus Texas Lottery Commission and Linda Cloud; 12:26 6 TXTV versus Texas Lottery Commission; 12:26 7 Ieric and Chris Rogers versus Texas 12:26 8 Lottery Commission and Executive Director; 12:26 9 Contract regarding the charitable bingo 12:26 10 system; 12:26 11 Employment law, personnel law, procurement 12:26 12 and contract law, and general government law. 12:26 13 Is there a second? 12:26 14 COMMISSIONER WHITAKER: Second. 12:26 15 CHAIRMAN CLOWE: All in favor say aye. 12:26 16 The vote is three-zero. The Texas 12:26 17 Lottery Commission will go into executive session. 12:26 18 The time is 12:26 p.m. Today is July 23rd, 2002. 12:26 19 (EXECUTIVE SESSION.) 20 CHAIRMAN CLOWE: The Texas Lottery 14:49 21 Commission is out of the executive session. The time 14:49 22 is 3:47 p.m. 14:49 23 Is there any action to be taken as a 14:49 24 result of executive session? If not, let's move on to 14:49 25 tentatively setting the next Commission meeting. 14:49 167 1 Commissioner Whitaker is indicating the 19th and 20th 14:49 2 are open days for her. 14:49 3 Which day would you prefer, 14:49 4 Commissioner Whitaker? 14:49 5 COMMISSIONER WHITAKER: The 20th would 14:49 6 be fine. 14:49 7 CHAIRMAN CLOWE: The 20th? 14:49 8 COMMISSIONER COX: What day is that? 14:49 9 CHAIRMAN CLOWE: That is Tuesday. 14:49 10 COMMISSIONER COX: That's perfect. 11 CHAIRMAN CLOWE: Tentatively, then, the 14:49 12 Commission plans to meet on Tuesday, August the 20th, 14:50 13 at 8:30 a.m. in this auditorium. 14:50 14 Is there any other business to come 14:50 15 before the Commission? 14:50 16 MS. KIPLIN: Yes, sir. Just the 14:50 17 signing of this order. That's the revised order of 14:50 18 St. Helen's Catholic Church. 14:50 19 CHAIRMAN CLOWE: Anything further? 14:50 20 If not, the Commission is now 14:50 21 adjourned. The time is two -- 14:50 22 MR. ATKINS: Mr. Chairman, I was going 14:50 23 to say, you said you came out of executive session -- 14:50 24 CHAIRMAN CLOWE: I misspoke. Thank 14:50 25 you. The time was 2:47. The time is now 2:49. Thank 14:50 168 1 you, Mr. Atkins. 14:50 2 We are adjourned. 14:50 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 169 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 8TH day of 16 AUGUST, 2002. 17 18 19 20 BRENDA J. WRIGHT, RPR, 21 Texas CSR No. 1780 Expiration Date: 12-31-02 22 1609 Shoal Creek Boulevard, Suite 202 Austin, Texas 78701 23 (512) 474-4363 24 JOB NO. 020723BJW 25