0001 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 SEPTEMBER 28, 2005 8 9 * * * * * * * * * * * * * * * * * 10 11 12 13 14 15 16 17 BE IT REMEMBERED that the TEXAS LOTTERY 18 COMMISSION meeting was held on the 28TH of SEPTEMBER, 19 2005, from 8:00 a.m. to 4:30 p.m., before Brenda J. 20 Wright, RPR, CSR in and for the State of Texas, 21 reported by machine shorthand, at the Offices of the 22 Texas Lottery Commission, 611 East Sixth Street, 23 Austin, Texas, whereupon the following proceedings 24 were had: 25 0002 1 APPEARANCES 2 3 Chairman: Mr. C. Tom Clowe, Jr. 4 Commissioners: 5 Mr. James A. Cox, Jr. 6 General Counsel: Ms. Kimberly L. Kiplin 7 Acting Executive Director: 8 Mr. Gary Grief 9 Charitable Bingo Executive Director: Mr. Billy Atkins 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 INDEX 2 3 Appearances.................................... 2 4 AGENDA ITEMS 5 Item Number 1.................................. 4 6 Item Number 2.................................. 97 Item Number 3.................................. 100 7 Item Number 4.................................. 101 Item Number 5.................................. 107 8 Item Number 6.................................. 110 Item Number 7.................................. 234 9 Item Number 8.................................. 239 Item Number 9.................................. 240 10 Item Number 10................................. 246 Item Number 11................................. 248 11 Item Number 12................................. 249 Item Number 13................................. 251 12 Item Number 14................................. 38 Item Number 15................................. 251 13 Item Number 16................................. 253 Item Number 17................................. 266 14 Item Number 18................................. 6 Item Number 19................................. 283 15 Item Number 20................................. 256 Item Number 21................................. 264 16 Item Number 22................................. 232 Item Number 23................................. 234 17 Item Number 24................................. 152 211 18 285 Item Number 25................................. 288 19 Item Number 26................................. 295 Item Number 27................................. 299 20 Item Number 28................................. 299 21 Reporter's Certificate......................... 300 22 23 24 25 0004 1 SEPTEMBER 28, 2005 2 CHAIRMAN CLOWE: Good morning. It's 3 8:00 a.m., September 28th, 2005. I would like to call 4 this meeting of the Texas Lottery Commission to order. 5 Commissioner Cox is here; my name is 6 Tom Clowe. At this time, I normally announce the 7 presence of the commissioners, and you will note that 8 Commissioner Olvera is absent. He has been appointed 9 to a district judgeship by the Governor of the State 10 of Texas and has submitted his resignation as a 11 Lottery Commissioner. 12 Counselor, if you would read his letter 13 of resignation into the record, I would appreciate it. 14 MS. KIPLIN: Yes, sir. I'd be happy 15 to. It's addressed to Governor Rick Perry. It's 16 dated September 26th, 2005. The contents are: 17 Dear Governor Perry: As a result of my 18 recent appointment as the judge of the 138th State 19 District Court in Cameron County, Texas, I hereby 20 respectfully submit my resignation as a member of the 21 Texas Lottery Commission. You have my gratitude and 22 utmost appreciation for allowing me to serve the 23 citizens of the state of Texas as a Lottery 24 Commissioner and now as a State District Judge. It 25 has been an honor to serve with my fellow 0005 1 Commissioners, Tom Clowe and James Cox. Their 2 volunteer service and work ethic are exemplary. In 3 addition, I commend the staff of both the Texas 4 Lottery and the Charitable Bingo Division for their 5 commitment and hard work on behalf of public education 6 and charitable fund raising in Texas. Through our 7 combined efforts, I am proud to report that during my 8 two-year tenure as a Lottery Commissioner, we 9 accomplished the following: One, the Texas Lottery 10 produced record results and consecutively contributed 11 over one billion in each of the two -- in each of the 12 past two years to the Foundation School Fund. The 13 overall contribution to said Fund surpassed seven 14 billion dollars; and two, Charitable Bingo 15 distributions reached approximately 800 million. 16 Should you require my input on Texas 17 Lottery or bingo issues in the future, please feel 18 free to contact me. 19 My best and kindest regards, 20 Sincerely, Rolando Olvera. 21 CHAIRMAN CLOWE: Thank you. 22 We wish Judge Olvera the best of good 23 fortune and luck in his new position and we regret his 24 loss as a Lottery Commissioner. He served with 25 distinction and we appreciate his service very much. 0006 1 Commissioner Cox and I constitute a 2 quorum, and so we will go forward with the 3 Commission's business on a regular basis and will wait 4 and welcome the appointment of a new commissioner by 5 the Governor. 6 I would now like to take up item 18, 7 report, possible discussion and/or action on 8 Scientific Games. Mr. Grief. 9 MR. GRIEF: Good morning, Mr. Chairman, 10 Commissioner Cox. This morning we have with us 11 Mr. Mike Chambrello and Mr. Steve Saferin from 12 Scientific Games. I would ask them to come forward at 13 this time. Also, Sam Wakasugi is here. 14 MR. CHAMBRELLO: Thank you and good 15 morning. Again, my name is Mike Chambrello. I'm 16 President and Chief Operating Officer of Scientific 17 Games Corporation. Thank you. It's a pleasure to be 18 before you today. We thank you very much for the 19 opportunity. As some of you may know, I joined 20 Scientific Games in July of this year, so I'm 21 relatively new to this company. I did spend the '80s 22 and most of the '90s in the lottery business and had 23 significant exposure and experience in the state of 24 Texas, and very much appreciate coming before the 25 Commission once again. It's been a long time. 0007 1 I understand that we have a relatively 2 brief period of time, but what we would like to do 3 is -- I would like to start with just a brief overview 4 of the company, and I will keep it brief, and then 5 Steve Saferin will formally introduce himself in a 6 moment, and will present to you some of the more 7 creative and innovative sides of Scientific Games. So 8 if you think that's appropriate. I would like to 9 continue. 10 CHAIRMAN CLOWE: Sure. 11 MR. CHAMBRELLO: Thank you very much. 12 One of the things that I really would 13 like to stress today is that, as a company, we really 14 have three primary business segments. One is in the 15 printed products or the instant tickets, as our -- as 16 our company is most greatly known for. That makes up 17 actually less than 50 percent of our overall revenue, 18 which is, last year, 725 million. This year, it'll be 19 much closer to 800 million. Greater than a third of 20 our business is actually on the online services side. 21 We are one of the two largest suppliers of online 22 services in the world today. We are number two, but 23 I'm pleased to say we are closing that gap over the 24 last two or three years rather quickly, and we are 25 positioning ourselves to a long-term permanent player 0008 1 in that sector. 2 One of other pieces of our business 3 that people generally don't recognize is our 4 pari-mutuel business. That business has been pretty 5 steady over the last few years, and it's one we remain 6 very committed to and been excited about some of the 7 opportunities. 8 And from the lottery segment, there is 9 a lot of information there. I'm not going to read 10 each bullet. It's for your information and follow up 11 as more of a leave-behind. A couple of points I would 12 like to make, though, is that we are the only 13 fully-integrated provider of instant tickets, online 14 systems and services in the world today, and we look 15 to leverage that experience and expertise and 16 diversity for quite a long time to come. 17 As I mentioned, we are number two. As 18 I sit here before you today, we have three online 19 projects going on simultaneously. One is a start-up 20 in Oklahoma, which is both online game instant 21 tickets, a very similar to model to what you have here 22 in Texas. We are also converting systems in the 23 Philippines and Catalonia, and so it remains a primary 24 and very focused set of activities for our company. 25 We do envision, as a company, strong 0009 1 continued growth in the instant ticket market and the 2 co-op services market, and increasingly, we look to 3 take some of the time and energy that we have driven 4 from an instant ticket perspective and provide that to 5 our online customers in stakeholders as well. 6 The pari-mutuel segment, I really won't 7 go into that, but for those of you that are familiar 8 with the racing industry, we are the largest provider 9 of tote systems in the world today. We are in the 10 process of re-energizing and restructuring that with 11 new systems and consolidation, and we look to drive 12 that business again for years to come. 13 One of our new areas in the pari-mutuel 14 segment is what we call the equivalent of co-op 15 services for instant tickets. That is, we really are 16 the full service provider for, primarily, tracks 17 outside of the United States, and increasingly for 18 Indian casinos here in the United States, where we do 19 perform not only the tote services, simulcasting, 20 increasing sports wagering and things of that nature. 21 Again, those are primarily driven from beyond the -- 22 the -- North America. 23 One of the things that interested me 24 most when I was looking at the company to join over 25 the spring and summer was the dramatic growth and 0010 1 change in instant tickets. When I exited the business 2 in the late '90s, online growth had somewhat 3 stabilized, but the instant tickets hadn't started 4 their tremendous growth spurt at this point. One of 5 the things that I find very, very encouraging is the 6 dramatic growth in instant tickets, particularly over 7 the last four or five years. While the instant 8 segment has not been cannibalized, there has been 9 small growth, but no cannibalization. We think that 10 bodes well for the future and we think that bodes very 11 well for some of the focus that we will put on new 12 games and new content from an online perspective. 13 One of the areas where Scientific Games 14 has tremendous focus at this point in time is the 15 international arena. If you look at the differences 16 between the United States and the non-U.S. retail 17 sales, 45 to 50 billion online started -- total 18 lottery sales in the United States, there is almost 19 132 or 135 billion outside of the United States. From 20 a Scientific Games perspective, the market mix and the 21 breakout is dramatically different, obviously, in the 22 international market, with less than ten percent 23 overall sales coming from instant tickets. We believe 24 and feel very strongly that with the automated systems 25 with game content and security and integrity of our 0011 1 product, that we can expand the instant ticket portion 2 internationally in the same way we collectively as an 3 industry have in the United States, and drive that 132 4 billion dollars to a much greater number, while 5 increasing both online and instant sales. 6 One of the things that we are most 7 proud up of, and again, one of the things that I found 8 very encouraging and exciting about the company, from 9 an instant ticket sales perspective, not only has 10 there been very, very significant growth over the last 11 year and over the last two or three, four years, but 12 from an SG perspective, our customers have seen much 13 more significant growth than our competitors' 14 customers have, and our co-op services, which is -- 15 which would include distribution, telemarketing, and 16 services of that nature, have shown even more dramatic 17 growth, and we look at that model to be expanded going 18 forward, and again, it's very similar to some of the 19 services that are provided here in the State of Texas. 20 But the difference between the ten or 11 percent 21 growth and the almost 25 percent growth is something 22 that we're very proud of and will continue to drive 23 well into the future. 24 Just to summarize -- and, again, it is 25 a brief summary -- we are customer focused. One of 0012 1 the reasons that Scientific Games held such great 2 appeal to me is, I spend the majority of my time not 3 in offices in Georgia or New York, but on the road 4 meeting with our customers, meeting with our operating 5 groups, really understanding and knowing where the 6 needs are, where the issues are, and where we can 7 improve. The closer we are to the customer, the 8 better we're positioned to serve. 9 Steve Saferin, who will take over in 10 just a moment here, really will demonstrate our focus 11 on content and how driven our company is by content. 12 I think the creative energy and the enthusiasm and the 13 innovation that Scientific Games brings to bear is 14 something that is very tangible and has resulted in 15 some of the increased sales that -- and revenue 16 drivers that I alluded to a moment ago. Enabling 17 technology clearly is there. As I've said to a number 18 of people, ten or 15 or 20 years ago, technology was 19 one of the driving factors in the industry. It was 20 how many tickets you could process in a given minute, 21 things of that nature, the speed of transactions. 22 Today, those are just bare entries. You can only -- 23 all vendors can process X number of transactions per 24 minute in orders of magnitude greater than will ever 25 happen, so we feel that the technology, while always 0013 1 important, is not as important going into the future 2 as content, customer service, and the integrity of the 3 system as a whole. 4 We will be growing and continuing to 5 grow internationally, but it will be focused, it will 6 be disciplined. We will not take our eye off of the 7 current customer base in order to pursue other 8 activities. As the company grows, we will grow in the 9 infrastructure, we will reinvest in ourselves, as the 10 company has over the last year or so, and I see 11 significant reinvestment in our core business, 12 certainly over the 12 to 24-month time frame. 13 We will as a company have had a history 14 of acquisitions. The company is positioning the size 15 of the company at this point is, that will probably 16 happen at points in the future if we see something 17 that really makes strategic sense to us, but we're 18 very well positioned at point where -- at this point 19 where we don't need an acquisition in order to grow 20 the company or expand our core products. So it'll 21 remain targeted and it'll be disciplined and will 22 remain part of our overall strategy. 23 Finally, for me, one of -- and this 24 really is about fun and it really is about 25 entertainment and providing a greater entertainment 0014 1 experience for our public and ultimately driving 2 revenue for the good causes that it serves, and this 3 is maybe a little bit of an awkward segue to Steve 4 Saferin and his great -- his great content service 5 activities. So thank you very much. When Steve has 6 concluded, we would welcome any questions you might 7 have. 8 CHAIRMAN CLOWE: Thank you. 9 MR. SAFERIN: Thank you, Mike. And 10 this really is an honor to be here. To give you a 11 very short overview on MDI Entertainment and the 12 licensing business in general -- but first we've got 13 to get the presentation up. 14 My name is Steve Saferin. I'm the 15 president of Scientific Games Ventures, and I wear a 16 second hat. I'm the president of MDI Entertainment, 17 which was previously known as Media Drop-In 18 Productions. And, again, we're going to talk about 19 licensed properties and the power of promotion with a 20 little background about MDI. MDI actually has some 21 pretty strong and deep Texas roots. In February of 22 1986, I left my job as director of programming at ESPN 23 and started Media Drop-In Productions and opened our 24 first office Mallick Tower in Fort Worth. Our first 25 two video projects featured two Texas icons, Willie 0015 1 Nelson and Darrell Royal. Back when MDI was known as 2 Media Drop-In Productions, we produced commercial 3 vignettes that told stories with the sponsor's 4 commercial dropped in the middle. Here is an example. 5 (Darrell Royal's Play Book video shown). 6 MR. SAFERIN: We produced 45 30-second 7 vignettes with Darrell Royal. We sold it to Budweiser 8 was the sponsor. We also produced other short form 9 regional programming, often tied to a special event. 10 And in 1986, MDI's very first project. Produced for 11 the Texas Sesquicentennial, was called Willie Nelson's 12 Two Tales of Texas, which was sponsored by Wrangler 13 Jeans. And here is some rare behind the scenes 14 glimpses of one of those vignettes. 15 (Willie Nelson video shown). 16 MR. SAFERIN: We actually presented a 17 copy of the master tape to the -- then Governor White 18 at the time, for the Texas Archives. 19 We became the vendor to the lottery 20 industry in 1987 when we had this idea about doing 21 drop-ins about lottery winners. And, in fact, before 22 there was a Texas Lottery, about 20 lottery winners 23 came to Austin for filming of a series called The New 24 Millionaires, with Alex Trebek. 25 From commercial vignettes, MDI ventured 0016 1 into the business of proprietary lottery games, 2 specifically, games that would enable players to win 3 merchandise prizes in addition to money. The Texas 4 Lottery was one of 25 lottery customers for our Money, 5 Movies & Music game, and we also developed systems to 6 distribute merchandise prizes to lottery players 7 across the country. And as part of Money, Movies & 8 Music, we produced a special tape called Great Moments 9 in Texas Sports that was narrated by Randy Galloway. 10 Today, we still fulfill all of our 11 merchandise from a warehouse in Dallas. So who is 12 MDI Entertainment? Well, we are the leading provider 13 of entertainment-based license and branded lottery 14 games worldwide. As I indicated earlier, we were 15 founded in 1986, we began licensed lottery games in 16 1996, and we were acquired, in one of those 17 acquisitions Mike talked about, by Scientific Games in 18 2003. We closed our Fort Worth office and moved to 19 Atlanta. 20 Today we have over 100 marketing and 21 licensing partnerships with some of the best-known and 22 most prestigious brands in the business. We estimate 23 that at least four out of every five licensed games 24 that are offered in the lottery industry in North 25 America are offered with MDI brands. And we have 0017 1 products and services with every lottery in North 2 America, except North Dakota, as well as lotteries on 3 four other continents. And because we have exclusive 4 rights to all of these brands, most of our contracting 5 is done on a sole source procurement basis. 6 But we don't just license a brand and 7 let it go, we try to work with each and every lottery 8 to make sure that each licensed brand is as successful 9 as possible. That includes project management, 10 coordination, and all creative approvals, ticket, 11 game, advertising design assistance, marketing, public 12 relations, promotional design and execution, second 13 chance drawings, Internet clubs and entries, and 14 post-game research. 15 So what is a licensed property? Well, 16 licensing is a very big business and it really -- in 17 the lottery business, it's utilizing a popular brand 18 or logo in association with lottery tickets. What it 19 does is it allows for some type of an immediate 20 connection with that brand between the consumer and 21 the brand. It's become very, very popular in the 22 gaming industry. Much like the casino and slot 23 industry, licensed games have become an increasing 24 important part of the lottery's overall instant ticket 25 marketing strategy. Many of our brands are also very, 0018 1 very successful slot machines, like Wheel of Fortune, 2 Harley-Davidson, Betty Boop and Monopoly, but we've 3 also managed to secure brands that are not available 4 in the slot machine world, such as the National 5 Basketball Association. 6 Licensed games and intellectual 7 property can really help increase a lottery's sales. 8 It does that by attracting new players and 9 reattracting lapsed players, thereby helping the 10 revenue, and it provides a terrific platform for 11 advertising and promotion for the lottery. It 12 certainly highlights the lottery's entertainment value 13 and it creates sort of a halo effect of entertainment 14 and excitement over the entire instant ticket product 15 line. And also, licensed property games can make the 16 lottery a lot of fun, and it can also make lottery 17 relevant in today's culture. 18 (Donald Trump video played.) 19 MR. SAFERIN: That's a commercial that 20 is just going to start there next week in Virginia for 21 their Apprentice game. 22 One of the most important things about 23 licensed games is the promotional platform that they 24 make -- that they afford each lottery. The lotteries 25 sort of have a hard time getting good publicity today 0019 1 and -- but you can find, with licensed games, you can 2 actually attract some very positive media attention 3 and get some good coverage. 4 (Lucille Ball video shown.) 5 MR. SAFERIN: That's just part of a 6 longer segment that was on that show. That's Suzanne 7 LaRusso, the officially licensed Lucy impersonator, 8 and she does a pretty good job. 9 Licensed games have grown dramatically 10 in the last three or four years. Between 2002 and 11 2004, instant sales in the U.S. grew by about 22 12 percent. Over that same period of time, the sales 13 of -- the face value of MDI branded games grew by 14 about 165 percent. If you take '05 and brought 15 another year through '05, instant sales will have 16 grown by about 34 percent, but MDI games will have 17 grown by about 500 percent. So simply put, licensed 18 games are contributing disproportionately to the 19 growth of instant ticket sales in the U.S. This chart 20 is a pretty good example. You can see, back in 2000, 21 instant sales were at about 16 or 17 billion and 22 licensed games made up about one percent of that. In 23 2005, sales are at about 26 billion and licensed games 24 represent about nine percent of that. In terms of 25 face value, in 2000, the face value of MDI brands that 0020 1 were printed was 168 million dollars, and in 2005, we 2 estimate it's going to be in excess of 2.3 billion 3 dollars in face value with MDI brands. 4 We've had some pretty good experience 5 here in Texas with brands. Our first licensed game 6 was done in 2002. It was Harley Davidson. It was a 7 five-dollar ticket. It indexed at an astonishing 172. 8 In 2003, we did a Harley-Davidson relaunch and a 9 NASCAR game, sort of hand in hand. In 2004, Corvette 10 and Monopoly were launched. In 2005, three games have 11 been launched -- actually, a fourth game just -- Wheel 12 of Fortune, Mustang, I Love Lucy, and in 2006, we're 13 looking at focus group testing of a variety of new 14 brands for 2006. The fourth game that was launched in 15 2000 -- that just went on sale, I guess this week, 16 basically today, is our World Poker Tour, Texas Hold 17 'Em game. It certainly capitalizes on one of the 18 hottest trends in America, Texas Hold 'Em or Hold 'Em 19 poker. Texas Hold 'Em was invented here in Texas, and 20 the game has been a phenomenal success in other 21 lottery jurisdictions, prompting multiple reprints in 22 most of them. And so we fully expect and hope that it 23 will be a huge success here in Texas. 24 Thank you very much. 25 MR. CHAMBRELLO: Thank you. I learned 0021 1 early in my experience not to follow Steve because his 2 information was always a lot more fun and exciting 3 than anything I ever had to present. So at this point 4 we would welcome any questions that you might have or 5 any additional information that we can provide. 6 COMMISSIONER COX: Mr. Saferin, I think 7 you said that nine percent of instant sales now are 8 your -- are the licensed products? 9 MR. SAFERIN: Approximately, yes, sir. 10 COMMISSIONER COX: Your products must 11 attract a premium price. You have to pay a licensing 12 fee, you do a lot of extra work, et cetera, and 13 probably expect a higher margin off of those products. 14 Are those all correct? 15 MR. SAFERIN: What we have -- there are 16 two business models for our product. One is that 17 there is a license fee that lotteries pay, which is a 18 percentage of sales, which then does carry with it a 19 premium price to the company, basically, because the 20 lottery pays more money. Or we have something that we 21 call the merchandise model, where the lottery, rather 22 than pay a license fee, dedicates a portion of the 23 money they normally pay out in cash prizes and uses it 24 to buy merchandise, to give -- use as second chance 25 prizes. In that particular scenario, it really 0022 1 becomes sort of a revenue neutral event for the 2 lottery. 3 COMMISSIONER COX: Okay. Let me see if 4 I can sort of -- sort any answers to my questions out 5 of what you just said. Let me just try again. 6 MR. SAFERIN: Okay. 7 COMMISSIONER COX: I'm assuming that if 8 we have one of your products, let's take the World 9 Poker thing that you just showed us, that we're paying 10 more for that than we pay for Lucky Duck. 11 MR. SAFERIN: Actually, I don't think 12 that's the case with the World Poker Tour. I think 13 you are -- I believe that the World Poker Tour, you 14 are taking a portion of what you would normally pay in 15 cash prizes and rather than give them out as cash 16 prizes, you're giving them out in merchandise prizes 17 and you're buying the merchandise from Scientific 18 Games. So that there is no license fee, there is no 19 additional cash payout. The cash payout has not been 20 raised, and so I think, in terms of comparing it to 21 Lucky Duck, you would actually have -- absent any 22 advertising that may be done, it would actually have 23 basically the same -- from the lottery. 24 COMMISSIONER COX: Okay. So if we're 25 getting the same and you're getting more, the customer 0023 1 is getting less? 2 MR. SAFERIN: No. I would argue the 3 customer is getting more. The customer is getting a 4 very well-known brand and -- and an exciting brand and 5 an opportunity not only to win cash, but also to win 6 merchandise prizes. 7 COMMISSIONER COX: Okay. Well, maybe 8 we can talk about dollars. Because I realize that the 9 psychic element of this thing is present, but very 10 difficult to measure. Is the player getting fewer 11 dollars back? 12 MR. SAFERIN: No. The player is 13 getting -- well, the player is getting fewer cash 14 dollars back, yes. 15 COMMISSIONER COX: So he is getting 16 some merchandise in there, that if you value it a 17 certain way, maybe he is getting more, and if you 18 value it another way, maybe he is getting less? 19 MR. SAFERIN: Yes, sir. 20 COMMISSIONER COX: Okay. Now, what 21 percentage do you think that these licensed properties 22 will ultimately make up of that instant ticket dollar? 23 You've got about nine cents now. Where do you think 24 that will go? 25 MR. SAFERIN: This is a question I have 0024 1 thought about a lot. At one time I had thought that 2 the outer limit, it was going -- it could get to ten 3 percent. But I have -- as it has continued to grow 4 over the past several years, I actually think now we 5 could get -- maybe perhaps as high as 20 percent. 6 COMMISSIONER COX: What do -- it seems 7 like that it is a very attractive way to go. It seems 8 like, to me, that if I could play the Texas lottery, 9 and I could see a product that I'm familiar with, 10 Harley-Davidson, let's say, and I chose that versus 11 Lucky Duck, I would probably go for Harley-Davidson 12 every time. Why do you think that the average player 13 only goes for your product nine percent of the time? 14 MR. SAFERIN: Well, I think part of it 15 is the overall product mix. I think it's -- it may be 16 less the choice of the player than it's the choice of 17 the lottery. If you introduce, you know, 50 or a 18 hundred games a year, most of those games sort of just 19 by the way that instant business has developed over 20 the years, have been generic. I mean, they are 21 replacing more generic games with branded games, but I 22 think that that's an evolutionary process and will 23 take sometime. 24 COMMISSIONER COX: So if we can try to 25 put them each on an equal playing field and say that 0025 1 you take your nine percent versus some average nine 2 percent, and let's say we're only talking about one 3 denomination so we standardize that kind of thing, are 4 your products, your licensed products more attractive? 5 Do they sell out faster? Do they -- how do you 6 measure their utility? 7 MR. SAFERIN: I think there are several 8 ways to measure them, and one is just a strict sales 9 indexing measure, which you compare it to other 10 tickets of the other price point at the same lottery. 11 And I think you saw that, for the most part, most of 12 those licensed games indexed higher than average above 13 one or above 100. So that's one way to measure it. 14 I'm not so sure that that's the best way to measure 15 the performance of licensed games, because I think 16 some of the bigger benefits of licensed games are to 17 attract new players. You know, people who have not 18 been playing the lottery, who haven't actually thought 19 about it, and all of a sudden now they see that 20 Harley-Davidson ticket and they say, oh, I will play 21 the lottery. I like Harley-Davidson. Or they see, 22 you know, the World Poker Tour or some other brand. 23 So the idea that it can bring in new players I think 24 is an important factor in the value of licensed games. 25 Also, the fact that it provides this 0026 1 promotional platform for the lottery, so it sort of 2 generates a very significant good and free publicity. 3 I think that's a very valuable asset that licensed 4 properties, you know, afford lotteries. And it 5 also -- we sort of have, I guess it's anecdotal 6 evidence, but just the idea of having a few licensed 7 properties in the overall product mix, when we have 30 8 or 40 or 50 games out there, tends to get the consumer 9 more interested in the whole product mix, not just the 10 licensed games. It can have a beneficial impact for 11 the whole product line. 12 COMMISSIONER COX: I'm sure we're not 13 unique among your customers in that we try to do cost 14 benefit analyses on the decisions that we make. Are 15 you able to help your customers with that cost benefit 16 analysis to try to quantify those new players and that 17 public relations aspect of this that is coming along 18 with it? 19 MR. SAFERIN: Yes. We do help 20 lotteries, certainly when asked and even when not 21 asked, we try to point out and as much as we can, 22 quantify the benefits that are quantifiable and also 23 talk about sort of the ones that are not as 24 quantifiable. 25 COMMISSIONER COX: Thank you. Thank 0027 1 you very much, Mr. Saferin. 2 CHAIRMAN CLOWE: We appreciate you 3 being here this morning and thank you for your 4 presentation. I appreciated the conversation between 5 you and Commissioner Cox, and I would like to further 6 that by asking a couple of questions. 7 I noticed that your experience is a 8 significant growth in instant tickets overall. And we 9 are experiencing that in our operation. And you show 10 potential for that beyond where you are now. We're 11 over 70 percent in our revenue from that segment of 12 our operation. Our return -- or our take, whatever 13 the proper terminology is, is lower from instant 14 tickets than it is the online operation. Is that 15 similar to the experience that you have in your 16 operations in the U.S. and non-U.S.? 17 MR. CHAMBRELLO: Well, clearly, in the 18 non-U.S. it's different because the makeup is 19 different. The presence of instant tickets is much, 20 much lower. If we were to fast forward two or three 21 or four or five years from now, we anticipate that you 22 would see a similar transaction where, instead of 23 being less than ten percent of overall sales, closer 24 to 40 to 50 or 60 percent, I think we would see some 25 of the same numbers. From an overall industry 0028 1 perspective, it really varies from jurisdiction to 2 jurisdiction. And the factors are a lot of what Steve 3 has -- you know, has just described. A lot of it has 4 to do with the instant product mix, how many games are 5 the street, how long the runs of those games are on a 6 jurisdiction by jurisdiction basis. The payouts for 7 the individual games are different from state to 8 state. The overall payout, the legislative mandated 9 payout is different from state to state. We firmly 10 believe that a greater balance -- again, as I 11 mentioned, we're the second leading online provider in 12 the world today, that if we were to take the same type 13 of content and the same type of approach and begin to 14 increasingly apply it to the online, that that would 15 come -- you know, that the -- that the overall mix 16 would -- you know, would level out quite a bit. And 17 the phenomena that you're seeing here is not unique in 18 my experience, and I'm going to defer to Steve because 19 my experience is relatively short at this point in 20 time, and our objective is to increase the content and 21 to increase the sales of both. So that when you look 22 at an overall product portfolio, you have a component 23 of instant tickets and you have a component of online 24 and there needs to be a balance amongst those two. 25 And -- but what we don't feel -- what we feel we need 0029 1 to do is drive online more than sort of try and 2 stabilize or dampen the instant spirit, because that 3 has been significant, the content is a wider scope, 4 and the overall sales of product have been greater. 5 So our perspective is, let's do the same application 6 for the online and get that up as opposed to trying to 7 sort of steal from Peter to give to Paul. 8 MR. SAFERIN: It certainly isn't 9 unique. I believe in this last fiscal year, it's the 10 first time that in the U.S., instant sales were 11 actually greater than online sales. So there were 12 more instant tickets sold than there were online 13 tickets sold. You know, there is an old saying that 14 you make it up with volume. And I think on the 15 instant side, just by the nature of the product, the 16 percentage return is always going to be less than it 17 is on the online side. But in case after case after 18 case, lotteries with -- even though they have a lower 19 return, are returning more total dollars to the state 20 because their instant sales are going up so much, and 21 they are making it up with volume. 22 But as Mike said, the goal now for the 23 lottery industry and Scientific Games is to try to get 24 the same kind of growth curve on the online side that 25 we've experienced on the instant side. 0030 1 CHAIRMAN CLOWE: And you said it's 2 always going to be less with instant tickets, and you 3 said that as if it were a given. And why is that the 4 statement that you made? 5 MR. SAFERIN: Well, I think -- I think 6 you probably can't go back. I mean, I think it's 7 difficult to take a product that's paying out 65 or 68 8 percent and ratchet that down to 55 or 58 percent. I 9 think the consumer will -- will revolt against it, and 10 I think we have some examples of that. And I think, 11 on the flip side of that, we clearly have examples 12 that when you raise the payout, the increased sales 13 more than off -- more than offset the increased 14 payout. 15 CHAIRMAN CLOWE: Well, that's 16 interesting. And how would you attempt to apply the 17 marketing aspect to the online games? What are your 18 thoughts about those, relative to the instant? 19 MR. SAFERIN: Well, we have a very 20 active game development group. We have about four 21 Ph.D.s and several other people that work in this 22 group to try to develop new online lottery games. And 23 the goals are, one, to try to see if we can develop 24 games that can justify a higher price point. A big 25 part of the growth in instant sales, a huge part of 0031 1 the growth in instant sales have been from the very 2 fact that the prices have gone up, from one to two 3 dollars to five dollars to ten dollars. And we're 4 just trying to get to two dollars now on the online 5 side. We've got several different products that have 6 been implemented, that are patent or patent pending 7 products that are actually at the two-dollar price 8 point. One in particular we call Multi-Hand Easy Win, 9 which is called Match Six in Pennsylvania, and is also 10 in Delaware. It's getting ready to go into a few 11 other states. So we're working very hard to develop 12 products that can increase the price point. And also, 13 online products that have significantly more winning 14 experiences than the typical online game. On the 15 online game now, the winning experiences are one in 16 40, one in 50, whatever they are, it's not enough to 17 keep the player, you know, sort of engaged and coming 18 back. So more winning experiences is something we're 19 working on, and more exciting and interesting games. 20 We're looking at ways to try to take some of our 21 licensed brands and see if there are opportunities to 22 develop online games around them. It's a much more 23 difficult challenge than it is on the instant side, 24 but we're working very hard on it. 25 CHAIRMAN CLOWE: Two of our largest 0032 1 online games we, I think, have the mindset that they 2 are jackpot driven. That would be the Lotto Texas and 3 Mega Millions. From your position or whatever 4 observations you have made, would you agree or 5 disagree with that? 6 MR. CHAMBRELLO: I think very clearly 7 that there you have a core base of players that are 8 going to play every week, almost like the old numbers 9 players used to be, that they're afraid their numbers 10 are going to come up. So they're going to play every 11 week. But the acceleration in sales clearly come from 12 the size of the jackpot, and that brings in the casual 13 player, the new player, and what we are seeing and 14 have seen for years in the industry are different 15 fatigue points, whereas 50 million used to be a huge 16 jackpot, and then it was a hundred and then it was 17 150, and on and on we go. So, you know, as we track 18 sales around the country, clearly, the sales at 100 19 million today, which used to be significant drivers of 20 increased sales, it's not nearly as high as it was. 21 So there is some fatigue. And that's been the case in 22 Europe, that's been the case in Canada, and certainly 23 has been the case here in the United States. And it 24 goes to what Steve was saying, jackpot-driven games 25 are here to stay. They're great games. What we need 0033 1 to do is diversify a bit, change the winning 2 experience and change the entertainment experience, 3 sort of shorten the time frame from check at 4 acquisition to some type of experience that could be 5 delightful. And that's what we do -- have done 6 successfully on the instant side. And those are the 7 types of games that we're driving on the online side. 8 We would absolutely agree that the games are jackpot 9 driven and largely -- largely, the online sales are 10 jackpot driven, again, with the exception of the 11 three-digit, four-digit states that -- and more in the 12 Midwest than in the eastern part of the country. 13 CHAIRMAN CLOWE: Well, it's a problem 14 that I think we face here and I think I'm hearing you 15 say, from your experience, other lottery operations 16 are also experiencing, that we're seeing an increase 17 in what I would call sales, but a maintenance or 18 possibly a degradation in the net return to the -- in 19 this case, the Foundation School Fund in our state, 20 and that's concerning to me. I don't think that 21 volume will make it up in the long run, and I'm 22 concerned about those issues of the high return on 23 instant tickets as they grow, as I've told you, to be 24 over 70 percent of our sales, and the fatigue, which 25 is obviously there with Lotto Texas and Mega Millions, 0034 1 even at the high levels that those reach from time to 2 time. And I'm hearing you say, that's not an uncommon 3 problem that other entities face. 4 MR. SAFERIN: Absolutely. 5 MR. CHAMBRELLO: That's true. And it's 6 actually -- when I left the industry in the late '90s, 7 the difference between -- it was almost the inverse of 8 online sales versus the ticket sales. And there has 9 been great progress on the instant side. One of the 10 areas that Steve mentioned that we're highly focused 11 on, as I think are all online vendors, is the content 12 portion of the -- of the online side. That has to 13 change and catch up more than in our -- from our 14 perspective, we need to change what we're doing on the 15 instant side. So let's not -- in our view, again, 16 let's not change what is working and what has driven 17 dramatic growth over the last three or four years, 18 let's rearchitect what was a great, great product and 19 a great mix in the '80s, mid '90s, but has clearly 20 been tapering off for almost a decade now. And that 21 means the same type of focus, the same type of energy 22 and enthusiasm as instant tickets have demonstrated. 23 And, you know, as I maybe have mentioned earlier, the 24 majority of my background is in the online side. We 25 have a dedication and a focus to that piece of the 0035 1 business, we have the core technology, but we think 2 ultimately over the next three to five and ten years, 3 the success of the online games will be driven by the 4 same sort of characteristics that have driven instant, 5 and that's content, that's innovation, changing the 6 winning experience, expand the entertainment 7 experience, and shorten the time between -- you know, 8 between win opportunities. We agree the balance needs 9 to be there, but let's drive the one that's lacking as 10 opposed to dampen the one that's grown dramatically. 11 CHAIRMAN CLOWE: And in your 12 experience, past and present, of all of your 13 operations, both online and instant tickets, how many 14 of your contracts are based on what I would call gross 15 sales, and how many are based on net income to the 16 operating entity? 17 MR. CHAMBRELLO: The majority are based 18 on gross sales. And I'm sure that there are some that 19 are net, but I -- I believe the vast majority are 20 gross sales. 21 Am I correct. 22 MR. SAFERIN: I believe that's right. 23 There may be one that I know of that is based on net, 24 but just one. 25 MR. CHAMBRELLO: I would be happy to 0036 1 research that and provide you with that information. 2 CHAIRMAN CLOWE: I think we would like 3 to have that, because there is a thought, I think, in 4 this agency that there is a beneficial result to the 5 vendor from being tied to gross sales, and as the 6 prize payout is increased, the return to the operating 7 entity is reduced. And the thought is, we would like 8 to see a tie between the vendor and the lottery on net 9 return. It's not the dollars that we sell, in our 10 mind, it's the return to the State that we're focused 11 on. What is your reaction to that? 12 MR. CHAMBRELLO: Well, you know, the 13 paradigm is changing. So very clearly this has always 14 been, to a large degree, more of a shared risk 15 business. If you look at the pure printed ticket 16 portion of the business, you pay your vendor X dollars 17 per thousand tickets, so that's a straight flat fee 18 and it almost commoditizes the product. Our co-op 19 services are a percent sale in, I think, all cases or 20 all but one, they are a percent of gross sales, but 21 there is an element of shared risk associated with 22 that as well. So I think the question is, would we as 23 a vendor, whether it's instant tickets or online, be 24 willing to -- to sort of change the shared risk 25 equation? I don't know what the equation is today, 0037 1 but we would be interested and willing and welcome the 2 opportunity to talk about it, absolutely. Because, we 3 agree -- you know, one of the reasons that Scientific 4 Games is so attractive to me is because we believe 5 that we can drive sales. We believe that we have the 6 content, we believe we have the creativity, so I think 7 what you're asking is, will you put your collective 8 money where your mouth is, and the answer to that is, 9 yes, we would love to talk to you about it. 10 CHAIRMAN CLOWE: Well, I think we're 11 certainly interested in that premise. And it seems to 12 me that you presented a strong case for your marketing 13 expertise here and your ability to create sales. In 14 Texas, I think we have just a certain number of people 15 that are going to be involved in playing these games 16 with some degree of frequency, and I think you have 17 touched on some of the keys to increase their 18 interest. But I for one, and I think perhaps 19 Commissioner Cox shares this, are interested in what 20 the return to the State is from all of this activity. 21 And we'd like to investigate the idea of tying our 22 vendors to a net return, because in my mind that's how 23 we're judged. And so your openness to that is -- is 24 appreciated. 25 MR. CHAMBRELLO: You'll get no 0038 1 resistance from us on that front. Again, if we're 2 able to be more involved, we're able to work more 3 closely with you, then we should be measured and 4 welcome the opportunity to be measured the same way 5 that the Commission is, in your success. 6 CHAIRMAN CLOWE: Thank you, gentlemen. 7 We appreciate you being here. Your presentation was 8 very informative. Thank you very much. 9 MR. CHAMBRELLO: Thank you very much. 10 CHAIRMAN CLOWE: We're going to have a 11 short break for just a few minutes and then we'll come 12 right back. 13 (RECESS.) 14 CHAIRMAN CLOWE: We'll come back to 15 order now. Next we'll take up item 14, report, 16 possible discussion and/or action on the procurement 17 of advertising services and/or extension of the 18 existing contracts. Mr. Anger. 19 MR. ANGER: Good morning, Mr. Chairman, 20 Commissioner Cox. For the record, my name is Michael 21 Anger and I'm the Lottery Operations Director. 22 I have two areas under this agenda item 23 that I would like to report to you on this morning. 24 And I would like to begin with a review of the 25 advertising services contract report presented to the 0039 1 agency by the University of Texas evaluation and 2 research team. A copy of this report is in your 3 packets. And I am joined today by Doctor Isabella 4 Cunningham, the Chair of the Department of Advertising 5 at the University of Texas, and the evaluation and 6 research team coordinator, Doctor Neal Burns. 7 Doctor Burns is the director of the Account Planning 8 Program at the Center for Brand Research at the 9 University of Texas. They're here today to present 10 their findings and recommendations related to their 11 review of the agency's advertising services contracts. 12 The staff has worked closely with the 13 consulting team in reviewing their recommendations, 14 and I would be happy to share the staff's input 15 following Doctor Cunningham's and Doctor Burns' 16 presentation if you wish. 17 I'll turn things now over to Doctor 18 Cunningham. 19 DR. BURNS: Let me open our 20 presentation, if I may, Mr. Chairman -- 21 CHAIRMAN CLOWE: Certainly. 22 DR. BURNS: -- peers, staff, and those 23 associated with the lottery as well as my colleague 24 Doctor Cunningham. 25 I double click on this and that is 0040 1 going to open for us. And then I should be able to 2 find the big screen view. Is it this one? 3 This is our team that has worked on the 4 project, and upon -- I have certainly imposed upon our 5 chair, Professor Cunningham, to talk a bit at the 6 beginning about how we approach the problem in terms 7 of service to the State and the ethical issues, and 8 also perhaps to ask her to introduce me. I'm always 9 interested in what she has to say. 10 DR. CUNNINGHAM: Good morning, 11 Commissioners. 12 CHAIRMAN CLOWE: Good morning. 13 DR. CUNNINGHAM: Thank you for having 14 us here. The University of Texas is very proud of its 15 advertising department, and we have worked closely 16 with the State for many years since, you're aware, a 17 very small department. We have worked with the 18 Attorney General's Office, we have worked with several 19 other organizations of the State, and we are proud to 20 have a role in helping the State do its job because we 21 consider ourselves part of the State. 22 I was very flattered when it was -- the 23 opportunity appeared for us to have some kind of a 24 role in helping the lottery. And I called upon 25 Doctor Burns to commandeer this team, which he does 0041 1 very well, as you saw. 2 We have several principles in the 3 advertising department. Advertising prides itself, 4 the advertising department prides itself in teaching 5 ethics, first of all, to our students, and the value 6 of being up front with what counts in the minds of the 7 consumer and in the minds of society. So we view 8 advertising as a tool that helps everybody make 9 decisions the right way and, hopefully, helps 10 institutions communicate the right message to their 11 constituents. So there is no doubt in our mind that 12 advertising and the lottery have ethical principles in 13 common that will satisfy both roles of our discipline 14 and of your agency. We want to reach all citizens, 15 while not discriminating against any kind of a 16 citizen, targeting the right public and bringing to 17 the State what the State deserves. 18 Without many more comments, I want to 19 introduce Doctor Burns, who we had the luck to recruit 20 to the Department of Advertising several years ago. 21 We don't count years any more at our age, we just 22 count experience. And he has been a fantastic member 23 of this department. He has done an awful lot of 24 projects, not only for us, but he has produced -- he 25 is a most capable person. He has directed, for many 0042 1 years, programs with NASA -- with NASA, the nation's 2 space program. He also started as a partner his own 3 advertising agency, and he has also worked very 4 closely with the Minnesota lottery, which has given 5 him experience on this subject. He not only teaches 6 strategy, but he makes the students face the real 7 world with an -- with a totally different outlook. So 8 I think we're very likely to have him. 9 DR. BURNS: Thank you. We're going to 10 try to move through the material that we've got here, 11 which is essentially a summary of the report that we 12 have delivered to the Commission's staff. 13 I enjoyed this cartoon and felt that I 14 would enjoy sharing it with you as well. For those of 15 you who can't read the line, it says, Professor Bush 16 has just won the coveted New York state lottery. 17 For many professors, I found out, the 18 lottery is essentially their retirement program. 19 We looked closely as we started the 20 project as to what the goals were of the Commission's 21 marketing and advertising program. And they are 22 stated very simply and very, very elegantly and these 23 four bullets, I think, are a reasonable summary. 24 To enhance the effectiveness and 25 certainly to reach both the general and the minority 0043 1 market, increasing the awareness of the lottery game, 2 and then also I think an important issue was educating 3 players as to what it is that the lottery really does. 4 What the funds are used for. And we wanted to do all 5 of those things within the general communication goals 6 that the Commission has set. 7 Sorry about that. How can I go back? 8 Can I just do this and that will do it. Thank you. 9 I should mention, if I make those 10 mistakes, I tend to be sort of an Apple, 11 Macintosh-bound person and look at these things with a 12 degree of apprehension. 13 I think between the Commission and the 14 its agencies there has to be mutually understood and 15 agreeable missions involved. There has to be, 16 certainly, an adequate level of support, both in terms 17 of the budget and in terms of the administrative 18 support and coordination that's available. We have a 19 rather unusual state here in the sense it that now is 20 one of the minority majority states, but finding ways 21 to properly reach those states and also support the 22 people within the advertising and promotion industry 23 who produce this where it becomes a part of the 24 mission and is also reflected in the historically 25 underutilized contractual requirements of the lottery. 0044 1 There are certainly relationships with 2 other institutions. I think the preceding 3 presentation also pointed out how effective 4 partnerships can be with well-known brands. We 5 discuss that in our report as well. 6 The issue of -- the issue of 7 understanding whether the State is getting its money's 8 worth is essentially captured in the concepts that are 9 in the contract and also, quite frankly, in the minds 10 of the Commissioners and the staff is, s the State 11 getting the best bang that it can for its buck, and do 12 we periodically review and improve the plans that we 13 have. 14 At the beginning, we looked in the 15 contract, both -- at both programs. As many in the 16 room know, there are two contracts in place, one with 17 DDB Dallas, the other with The King Group, also 18 located in Dallas. We looked and compared the kinds 19 of billing practices, the rates that were charged, 20 went through a large number of invoices, not all of 21 them, but a very significant sample, and we compared 22 that data to such association data as exists, 23 primarily looking at what essentially is the agency 24 benchmark in this country, which is the American 25 Association of Advertising Agencies, often referred to 0045 1 as the 4-A's. We also wrote to what we considered to 2 be competitive states -- or comparative states is 3 perhaps the better term. Those would be states that 4 had some of the same issues that we did in terms of 5 diversity of the population, and so we received -- 6 wrote for and requested and received samples of work 7 from California, Florida, New York, and also, because 8 of my previous connection, looked closely again at 9 some of the Minnesota work. 10 I guess I should mention that the 11 agency that I was one of the partners and managers in, 12 started with the Minnesota lottery. I think it may be 13 important to point out that in '95, after some ten 14 years with the lottery, we essentially didn't rebid 15 the program, but were involved with it for the 16 previous ten years. 17 We also wanted to look at the terms and 18 conditions and compare them to what are being put 19 forward now by a number of the general associations of 20 advertising. What one considers today to be best 21 practices, both in terms of negotiations and the 22 contracts that are in effect that represent 23 essentially fairness to both sides, and in that 24 context become reasonable contractual instruments. 25 This is another cartoon that I found 0046 1 rather ingenuous. It says at the bottom, if I won 47 2 million dollars in the lottery, I wouldn't change a 3 thing. Not at first. 4 We first looked, by the way, at the 5 general terms and conditions of the contract. As I 6 said, we received the other material. We looked at 7 the nature of the compensation that was in place and 8 spent a lot of time on that, as you'll see as we go 9 through the recommendations, and wanted to be sure 10 that we understood the goals and performance 11 expectancies that were contractually explicit, as well 12 as generally assumed in the practice of the business 13 on a day-to-day basis. We also wanted to look at what 14 kind of evidence we had of -- you know, concerning the 15 results that were actually achieved by this work. And 16 as soon as one starts talking about results, and even 17 in the prior discussion, the idea of service and a 18 significant net to the State and what kind of return 19 on investment the State receives for the money it 20 spends for its advertising spend, became -- became an 21 issue for the study team as well. 22 If we had to summarize what we thought 23 advertising needed to do, we actually had three 24 fundamental issues that we addressed and kept that in 25 mind as sort of benchmarks throughout the report as we 0047 1 looked at the work -- I mean, as we looked at the 2 billing, as we looked at the nature of the invoicing, 3 and at the nature of the two contracts. 4 We first were interested in whether the 5 State was receiving value. We're interested in 6 quality. And quality, I think, you know, it involves 7 two things here, it involves both growth in terms of 8 sales of a particular product that the lottery offers 9 during that particular time, and I think we're also 10 interested in having the State understand what the 11 value of the lottery is for the State, and we also 12 spent some time looking at whether or not the 13 messaging and promotional and advertising material 14 that was out there was contributing to the brand, the 15 brand called the Texas Lottery. 16 Finally, the issue is, how effectively 17 are the resources being used. The resources that the 18 agency has, the way in which they actually conduct 19 their work and coordinate their efforts so that 20 efficiencies, high value, and good quality are more 21 readily achieved. We also were interested, clearly, 22 in the importance of reaching minority populations and 23 utilizing those resources and, in some sense, some of 24 the delicate aspects of this issue. In our report, 25 there is a -- I think, a reasonable amount of material 0048 1 and also references that discuss some of the ethnic 2 differences, some of the racial differences that are 3 associated with people who regularly play. What their 4 expenditure is, how that relates to their household 5 income, and the concern one has to have, on the one 6 hand, of properly utilizing the full resources, the 7 full creative, marketing and promotional resources 8 that exist within the State, whether those resources 9 are owned and maintained and executed by 10 minority-owned firms or others, and yet not 11 essentially targeting them on those who may in some 12 sense have a greater susceptibility to participation. 13 A few weeks ago we had this 14 announcement and as you all know, we became the fourth 15 state to have a majority minority population. We now 16 find that we're slightly more than 50 percent of the 17 state of Texas is essentially described as a minority. 18 And this isn't such a new phenomenon. In fact, if we 19 look at the 2000 census, at that point we had some 47 20 percent. We also know how tough this business is and 21 how behavior and things like consumer confidence and 22 purchase behavior, you know, discretionary income of 23 something like the lottery is affected by other 24 events. It would not be reasonable not to expect that 25 horrendous events like 9/11 or Rita or Katrina, as 0049 1 well as a number of other issues, terrible news on a 2 particular day from a nation far away where our troops 3 are involved, can have an impact on how people behave 4 and how they function in a convenient store and so 5 forth, and so we looked at those issues as well. 6 Another important thing in that last 7 bullet point was, what is the image. And, quite 8 frankly, there seems to be, because this is -- this is 9 a State function, and I might mention that I have had 10 the opportunity to work with senior management 11 positions in State government and in federal 12 government, and I know the complexities and the public 13 scrutiny that exists when you're in those positions. 14 But we do have -- and there is a much longer list than 15 this, as you all own know, of the kinds of issues and 16 the kind of press that essentially aren't good in 17 general for lotteries or chance, across the nation and 18 particularly perhaps here in Texas, and we think that 19 needs to be examined and considered as part of the 20 contractual obligations here as well, as you'll see. 21 I think we have ten or 11 22 recommendations and I'm going to go through them. I 23 promise you, this is my last attempt at humor. I sort 24 of really enjoy this one. And it says, those two are 25 recent Powerball money. The people by the table are 0050 1 old State lottery money. 2 And maybe some of you have been at 3 those cocktail parties. 4 We have a series of recommendations, 5 and this is sort of a recap. We actually, in the 6 fourth bullet on this particular chart, and I think 7 that's an important issue for the Commission to 8 discuss with its staff, perhaps at today's meeting, is 9 to modify the current extension period and consider 10 very seriously initiating a new request for proposal. 11 In our opinion, just, you know, to have a summary at 12 the beginning of what we stated the -- in the room, 13 the second action would be in the best interests of 14 the Commission. 15 Our first recommendation concerned 16 contract extensions, and as it says here, we 17 recommended in our preliminary report at the end of 18 July that when the current contract period ends, and 19 this is the end of the first extension, the contract 20 as you will recall had two 12-month extension periods 21 that were available, that the second one not be 22 executed. That, ideally, negotiations be conducted 23 prior to the issuance of a new RFP that are fair and 24 representative of both the lottery as well as for its 25 advertising agencies, and that will certainly not 0051 1 produce any serious disruption and maintain the 2 continuity of the enterprise during this period of 3 time. And we understand how important that is. 4 The second thing that we -- you know, 5 that just goes right on the heals of that is that a 6 new RFP be prepared that, in part, would reflect some 7 of the findings of our report, and might emphasize 8 more heavily the importance of innovation and the fact 9 that the Commission itself is willing to look at other 10 contractual formats and other professional 11 organizations that essentially approach the issues of 12 advertising and promotion for the lottery. 13 An issue that we think is critical and 14 that was always alluded to during our work, and even 15 came up already in this morning's discussion, is that 16 we need to always maintain the full faith and 17 confidence of the Texas public, and that we -- we 18 spend some time and some effort making sure that that 19 takes place. I think that it's part of what the 20 mission suggests. This is the direct quote, and it 21 says that we are administer and market State lottery 22 games in an efficient and secure manner essentially 23 while enhancing public confidence in the integrity and 24 fairness of the games. And even in today's 25 discussion, as the Commissioners asked, you know, who 0052 1 is essentially paying for this, is it the consumer 2 that is getting less, also speaks for the integrity of 3 the way in which the general business strategy of 4 the -- of the Texas Lottery and its management, 5 through the Commission and its staff, takes place. 6 Our fourth recommendation concerned the 7 general -- the general practice that has been, I 8 think, the case in the State of Texas since the late 9 '90s, is that two agencies be retained, one 10 essentially addressing the minority market and one 11 addressing the general market. What we're 12 suggesting -- and the suggestion, by the way, of the 13 prime contractor has no real concern as to whether 14 that prime contractor were, in fact, a minority owned 15 agency or what's currently called a general market 16 agency. But that a large part of the concern that we 17 have and I think a major factor in achieving success 18 calls for that kind of a single coordinating point 19 that essentially represents the games, whether they're 20 the scratch off or they're online, and that also 21 really contributes to the integrity and the importance 22 of the brand called the Texas Lottery. 23 I think there are a number of impact 24 issues that that kind of a decision entails. It may 25 be the case, and in our report we suggest some 0053 1 examples where we think we found evidence of that, 2 that having two agencies may not be as effective as 3 having a single agency. By the way, having a single 4 agency, again, for those not familiar with the 5 practice of a prime contractor and subcontractors, 6 doesn't mean there is only a single agency. If, in 7 fact, there were a single agency that had had evidence 8 it could provide in its response to a request for 9 proposal where it has evidence that it has properly 10 utilized a HUB, that it has properly addressed issues 11 of reaching out to minority-owned media, that within 12 its staff and within the staff that is going to 13 leverage against the lottery account, it has full 14 representation, particularly in this state, of Latinos 15 and African-Americans, such an agency could perhaps do 16 that job. It may also be the case that such an agency 17 forms a collaboration with several other agencies, who 18 serve as subcontractors, where it serves as prime. 19 A second important point is that where 20 you have the separation -- and I understand the nature 21 of this business because, as you know, not only did I 22 serve, as I mentioned in State and federal positions, 23 but also, a very large part of my career was spent 24 within the agency business. Agencies don't always 25 embrace each other readily. If you're dealing with 0054 1 creative product, you're dealing with a lot of -- of 2 highly opinionated people, some of whom are sitting at 3 this table. And when you think that that essentially 4 creates certain kinds of inefficiencies, and that 5 could that be perhaps relieved with the single source 6 of contact. And, again, we've mentioned the 7 importance of the brand and the impact that has on 8 loyalty need to be considered as well. 9 The fifth recommendation involved goals 10 and accountability. It turns out that the current 11 staff, as you all know, was not there when the current 12 contracts were put in place. The issue of having 13 good, firm performance goals, interestingly enough, 14 were not reflected within the contract. We understand 15 that the Commission understands the importance of 16 specifying the goals, and we would encourage that 17 goals and accountability be contractually instituted 18 and constantly monitored. I think that if you set a 19 goal, it's got to be specific. And in my experience, 20 a general goal is almost worst than having no goal at 21 all. I think you can have the goal concern sales. 22 Sometimes it may be looking at the number of people 23 that visit a Web site, or it may be simply -- one of 24 the other metrics you might use is to just enhance the 25 brand or to understand the purpose of the lottery. 0055 1 But essentially, when I ask for specificity, what I'm 2 saying is, the fundamental question is, how much, and 3 as a person in the agency business, my constant 4 question was, how much and by when. And our job was 5 to deliver what the client wanted. And I fully 6 understand the nature of this business is that 7 agencies, advertising agencies serve at the pleasure 8 of the client. 9 In line with that sense of 10 accountability, we recommended that there be agency 11 audits. Our agency was audited periodically by the 12 Minnesota State lottery. That kind of audit, by the 13 way, is complex. There is always, quite frankly, a 14 bit of anxiety within the agency when you know that 15 you're about to be audited. You want to make sure 16 that you've kept good time sheets, that you have, you 17 know, good -- good solid records from the vendors that 18 you've used. The audit, by the way, is restricted to 19 this particular piece of business, and it does place a 20 burden on the agency to maintain those books so that 21 audits can take place relatively expeditiously. I 22 also need to tell you that I understand that it is 23 often cumbersome and not as expeditious as either 24 party would like. 25 One of the concerns that exists, I 0056 1 think from both sides of the table, is who is really 2 assigned, who are the key members of the team, are 3 they there, and that's an auditable issue, have they 4 worked, have they spent time. I think that we need to 5 make sure that we've got definition and that it's 6 understood by both the lottery as well as by their 7 agencies, what are the metrics that will be used and 8 how are they defined. I think that if -- you know, 9 that if we have an audit, we are more able to 10 forecast, in a sense, the impact that we think these 11 investments are likely to have, because we're 12 confident of the numbers that are there. 13 Our seventh recommendation -- and I 14 know I'm moving through this quickly, but you do have 15 the report before you to read as well -- the level of 16 relationship that exists between the client and the 17 agency is critical. And essentially, the contract is 18 the contract, and the relationship is the 19 relationship, and those two are not necessarily 20 synonymous. In reviewing the events and some of the 21 conference reports that we had the opportunity to 22 review, our belief is that regular sessions need to 23 take place. This is a dynamic market. Quarterly may 24 even not be often enough, but whether it takes place 25 quarterly or it takes place at will or as needed, both 0057 1 parties have to understand that that's part of their 2 task. 3 What things would be on the agenda if 4 such meetings took place? I think that a critical 5 issue to constantly point out is, what the mission is 6 of this enterprise, its culture, its history, and 7 where they'd like to go. Desires are particularly 8 important, and very often in agency-client 9 relationships, it's those almost unwritten issues that 10 become the definitive issues that describe how pleased 11 both parties are with the contract that they are have 12 entered into. 13 I think another issue that's important 14 when you think about advertising is, what can you do 15 that's going to increase the perception of value, and 16 the impact that the agency has, particularly 17 internally. Very often, I think people who work in 18 complex organizations with regard to advertising don't 19 do a good job within their own organization of 20 pointing out the positive contributions that 21 advertising expenditures have produced. And I think 22 those kinds of meetings are an opportunity to listen 23 and to particularly hear what the agency is saying, 24 and the agency needs to hear what the client is 25 saying. And very often there are very straightforward 0058 1 requests that occur more rationally and more -- more 2 openly when the contact is regular and expected as 3 opposed to infrequent and only called when there is 4 some real -- some real problems that exist. 5 Our eighth was the suggestion that the 6 Commission look at alternative contractual formats. 7 Historically, they've based their compensation 8 agreement on commission. "Commission" meaning that 9 agency income is derived essentially from media 10 placements. We would like to see it moved to 11 something resembling a fee basis, which is almost 12 de rigueur for most accounts, including lottery 13 business, by the way. And we would also receive not 14 only examples of the work, but we received examples of 15 the RFPs and the contracts from the states that I had 16 mentioned earlier. 17 We've spent a lot of time on contract 18 formats. We did spend some time in the report 19 describing them. I'll just mention a few of the 20 points that I would encourage those who look at the 21 report to review. One is our concern about -- I'm 22 sorry for that echoing. I'll move back at bit. How a 23 contract that's based fundamentally on commissions 24 that are earned from media that are placed, that's 25 essentially the current baseline contract. There are 0059 1 people who look at cost recovery. A very fundamental 2 contractual format is cost plus a fixed fee. What 3 that essentially says is, costs, particularly for 4 developing creative products may get out of hand 5 periodically, but no matter how much you actually have 6 spent on that aspect, the amount of income the agency 7 is going be -- the amount of profit, the amount of 8 gross income the agency will retain essentially stays 9 the same. You can have also contracts that are 10 incentive based, and more and more as you look at what 11 is happening and read the summary reports of the 12 American Association of Advertising Agencies, as well 13 as the American Advertising Federation, agencies are 14 being encouraged to move towards an incentive-based 15 contractual format, which means that if they meet the 16 goals, that's fine; if they do better than that, they 17 may, in fact, walk away with a greater -- a greater 18 fee or a greater profit. 19 We also suggest that a creative review 20 board be established. There is something about 21 creative that's always complex in a sense. You know, 22 it's -- if advertising is a discipline, and those of 23 us who teach it sometimes wonder that, is it an art. 24 The answers clearly are not in the back of the book. 25 But it does turn out that there is surprising 0060 1 unanimity among professionals in the field as to what 2 good work consists of. And our belief is that a 3 creative review board could be established and 4 recruited, particularly within the state of Texas, and 5 our suggestion in the report is that those people 6 might come from one or several of the universities, or 7 some of the creative -- executive creative directors 8 of agencies who are not at that particular point in 9 time involved with -- with the lottery, but, as good 10 citizens, good forward and offer their expertise and 11 judgments. And do so, by the way, in a fashion that's 12 very familiar and part of what the advertising 13 business has been about for years. And we would like 14 to encourage the Commissioners to consider that. Our 15 belief is that it's typical, as I mentioned, that 16 these people, if they have no conflicts, will serve if 17 they're asked. And I also believe, and if I were in 18 the agency that had the contract, that knowing that 19 review would take place, it would have a positive 20 impact on me and my staff, because we want to look 21 good before our peers. You really get ready for 22 those. 23 And recommendation ten says that return 24 on investment is something you can no longer ignore. 25 And how that analysis is performed is -- with regard 0061 1 to advertising and marketing expenditures is still in 2 development, quite frankly, but we mentioned several 3 new accounting firms that have experience with looking 4 at it with regard to the value of brand, the value of 5 the stock, and the value to the enterprise. I think 6 cardinal here is the fact that the most believable ROI 7 analysis that would be performed should probably come 8 from an independent source. Although, major agencies 9 or their affiliates have excellent organizations, and 10 some of you have had the experience of looking at one 11 such analysis that was provided -- that I think was 12 provided by DDB. 13 Why is it such an important issue? I 14 think without it, it's hard to decide whether or not 15 the expenditures and the program and the campaigns 16 have been effective. I think what we're trying to do 17 here is to leverage the impact of all the dollars that 18 are spent, and the 30, 35 million dollar kinds of 19 budgets that we're talking about are significant 20 expenditures and deserve public scrutiny. And I think 21 we're competing here for eyeballs, we're competing for 22 shared disposable income. Whether someone is online 23 or someone goes into a C-store, you are entitled to 24 understand what the return you receive was for the 25 effort that was expended. And fundamentally, ROI is 0062 1 important because boards of all organizations, and the 2 Commissioners of this organization want to know. They 3 want to know if they're helping the State get its 4 money's worth for the dollars that they're spending in 5 advertising and promotion. 6 Our 11th recommendation was that the 7 contracting officers have the opportunity to go to 8 some of the frequent -- and some of you may believe 9 they're too frequent -- but there is always a meeting 10 where attorneys and contracting officials are meeting 11 with agency people to look at the new contractual 12 formats. This is a major state, we are a national 13 leader, and I think it's important that the kinds of 14 agreements as well as the kind of work that's produced 15 here is leaderly. It's appropriate for the State of 16 Texas, and there is a sense of which there should be 17 nothing less than that. And so we would encourage 18 that to happen. I think that if the people who help 19 generate, write and approve these contracts in the way 20 in which expenditures, you know, are going to be 21 compensated, I think that the enterprise will 22 understand the nature of the compensation. I think 23 the concept of fairness needs to constantly be on the 24 table. It gives those involved in contracting the 25 opportunity to be current on what is happening within 0063 1 the industry. You can look at other alternative 2 contractual formats and understand them. I think it 3 defines the kinds of metrics that are currently in use 4 for establishing quality and good performance. And I 5 also think that it's important for the contracting 6 officers of State organizations to understand that 7 agencies that have cultural differences, not only 8 cultural differences, quite frankly, that may depend 9 upon the predominant ethnicity within the agency, but 10 there are shops that are sometimes dedicated to 11 performance, there are shops that are sometimes 12 dedicated to producing breakthrough creative, and 13 understanding that the history of that agency and its 14 culture is an important aspect of any contractual 15 format. 16 I have been interested in the kinds of 17 contributions and the complexity of talking about 18 the -- the School Fund, the Foundation School Fund, 19 and I found this note that I sort of enjoyed. This is 20 a Harvard College lottery ticket from March 1806. And 21 I thought it was just pleasant to me to realize that 22 there is a long history, not only within the state of 23 Texas and other states, of lotteries contributing to 24 education. And I found that between 1790 and the 25 Civil War, 50 colleges, 300 schools, 200 churches were 0064 1 erected with lottery proceeds, most notably, Harvard, 2 Yale, Princeton and Columbia were initially funded by 3 lotteries. 4 I had the privilege of serving as 5 principal investigator, had some brilliant students, 6 the constant criticism and encouragement from 7 Isabella, and friendly and collegial participation 8 from DDB, and Ashley King, and also from The King 9 Group, and both Joe and Doctor Delva King came to meet 10 with us as well. And we also had the opportunity to 11 really work with young and experienced, dedicated 12 staff, both Chelsea and Ray Page. As Isabella 13 mentioned, the chance to be of service is one we 14 appreciate. 15 Mr. Chairman, Commissioners, others in 16 the building, that concludes our presentation. 17 CHAIRMAN CLOWE: Thank you very much. 18 Commissioner Cox. 19 COMMISSIONER COX: Really a fine piece 20 of work. A number of the things that I see here, I 21 have been concerned about since I've been on this 22 Commission. Some of the others, I am very glad to see 23 come to the surface. I think it's very clear that we 24 need some help in our mission. Our mission, as I see 25 it, is we are contracting for services, managing 0065 1 contracts, which includes auditing and performance of 2 contracts. You have hit on all those areas. It's 3 very clear to me that the expertise you bring to this 4 thing is a welcome addition to the arsenal that we 5 have. And I thank you. 6 I do have some specific thoughts. One 7 of the areas, item ten that you mentioned, the return 8 on investment, I think I've been asking about since my 9 first meeting as a Commissioner, and I've never gotten 10 anything that resembles a satisfactory answer, despite 11 continued efforts by DDB to provide answers. Is this 12 something that can be done? I know it makes sense and 13 I know I want it done, but the fact that three years 14 have passed and it hasn't been done by some people 15 that I know have capabilities, tells me that it must 16 be very, very difficult. Can you help me with that? 17 DR. BURNS: Well, I can try. I think 18 you're right. I think the return on investment, you 19 know, even in some of the earlier conversations, as 20 some of you know, our agency -- the agency that I was 21 with for a long time, last December celebrated its 22 25th year with Harley-Davidson. And so the issue is, 23 what is the value of a brand. And it's interesting, 24 wherever you go, you see the Harley logo or the Harley 25 name being described. The best answer I can give you 0066 1 is, I think that any one of a number of the accounting 2 organizations, and there were two or three that we 3 pointed out in our report, are currently doing return 4 on investment analysis, using the variety of issues 5 that advertising people claim are important. Levels 6 of loyalty, levels of repeat business, visibility of 7 the brand, attitudes towards the brand. So there are 8 a set of metrics. Are the metrics perfect? I don't 9 know that that's necessarily the issue. I think that 10 if the metrics can be agreed to by both the agency and 11 the enterprise, what you have established is a metric 12 and a baseline, and so the thing to look at is the 13 continuity of the measurement of ROI and see whether, 14 in year two, things have changed, and using the same 15 metrics, there is some significant improvement taking 16 place. And so the essentially the answer is not -- in 17 my mind, because of the -- to coin a phrase, because 18 of the relatively squishy nature of some of the 19 metrics that are used, what you're looking at is 20 establishing a benchmark and then comparing 21 performance to that benchmark year after year, or 22 whatever measurement period you -- one selects. And I 23 think that's the way in which the best work has been 24 done. 25 Isabella. 0067 1 DR. CUNNINGHAM: If I may try to answer 2 partially your question, Commissioner. I think there 3 are two things that are misunderstood when one talks 4 about ROI in advertising. One, and the immediate 5 reaction is to relate the investment to immediate 6 sales, as I heard the discussion previous to our 7 presentation. And that's a very legitimate way to 8 measure the return on investment. And, in fact, some 9 of the advertising budget should be dedicated to that 10 particular objective. The harder one to measure is 11 the long-term effect of the investment. You have not 12 only one constituency, meaning the people who buy 13 lottery tickets, other constituencies are the public 14 in the state of Texas, the perception that people have 15 of the function of the lottery, and government 16 officials. And any other types of constituencies that 17 must have a very positive idea of what this 18 institution is doing for them, for the State of Texas, 19 and for those who benefit from the proceeds as well. 20 Those long-term objectives have to be measured, as my 21 colleague said, based on a baseline of some kind. 22 Start with a standard. What do people think of us 23 today, all of those constituencies, and some of those 24 advertising dollars, some of that investment, must be 25 dedicated to improving that value, perceived value of 0068 1 the brand. Because in the long run that means that 2 people will be more favorable in voting for changes, 3 in buying lottery tickets, people like me will be, as 4 an example, have an incentive of buy lottery tickets 5 because I think it would benefit somebody else as 6 opposed to not benefitting somebody else. So 7 the RFPs, when establishing standards for measurements 8 of ROI, must be very specific as to what measurements 9 are short-term measurements, meaning sales, and what 10 measurements will be long-term measurements, parceled 11 out on a year-to-year basis. A common thing is to 12 say, okay. If ten percent of the public of the state 13 of Texas is aware of the lottery today, would it be a 14 reasonable goal to say that your advertising will make 15 at least 12 percent of the people in the state of 16 Texas in this area to be aware of the lottery, for the 17 next year. And then another goal for the following 18 year. So you can have periodic measurements of that 19 growth, the long-term goal. Okay? I'm trying to 20 break it down to a little more specific measurements. 21 COMMISSIONER COX: Is this an area 22 where you and your colleagues could work with us to 23 try to develop ROI analysis? 24 DR. CUNNINGHAM: Yes, sir. This is 25 probably one of the most intensively scrutinized areas 0069 1 of advertising today. The industry realizes that we 2 need to be accountable. We can't just say, we're good 3 and this is a good ad. And so that's what we teach. 4 We work on this constantly. As Neal said, we don't 5 have a perfect formula, but we constantly work with 6 clients and with agencies and with the media to try to 7 assess what kind of measurements are best at telling 8 us whether the investment was a smart investment that 9 has produced the results that were intended. The 10 easiest way to measure investments in advertising 11 would be the short-term. These are going back to 12 school sales or going out of business sales. That's 13 easy to measure. Everybody can say, okay, I put ten 14 dollars in, I got 15 dollars worth of sales. But 15 that's not what we're all about. In your type of 16 investment, when you invest this kind of money, you 17 want both the short-term and the long-term results. 18 COMMISSIONER COX: Okay. The second 19 area that I am interested in specifically, 20 particularly, is the audit area. What I -- I have 21 asked our staff to look at this -- and perhaps, 22 Professor Burns, you could tell me -- is it your 23 understanding that we have not done any auditing of 24 the advertising agencies in the nature -- of the 25 nature that you're talking about? Now, I'm certain 0070 1 that our accounts payable department has audited the 2 invoices that have come in and looked for support and 3 those kinds of things. I've asked our internal 4 auditors what they may have done and I've asked them 5 to report to us later. But as far as the things that 6 you were mentioning specifically that seem to be 7 related to an advertising audit that one might not 8 look for in financial audits, let's say, those are 9 things that, it appears to you, we have not been doing 10 at all? 11 DR. BURNS: To the best of my 12 knowledge, and in talking with the agencies, I'm not 13 aware of -- of a specific audit that has been done on 14 the lottery accounts in either of those shops. If I'm 15 in error on that, I apologize to the people in the 16 State who did the audit and to the agencies. But, 17 again, by my recollection and my notes, and I think we 18 quoted that in our final report as well, is those 19 audits didn't take place. 20 The question that you asked was, 21 what -- how does that audit occur or what would you 22 look for? Or was it just whether it has taken place? 23 COMMISSIONER COX: I think you -- what 24 I was trying to ask, I think you've answered. 25 The next part is that what I saw you 0071 1 put up there about what kinds of things auditors might 2 be looking for looked very specialized, and I think I 3 heard you say that there are firms out there who do 4 specialize in these kind of audits. 5 DR. BURNS: Uh-huh. 6 COMMISSIONER COX: Is this, again, an 7 area where you could help us by supplementing our 8 expertise to help us either develop some of this 9 capability in-house, acquire this capability, or some 10 combination of those, so that we are exercising our 11 fiduciary responsibility to audit these ventures? 12 DR. BURNS: Let me mention that I 13 understand, both from your staff as well as from the 14 conversations that we've had, as well as looking at 15 billing itself, that the complexity of approving 16 invoices on all parties' parts is, it seems, 17 extraordinarily cumbersome. And one would like to 18 find ways of streamlining that, to the extent that it 19 can be streamlined. I think there are some barriers 20 in place, because it is a State agency and because of 21 the kinds of scrutiny that State and Federal agencies 22 must have in terms of making sure that they serve the 23 public, and because of the devastating impacts of 24 things going south at any point, that -- that needs to 25 continue. It doesn't mean that it can't be improved. 0072 1 But that's not the audit of which we're speaking. 2 Yes, I do think there are firms that can conduct such 3 audits, but I also think, if you are going to really 4 be sure to implement that, I would suggest -- and it 5 may be through the good services of an organization 6 such as the University of Texas -- that discussions 7 take place within the State, and also with large and 8 small agencies, about the kind of audit that -- you 9 know, that would be reasonable. And I think that 10 agencies will be forthcoming and say, these are the 11 kinds of metrics and this is the way in which we keep 12 our data, and these are the things that we could 13 conveniently provide to you that would give you an 14 indication of how genuine and the level of effort 15 that -- you know, that we expended. And when you 16 would do that, you know, you would actually have a 17 history that would be there, not only for that time 18 period or comparing, you know, a variety of agencies, 19 you could also have it on a going-forward basis. And 20 so I would not suggest that in some independent 21 fashion, some people in the ivory tower would sit down 22 and decide what the audit should consistent of. But I 23 think that if one did such a study and came back to 24 the Commission, properly done, it would have full 25 consideration for the people in the agency as well as 0073 1 for the needs that the State has in terms of making 2 specific financial determinations. 3 COMMISSIONER COX: And, finally, one of 4 the representatives of one of our agencies indicated 5 that his agency spends more time in billing than they 6 spend on creative and production. Do you -- 7 DR. BURNS: Are you doing your written 8 comments? 9 COMMISSIONER COX: Are we too much 10 trouble? 11 DR. BURNS: No. And, you know, I also 12 think that that -- that that is a luncheon 13 conversation comment that I did probe a bit and felt I 14 should report because I thought that it kind of 15 epitomized the complexity that I heard both internally 16 from your staff as well as from -- you know, from the 17 agencies. But it may have been a bit of an offhanded 18 comment and I would hate to have that characterize the 19 work of any agency, although the comment was made, you 20 are trouble. Working for the National Aeronautics and 21 Space Administration, working for the Department of 22 Defense on -- it doesn't matter whether you're a huge 23 contractor whose CEO has become the vice-president of 24 the nation, or whether you're a small-owned minority 25 firm with a dozen or two dozen employees, if you're 0074 1 working for the government, you have the burden of 2 that kind of reportage, and it just comes with the 3 territory. There are, by the way, advantages to 4 having a piece of business from the State, whether 5 it's natural resources or it's the lottery, it should 6 be a showpiece. It means that you've competed with 7 your fellow agencies and you've won. And, you know, 8 so there -- there are other rewards that accrue to the 9 agency that succeeds in those competitions and that 10 does that work. It is also highly visible work and 11 there is a lot of work to be done. A lottery is 12 essentially a retail business and it generates a lot 13 of ads. You end up with a portfolio of dozens of 14 radio commercials and a lot of print and outdoor and 15 television. And so that gives your staff a -- a 16 wonderful -- you know, so are you too much trouble? I 17 don't think it's you, I think that if one decides that 18 one is going to do the work for State and Federal 19 agencies, there is a level of scrutiny that isn't so 20 different, by the way, any longer as it is working for 21 other companies as well. We've come through a period, 22 as you know, whether it's MCI, or it's Enron, or it's 23 Vice President Cheney, or it's the lottery and its 24 director, at a particular point in time where 25 appropriate scrutiny is good. And that happens. 0075 1 The -- you know, the press is often criticized, and 2 maybe I even suggested that it seems to be a little 3 critical, but the issues and the variances are done by 4 the enterprises, and the press reports that. 5 COMMISSIONER COX: I see your message 6 loud and clear as being, we can get more for our 7 advertising dollar. 8 DR. BURNS: I believe that to be the 9 case. 10 COMMISSIONER COX: And I appreciate you 11 all bringing that to our attention, and hope that our 12 staff will work continue to work with you to help us 13 achieve that goal. 14 CHAIRMAN CLOWE: I'm going to defer my 15 questions or comments until after we hear from staff 16 and Mr. Grief. Mr. Anger, I believe you wanted to 17 comment? 18 MR. ANGER: Yes, sir. In fact, I'll 19 ask Doctor Burns to play musical chairs with me so I 20 can have access to the PC. I just have a very brief 21 presentation for you this morning. 22 Commissioners, the staff have reviewed 23 in detail the recommendations presented by the 24 University of Texas consulting team and visited with 25 the consultant and members of the UT staff regarding 0076 1 those recommendations. And I would like to begin by 2 stating in brief that staff agrees with all 11 3 recommendations outlined in the consulting report. 4 With regard to two of those recommendations, however, 5 staff agrees in principle with these findings, with 6 some slight modifications being proposed for those 7 recommendations. And I would just like to review 8 those with you. 9 Recommendation number five in the 10 consultant report talks about goals and 11 accountability. From the consultant's report, the 12 team recommends that performance goals for advertising 13 and marketing communications be established and 14 specific in the contractual format. The staff 15 supports this recommendation and believes that it is 16 important that advertising goals should be established 17 to provide the advertising vendors with benchmarks 18 with which to gauge their success and their 19 performance. However, staff believes that tying such 20 goals and objectives to the advertising service 21 contracts, in essence, embedding certain performance 22 goals in the contract, would limit flexibility 23 required to react to the marketplace and State agency 24 requirements. Staff's recommendation would be that 25 those strategic goals and objectives be established 0077 1 outside of the advertising services contracts 2 themselves and that the contract talk to the 3 importance of these goals and objectives and set a 4 structure for those how those goals and objectives 5 would be both contemplated and measured. And what 6 staff would recommend in that regard would be formal 7 annual meetings to establish the advertising goals and 8 objectives. And additionally -- and this ties into 9 recommendation number seven that Doctor Neal Burns 10 covered, regarding having quarterly meetings -- also 11 setting a quarterly structure to sit down in a very 12 formal way and review those goals and objectives, 13 review performance against those goals, and possibly 14 reset and make changes to goals and objectives that 15 have been established, based on performance. 16 The staff has discussed this approach 17 with regard to these goals and objectives with 18 Doctor Burns, and we believe that -- that that's an 19 approach that we can functionally establish as far as 20 clear goals and standards, while maintaining the 21 flexibility to adjust to the agency's changing needs. 22 The second recommendation that the 23 staff had comment on is regarding alternative 24 contractual formats, and the response from the 25 recommendations that came in that the team recommends 0078 1 that alternative advertising agency contract 2 arrangements be considered that are based les on 3 agency income being derived from media placements and 4 more on performance. 5 Once again, staff supports this 6 recommendation that advertising vendors' compensation 7 agreements should be based on a broader range of 8 services than the current contract, which is primarily 9 focused on commissions charged for media placement and 10 production services. Staff is currently researching 11 and reviewing best practices in regard to the 12 advertising service contract compensation structure, 13 and we're currently looking at some of the different 14 concepts that Doctor Burns laid out with regard to a 15 fee-based approach or a cost recovery approach plus 16 fixed fee. Staff is somewhat concerned with an 17 approach that would tie payment for services to 18 incentive-based performance clauses that existed in 19 the contract, and this goes back to the staff's 20 comment with regard to recommendation number five. 21 The staff believes that tying compensation to specific 22 performance-based goals outlined in the advertising 23 services contracts would limit the flexibility 24 required to react to the marketplace and State agency 25 requirements. As outlined previously, staff 0079 1 recommends that strategic goals and objectives be 2 established outside of the advertising services 3 contracts and measured routinely through an organized 4 process. Staff also believes that the recommendation 5 outlined in number nine, which would allow the agency 6 to receive additional feedback on vendor performance 7 with regard to creative development from the 8 advertising community would also be an opportunity to 9 share with vendors communication with regard to their 10 performance and another basis for measurement on the 11 part of the agency. Staff has communicated with 12 Doctor Burns with regard to this suggestion and it is 13 well believed that the RFP can be drafted with a more 14 comprehensive cost structure that would best serve the 15 needs of the agency and committed to working with the 16 advertising consulting team to identify the very best 17 structure for the agency. 18 That concludes my comments. I'd be 19 happy to answer any questions. 20 CHAIRMAN CLOWE: Any questions? 21 COMMISSIONER COX: Michael, could you 22 bring into real sharp focus the differences between 23 what the consulting team recommended and what you're 24 recommending, in a line or two? 25 MR. ANGER: Yes, sir. And maybe the 0080 1 best way for me to do that is via an example. The 2 agency may, at a particular point in time, sit down 3 with the agency advertising firms and, for instance, 4 if we're going through an RFP and taking the approach 5 that Doctor Burns outlined, we would establish very 6 specific set goals for the vendor to achieve, and 7 those would probably be based on measurable 8 percentages, possibly through IPSOS-Reid, research 9 feedback that we receive, measurements of sales, 10 percentage increase in sales on particular products 11 that we might be interested in emphasizing. But we 12 are concerned that over the length and life of a 13 contract, that that's a living, breathing arrangement 14 that is subject to change over time. And if by 15 embedding things that we sit here today believing are 16 the highest priorities for the agency, into that 17 contract, might limit us. And the example I would 18 give you is this: Let's say that we wanted to focus 19 on the Mega Millions game and we wanted to increase 20 awareness of that game by ten percent among the Texas 21 public population and we wanted to increase sales by 22 three percent. And if we went forward and set that 23 out in a contract agreement and then we looked to the 24 second year of that contract agreement and we wanted 25 to set new parameters and increase that level even 0081 1 more, so maybe we set the awareness level at -- from 2 the baseline, a 15 percent increase and then a five 3 percent increase in sales, that if we had over 4 performance, if we were wildly successful beyond our 5 original expectations, we would set a standard in the 6 first year that might be achieved, and we might have 7 gone beyond that all the way to the standard that was 8 set in the second year, and we wouldn't have, in the 9 contract structure, the ability to easily move that or 10 change that. In other words, if our success is 11 greater or less than what we expect, we may have 12 adjust our expectations or adjust the goals that we 13 set, and we would want to have the flexibility to be 14 able to do that. We feel like that by clearly 15 communicating that that is the way that this agency 16 measures performance via the contract itself, we could 17 then go through a mechanism outside of the contract 18 and set those standards, and we could adjust them 19 according or change more rapidly to set new goals that 20 we could agree upon with an advertising vendor. 21 COMMISSIONER COX: That was a pretty 22 long line. 23 MR. ANGER: That was a long line. It 24 was a bit longer than two lines, wasn't it? 25 COMMISSIONER COX: Professor Burns, 0082 1 does that work for you? 2 DR. BURNS: I think it does. And I 3 think what Michael has -- in our discussions, as he 4 has mentioned, there are some operational 5 considerations. The concern that one has is that in 6 the modifications that are being suggested, we don't 7 remove the essence of the recommendation, which is 8 that the enterprise as a whole is going to be 9 measured. It's going to be measured by the public in 10 terms of its response, it's going to be measured by 11 the state legislature, and it's going to be measured 12 by the media, and so we need to have reasonable goals. 13 I think the flexibility that you're talking about is 14 an important operational consideration that we may not 15 have given enough attention to. One could argue that 16 you could try to write a contract that would give you 17 such flexibility, but I think the modification that 18 the staff has come forward with is reasonable and 19 operationally sound. 20 COMMISSIONER COX: Thank you, 21 Mr. Chairman. 22 CHAIRMAN CLOWE: Mr. Grief, I believe 23 you have a view that you want to express, but before 24 we get into that, let's take a short break. 25 (RECESS.) 0083 1 CHAIRMAN CLOWE: We'll come back to 2 order now, please. 3 All right. Mr. Grief, you'll have your 4 bite at the apple now. 5 MR. GRIEF: Very good. Good morning 6 again, Mr. Chairman, Commissioner Cox. I just wanted 7 to supplement what the staff's recommendation has been 8 this morning. If you could get the lights, I have a 9 brief few slides I want to go through. 10 First of all, I want to thank the 11 University and Doctor Burns in particular for the 12 excellent work that they've done for this agency. 13 They've been a delight to work with, and I've had the 14 chance now to sit in on a couple of lengthy meetings 15 with Doctor Burns and his staff, and it's been very 16 helpful, educational. I think this will go a long way 17 towards helping us improve the way we advertise 18 lottery products here in Texas. 19 I also want to say that I fully support 20 the recommendations that Mr. Anger has laid out on 21 behalf of staff. But I believe that recommendation 22 number four by Doctor Burns' team, which has to do 23 with recommending a single advertising agency be 24 selected for maintaining brand equity, I believe that 25 one deserves a little bit more discussion, and I want 0084 1 to go through a couple of things with you, if I could. 2 In the report that was produced by the 3 University, some excellent points were made regarding 4 how critical it is that lottery advertising 5 effectively and appropriately appeal to a wide 6 audience that reflects the diversity of our state's 7 population, as well as the State initiative of HUB and 8 minority participation in contracts such as these 9 advertising contracts. Regarding the current 10 contractual arrangement that the Lottery Commission 11 has with our two advertising vendors, DDB and The King 12 Group, I want to reference some excerpts from 13 Doctor Burns' report. The report states that the 14 advertising responsibilities and media planning are 15 currently held and executed by two agencies, one 16 primarily serving the general market, and the other 17 the minority segments in Texas. The contracts 18 themselves reflect in part the importance placed on 19 HUB minority participation. The TLC has been 20 successful in meeting or exceeding the HUB goals and 21 its advertising agency contractors have functioned 22 similarly. New opportunities in gaming and the 23 importance of attracting new segments to the game, 24 while keeping the segment currently active, represent 25 important challenges. Regarding the challenge in 0085 1 effectively reaching the African-American market, 2 Doctor Burns' report states that African-Americans 3 reflect approximately 12 percent of the Texas 4 population, and that general marketing efforts are 5 often inadequate in reaching and motivating 6 African-Americans. He goes on to say that this means 7 that an advertising plan that reaches the general 8 population may often under deliver African-Americans. 9 Historically, the lack of diversity in the advertising 10 industry itself is also quite telling. And without 11 the in-house resources to create relevant and 12 compelling communications to African-Americans, many 13 general market advertising agencies rely on ethnic 14 casting for their multi-cultural efforts, a trend that 15 often rings false for many African-Americans. Casting 16 without insight does not address the subtleties of 17 culture and does not make for compelling advertising. 18 Regarding the Hispanic market in Texas, 19 the report goes on to say that for the Texas Lottery 20 and its reach and presence within the Hispanic 21 community, thorough understanding of the use of the 22 Hispanic media is important for the advertising agency 23 charged with communicating with that segment. The 24 report also says, in some areas such as Texas, the 25 Hispanic and African-Americans plus Asians outnumber 0086 1 the Anglo non-Hispanic population. Reaching this 2 Texas minority majority market in Texas in ways that 3 will be perceived as relevant and informative will 4 require a very sophisticated understanding of this 5 multi-cultural part of our population by those charged 6 with communicating the lottery and the messages about 7 its products. 8 And finally, the report goes on to say, 9 fundamentally, the issues addressed in the previous 10 half dozen pages may well represent the major 11 challenge in the contracts we have reviewed. The 12 existence of two agencies that are not related and 13 have essential autonomy from each other create certain 14 inefficiencies in the conduct of their service to the 15 TLC. Equally important, such agency division and 16 separation may not be truly effective in building of 17 brand loyalty across the state of Texas. 18 My point in referencing the report on 19 these matters is to emphasize the importance and the 20 challenge of, first, effectively reaching both the 21 general market and minority market with our 22 advertising efforts; and, secondly, following State 23 policy in our good faith efforts to contract with HUB 24 and minority vendors when possible, both ventures that 25 we have been successful in over the past several 0087 1 years, considering the agency's record and HUB and 2 minority contract participation, and the amount of 3 revenue that the lottery has contributed to the State. 4 I took note in the report of the 5 concerns raised that the general market advertising 6 agency may lack the expertise to effectively reach the 7 minority market, and while I certainly embrace the 8 majority of your report, I am recommending that we 9 proceed with careful consideration and execution in 10 the area of determining whether a single or multiple 11 agencies will be the most effective approach for our 12 advertising efforts. 13 With that in mind, I am recommending to 14 the Commission that you allow us to draft the 15 advertising RFP in a very broad and flexible manner, a 16 manner that will allow us to keep all of our options 17 open and solicit proposals under a variety of 18 different structures, such as one similar to our 19 current structure, using a general market and one or 20 more possible minority market agencies, or perhaps 21 utilizing a primary agency with some required 22 subcontracting agencies, or even utilizing a structure 23 like the one that's been recommended in the 24 University's report. Or perhaps a hybrid, one I've 25 previously mentioned. 0088 1 We will certainly call upon the 2 University, under the terms of our interagency 3 agreement, to assist us in developing the RFP. And we 4 will also call upon them to help us evaluate the 5 proposals that we receive, and they will also help us 6 in determining the best option for the State, and we 7 will keep the Commission apprised of our progress. 8 I welcome any feedback or suggestions 9 the Commission may have. 10 CHAIRMAN CLOWE: Comments, 11 Commissioner? 12 COMMISSIONER COX: I think it's about 13 your turn. 14 CHAIRMAN CLOWE: I've been waiting for 15 this. 16 I would like to join Commissioner Cox 17 in the expression of appreciation to you, Doctor, and 18 you, Professor, for your work in the report that 19 you've given us here this morning. Although I haven't 20 met at length with you, I have been interested in your 21 work and I think many of my thoughts and interests 22 have been conveyed to you. 23 I would first like to make a comment 24 about the past. You know, this agency is unique and 25 as I often say, we're not making license plates here. 0089 1 We're printing a product that has a minimum of a 2 dollar value and, in many cases, what we're printing 3 has much more than a dollar's value, and then we turn 4 around and sell that to the general public. And that 5 makes this agency very unique. We're running a three 6 and a half billion dollar a year business by selling a 7 product to those in the state of Texas and outside of 8 the state of Texas, and that makes us the subject of 9 scrutiny, sometimes much of it adverse. There are at 10 least a quarter, maybe a third to a half at a certain 11 point in time, of the people in this state who do not 12 like what we are doing at this agency. And we're 13 respectful of that. We are very respectful of that. 14 And over the time that I have been on this board, 15 there has been from time to time a public reaction 16 against gaming in this state, and specific anti-gaming 17 sentiment expressed from members of the legislature. 18 I can remember when I first came on 19 this board, there were members of the legislature who 20 had caused this agency to do away with one of its most 21 effective advertising images, and that was Scratch 22 Man. There were those, over my tenure on this board, 23 who did not want the fact publicized that the proceeds 24 to the State of this operation went to the Foundation 25 School Fund. And there was a member of the 0090 1 legislature who told me that the Foundation School 2 Fund didn't need the proceeds of this agency's 3 activity, and that individual wished there was no 4 gaming in this state and would do everything that that 5 individual could do to stop gaming in this state. And 6 that sentiment has affected our advertising budget in 7 a real and tangible way over the various sessions of 8 the legislature. 9 Currently, I see the attitude of the 10 legislature, as I read it, as more favorable to the 11 operation of the lottery, with the proceeds of 12 approximately a billion dollars a year to the 13 Foundation School Fund being viewed as more important, 14 but at the same time, there is a continuing view that 15 there needs to be care about how we advertise this and 16 how we approach the players that are in the state of 17 Texas. We see that from time to time manifested in, 18 for example, the report that we take on the players of 19 the game. And more recently the indication is, and 20 it's debatable, there are members of minority groups 21 playing more often, spending more money. That is a 22 point of criticism on the behalf of those who do not 23 want gaming in this state. There is the issue of 24 targeting, and you mentioned that in your report. And 25 on the one hand, there are those segments of the 0091 1 population in the state who want more advertising 2 dollars and are asking for it, based on being a 3 minority ethnic group, but there are those in that 4 same ethnic group saying, you're targeting us with 5 your advertising and you're taking more of our dollars 6 and you shouldn't do that. This is a prickly subject. 7 And being a State agency and working with the State of 8 Texas' money, we don't have the freedom that, for 9 example, Coca-Cola might have in trying to get people 10 to buy that product instead of Pepsi-Cola. 11 This is a subject that is very 12 delicate. And that's a concern that I want to tell 13 you that I have in our advertising efforts. And I 14 have seen over my now almost eight years on this board 15 the sentiment, as I say, change more in the 16 legislature, I think, than among public members. I 17 have heard media criticism that they weren't getting 18 enough advertising dollars. I don't believe in my 19 tenure I've heard individuals in the player group 20 criticize the advertising as targeting them, but that 21 may have been out there and I just haven't heard it. 22 As I say, I am very respectful of those people who 23 don't like gaming. We must be mindful of their 24 viewpoint and we must be very balanced and even-handed 25 in the approach that we take in our advertising. We 0092 1 cannot target and we cannot fail to recognize and 2 respect the ethnic groups that make up the population 3 among the players. 4 I think Gary Grief has expressed a 5 thought that I am very sympathetic to, and that is, 6 the continued development of fairness and equality in 7 the awarding of this advertising contract, along with 8 all of the other issues that you have raised. We are 9 a State agency and we are extremely proud of the 10 effort and the results that we have created in the 11 business that we do in the State and engaging HUB 12 activity companies and minority contract placement. I 13 think we rate -- I think we rate number one among 14 agencies of our size. If not, we rate right there at 15 the top in this effort. And I also was on this board 16 when the minority advertising contract scheme was 17 developed, and that it was given the opportunity to do 18 the things that we've talked about that are equal and 19 fair for advertising. 20 I sense an underlying feeling from your 21 report that we haven't done a very good job having 22 these two entities, and that we are wasting some money 23 and we are wasting some productivity as a result of 24 lack of either supervision or control in having this 25 kind of arrangement. I'm open to your recommendation 0093 1 that we only extend these contracts I think for six 2 months and then come out with an -- another RFP and 3 develop a new approach as long as, Gary, you stated in 4 your recommendations, these elements of fairness and 5 equality are preserved. And if we can achieve that 6 and at the same time have a more meaningful use of our 7 advertising dollar, which I think is our goal, then we 8 sort of have the best of both worlds. 9 In so far as the future, I share in 10 everything that Commissioner Cox said. I think we 11 have made a best effort in this agency to get the most 12 out of our advertising dollar, but up until now, we 13 haven't had the kind of expertise that you have 14 brought to us. We have had some very professional 15 people in the agencies that we've employed and 16 IPSOS-Reid and the surveys that they've conducted, but 17 we haven't had the kind of oversight that you have 18 given us in this report that you have covered this 19 morning. And this is what Commissioner Cox has been 20 after, and I've been behind him supporting him in it. 21 This is what we need when you're spending in excess of 22 30 million dollars a year, to evaluate, to judge, and 23 then to make changes. 24 I think our meeting here this morning 25 and this item on the agenda is not an action item. We 0094 1 are not going to take a vote on this, but I think that 2 what we're giving you is policy advice. And I'm 3 satisfied with the report that has been made and the 4 comments now that you have received from Commissioner 5 Cox and myself. And I think both of us look forward 6 to working with you as you develop your path in the 7 future, and I think we want to keep these folks from 8 the University of Texas close to us and having them 9 advise us, because this is the highest level and the 10 most professional advice I think we've gotten on this 11 subject. 12 MR. GRIEF: I totally agree. 13 CHAIRMAN CLOWE: Commissioner Cox, 14 would you add to that? 15 COMMISSIONER COX: No, sir, I would not 16 add to that. I agree completely. 17 CHAIRMAN CLOWE: Very well. Thank you 18 all very much. We appreciate it. 19 COMMISSIONER COX: Mr. Chairman. 20 CHAIRMAN CLOWE: Yes, sir. 21 COMMISSIONER COX: I do want to put 22 something on the record, Mr. Chairman. Right here in 23 the back of this report -- this report is a public 24 document, I assume, Ms. Kiplin? 25 MS. KIPLIN: Is it a final report? 0095 1 DR. BURNS: Yes, ma'am. 2 MS. KIPLIN: Then I believe, under the 3 Open Records Act, it would be. There may be 4 information in there that we would need to take a look 5 at to see if it would be excepted from public 6 disclosure for other reasons. 7 COMMISSIONER COX: And this is a xerox 8 copy of something from the Harvard Business School? 9 MS. KIPLIN: I haven't review it, so 10 I'm going to qualify my remarks on it. 11 COMMISSIONER COX: Do you want to look 12 at it now? 13 MS. KIPLIN: It's a publication that's 14 already been distributed and is open to the public. I 15 think that's fine. The only thing I was thinking 16 about were excerpts that might have been taken from 17 contracts that somebody might claim to be of a 18 proprietary nature and therefore protected. 19 COMMISSIONER COX: No, no. This 20 appears to be, Mr. Chairman, a case study at the 21 Harvard business school relating to lotteries. And 22 there are three tables in this case study purporting 23 to rank the top ten lotteries by three criteria; one 24 being marketing efficiency, the second being lottery 25 effectiveness, and the third being lottery efficiency. 0096 1 Now, if you look at all of these, you will find that 2 on -- in the top ten of two of those categories, Texas 3 does not appear, and in the third category, the State 4 of Texas appears ninth out of ten. What the folks who 5 wrote this case -- or at least put together these 6 tables seem to have overlooked is that it is very easy 7 to be efficient in marketing when you're in New Jersey 8 and when you have very large populations in contiguous 9 states that are very close to you and who you are 10 reaching with your marketing efforts. Whereas, when 11 you are Texas and you have very small population in 12 contiguous areas and they're spread out and hard to 13 reach, it's not quite so easy. So I would ask that if 14 anyone wants to look at that and say that the Texas 15 lottery is not very good at those three things, they 16 would recognize that whoever put the tables together 17 apparently didn't take into consideration how easy the 18 job was, but just looked at some numbers. 19 CHAIRMAN CLOWE: Very good. And I 20 guess I would like to add, since you've brought that 21 up, that Booth has always been one of my favorite 22 cartoonists, and I think that you picked three great 23 ones, and that one particularly I enjoyed. Then I did 24 want to ask you finally, is Alpha Delta Sigma still 25 alive and well? 0097 1 DR. CUNNINGHAM: Yes, sir. 2 CHAIRMAN CLOWE: I just want you to 3 know, I'm an alumni. I was in the School of 4 Journalism for a short time until they threw me out. 5 DR. CUNNINGHAM: That's wonderful, sir. 6 We're proud of all of our alumni, especially alumni 7 like you. 8 CHAIRMAN CLOWE: I think I've got to 9 write the check now. Thank you all very much. 10 DR. CUNNINGHAM: Thank you. 11 CHAIRMAN CLOWE: Next we'll go on to 12 item number two, consideration of and possible 13 discussion and/or action, including proposal, on new 14 rules 16 TAC 402.706 and/or 402.707 relating to the 15 Standard Administrative Penalty Guideline and 16 Expedited Administrative Penalty Guideline. 17 Commissioner Cox, I have a letter, and 18 I believe you have a copy of it, from Mr. Fenoglio, 19 representing -- and although I thought I was going to 20 have it read into the record, I think, in the interest 21 of time, I'll just ask you to review it -- asking that 22 this item be passed due to a number of people who have 23 an interest in this being able to attend this meeting 24 today because of the recent storm and the disruption 25 in the southeast part of the state. I'm inclined to 0098 1 agree to pass this item if you would so allow. 2 COMMISSIONER COX: So these are people 3 that are going to come down here and try to talk us 4 out of even publishing the rule for comment? 5 CHAIRMAN CLOWE: I think that 6 Mr. Fenoglio is better able to answer that question 7 than I am. 8 Steve, would you come up, please. 9 MR. FENOGLIO: For the record, my name 10 is Stephen Fenoglio. I'm an attorney and I'm the 11 author of the letter you have in front of you. 12 There are a number of disparate and, I 13 believe, unique concerns that charitable organizations 14 and lessor organizations have -- or lessor entities 15 have, related to the proposed rule. And they would 16 like to have those in the Commission meeting, on the 17 record, and because of the reasons I outlined in the 18 letter, are not able -- many are not able, most are 19 not able to be here today. 20 COMMISSIONER COX: Well, Mr. Chairman, 21 this is a question of process. Now, these folks get a 22 bite at the apple when they work on subcommittees of 23 the Bingo Advisory Committee, they get a bite at the 24 apple at the Bingo Advisory Committee, they get a bite 25 at the apple at the public comment, and now they want 0099 1 a bite at the apple before we even expose it for 2 public comment? 3 CHAIRMAN CLOWE: That's correct. 4 COMMISSIONER COX: So I do understand 5 it correctly? 6 CHAIRMAN CLOWE: Yes, sir, you do. 7 COMMISSIONER COX: Okay. Whatever your 8 pleasure may be, sir. 9 CHAIRMAN CLOWE: Well, I think the 10 Commission has always had, generally, a policy of 11 being open to comment, and this item is somewhat 12 long-bearded at this time. And it has been passed by 13 the staff a number of times, and they are ready to go 14 forward at this time. I ordinarily would hold to 15 moving forward with it today but, in fact, there was a 16 substantial disruption to the southeast part of the 17 state, and I don't think things in Houston are really 18 back to normal. Certainly, not in Beaumont and 19 Port Arthur and Nederland. And Mr. Fenoglio has 20 represented to us in writing that there are some who 21 would be at this meeting, and if they were here, it 22 would be my inclination to allow them to make 23 comments. And in a sense of abundant fairness, I am 24 inclined to allow this to be passed for one month and 25 let them have that bite at the apple. Can you stomach 0100 1 that? 2 COMMISSIONER COX: Sure. 3 CHAIRMAN CLOWE: Okay. This item will 4 be passed until our meeting in October. 5 Next, item number three, consideration, 6 possible discussion and/or action, including adoption, 7 on amendments to 16 TAC 402.102 relating to the Bingo 8 Advisory Committee. 9 MS. KIPLIN: Commissioners, this is a 10 matter that really relates to extending the Bingo 11 Advisory Committee in existence for one additional 12 year. At your July 11th, 2005 Commission meeting, you 13 did vote to continue the Bingo Advisory Commission and 14 to propose a different abolishment date in the rule, 15 of August 31st, 2006. In connection with that, the 16 staff did propose these amendments and they were -- to 17 the rule and they were published in the July 29th, 18 2005 issue of The Register. We received no comments 19 regarding this rulemaking, and at this time the staff 20 does recommend that you adopt the amendments to this 21 rule. 22 CHAIRMAN CLOWE: Is there any comment? 23 So moved. 24 COMMISSIONER COX: Second. 25 CHAIRMAN CLOWE: All in favor, please 0101 1 say aye. Opposed, no. The vote is two-zero in favor. 2 MS. KIPLIN: Commissioners, I have an 3 order for you. 4 CHAIRMAN CLOWE: Phil, if you would 5 come up, we'll take your item next. 6 Next, item four, report and possible 7 discussion on bingo financial information and 8 statistics, including charitable distributions. 9 MR. SANDERSON: Thank you, 10 Commissioners. For the record, Phil Sanderson, 11 Assistant Director of Charitable Bingo Operations 12 Division. 13 In your notebook today you have a 14 report of the second quarter financial information, 15 for 2005. I would just like to briefly go over that 16 first page there, which indicates total gross receipts 17 of 156.9 million, prize payouts of 118.4, total 18 revenue of 38.5, cost of goods sold at eight million, 19 leaving a net adjusted gross receipts of 30.5 million. 20 Total expenses of 25.8 million, leaving a net revenue 21 of six million, with charitable distributions for the 22 quarter totaled at eight million dollars. 23 I would like to go to the next page, 24 which compares the second quarter of 2005 along with 25 the previous four quarters. The last column will give 0102 1 you a comparison of the second quarter of 2005 with 2 the second quarter of 2004. And if you'll note, gross 3 receipts are up 6.03 percent, prizes are up 7.66 4 percent, revenue is up 1.3 percent, adjusted gross 5 receipts is up .68 percent, and net revenue is down 6 3.14 percent. Charitable distributions is down .67 7 percent, and if you'll note, the required distribution 8 of 1.3 million for the second quarter is down 47.5 9 percent, that's based on the calculation that's in 10 statute. 11 The third page gives you a comparison 12 of the second quarter with the previous four years of 13 the second quarter information. If you'll note, in 14 the last column, compared to the 2001, the second 15 quarter is up 13.45 percent in gross receipts, prizes 16 are up 18.34 percent, revenue is up .66 percent, 17 adjusted gross receipts is up 3.3 percent, net revenue 18 is down .76 percent, with the distributions down 13.38 19 percent. In the earlier presentation that y'all had 20 from the -- I guess it was the Sci Games and MDI, 21 along the lines of instant pull tabs, instant tickets, 22 if you'll note, in the first -- in the second quarter 23 of 2001, gross receipts were 21.3 million and instant 24 pull tab prizes were 14.8, and in the second quarter 25 of 2005, the gross receipts increased 163 percent, to 0103 1 56 million, and prizes increased 176.9 percent, to 2 41.1 million. And that leads with the -- the bingo is 3 in the last five years, showing a gradual gain in 4 instant -- the instant pull-tab tickets. 5 And I'll be glad to answer any 6 questions you have concerning these reports. 7 COMMISSIONER COX: Phil, I see on the 8 page you are on now, the third page, that gross 9 receipts are creeping up. 10 MR. SANDERSON: Yes, sir. 11 COMMISSIONER COX: But I look down at 12 the bottom to some statistics there, conductors 13 reporting, and I see the number of conductors going 14 down each year and the number of occasions, as you 15 would expect with the number of conductors going down, 16 declining and the attendance declining. So what I see 17 is that you're getting more dollars from fewer people 18 and, typically, that is not a situation that can 19 sustain itself for very long. Do you know what the 20 industry -- has the industry looked at those numbers 21 and what kind of reaction they have to that, what kind 22 of concern they have to that, what kind of plan they 23 have about that? 24 MR. SANDERSON: I think that the -- and 25 if you look at the -- going back to 2001, the second 0104 1 quarter, regular bingo, the prize payout percentage 2 was around 69 to 70 percent, and that has increased 3 up, in the second quarter of 2005, to almost 77 4 percent. 5 COMMISSIONER COX: Uh-huh. 6 MR. SANDERSON: The same thing for the 7 instant pull tabs, the prize payout percentage has 8 gone from 69 percent to 73 percent. So if you look at 9 the adjusted gross receipt line, you'll see that that 10 line on this page stays more consistent, which is 11 basically after you're -- it's the hole, so to speak, 12 that you've been talking about in the previous 13 meetings. I don't know if anyone has actually, in the 14 industry, analyzed the numbers as far as the effect or 15 the continued decline. I do know that the number of 16 organizations that are conducting bingo has gradually 17 decreased as well as the number of locations where 18 bingo is conducted. Individuals that are playing 19 bingo are probably playing -- spending more per 20 occasion, but they're not playing as often, so 21 therefore, that gives you the decrease in the 22 attendance number. 23 MR. ATKINS: Commissioner Cox. 24 COMMISSIONER COX: Yeah, Billy. 25 MR. ATKINS: If I could -- kind of 0105 1 along the lines of what Phil is saying, I don't know 2 that we've received any type of formal report from 3 anybody in the industry. We have heard through 4 licensees that we talk to on a regular basis through 5 the conduct of bingo or the Bingo Advisory Committee 6 some pretty consistent comments in terms of the 7 competition that they're facing from other forms of 8 gaming, particularly, nearby casinos along the Texas 9 border, et cetera. In certain large metropolitan 10 areas such as the Dallas area, we continually hear the 11 effects that the no smoking ban has had on those 12 organizations. Again, that being an issue that's out 13 of control of the agency. And probably the most, I 14 would guess, consistent recommendation that we hear 15 from the organizations deal with a better ability to 16 compete for those discretionary dollars through the 17 form of additional or various forms of games that have 18 been talked about fairly extensively. Progressive 19 bingo games, something that may affect the jackpot 20 amount that bingo halls are allowed to award. In 21 recent legislative sessions, there have been 22 discussions of instant bingo card minders. So that's 23 kind of the context that we get from the industry. I 24 do -- you know, the industry knows, as well as we do, 25 in terms of the decline in licensees, occasions, et 0106 1 cetera. But they have been very responsive to the 2 increase in sales in the pull-tab tickets. We're at 3 approximately 111 million dollars so far this year, 4 we're looking at exceeding 200 million dollars in 5 pull-tab sales. So I think the industry sees that and 6 sees that the bingo market has some elasticity in 7 responding to new or varied types of games. 8 COMMISSIONER COX: You didn't mention 9 the gray machines, Billy, the machines that the State 10 of Texas -- 11 MR. ATKINS: I didn't, but we also hear 12 from organizations regarding those. 13 COMMISSIONER COX: Thank you, Billy. 14 CHAIRMAN CLOWE: Anything further, 15 Phil? 16 MR. SANDERSON: Yes, sir. I would like 17 to give you a little bit more presentation on the new 18 forms of the quarterly report, the information that 19 we're garnering off of that with the breakdown in 20 expenses. 21 CHAIRMAN CLOWE: Good. 22 MR. SANDERSON: If you'll notice, for 23 the second quarter of 2005, the regular and electronic 24 bingo sales gross receipts and the prizes paid out are 25 at 76.6 percent, and the prize payout for instant 0107 1 bingo tickets is at 73.4 percent. Cash disbursements 2 out of the bingo account other than prizes as they 3 relate to gross receipts, rent payments, which is the 4 commercial lessors of 6.3 percent, salaries for the 5 callers, cashiers and ushers is 5.9 percent, 6 distributions of 5.1 percent, lease payments to the 7 distributor at 3.2, and the cost of goods sold at 1.9, 8 the janitorial expenses of 1.6 percent, security, 9 legal and accounting of 1.3 percent, and miscellaneous 10 identified in the -- in that box right there, at 1.4 11 percent. 12 And then as -- percentage of overall 13 expenses as they relate to the total expenses, the 14 less -- rent payments to the lessors of 9.9 million 15 represents 38.2 percent of the expenses, the callers, 16 cashiers and ushers represent 35.6 percent, overall 17 salaries account for a little over 50 percent of total 18 expenses, and with the 38.2 percent of the rent 19 payments, the 91 percent -- a little over 90 percent 20 of total expenses are salary and commercial lessor 21 rent expense. 22 And with that, I'll be happy to answer 23 any questions you have on that. 24 CHAIRMAN CLOWE: Thank you, Phil. 25 Next we'll go item number five, 0108 1 consideration of and possible discussion and/or action 2 on a lottery advisory committee. Mr. Grief. 3 MR. GRIEF: Commissioners, on 4 September 15th, I provided you with a document of 5 research performed by staff on a concept that had been 6 asked about by the Commission, and that is, a lottery 7 advisory committee. Just briefly, the key points of 8 that research included that a commission has no 9 express statutory authority to create a lottery 10 advisory committee for general purposes, but could 11 possibly rely on your broad authority to promote and 12 ensure integrity, honesty and fairness in the 13 operation and administration of the lottery. None of 14 the responding lotteries or surveyed State agencies, 15 at the time we sent you the report, reported to us 16 that they had an advisory committee that advises on 17 the overall operation of the lottery other than those 18 Governor-appointed boards and commissions. Many State 19 agencies did, however, have advisory committees for 20 specific purposes or programs. 21 Since I sent you the report, we did 22 have another response come in from the D.C. lottery. 23 They indicated that they do have an advisory committee 24 consisting of, in the words of the D.C. lottery, 25 participants who reflect different areas of the 0109 1 community, such as marketing, sales, business, and 2 players. The committee meets quarterly to provide 3 advice and support for changes in games, promotions, 4 organizational structure. Their comments reflect 5 issues voiced in the community. That advisory 6 committee has 15 members, which are appointed by the 7 executive director of the D.C. lottery. 8 Moving on through the report that I 9 sent you, the general sentiment from staff at the 10 leadership offices that we contacted was that advisory 11 committees can sometimes add an extra layer of 12 bureaucracy to the process, but they could be helpful 13 if they are created for a specific purpose or to 14 address a specific matter. 15 And, finally, also noted by staff at 16 the leadership offices was that when an advisory 17 committee is created, one could raise the question of 18 whether the commission or board was having difficulty 19 addressing an issue and therefore needed the 20 assistance of an advisory group. 21 And this morning, I have both legal and 22 research staff standing by who helped compile that 23 report for you and we would be happy to try to answer 24 any questions that you might have. 25 COMMISSIONER COX: Mr. Chairman, I 0110 1 asked this question a couple of months back, and I 2 think it's been satisfactorily answered. I think that 3 the presentation that we have in our book addresses 4 the various issues, and I think that I -- we explored 5 it and I don't see any need for it. I know that the 6 folks from UT suggested the other day -- I was talking 7 to Professor Burns and he suggested we might have this 8 advisory committee on creative, and my first reaction 9 to that was, I would rather have you guys. So I think 10 if we need specific help, we can get consulting help 11 and go from there. 12 CHAIRMAN CLOWE: I agree. Thank you, 13 sir. Thank you, Gary. 14 Next, item six, report, possible 15 discussion and/or action on lottery sales and revenue, 16 game performance, new game opportunities, instant game 17 plan, and trends, such report to include an analysis 18 of the relationship between lottery sales and 19 increasing energy costs. 20 Ben. 21 MR. NAVARRO: Good morning, 22 Commissioners. For the record, my name is Benito 23 Navarro. I'm the Financial Account Reporting Manager. 24 Our presentation has changed in form a 25 little bit this month because we have concluded one 0111 1 more fiscal year, so rather than give you the typical 2 update from week to week, we're going to give you a 3 fiscal year 2005 update. 4 First, we have our graphic reflecting 5 revenue from sales and net revenue to the State. Key 6 figures here to point out is the estimated revenue to 7 the State of 981.2 million dollars. All the figures 8 represented in this graphic today are on an accrual 9 basis of accounting as opposed to a cash basis of 10 accounting, which we usually report to you on a 11 month-to-month basis. 12 Revenue -- obviously, the estimated 13 revenue to the State is down from fiscal year 2004 by 14 approximately 1.7 percent. We have -- I have adjusted 15 also the prize expense for unclaimed prizes, and you 16 see that our year-end prize payout percentage has 17 decreased from the 62.6 to the 60.9 percent. 18 This is a graphical representation of 19 online and instant revenue from sales only. And you 20 see that there is a 17.4 percent decrease in revenue 21 from '04 to '05, where instant tickets revenue from 22 sales increased by 11.6 percent. 23 This is the same representation, but 24 from a sales standpoint. You'll see that, again, 25 online sales decreased by 17.6 percent and instant 0112 1 ticket sales increased by 16.3 percent; overall 2 increase in sales of five percent from '04 to '05. 3 This is year 2005 sales and revenue by 4 game. Again, instant tickets making up 61.5 percent 5 of our revenue of 603.9 million. Lotto Texas and 6 Pick 3, very close from a revenue standpoint, but 7 Pick 3 did edge out Lotto, making up 11.8 percent of 8 our revenue, followed by Mega Millions, with 70.7 9 million, or 7.2 percent of our revenue. Again, total 10 revenue to the State from sales 981.2 million. Total 11 sales for the fiscal year of 3.7 billion. 12 This is just a graphical 13 representation -- 14 COMMISSIONER COX: Let me ask you a 15 question back there. 16 MR. NAVARRO: Uh-huh. 17 COMMISSIONER COX: We've got Pick 3, 18 the numbers game -- 19 MR. NAVARRO: Right. 20 COMMISSIONER COX: -- generating more 21 money than either of our lottos. Is there any other 22 state where that's the case? 23 MR. NAVARRO: I couldn't tell you off 24 the top of my head, Commissioner Cox, but we could 25 certainly look into that. 0113 1 COMMISSIONER COX: Robert, do you know? 2 MR. TIRLONI: For the record, my name 3 is Robert Tirloni. I'm the Products Manager for the 4 Texas Lottery. 5 I don't know off the top of my head. I 6 can tell you, there are a lot of states in different 7 regions of the country that do even better than we do 8 on daily numbers games such as Pick 3 and Pick 4. 9 What I've heard from recent lottery conferences that 10 I've just attended was that jackpot games -- and as we 11 discussed earlier today, jackpot games in the industry 12 are in trouble, so to speak, because of the reliance 13 on reaching a jackpot level that's appealing to the 14 public. And so games in the state, in some states, 15 such as your daily numbers games that are not reliant 16 on those jackpots, are doing better. 17 COMMISSIONER COX: And that -- you just 18 said daily numbers games. Pick 3 is a daily game? 19 MR. TIRLONI: Monday through Saturday, 20 twice a day. 21 COMMISSIONER COX: Monday through 22 Saturday. One of the things I heard the folks from 23 Sci Games talk about, and which we have talked about, 24 is -- I think they used the term more frequent winning 25 opportunities. 0114 1 MR. TIRLONI: Correct. 2 COMMISSIONER COX: Is -- how much of 3 the decline in Lotto Texas and Mega Millions is 4 related to the fact that while we have accelerated the 5 jackpots by reducing the opportunity to win, if you 6 will, by increasing the odds, we have not accelerated 7 the temporal opportunities to win. It remains twice a 8 week. 9 MR. TIRLONI: I think that's a good 10 point. I think, based on the conversations from this 11 morning's presentation and things that we've talked 12 about here in previous meetings, I think the success 13 with the instant product is the fact that somebody can 14 make a purchase and, in very short order, find out if 15 they've won a prize on that game. 16 COMMISSIONER COX: Like instant 17 gratification. 18 MR. TIRLONI: Absolutely. And I think 19 on the online side of the business, Pick 3 is the game 20 that comes closest to that, because you can go in at 21 11:00 o'clock in the morning and you can make a 22 purchase for our day drawing, and within an hour, the 23 day draw is around 12:27, you can find out if you have 24 won on that wager, and then we follow that up with an 25 evening draw later on in that day. So I think, of all 0115 1 of the online products, Pick 3 is closest to, you can 2 make a wager and find out if you've won. And I think 3 that is a big part of the success of the Pick 3 4 product. 5 Another issue you just raised, besides 6 the frequency, is the odds of winning on the jackpot 7 games. The overall odds of winning any prize on Lotto 8 Texas currently is one in 57. While people do play 9 for the jackpot prize on those games and we're all 10 aware of that, when you continually play with no type 11 of winning reinforcement, after a while, you -- you 12 may stop playing that game and go to a game where 13 you're going to see some type of win. While it might 14 not be a very large amount, but you may go to a game 15 where you see some type of win on some more -- more of 16 a regular or more of a frequent basis. 17 COMMISSIONER COX: So are -- do we have 18 any way of knowing whether players are migrating from 19 Lotto Texas and Mega Millions to Pick 3? 20 MR. TIRLONI: We may be able to look at 21 some previous -- or some of our tracking studies or 22 some of our research studies through IPSOS-Reid, and 23 we may have to -- we may be able to cross tab some 24 data to try to find out or try to get that 25 information. I personally think that we have worked 0116 1 pretty hard to continue to maintain the Pick 3 game 2 over the years. And, you know, Pick 3 is the only 3 product in the entire portfolio, including instants, 4 that has seen an increase every year since it was 5 introduced in '93. 6 COMMISSIONER COX: You know, one of the 7 things that we've done with instants -- I don't know 8 how many instant tickets we used to have, but I'm 9 thinking there must have been a time when we had five 10 and now we have a hundred. Does it make any sense to 11 have more than one Pick 3 game? 12 MR. TIRLONI: More than one Pick 3 game 13 or similar games that are daily number games? 14 COMMISSIONER COX: Yes. 15 MR. TIRLONI: I think that does make a 16 lot of sense, and we're looking at those options. 17 We've talked about a Pick 4 game in the past, and 18 we've also talked about expanding the number of 19 drawings on Pick 3. Those ideas have all been floated 20 around in the past, and we still have those top of 21 mind. Right now we're working on a Lotto 22 recommendation for the Commission next month, and 23 shortly after that we'll be -- we'll be focusing on 24 those games as well. 25 COMMISSIONER COX: Well, you know, 0117 1 we've got some games up there that are troubled, yet 2 we've got a game that's very healthy. And let's don't 3 forget the healthy ones. Let's give them time and 4 attention, and if they need to be replicated to give 5 the people what they're looking for, let's replicate 6 them. 7 MR. TIRLONI: Yes, sir. 8 MR. GRIEF: Commissioner, if I could, a 9 couple of points. The things that you mentioned about 10 the frequency of the opportunities to win, et cetera, 11 those are all things that we're looking at as we're 12 looking to change Lotto Texas. And then the other 13 point I wanted to make is, when you look at that chart 14 and you see that Pick 3 sales, the return has 15 surpassed that of Lotto Texas, I think now in today's 16 environment, the more fair comparison is to compare 17 Pick 3 versus Lotto plus Mega Millions plus Megaplier. 18 I think that market is -- is the fair comparison now. 19 When you start looking at state to state and whether 20 or not Pick 3 is outgenerating the Lotto game, it's 21 not just Lotto any more, it's Lotto plus whatever the 22 multi-state -- if they have a multi-state, whatever 23 that game is. 24 COMMISSIONER COX: And, Gary, you make 25 a good point. My point was not so much absolute as 0118 1 relative. Those games combined are declining; Pick 3 2 is accelerating. 3 MR. GRIEF: And that acceleration has 4 slowed recently. 5 MR. NAVARRO: This is a graphical 6 representation today that was presented previously. 7 This is total lottery revenue from fiscal year 2005 8 sales. Again, you can see that instant tickets make 9 up 61.5 percent of our revenue, followed by Pick 3 and 10 Lotto Texas and Mega Millions. 11 The same graphic for sales, and you can 12 see that instant sales as -- 13 COMMISSIONER COX: Could you go back to 14 the last one a minute, please. 15 MR. NAVARRO: Yes, sir. 16 COMMISSIONER COX: Now, what we've got 17 there is revenue. That's the number that was 18 transferred to the State? 19 MR. NAVARRO: On an accrual basis. 20 This is revenue on an accrual basis. This -- we'll 21 get -- 22 COMMISSIONER COX: So to get there by 23 product, you have made some perhaps heroic assumptions 24 about allocation of expenses, haven't you? 25 MR. NAVARRO: No, sir, because -- well, 0119 1 not heroic, because basically what -- the calculation 2 was that -- that is made here is based on amounts that 3 were actually appropriated to this agency based on 4 sales. 5 COMMISSIONER COX: But have -- you've 6 allocated them pro rata? 7 MR. NAVARRO: Yes, sir. 8 COMMISSIONER COX: So you don't know 9 whether that is the real contribution or not, because 10 you haven't analyzed your expenses to see which 11 expenses relate and -- 12 MR. NAVARRO: Absolutely. 13 COMMISSIONER COX: -- might relate 14 disproportionately to different expenses? 15 MR. NAVARRO: Absolutely. Yes, sir. 16 COMMISSIONER COX: I would rather you 17 didn't use that chart in the future. 18 MR. NAVARRO: Okay. 19 CHAIRMAN CLOWE: Excellent point. 20 MR. NAVARRO: Yes, sir. This is the 21 same representation, but for sales. And, again, 22 instant tickets, like we discussed earlier today, make 23 up about 73.9 percent of our sales. 24 MR. TIRLONI: Commissioners, this is an 25 update that we've been showing you monthly. This is 0120 1 instant revenue by price point. This just illustrates 2 that the bulk of the revenue on the instant product 3 line is coming in from the two-dollar and the 4 five-dollar price point, followed closely by the 5 one-dollar price point. Again, we've not seen really 6 any change in this for quite some time. 7 And then again, we just talked about 8 revenue. Here is the look at sales. Again, the two, 9 the five and the one are leading price points in terms 10 of sales on the instant product line. 11 MR. NAVARRO: Now, we're just going to 12 go on to a historical comparison. Again, on an 13 accrual basis we've allocated revenue by game, and 14 just showed a -- you know, a historical representation 15 of that from fiscal year 1992 through fiscal year '05. 16 And again, like you said, Commissioner Cox, earlier, 17 this is based on an allocation, so if the other is not 18 proper, then this also is not proper, at least for 19 fiscal year '05. All the other years are audited and 20 actual expenses have been included in these 21 calculations, but not for '05. 22 COMMISSIONER COX: Well, maybe you -- 23 maybe I wasn't as clear. I'm not talking about 24 whether the expenses have been audited -- 25 MR. NAVARRO: You mean allocations 0121 1 by -- allocations to the game for expenses. Is that 2 what you were talking about earlier? 3 COMMISSIONER COX: To my knowledge, we 4 do not have an accounting for expenses by product 5 line. 6 MR. NAVARRO: No, we don't. I see what 7 you're saying. 8 This is the same representation for 9 sales. This is the cash basis transfers to the State, 10 and this is what we typically present to the 11 Commission on a monthly basis. And, again, you see 12 that for fiscal year '05, we did transfer to the State 13 1,077,000 dollars. That's an increase of about 33 14 million dollars from the prior year, of 101,044,000. 15 The green line represents the transfers to the 16 Foundation School Fund. The blue represents all 17 transfers, including unclaimed prizes, for the fiscal 18 year. 19 MR. TIRLONI: Commissioners, last month 20 I promised you a -- kind of a recap or an -- an 21 overview of our efforts on our instant product line 22 for the first quarter of this fiscal year. And Dale 23 Bowersock, our Instant Product Coordinator, is going 24 to walk you through that right now. 25 MR. BOWERSOCK: Good morning, 0122 1 Commissioners. I'm pleased to be here to introduce 2 you to some of the games that the products department 3 plans to launch for the first quarter of FY '06. We 4 have several really exciting initiatives planned, and 5 we hope the players find these games as entertaining 6 as we think they will. 7 The first product that I am presenting 8 has caused a lot of stir around here, and the 9 excitement was mounting this week as we launched our 10 first World Poker Tour 100,000 dollar Texas Hold 'Em 11 ticket. I want to point out a few of the features on 12 this game and explain how we arrived at them. The 13 game has so much play value to it that staff felt that 14 a ten-dollar price point would be appropriate. Our 15 other jurisdictions have offered this game at both 16 five and ten-dollar price points and it has been 17 extremely successful at either. Our staff just felt 18 that we would be missing out on the extra five dollars 19 per sale unless we introduced our first Texas Hold 'Em 20 game at the ten-dollar price point. Staff also 21 debated the 20-dollar price point, but we wanted to 22 make this game available to all players. And 23 unfortunately, the 20-dollar price point currently is 24 not available at all retail locations. 25 Now, moving on to the top prize, we 0123 1 reviewed price structures of all sorts, some with huge 2 top prizes, some with annuity prizes, but in the end, 3 we decided to look at a prize structure of one of our 4 most recent successful ten-dollar games, Wild 10's. 5 Using its prize structure as the starting point, the 6 top prize of 100,000 dollars was locked into. Hence, 7 the game offers the players the chance to enter 8 nonwinning tickets into a second chance drawings for 9 World Poker Tour merchandise prizes. But the feature 10 that I think is going to sell this game is the Texas 11 Hold 'Em play style. Many Texans are familiar with 12 the Texas Hold 'Em card games and tournaments, thanks 13 to the enormous amount of air time that they receive 14 on channels such as ESPN and the Travel Channel. This 15 scratch off game plays very similar to the card game. 16 There are five tables in the play area. Each table 17 has two hands of two cards and one set of community 18 cards. The player scratching the ticket combines 19 their two cards with the community cards to determine 20 their best five-card poker hand. Then they look at 21 the opponent's two cards and the community cards to 22 determine the opponent's best five-card poker hand. 23 If their best hand beats the opponent's best hand, 24 they win the prize shown for that table. 25 Other jurisdictions have already 0124 1 launched Hold 'Em style instant scratch off games and 2 have reported that these games have been very strong 3 performers and have been successful in recruiting a 4 new lottery player that is attracted to this 5 particular game's play style. 6 To inform this new player that this 7 exciting game is available, we have several 8 initiatives supporting this game. A statewide 9 retailer contest awarding World Poker Tour merchandise 10 provided by Scientific Games International to 11 top-selling retailers will be held from September 25th 12 through October 22nd. A lottery sales rep contest, 13 supported by the GTECH Corporation, will run from 14 September 25th through November 5th. DDB Dallas will 15 be producing outdoor billboards for us, which will be 16 up between October 10th through November 9th. These 17 are not as large as the jackpot billboards that 18 everyone is used to seeing, these are smaller 19 billboards that are on highways and busy 20 thoroughfares. You may have seen these during the 21 Megaplier launch campaign this summer. 22 And finally, from October 24th through 23 November 11th, our advertising agencies will be 24 running a television and radio advertising campaign. 25 This slide shows the design of the outdoor billboards 0125 1 that I had just mentioned. I believe DDB will be 2 obtaining 558 of these billboards for us across the 3 state. 4 The next game that I wanted to present 5 to you is the relaunch of Wheel of Fortune. In a 6 previous meeting, I presented the sales figures and 7 success of our first Wheel of Fortune game. The game 8 was so successful, in fact, that we decided to reorder 9 another Wheel of Fortune game. Unlike the original 10 game launch this last spring, this version will not be 11 supported with advertising campaign since our obvious 12 focus this quarter is on the wheel -- the World Poker 13 Tour Texas Hold 'Em game, but we believe that the 14 advertising campaign from the first flight more than 15 adequately built awareness of the game and it should 16 perform well on its own. 17 As you see by this slide, the price 18 point and top price has not changed from the original 19 game. We are now eager to follow the sales of this 20 game as it hits the retailers next week. 21 Next I wanted to show you Diamond Mine, 22 to demonstrate that we are introducing new concepts 23 other than licensed properties. Diamond Mine is 24 categorized as an extended play game. A typical game 25 has a play style that is relatively simple to play and 0126 1 quick to figure out if you've won a prize or not. An 2 extended play game, on the other hand, takes a bit 3 more time to determine the outcome of the play. In 4 this game, there is a list of numbers at the bottom of 5 the ticket under the red numbers box. You match your 6 numbers to the numbers in the diamonds, and if you 7 match all the numbers on that line, you win the prize 8 for that line. We are launching this game next week 9 as well, making this an exciting launch week indeed. 10 Hopefully, between Hold 'Em poker this week and Wheel 11 of Fortune and Diamond Mine next week, we'll be 12 offering a product for everyone as we go into our new 13 fiscal year. 14 Now for my favorite time of the year 15 and the agency's typically most productive scratch off 16 games, our 2005 holiday suite of games. We're going 17 to introduce these to you by price point. 18 Our one-dollar holiday game is Holiday 19 Cash. It features a whimsical snowman and has a top 20 prize of 1,000 dollars. The launch date for this game 21 is October 31st. 22 The two-dollar game is Sleigh Ride 23 Riches. Its top prize is 25,000 dollars, but I find 24 the art work and ticket design to be really 25 intriguing. The scratch off area of this game is 0127 1 hidden in the design of the ticket, meaning that it's 2 not in the typical enclosed box. I think this makes 3 this ticket really attractive and is -- would be a 4 great gift to add to cards, holiday gift cards. 5 Our first holiday bingo ticket is also 6 a two-dollar price point. We have very devoted 7 scratch off bingo players and this ticket should prove 8 to be very popular with them. The colors are bright 9 and full of holiday cheer. This game is considered an 10 extended play game as well and would be a great gift 11 due to the extra play action that the recipient would 12 get. 13 Our five-dollar holiday game is 100,000 14 Dollar Surprise Package. This games offers an 15 attractive top prize for its price point and also has 16 a lot of play action for the price point by offering 17 three different games on each ticket plus a bonus box, 18 which is a very popular feature. 19 Winter Treasures is the ten-dollar 20 holiday game. Featuring a top prize of 500,000 21 dollars, this game has been built with a doubler and a 22 25 times feature to add a bit more excitement to the 23 game and has a totally different look and feel 24 compared to the other games you have seen so far. 25 And finally, our 30-dollar holiday game 0128 1 is Holiday Millionaire. This game offers top prizes 2 two million dollars and has a very classy -- classic 3 holiday design to distinguish this game as our premium 4 holiday product. Once again, something for everyone. 5 This year our holiday suite of games 6 will be supported with outdoor billboards and 7 television and radio advertisements during the month 8 of December. We'll be providing the Commission with 9 more information on these ads as we get closer into 10 the production schedule. And that concludes my 11 instant products update. 12 MR. TIRLONI: Commissioners, I have an 13 update for you on Mega Millions. There was a jackpot 14 ticket sold on Friday, September 16th, for an 15 advertised jackpot of 250 million dollars. That 16 ticket was sold in New Jersey. It was a cash value 17 ticket. The cash value was approximately 156.1 18 million. Our contribution to that prize was over 10.6 19 million. And that prize was already claimed in New 20 Jersey. It was claimed last Friday, September 23rd. 21 I have some analysis to show you -- and 22 this kind of goes along with the conversation the 23 Commissioners had with Mr. Chambrello this morning, 24 and it illustrates the change in draw sales for Mega 25 Millions states, and it talks to the issue of jackpot 0129 1 fatigue on jackpot games. This is basically a 2 comparison between the 250 million dollar drawing on 3 Friday the 16th, and it's compared to a 230 million 4 dollar drawing in February of '04. This is the 5 closest similar comparison that we can make in terms 6 of draw days. We always like to compare Friday draws 7 to Friday draws and Tuesday draws to Tuesday draws. 8 So these are Friday draws. As you can see -- and 9 California, let me say, is not included in here since 10 they've only been in the game for a few months. So of 11 the 11 states that were in the game, only one showed a 12 sales increase between these two drawings, and that 13 was Massachusetts, and it was a .3 percent increase. 14 All other ten states saw a decrease in sales. Georgia 15 and Texas right around 47 percent, Ohio and Washington 16 upwards of 33 percent, Virginia, Illinois, Michigan, 17 even New York upwards of 25 percent, and then Maryland 18 and New Jersey seeing a decrease of approximately 15 19 to 17 percent. 20 I did mention earlier that I attended 21 the NASPL 2005 lottery conference. I represented 22 Mr. Grief at the Mega Millions directors meeting. We 23 were in Minneapolis during this week, so this draw had 24 not occurred yet. But I did want to let you know that 25 the Mega Millions directors did talk about jackpot 0130 1 fatigue. They are concerned about it. They are aware 2 of it. I think the comments that were made earlier 3 are very relevant in terms of what states are 4 experiencing with jackpot games. 5 I think in Texas, we have taken a 6 proactive approach on -- on our marketing efforts in 7 terms of Mega Millions, and I think our focus has been 8 the Megaplier feature of the game. And I think that's 9 a resource for us that a lot of other states don't 10 have. They are dependent on the jackpot growing up to 11 a level that becomes appealing for the players in 12 those states. Whereas, this past summer, we launched 13 a major initiative to refresh and re-educate our 14 players in Texas on the Megaplier feature. And we 15 homed in on the fact that if you play Mega Millions 16 and you play Megaplier, you can win a million dollars 17 without even winning the jackpot prize. We plan to 18 continue those efforts and those initiatives. We have 19 another Megaplier refresh campaign coming up in 20 October and, of course, we'll continue to keep you 21 updated on Mega Millions and all of these games. 22 COMMISSIONER COX: Robert, you said you 23 attended the Mega Millions directors meeting. 24 MR. TIRLONI: Yes, sir. 25 COMMISSIONER COX: And you said they're 0131 1 aware of this. What are they doing about it? 2 MR. TIRLONI: Good question. The way 3 these games are structured, you know, it's like 4 Mr. Chambrello said, they play a role in the product 5 mix, and that's the positive side. When you get large 6 jackpots, you do bring in new players and you do 7 create excitement and you get people into the game 8 that might not typically play. That's the upside. 9 The downside is, every time you get to those high 10 jackpots, you kind of have to go higher and higher 11 each time to see that level of excitement. You know, 12 200 -- I think we've -- we demonstrated a few months 13 back, on Mega, at a hundred, we see increased play, 14 but then we see another surge at 200. I would say 15 that the highest jackpot we've experienced here in 16 Texas on Mega Millions, or overall, it came from the 17 Mega Millions game, was the 290 million. I would -- I 18 would say that next time we got up into the 250s, 19 280s, 290s, we would not see the sales levels that we 20 saw last time we were at the 290 million dollar level. 21 The challenge overall on the online side is coming up 22 with games and coming up with features where you're 23 not so reliant on that jackpot amount. 24 COMMISSIONER COX: I'm sorry, Robert. 25 I understand all that, but what is Mega Millions 0132 1 board, the governing body of Mega Millions, doing 2 about that? 3 MR. TIRLONI: Each state is doing what 4 they feel they need to do to generate sales and 5 generate excitement about the jackpot and the game, 6 overall -- 7 COMMISSIONER COX: So nothing is being 8 done top down? 9 MR. TIRLONI: No, sir. The matrix 10 change was just made due to California's introduction 11 in June of this past year. 12 COMMISSIONER COX: Uh-huh. 13 MR. TIRLONI: So, no. To answer your 14 question directly, there is nothing being done top 15 down that the Mega Millions directors have implemented 16 or have talked about. All of those efforts are each 17 state -- 18 COMMISSIONER COX: Do they have a plan 19 for the next matrix change or the next game change? 20 Have they talked about it? Do they know when they're 21 going to talk about it? 22 MR. TIRLONI: They have not made any 23 mention of any future matrix changes at this point 24 that I'm aware of. 25 COMMISSIONER COX: Thank you. 0133 1 MR. GRIEF: Commissioner, I believe 2 some -- and, Robert, you'll have to help me remember. 3 I want to say in June, July, somewhere around that 4 time, I think I remember seeing a vote by the Mega 5 Millions directors not to allow another state to enter 6 into the game -- for the next year, Robert? 7 MR. TIRLONI: I believe that's correct. 8 They have decided that for the next 12 months, no 9 future -- or no additional states would be admitted, 10 so to speak, into the game. 11 MR. GRIEF: I think that's maybe the 12 extent of the plans. 13 COMMISSIONER COX: Gary, is there 14 something you could be doing to encourage those people 15 to think about things a little further in advance? 16 MR. GRIEF: Perhaps. But my experience 17 with that group is that although there is a -- a group 18 that gets together and talks from time to time, 19 they're very territorial in nature about their state. 20 They're very aware of the differences in the players 21 in their state and their habits, spending habits, the 22 marketing efforts that it takes. And I truly believe 23 that the emphasis on -- is on, here is the 24 information. Go back to your state and do what you 25 believe is best. As far as a coordinated effort from 0134 1 the group, I don't believe that exists to this point. 2 COMMISSIONER COX: So if everyone is 3 looking at a different set of wants, if you will, from 4 their -- perceived from their customer base, how do 5 these folks ever decide how to change the game? 6 MR. GRIEF: I think what has driven the 7 group to this point as far as changing the game has 8 just been the addition of new population basis -- 9 COMMISSIONER COX: They're not doing 10 anything creative or imaginative. They're multiplying 11 the population by something or dividing it by 12 something and that's how it evolves? 13 MR. GRIEF: That's my -- 14 COMMISSIONER COX: They're staying with 15 the bonus ball, there is nothing creative going on? 16 MR. GRIEF: I don't know that I can 17 definitively say nothing creative going on, but I 18 think my understanding is, they've just been 19 considering the populations involved and what the 20 matrix needs to be in order to generate higher 21 jackpots which, in turn, hopefully generate increased 22 sales and increased revenue. 23 COMMISSIONER COX: Hope we've got it. 24 CHAIRMAN CLOWE: I'll bet the next 25 thing that comes down the pike is the idea of 0135 1 combining with Powerball. 2 MR. GRIEF: We've talked about that 3 before here in Texas. 4 CHAIRMAN CLOWE: They're going to come 5 up with that sooner or later. I don't understand the 6 12-month moratorium. What is the beneficial result of 7 that? 8 MR. GRIEF: I wasn't part of that 9 decision, Mr. Chairman, but I think there was some 10 discomfort among some members of the group in that 11 they may have been growing too fast, adding Texas, 12 then California, in some people's mind, quickly behind 13 that, and they wanted to have a comfort level that 14 they weren't going to add another state over some 15 period of time, and also, assure their players that we 16 weren't going to change the matrix again for a period 17 of time and make it even harder to win than it 18 currently is. I think that was the thinking behind 19 that. 20 CHAIRMAN CLOWE: Is that your feeling, 21 Robert? You were there. 22 MR. TIRLONI: That was not discussed at 23 the meeting that -- 24 MR. GRIEF: I'm referring back to June 25 and July. 0136 1 CHAIRMAN CLOWE: Oh, prior, when you 2 were -- 3 MR. GRIEF: I was not there. That's my 4 understanding from our former executive director. 5 CHAIRMAN CLOWE: Well, when is their 6 next meeting? 7 MR. GRIEF: Usually on a quarterly 8 basis, I believe. Is that correct, Robert? 9 MR. TIRLONI: They try to meet once a 10 quarter and they have not set their next meeting as of 11 yet. 12 CHAIRMAN CLOWE: It's the problem we've 13 talked about when we got into this game, that we are 14 one of then ten, now 11. And we don't have the 15 history, we don't have the influence. And I think 16 Gary was honest when he said, everybody has got their 17 own interests and I think they're very provincial. 18 And I think, frankly, there are subgroups within the 19 group that seem to form alliances and control, and our 20 interest hasn't risen to the surface, in my view. 21 COMMISSIONER COX: I totally agree. 22 CHAIRMAN CLOWE: But I want to bring up 23 another subject, and I think it's appropriate right 24 now. And I think you have more to cover, Robert, but 25 talking about Lotto Texas. You know, we do control 0137 1 that game. And I hear the answer that Commissioner 2 Cox was given about, well, we're studying a Pick 4 3 game. And I hear the answer, we're studying what to 4 do with Lotto Texas. But for months we've been 5 getting that answer as the policy makers and the 6 overseers, and we haven't seen any tangible results of 7 those studies. And I'm frustrated that the game is 8 still struggling, and I've heard the comment, well, 9 you have made it so hard now, nobody can win it. But 10 I think somebody won it last Saturday night at the 11 four million dollar level. What was the coverage? 12 MR. TIRLONI: I don't remember the 13 coverage off the top of my head for that drawing. 14 Based on past experience, I would say it was probably 15 under five or six percent, though. That's been a 16 trend at that sales level. 17 CHAIRMAN CLOWE: So the game is not too 18 hard that it can't be won. That's just not true. We 19 have got to do something, it seems to me, to make that 20 game more attractive to the players. And I 21 appreciate, gentlemen, the work you're doing on 22 instant tickets and I'm impressed by it. But, you 23 know, when I was in business, I always had to watch my 24 salesmen because they always wanted to call on the 25 customer that liked them. And they would spend all 0138 1 their time calling on the easy calls. They wouldn't 2 go call on the people that they had a hard time 3 selling. And I -- and I get this sense of tilting 4 towards the instant tickets because they're fun and 5 because we can be creative and we've got that revenue 6 going up, -- sales going up, but the revenue is going 7 down. And that's not, as a shareholder, what I want 8 to see happen. You know, we've got to be able to do 9 something to make that Lotto Texas, which is our game, 10 more attractive. And I am sitting here listening to 11 your comments and what you're doing with the holiday 12 suite of games and Scientific Games talking about 13 their marketing and research. Why can't we do 14 something creative for a change about making it a four 15 million jackpot and two Harley-Davidson motorcycles, 16 or a Corvette, or one of those fancy trucks, and then 17 add another truck to it or something. I mean, let's 18 create some buzz. Those things are not that expensive 19 compared to what the jackpot is, but just those -- 20 those small jackpots, even as they get now beyond 20 21 million, it's not doing the job. So we've got to 22 think about being creative and doing something that 23 creates some interest for a change. The interest in 24 that game is dwindling. And I just hate to see us 25 sitting here saying, well, we're studying this, we're 0139 1 studying this, and nothing happens. And, again, if I 2 owned this thing, I would be in there with you guys 3 saying, now, what are we going to do next month. 4 We've got to turn this game around. And I don't see 5 that occurring with Lotto Texas. And I think 6 Commissioner Cox put his finger on the problem with 7 Mega Millions. We're one of 11 and we can go to those 8 meetings and we can express ourselves, but I don't 9 think we've got the stroke there. But we've got it 10 with Lotto Texas and it's still a substantial part of 11 our sales and our revenue. But we've just -- we've 12 got to do something with that game if we want to see 13 it come back. It's not coming back on its own. So I 14 am appreciative of the hard work you're doing with the 15 instant tickets. To me, that's a lot of fun, that's a 16 lot of effort, good hard work; diminishing returns. 17 As a bottom line shareholder, I'm not so much 18 interested in that as I am rescuing our sweetheart out 19 there who is languishing. Let's do something 20 creative. Is that okay? 21 COMMISSIONER COX: Yes, sir. 22 CHAIRMAN CLOWE: And just don't tell us 23 any more that you're studying that, please. I'm 24 really tired of hearing that. 25 MR. GRIEF: Mr. Chairman, if I could. 0140 1 CHAIRMAN CLOWE: Yes, sir. 2 MR. GRIEF: We -- my goal all along, 3 since I was named acting executive director, was to 4 push that ball along and get something done on that 5 Lotto Texas. And our intent has been, for the past 6 two months anyway, to bring forward a rule change to 7 the Commission in the October meeting. And that is 8 our plan, regarding Lotto Texas. So I want you to 9 know we have been totally focused on that game and 10 what we can do to change that game. There is a lot of 11 moving parts in trying to bring an idea from 12 conception to fruition, and we've been working through 13 that, but we're still on track to bring you something 14 for your consideration in October. 15 CHAIRMAN CLOWE: Well, you know, I 16 haven't heard anybody say, you know, let's give four 17 million dollars and let's give a year's free 18 groceries. You can do a promotion of that kind and it 19 makes our game different. And let's try it and see if 20 it works. And if it doesn't work, let's try something 21 else. And let's get all these moving parts working 22 for us instead of just churning. We may be up against 23 something that is a worldwide, nationwide trend, but I 24 just want us to fight it harder than we're fighting 25 it. 0141 1 MR. GRIEF: Very good. We will. 2 CHAIRMAN CLOWE: Okay. 3 COMMISSIONER COX: Short break. 4 Robert, hold your fire. We'll come back in a minute. 5 When we finish this item, we're going 6 to call the next item as number 24, letter L, the 7 Matter of the Texas Lottery Commission of the 8 Application for Bingo License by Red Men Council 12 9 White Mountain. We have a number of individuals who 10 are here for that case, and we'll call it after these 11 gentlemen finish. Short break. 12 (RECESS.) 13 CHAIRMAN CLOWE: We're back on the 14 record. 15 MR. TIRLONI: Commissioners, I just 16 have a few more slides. These next two are actually 17 follow-up, Commission Cox. You asked about this in 18 our last meeting, about states that might be 19 advertising or promoting the cash value amounts of the 20 jackpot. The products department worked closely with 21 our internal research group and we issued a survey, 22 and to which 38 lotteries responded. 29 of those do 23 have games that have annuity or cash -- that have 24 games that have an annuity or cash value option 25 associated with them. Eight of those 29 advertise the 0142 1 CVO. The most common method that we found that the 2 states are advertising the CVO, or the cash value 3 amount, is via their websites. Some other states that 4 are doing things a little differently, in addition to 5 the website, Maryland is providing the cash value on 6 radio ads and during their televised drawings. New 7 Hampshire is placing the cash value on the front of 8 tickets. None of the states that responded actually 9 placed the cash value on billboards or on TV ads, so 10 the website seems to be the most prevalent method to 11 distribute the cash value option amount. And we are 12 currently doing that here in Texas for the Lotto Texas 13 game, we are putting the CVO amount on -- 14 COMMISSIONER COX: Okay. 15 MR. TIRLONI: -- on txlottery.org. 16 COMMISSIONER COX: And there is nobody 17 out there that on their billboards -- their primary 18 advertising of the jackpot is advertising the cash 19 value? Everybody is advertising the future value of 20 the annuity? 21 MR. TIRLONI: From what we've found, 22 everybody is advertising the annuity amount. Yes, 23 that's correct. 24 COMMISSIONER COX: Thank you, Robert. 25 MR. TIRLONI: You're welcome. 0143 1 I've also been asked to provide you 2 with a brief update of our flat four million dollar 3 Lotto jackpots. And when I say that, I mean staying 4 at four until we can fund a roll up to the next full 5 million dollars. 6 Let me quickly explain for you what 7 you're seeing here. This was back -- the green line 8 was back in the fall of '04 of what our roll strategy 9 or our roll cycle looked like, and that was basically 10 rolling in million dollar increments, four, five, six, 11 seven, eight, nine, so on and so forth. 12 During this past summer, for the first 13 time, we actually rolled four, five, six, seven, 14 eight, and for the first time, as you all are well 15 aware, we held at the eight million dollar jackpot 16 amount. Most recently, as we discussed in a previous 17 Commission meeting, our strategy was going to start at 18 four and stay at four until we could fund a full 19 million dollar roll up to five. And so that's kind of 20 just a little history of how that's been working, and 21 I'll show you the sales impact. 22 The dotted lines are actually sales, 23 the solid lines are actually trends. Again, the green 24 goes back to last fall. And these are all good 25 comparisons because we're all starting on -- we're 0144 1 starting the roll cycle on Wednesday, so we're not 2 comparing apples and oranges in terms of a Wednesday 3 start versus a Saturday start to a roll cycle. Again, 4 the green dotted is from -- is actual sales from last 5 fall, and you see the impact. Again, this was when 6 we -- for the first time ever we were at eight and we 7 stayed at eight. We did see -- we did see a sales 8 increase. And then here most recently, the strategy 9 of staying at four until we could actually roll up to 10 the next million dollar increment, which was five, I 11 mean, you see there has been -- there is a sales 12 impact to doing that. And we just wanted to provide 13 you with this information and show you what was 14 happening with that. 15 We did have a winning ticket sold at 16 that six million dollar jackpot. Chairman, you just 17 referred to recent wins on lotto. We did have a win 18 at the six million dollar level, and then this past 19 Saturday we actually had a win at the four million 20 dollar level. And that was the second four. 21 COMMISSIONER COX: Robert, I'm going to 22 have to ask you a couple of questions there. I'm not 23 able to discern what I'm seeing. 24 Why is that line going up and down? 25 The dotted line? Let's just look at the bottom one 0145 1 there. What's going on there? 2 MR. TIRLONI: It's going up because of 3 the Wednesday-Saturday cycle. Saturdays are always 4 typically higher sales draws than -- 5 COMMISSIONER COX: Okay. I got you. 6 Now, is there anything in that data, 7 Gary, that would suggest that we should be doing 8 anything other than four, four, four, four, for the 9 first four rolls? 10 MR. GRIEF: Not under our current rule, 11 Commissioner, no, sir. 12 MR. TIRLONI: It is probably worth 13 noting that as we get to the third four, so to speak, 14 you do notice that the third four is less than when we 15 actually started the roll cycle. And even by the time 16 we get to the fifth drawing in the roll cycle, which 17 is five, that was also less than the actual starting 18 point. 19 MR. GRIEF: Let me add my comment, if I 20 could, Commissioner. And I'm looking to the future. 21 We do have a -- an amendment to the Lotto Texas rule 22 that's currently out and is going to be ripe for 23 adoption at the next meeting. Once we adopt that 24 rule, if you recall, if it's adopted as it's proposed, 25 it guarantees every single -- 0146 1 COMMISSIONER COX: Yes. 2 MR. GRIEF: -- jackpot amount. And I 3 will be talking to staff and talking to the 4 Commissioners about this information and how, under a 5 different rule structure, where we are able to pay 6 every jackpot that we advertise, there might be a 7 better approach than staying at the four until we roll 8 to the five. 9 COMMISSIONER COX: Okay. 10 MR. GRIEF: I wanted to make you aware 11 of that. 12 MR. TIRLONI: I know this has been a 13 long presentation today due to our holiday sweep. I 14 do have two last slides, though, just to show you some 15 important data that we felt you needed to see 16 regarding a regional decrease in overall lottery 17 sales. And this is comparing the week ending 18 Saturday, 9-17, to the week ending 9-24. Statewide, 19 the week-over-week sales decline was 23 percent. Now, 20 part of that has to be attributed to the fact that on 21 Friday the 16th, we had a 250 million dollar Mega 22 Millions jackpot that was hit. So for the week ending 23 9-24, we did have -- we were back at starting jackpot 24 levels on Mega Millions. So that has to be said, but 25 if you look at the Houston and the Victoria districts, 0147 1 those are the districts that were most impacted by 2 Hurricane Rita, and you see a 47 percent decrease in 3 lottery sales in the Houston sales district, 28 4 percent in the Victoria sales district. 5 COMMISSIONER COX: What happened in El 6 Paso? 7 MR. TIRLONI: El Paso? We wondered 8 about that when we looked at this. They had a major 9 drop-off in online sales for -- for that time period, 10 those -- that comparison period, and we believe that 11 was because of the Mega Millions jackpot. 12 COMMISSIONER COX: Has the New Mexico 13 lottery cranked up? 14 MR. TIRLONI: New Mexico has been in 15 existence for a while. 16 MR. GRIEF: Oklahoma? Is that what 17 you're -- 18 COMMISSIONER COX: Oklahoma. Yes, sir. 19 MR. TIRLONI: No, sir. They have not 20 started yet. 21 COMMISSIONER COX: Okay. And does New 22 Mexico have a -- are they a Powerball state? 23 MR. TIRLONI: They are a Powerball 24 state. 25 COMMISSIONER COX: Was that a big 0148 1 Powerball jackpot weekend? 2 MR. TIRLONI: I don't know off the top 3 of my head if that was or not. 4 MR. GRIEF: Nothing newsworthy, I do 5 know that. 6 MR. TIRLONI: Yeah. I didn't see 7 anything in the press about that. 8 And then this was on actual overall 9 lottery sales, and this is just very specific to 10 Lotto. And, again, you see the 56 percent decrease in 11 the Houston and the Victoria, and even in the Tyler 12 district. Obviously, Houston has the biggest impact. 13 Houston is our largest sales district, with 4500 14 retailers, so disruption in the Houston district can 15 have a major impact on our sales, and we just wanted 16 to show you that. 17 COMMISSIONER COX: There is nothing up 18 there that captures Beaumont/Port Arthur, is there? 19 MR. TIRLONI: I believe Beaumont and 20 Port Arthur are part of the Victoria sales district. 21 I'm sorry. It is Houston. It is Houston. 22 COMMISSIONER COX: Okay. 23 MR. TIRLONI: That concludes this 24 portion of the presentation. Commissioner Cox, we do 25 have David Sizemore, the agency's research coordinator 0149 1 here, and he does have follow up on a question 2 regarding energy costs. 3 COMMISSIONER COX: Okay. And I have 4 looked at the very impressive information that you 5 have put together here. And while I enjoyed reading 6 it, I'm guessing that Chairman Clowe may not have the 7 appetite for all of it, and if he doesn't, but rather, 8 like I, would just like to know, yes, no, or we don't 9 know, that would be fine with me, Mr. Chairman. 10 CHAIRMAN CLOWE: Give us the lights, 11 Philip, if you will. 12 MR. SIZEMORE: Well, thanks for the 13 opportunity to do the research. 14 First, I am David Sizemore, Research 15 Coordinator. 16 And to boil a very lengthy piece of 17 research down to a few statements, it goes something 18 like this. The results don't necessarily support the 19 idea that rising gas prices are associated negatively 20 with lottery sales. That is, gas prices go up, sales 21 go down. Over the long term, and even in a more 22 shorter term, from 2000 to this year, that association 23 doesn't play out. The opposite could be, in fact, 24 said for the consumer confidence index, that is to 25 say, there is really nothing going on between these 0150 1 variables at all. In the most recent period that I 2 analyzed, which was on one of the last slides provided 3 to you, just for this year, that there was an earlier 4 positive relationship found between instant ticket 5 sales and Pick 3 sales, meaning, those two games' 6 sales go up, gas prices are going up at the same time. 7 This is an association, and it's not a causal 8 argument. Gas prices don't cause changes in sales. 9 But there is an association with that. That positive 10 relationship for those two games was, in fact, 11 reversed for the most recent 2005 data. And there was 12 a strong and significant negative association between 13 those variables. 14 COMMISSIONER COX: So, lately, we, like 15 Wal-Mart, have seen that gas prices are hurting sales? 16 MR. SIZEMORE: You could make that 17 argument, yes. It seems the literature that is out 18 there suggests that disposable income is affected. If 19 disposable income is affected, we could argue that 20 ticket sales depend to some extent on disposable 21 income, then we can make that leap, as it were, to say 22 that gas prices have a negative effect on sales. And 23 interestingly enough, there is also consumer 24 expenditure data from the Bureau of Economic Analysis 25 that suggests that although lottery sales -- or 0151 1 expenditures on lottery tickets are going up, over the 2 course of time, that trend is in fact slowing down. 3 And that is also presented in the slides I gave to 4 you. 5 COMMISSIONER COX: I thought it was 6 very impressive work. 7 CHAIRMAN CLOWE: Yeah, it really was a 8 good job. 9 MR. SIZEMORE: Thank you. 10 CHAIRMAN CLOWE: Very good. Anything 11 further, gentlemen? Thank you. 12 Ms. Nettles, did you have a comment? 13 MS. NETTLES: Good morning, 14 Commissioners. My name is Dawn Nettles. I'm with the 15 Lotto Report out of Dallas, and I was just enticed to 16 make one comment really. 17 When y'all asked while ago about 18 holding the jackpot, starting it at four and holding 19 it for the first four draws, I did not think you all 20 should do that at all. I really think you should have 21 lowered it to two so that you could increase it. You 22 might have to stay at two for two draws, but then you 23 would be able to increase it to three million and up 24 to four million. I don't know what kind of comment 25 this agency is getting, but I personally am getting a 0152 1 lot of comment from players who simply do not 2 understand why it's staying at four million. I really 3 firmly believe you should have just lowered it, and 4 the rule would allow you to do that. As for the 5 proposed rule that the comment period ends next week, 6 I'm definitely opposed to guaranteeing any jackpot 7 amounts. In fact, last Saturday night's win is clear 8 proof of the damage that it can -- that can be done 9 from that. You're having to take a million or 1.1 10 million dollars from reserve to fund that win. And if 11 you didn't advertise the four million dollars, you 12 wouldn't be doing that. And I'm assuming you all know 13 that. But for the sake of marketing and for getting 14 the message across to the people of Texas who play 15 these games, you really need to start it at two 16 million. That would be your best bet, your safest 17 bet. And that was the only comment I wanted to make. 18 CHAIRMAN CLOWE: Thank you, 19 Ms. Nettles. 20 Next, Commissioners Cox, with your 21 permission, we have some individuals who wish to 22 appear before us in item number 24, letter L, docket 23 number 362-03-0248, the consolidated, In the Matter of 24 the Denial by the Texas Lottery Commission of the 25 Application for Bingo License by Red Men Council 12 0153 1 White Mountain. And then there are other 2 consolidation dockets in that item. We'll take that 3 item up now because there are individuals here who 4 want to make an appearance before the Commission. 5 Counselor, do you have a comment to 6 make on this? 7 MS. KIPLIN: Yes, I do. And I guess my 8 first comment is that I believe there is an attorney 9 for Red Men, Mr. Gary Bledsoe, who has indicated that 10 he wanted -- okay. 11 Mr. Bledsoe, the Chairman has called 12 the Red Men matter, so I wanted to make sure you were 13 aware of that. 14 MR. BLEDSOE: Thank you. 15 MS. KIPLIN: I think what we have is an 16 intention by both the enforcement chief, Mr. White, 17 and I believe Mr. Bledsoe, wanting to make argument to 18 the Commission regarding this matter. And I will have 19 to urge both of them to keep each other in check in 20 terms of staying within the record and making sure 21 that each person keeps their arguments limited to the 22 evidence that has been part of the record and the 23 pleadings that are part of the record. 24 Mr. Atkins also has information that he 25 wants to put on the record, and I would like for you 0154 1 to allow him to do that at this time. 2 CHAIRMAN CLOWE: Very well. 3 MR. ATKINS: Thank you, Mr. Chairman. 4 I wanted to put on the record today, disclose a 5 conversation that Commissioner Cox and I had 6 yesterday, Tuesday, September 27th. Commissioner Cox 7 called me at approximately 2:45, and had some 8 questions about the draft rules relating to 9 administrative penalties that were on today's agenda. 10 And after discussing those rules, Commissioner Cox 11 asked if there was anything else we needed to discuss, 12 and I mentioned the BAC rule, the amendments to the 13 BAC rule, which you previously adopted, as well as the 14 presentation on financial information for the second 15 quarter of 2005. 16 Commissioner Cox asked if there was 17 anything else that we needed to discuss, and I 18 referenced what is posted on the agenda as item 24.L., 19 the consolidated Red Men cases. I informed 20 Commissioner Cox that we anticipated the parties being 21 present and that the matter could potentially be 22 somewhat contentious. As I recall, Commission Cox 23 asked about the issues in the case. I referred to 24 page five of the proposal for decision where the 25 administrative law judge refers to the Commission 0155 1 being able to review certain documents, especially 2 invoices for disbursements claimed to be charitable in 3 order to fulfill its statutory obligation. I then 4 referred to page six of the PFD where the ALJ found 5 that, except for certain convention expenses, the 6 licensees had failed to supply those documents. 7 Commissioner Cox commented that he wouldn't have 8 thought there would be invoices associated with 9 charitable distributions, and I replied that 10 organizations could also submit thank you letters or 11 other forms of documentation supporting their 12 distributions. Commission Cox asked if canceled 13 checks would be acceptable, and I indicated that, 14 depending on the specific situation, they could be. I 15 further indicated that I seem to recall from the PFD 16 the organizations had submitted copies of the front of 17 some checks, but not the backs in a legible format. I 18 informed Commissioner Cox that the ALJ was 19 recommending that the organizations pay back the 20 disallowed distributions and the Commission issue the 21 renewal licenses. I also informed Commissioner Cox 22 that the staff would be recommending that the 23 Commission deny the licenses. 24 At this point, Commissioner Cox asked 25 why the ALJ would make the recommendation to issue the 0156 1 licenses, and I indicated that I could not speculate 2 why the ALJ would make that recommendation. 3 Commissioner Cox suggested that I locate the agency's 4 general counsel, Kim Kiplin, and that we call him back 5 regarding this matter. 6 The conversation ended at that point, 7 and I immediately contacted Ms. Kiplin, who instructed 8 me to have no further conversations with Commission 9 Cox regarding this matter. 10 CHAIRMAN CLOWE: Counsel. 11 MS. KIPLIN: Mr. Chairman, I wanted to 12 ask Mr. Atkins to go ahead and put that on the record, 13 and then give both attorneys an opportunity to respond 14 to that and make sure that they were aware of that 15 communication. I've taken a look at the provision 16 regarding ex parte communications and in my own mind, 17 I think it's an issue, but I don't think it crosses 18 the line. But in an abundance of caution, I wanted to 19 make sure that this communication was disclosed and 20 both parties were aware of it and had an opportunity 21 to respond to it. 22 CHAIRMAN CLOWE: Mr. White? 23 MR. WHITE: Based on what Mr. Atkins 24 says, it does not appear he stated to Commissioner Cox 25 anything other than what was in the record and what 0157 1 was cited in the PFD, which is before you today, so I 2 do not have any issue with the conversation. 3 CHAIRMAN CLOWE: Mr. Bledsoe, would you 4 come up, please, and give us your response to that 5 comment? 6 MR. BLEDSOE: Thank you, Mr. Chairman. 7 I haven't really had an opportunity to 8 review the rule, so I don't know specifically if there 9 is a concern about that. I know we had tried to make 10 sure that we avoided any instance where that might 11 happen with us. But it's a matter that if I might 12 have an opportunity later to review the rule, I could 13 give you something more definitive. It may be that it 14 was innocuous and clearly is not a problem, but in the 15 interest of protecting the client's interests, I would 16 like to look at that in more depth. 17 CHAIRMAN CLOWE: All right. With that 18 proviso, you don't have any objection to going forward 19 at this point? 20 MR. BLEDSOE: No, I do not. 21 CHAIRMAN CLOWE: Very good. Then I 22 would like to ask both of you -- and Mr. Bledsoe, for 23 the record, you represent the combined Red Men lodges. 24 Is that correct? 25 MR. BLEDSOE: Mr. Chairman, that's 0158 1 correct. 2 CHAIRMAN CLOWE: I'm going to ask both 3 of you, in your comments, to not try the case again, 4 but to make as brief as possible summaries for the 5 Commission, staying within the record. 6 Mr. White, I'll give you the first 7 opportunity. 8 MR. WHITE: Thank you, Commissioner. 9 For the record, my name is Steven 10 White. I'm the Chief of Enforcement. 11 This case arises out of audits of eight 12 conductor organizations performed in 2001. The cases 13 were filed at SOAH in 2002, after the organizations 14 refused to produce requested documents and reimburse 15 their bingo accounts for disallowed disbursements. 16 Discovery and mediation continued until the cases were 17 tried in December of 2004. The findings of the 18 administrative law judge were that these organizations 19 failed to produce records necessary for the 20 Commission's auditors to complete their audits, as 21 well as having disbursed over 60,000 dollars in 22 charitable bingo funds for noncharitable purposes, in 23 violation of the Bingo Act. 24 Despite these findings, the 25 administrative law judge recommended that these 0159 1 organizations be required to pay back the disallowed 2 disbursements and that their licenses be renewed. 3 The staff has drafted two orders for 4 your consideration, one that doubts that the ALJ's 5 recommendation that the license be renewed and that 6 they be ordered to repay their bingo funds the amount 7 of the disallowed disbursements and reimburse the 8 Commission for the costs of the audits. The other 9 order, which the staff recommends you adopt, denies 10 the renewal of their licenses. Specifically, the 11 staff recommends that the Commission adopt all of the 12 ALJ's findings of fact and conclusions of law with the 13 exception of conclusion of law number 11. The 14 administrative law judge's conclusion of law number 11 15 states, based on the foregoing, the Commission should 16 renew the applicant's bingo operators licenses. This 17 is not a conclusion of law, but rather a recommended 18 licensing action, characterized as a conclusion of 19 law. It is the sole responsibility of the Commission 20 to decide what is the appropriate licensing action, 21 not the administrative law judge's. The Bingo 22 Enabling Act mandates that the Commission exercise 23 strict control and close supervision over all bingo 24 conducted in this state. The ALJ made findings that 25 the applicants committed numerous violations of the 0160 1 Bingo Enabling Act, including the disbursement of 2 approximately 60,000 dollars of charitable bingo money 3 to their own use, in violation of the Bingo Enabling 4 Act, and failed to produce records and documents 5 necessary for the Commission to carry out its mission 6 of regulating the bingo industry. The administrative 7 law judge recommended licensing action distinctly 8 inconsistent with the Bingo Enabling Act and 9 long-standing agency policy. Conclusion of law number 10 11 is irreconcilably inconsistent with the ALJ's 11 finding that the applicants failed to properly 12 disburse charitable proceeds. Section 2001.105(a)(3) 13 of the Bingo Enabling Act states that the Commission 14 shall renew a license to conduct bingo only if it 15 determines that the applicant's bingo proceeds are 16 being disposed of in accordance with the Act. 17 And in conclusion of law number seven, 18 the administrative law judge found that the applicants 19 had not disposed of bingo proceeds in accordance with 20 the Act. The ALJ cites to no law that would allow the 21 Commission to ignore Section 2001.105 and to renew the 22 applicant's licenses. Commission auditors Randall 23 Hare, Thomas Lieck, and Phil Sanderson, the Assistant 24 Director of Charitable Bingo Operations, all 25 testified, to the best of their knowledge, the 0161 1 Commission has never allowed a licensee to continue to 2 conduct charitable bingo when they refuse to or are 3 financially unable to reimburse their bingo funds for 4 the disallowed charitable disbursements. 5 Conclusion of law number 11 is 6 irreconcilably inconsistent with the administrative 7 law judge's findings that the applicants violated 8 Bingo Enabling Act, Sections 2001.302 and 2001.505 and 9 Charitable Bingo rule 402.590, by failing to produce 10 general account records requested by the Commission. 11 The ALJ found that the applicants deposited 45,000 12 dollars in charitable proceeds into a private bank 13 account, which was subsequently used for capital 14 improvements of a privately-owned island of one of its 15 members. The ALJ found that this 45,000 dollars in 16 improper disbursements was made in direct violation of 17 Section 2001.002(19)(a) of the Bingo Enabling Act, 18 which states that a nonprofit organization may not 19 distribute any of its income to its members, officers, 20 or governing body, other than as reasonable 21 compensation for services. When our auditors went out 22 to audit these organizations and asked for the 23 necessary records and documents in an attempt to do 24 their job, they were told, we are not going to give 25 you those records. We are never going to give you 0162 1 those records. In other words, they told our 2 auditors, we are not going to comply with the law. We 3 are never going to comply with the law. To that 4 extent, they have kept their word. As of today, our 5 auditors have never been able to complete their audits 6 because of the refusal of these organizations to 7 provide the necessary documents, despite numerous 8 written demands. 9 The staff believes that denial of the 10 applicant's licenses for such deliberate and ongoing 11 violations of the Bingo Enabling Act is the only 12 remedy consistent with the Act, rules, and Commission 13 policy. Thank you. 14 CHAIRMAN CLOWE: Mr. Bledsoe. 15 MR. BLEDSOE: Thank you, Mr. Chairman. 16 Mr. Chairman, regretfully, I have to 17 report to you that I think there is a -- there is a 18 lot of animus towards my clients that is wrongfully 19 placed that members of your staff have. And I think 20 that is one of the reasons why we are here. If I 21 might, in purposing our remarks, give you some history 22 regarding what occurred in this situation. 23 The staff had received some allegations 24 relating to alleged improprieties relating to a member 25 of one of the Red Men organizations and to the head of 0163 1 the Lottery Commission. Those matters were referred 2 to authorities, both state and county authorities, in 3 that area back in the year 2001, and nothing -- 4 nothing occurred with those. And, in fact, when I 5 took the deposition of your -- the investigator who 6 was in charge of investigating that, 7 Mr. Marcos Martinez, he indicated that he had spoken 8 to numerous individuals and could not substantiate any 9 of the allegations. But what occurred was, that 10 information was received, probably in September or 11 October of 2000, the best evidence indicates at this 12 point, and it was in the next year, in 2001, at the 13 beginning, in January, that you decided to audit all 14 of the eight Red Men organizations that had any 15 association with this particular individual. So in 16 somewhat of an unprecedented fashion, you had eight 17 different organizations that were all audited at the 18 same time. 19 At that time, information was disclosed 20 relating to the lease of property, an island, to the 21 Red Men organizations for a number of reasons that we 22 think were clearly appropriate. But that information 23 is now even the subject of a proposed new charge, and 24 we're looking -- we're more than four and a half years 25 after the lottery has received this information, 0164 1 they're talking about filing a new charge, a new 2 notice of opportunity to show compliance that's been 3 sent in that case. 4 MS. KIPLIN: Is this a part of the 5 Red Men case? 6 MR. BLEDSOE: Yes, it is, and if I 7 could, Ms. Kiplin, allow me to make my comments. 8 Thank you. 9 MR. WHITE: It is not part of the 10 record in the Red Men case. 11 MR. BLEDSOE: Mr. Chairman, I respected 12 them and allowed them to speak without interrupting 13 them. Would you please ask them to allow me -- 14 CHAIRMAN CLOWE: You may do that, 15 Mr. Bledsoe, but be mindful of the fact that you must 16 stay within the record. 17 MR. BLEDSOE: And we are -- they are -- 18 Mr. White just stated we're not in the record. I'm 19 not going outside of the record. I'm trying to give 20 you information that I think will illuminate for you 21 what is actually occurring. Because as the 22 individuals that have the fiduciary responsibility to 23 the taxpayers of this state, I want you to have the 24 information that I have that I think will be 25 illuminating to you. Because I think I would want 0165 1 that if I was sitting in your chair. 2 CHAIRMAN CLOWE: We're happy to receive 3 that as long as it is within the record. 4 MR. BLEDSOE: Okay. Well, that's not 5 in the written record. That's a corollary matter that 6 is associated, but it's not in the written record. 7 But I'm trying to give you the history. Now, the 8 other things are in the record in terms of the actual 9 allegations that were made. 10 CHAIRMAN CLOWE: And stay within the 11 record for the purposes of these proceedings, if you 12 will. 13 MR. BLEDSOE: Okay. But I would like 14 to state in terms of this -- the information that was 15 just provided to you by Mr. White alleging that my 16 clients stated they would never turn over the records 17 and stating that they have not turned over the records 18 and that's a continuing violation, that's absolutely 19 not in the record. That's his testimony. He has 20 added that. There is not one iota of testimony to 21 support that in the record in any way whatsoever. 22 That's a stretch and a desire to color your 23 observations of what has occurred and to bias you 24 against my clients. 25 Let me again state that there is a lot 0166 1 of history behind this. The matter was investigated 2 way back when. Nothing was actually done. But this 3 matter actually commenced. But let me tell you what 4 the main backdrop that got this started, and this is 5 in the record, because I think you need to understand 6 that. First of all, I will say that your staff can't 7 come together with an understanding of what actually 8 should or should not be a charitable distribution. 9 Now, importantly, your staff has a schedule that they 10 send out to all of the individuals who are being 11 audited, and on that -- that document, it says 12 Charitable Distributions at the top. And it defines 13 charitable distributions as charitable or fraternal 14 distributions, so it clearly merges and suggests by 15 your very document that fraternal distributions are 16 the same as charitable distributions. Now, some of 17 the auditors testified that they think that if you 18 were to rent a facility or to buy a facility for a 19 volunteer fire department, that that would be an 20 acceptable charitable distribution. Others say that 21 if you did it for a VFW or an American Legion that it 22 would be acceptable. But there was not any agreement 23 as to what would be a legitimate charitable 24 distribution for paying for rent or purchasing 25 property for a fraternal organization. And that is 0167 1 preface, then, for what I think the primary problem is 2 here. We have an organization. It's a 501(c)(10) 3 fraternal organization. It's an organization created 4 by the laws of the United States of America. And 5 that -- that statute that creates them lays out the 6 purposes. One of the purposes is, of course, to 7 increase or enhance loyalty to the government of 8 United States of America. There are a number of 9 rituals and things of that nature that are involved or 10 associated with individuals who participate in this 11 fraternal organization. 12 Now, it was decided by members of the 13 fraternal organization, these eight groups, that they 14 would lease this island, that they would lease this 15 island from a trustee. And one of the members was a 16 beneficiary of the trust. The island was leased, and 17 it was leased with a right to have the exclusive 18 control of the property for five years. Now, the 19 purpose of leasing the property was very clear. It 20 was to provide for retreats for the members, which is 21 one of the clear 501(c) purposes of a fraternal 22 organization, it was leased in order to enable them to 23 have meetings, it was leased in order to enable them 24 to allow other private nonprofit charitable, deserving 25 groups to actually use the property. And they allowed 0168 1 Boy Scouts, Girl Scouts, Cub Scouts, schools, State 2 Senators to have retreats, State legislators to have 3 retreats. All of those are noble and appropriate 4 purposes, and those individuals were allowed to have 5 retreats out there on the property. 6 The amount of money that we're talking 7 about here was 45,000 dollars that was dedicated to 8 that purpose. And for -- what the evidence that we 9 were able to uncover was that for retreats of this -- 10 of this type, that indeed, weekend stays and 11 opportunities to utilize these facilities would be 12 worth thousands over a -- the course of a weekend per 13 individual. And so I think it's clear that there was 14 a great benefit to be derived from that. So what 15 really got this whole matter taken to another level 16 was this Dos Rios property, which was leased. Now, 17 the property, at the time it was leased, was 18 unimproved. It did not have paved roads. It did not 19 have a structure that was really habitable for 20 individuals to go and to live and to be on that 21 property. And so what that money was used was to -- 22 to improve the property so it could be habitable and 23 could be utilized for the purposes of the Red Men and 24 for the purposes of other nonprofit organizations and 25 deserving entities. It also was necessary to have a 0169 1 barge to provide for transportation over to the 2 property because it was not accessible by land. And 3 so that is -- that was the purpose for the Dos Rios 4 property actually being created. 5 I think clearly, when you look at the 6 statutes that are involved and that were applicable, 7 that anyone can make the -- reach the conclusion that 8 in good faith that is a legitimate charitable 9 distribution. Now, even if you disagree, I think what 10 I would ask both of you to look at is, if you have a 11 charitable organization and it is appropriate to pay 12 for rent, it is appropriate to purchase a facility, 13 there is nothing wrong with that arrangement under the 14 circumstances that has been shown by the evidence in 15 this case. 16 I think as a background to the 17 administrative law judges' opinion, we have to take a 18 look and see, while we are -- where we are. And one 19 of the things that I think that probably led the 20 administrative law judge to make the decision that the 21 administrative law judge made, to begin with, it's 22 clear that the law that was in place relating to 23 charitable distributions was unclear. It's very clear 24 that that law should not be used and should not be the 25 basis for taking anyone's license. Let me tell you 0170 1 what evidence that there is in the record and that 2 actually exists, because I think it's truly 3 illuminating in this case. Number one, in terms of 4 the -- in the statute, it was revealed by the -- by 5 the Sunset Review Commission, and the Sunset Review 6 Commission concluded that it did not give guidance to 7 individuals who were licensees, that they were 8 confused, and no one understood what was allowed and 9 not allowed. 10 CHAIRMAN CLOWE: I didn't read that in 11 the record, did I, Mr. Bledsoe? 12 MR. BLEDSOE: Yes. In fact, what I 13 will do is I will read -- if I might, I'll read a 14 quote from the judge's opinion -- 15 CHAIRMAN CLOWE: Good. 16 MR. BLEDSOE: -- where he cites this. 17 I think that will be the best thing to do there. 18 Okay. This is page 13 of the judge's 19 administrative -- the administrative law judge's 20 opinion. 21 At the time of the audits in 2001, the 22 Commission statute did not clearly define charitable 23 purpose. A rule did not exist in 2001 defining 24 charitable purpose, especially with regard to the 25 definition of a needy or deserving person. In 2003, 0171 1 the Sunset Advisory Commission recommended that the 2 Commission clarify the definition of charitable 3 purpose, because the current definition was confusing; 4 it did not give organizations guidance about how they 5 should -- how they could spend bingo proceeds. 6 Effective September 1st, 2003, Texas Occupational Code 7 annotated Section 2001.454 was amended to more clearly 8 define an acceptable charitable disbursement. 9 Okay. So what we have here is the 10 Sunset Review Commission looked at this issue. And 11 one of the things, if you looked at the Sunset Review 12 Commission report, the Texas Lottery Commission goes 13 on the record and admits that this is true. Okay? 14 That's important. The Commission admitted that it was 15 confusing and that it was unclear, that it did not 16 provide proper guidance. But there is more evidence 17 than just that that's in the record that I think is 18 important for you to look at. Okay? Besides the 19 Sunset -- 20 CHAIRMAN CLOWE: Okay. I see that now, 21 and I understand what you were -- the point you were 22 making. 23 MR. BLEDSOE: And if I might go further 24 and lay out some additional things. I was able to 25 take the depositions of a number of your staff 0172 1 members. I was able to cross examine members of your 2 staff on the witness stand. And I know that 3 Mr. Sanderson specifically admitted that indeed it is 4 an unclear definition. We don't know that -- that it 5 is a problem. 6 Now, I think another thing that's 7 important to you, you just voted today to extend your 8 Bingo Advisory Commission. Your own Bingo Advisory 9 Commission had concluded and said that this was 10 confusing and that there was not proper guidance to 11 people about what was a proper or was not a proper 12 charitable distribution. So you've got your own Bingo 13 Advisory Commission and you've got -- 14 CHAIRMAN CLOWE: I don't think that's 15 in the record, Mr. Bledsoe. I don't think the BAC's 16 opinion about the charitable definition is in this 17 record. 18 MR. BLEDSOE: Yes, it is. 19 CHAIRMAN CLOWE: Where is that? Point 20 that out to me. 21 MR. BLEDSOE: It's not in here, but it 22 was in the evidence in the court case. 23 CHAIRMAN CLOWE: Okay. I didn't read 24 it -- 25 MR. BLEDSOE: And I think it's probably 0173 1 in -- I'm not certain, but it might be in the expert 2 witness report. 3 CHAIRMAN CLOWE: Okay. I did not read 4 that. Try to stay as close to this as you can, 5 because -- 6 MR. BLEDSOE: Okay. But there are many 7 things -- there is a voluminous record. You know, it 8 was three or four days of testimony besides numerous 9 days of depositions that were admitted into the 10 record, so there is a voluminous record. And the 11 issue related to the Bingo Advisory Commission 12 absolutely is in the record. 13 COMMISSIONER COX: I have a question. 14 CHAIRMAN CLOWE: Yes, sir. 15 COMMISSIONER COX: What is the record? 16 Is the record what I have seen here or is the record 17 those four days of stuff, and if so, if the record is 18 four days of stuff, I want to see it. If the record 19 is this, then I want to talk about this. 20 MS. KIPLIN: Well, the record is more 21 than what is in front of you. And if there were a 22 lawsuit that were to occur based on somebody feeling 23 aggrieved by your decision, then the record would be 24 each pleading, motion, intermediate ruling, evidence 25 received, considered, and so forth. And you're 0174 1 absolutely entitled to see the record if that's what 2 you want. And we can get you the record. I will say 3 that on a level where you are now, you are listening 4 to oral argument. The purpose of having an 5 administrative law judge is to amass that record and 6 to make findings of fact based on the evidence that 7 both of these counsel have offered and was admitted, 8 in whatever form it was, whether it was witness 9 testimony or documentary evidence, and to make 10 argument and to file pleadings. And that's what 11 occurred on that level at the contested case 12 proceeding. What is before you now is your decision 13 based on the proposal for decision that's been issued 14 by the administrative law judge that -- that contains 15 the proposed findings and conclusions. 16 COMMISSIONER COX: Okay. Now, are we 17 going to be sitting here and listening to somebody's 18 opinion on what happened in four days of testimony and 19 stacks of documents and all of this, and who is going 20 to check to tell us whether that's really what 21 happened? How -- this is out of control. 22 MS. KIPLIN: Well, I will tell you that 23 this agency has adopted a practice where it has 24 allowed counsel to come before it on matters that are 25 noticed for the -- on the agenda and to give them the 0175 1 opportunity to make oral argument. And that's what is 2 occurring right now. It is up to each one of the 3 attorneys to make proper objection to keep them within 4 the record. And so that we -- if in fact there is 5 some sort of a judicial review, that record is clean 6 and when it goes up to a district court, it contains 7 what it ought to contain pursuant to statute. But 8 what is before you are counsel making oral argument. 9 CHAIRMAN CLOWE: So I think the answer 10 to your question, Commissioner Cox, is that we have 11 not seen the complete record. 12 MS. KIPLIN: Right. 13 CHAIRMAN CLOWE: We have read what is 14 in the notebook, which is the ALJ's recommended 15 decision and order, but that's the limit of what we 16 have been exposed to at this point in time. 17 Mr. Bledsoe is quoting from matters which we have not 18 been exposed to, and I think Mr. White stayed pretty 19 well within this recommended order. 20 MS. KIPLIN: And both of them should be 21 staying within the record in terms of the evidence 22 that was offered, and that is -- that is appropriate 23 for a counsel, when they're making oral argument, to 24 be able to refer to the record to bolster their oral 25 argument. 0176 1 COMMISSIONER COX: And, again, the 2 record is what is in this -- behind this tab or this 3 four days of stuff that we haven't seen? 4 MS. KIPLIN: It's each pleading, 5 motion, and immediate ruling, evidence received or 6 considered, statement of matters Officially Noticed, 7 questions and offers of proof, objections and rulings 8 on them, proposed findings and exceptions, each 9 decision, opinion or report by the officer presiding 10 at the hearing, and all staff memoranda or data 11 submitted to or considered by the hearing officer or 12 members of the agency who are involved in making the 13 decision. 14 COMMISSIONER COX: Okay. So what I 15 think I'm being asked to do here is to listen to a 16 selected portion, unaudited portion of what supposedly 17 is in the record, not having the rest, having no 18 context, and make a decision. Is that where we are 19 kind of? 20 MS. KIPLIN: Well, what I would answer 21 to you is, what you're listening to is oral argument. 22 And there are some agencies that do not afford the 23 opportunity for counsel to make oral argument and a 24 proposal for decision is submitted to y'all for your 25 consideration along with the exceptions and the 0177 1 replies. But this agency has afforded them that 2 opportunity, and I would recommend against cutting it 3 off at this point because I think it's been a 4 long-standing agency practice. But what you're being 5 asking to do is make a decision in a contested case 6 matter, as a decision maker on your level. You were 7 not the trier of the facts. You are not the entity 8 that ruled on objections. You are not the entity that 9 decided discovery disputes, which I'm thinking, 10 because it's a contested case proceeding, probably 11 happened, nor were you the judge that -- 12 COMMISSIONER COX: Okay. Now, you've 13 told me what I'm not. Now, Mr. Chairman, what I would 14 like to have brought into sharp focus is, what are we? 15 CHAIRMAN CLOWE: Well, it's our duty to 16 rule on this matter. And we can do that after we hear 17 oral argument. And I like hearing oral argument. I 18 think it's fair to all parties to do that. We can 19 defer, after we hear oral argument, and go back and 20 review the record in more detail and bring this up at 21 our next meeting, if that's our decision. We can make 22 a decision today, if a motion is made and seconded, in 23 deciding this case. Those are our options as I see 24 them. 25 COMMISSIONER COX: And the issues that 0178 1 we are looking at here are basically -- well, what 2 does the decision tree look like? What are the 3 possible outcomes? I know you said we can make a 4 decision or we could defer, but if we made one, what 5 kinds of things could we be deciding here? 6 CHAIRMAN CLOWE: We can decide anything 7 we want to, as long as it's within the law. 8 COMMISSIONER COX: So we can make 9 determinations of fact that are contrary to the ones 10 that the -- 11 MS. KIPLIN: If I might be able to 12 respond to that. There is a provision in the 13 Administrative Procedure Act, it's Section 2001.058, 14 and it applies only when an administrative law judge 15 that's employed by the State Office of Administrative 16 Hearings is presiding. And in this case, our cases go 17 to the State Office of Administrative Hearings. A 18 State agency -- and that would be you all, the 19 decision maker -- may change a finding of fact or 20 conclusion of law made by the administrative law 21 judge, or may vacate or modify an order issued by the 22 administrative judge only if the agency determines 23 that the administrative law judge did not properly 24 apply or interpret applicable law, agency rules, 25 written policies, provided under Subsection C -- and 0179 1 I'll get to that -- or prior administrative decisions. 2 That a prior administrative decision on which the 3 administrative law judge relied was incorrect or 4 should be changed, or that a technical error in a 5 finding of fact should be changed. The agency shall 6 state in writing the specific reason and legal basis 7 for a change made under this subsection. 8 The -- in terms of changing findings of 9 fact, that's the point of having an administrative law 10 judge who is the trier of the evidence, who sees and 11 judges the demeanor and the credibility of the 12 witnesses, both on direct and cross examination, and 13 has to find what the facts are by sifting through the 14 evidence. That's their job. And if you are in a 15 position where you believe that you need additional 16 facts found to be able to come to a decision on an 17 order, in other words, what is an appropriate 18 disposition of the matter, then that is certainly an 19 option to you. You may remand this back to the State 20 Office of Administrative Hearings for additional fact 21 finding. 22 COMMISSIONER COX: Okay. And 23 Mr. Chairman -- and Mr. Bledsoe, I apologize for 24 interrupted you right in the middle of your 25 presentation. And thank you for partially educating 0180 1 me at this point, and I agree with you, that we should 2 listen to Mr. Bledsoe and then go from there. 3 CHAIRMAN CLOWE: And in point of 4 further clarification, I think I heard Mr. White say, 5 he agreed with every recommendation that the 6 administrative law judge made except number 11. Was 7 that the number? 8 MR. WHITE: Yes, sir, that's true. 9 CHAIRMAN CLOWE: That the licenses be 10 renewed. And he objected to that and is asking that 11 the licenses not be renewed. That's the point of 12 contention between these two counsels. 13 MS. KIPLIN: If I might just raise an 14 issue. And I may be looking at the wrong document, 15 and I look to both counsel for this. Mr. White, I 16 hear you say it's conclusion of law 11, but I am 17 looking at what I believe to be the proposal for 18 decision and my notebook, and I see conclusion of law 19 ten, and so I don't know whether that's the -- a 20 miss -- a disconnect on my point or not, but I would 21 point that out to both of the parties. 22 COMMISSIONER COX: I see what 23 Ms. Kiplin sees. 24 MR. WHITE: You're correct and -- 25 MS. KIPLIN: And so I'll leave that 0181 1 with you, but -- 2 CHAIRMAN CLOWE: So we've got a wrong 3 number in there, but it's the same -- 4 COMMISSIONER COX: It's based on the 5 foregoing, the Commission should renew. 6 CHAIRMAN CLOWE: Now, since we're at a 7 pause, let's ask some questions. 8 Do you have some questions? 9 COMMISSIONER COX: I've got a ton of 10 questions. 11 CHAIRMAN CLOWE: Okay. Have at it. 12 COMMISSIONER COX: I -- I think maybe 13 Mr. Bledsoe's argument might answer some of them, so 14 would it be fair to let him go ahead and make that? 15 CHAIRMAN CLOWE: You're to a point, 16 though, where I want to ask a couple of questions, 17 Mr. Bledsoe, before you continue, because I don't want 18 to lose it in my mind. 19 MR. BLEDSOE: Yes, sir. 20 CHAIRMAN CLOWE: You made a comment 21 about an event involving the chair of the Lottery 22 Commission in 2001? 23 MR. BLEDSOE: Not the chair, the 24 executive director. 25 CHAIRMAN CLOWE: Oh, the executive 0182 1 director. You said the head of the agency. I have a 2 different view of that. 3 MR. BLEDSOE: I misspoke. I misspoke. 4 CHAIRMAN CLOWE: But I respect another 5 man's view, or woman's view. 6 The second question I had -- and you're 7 not talking about the Charitable Bingo Division 8 director, you're talking about the Executive Director 9 of the Lottery Commission in that remark? 10 MR. BLEDSOE: No. Actually, it would 11 be the Bingo director. 12 CHAIRMAN CLOWE: Okay. Now we're 13 talking about -- 14 COMMISSIONER COX: Since we're on that 15 point, and since we now know it was Mr. Atkins, what 16 was it he did? 17 MS. KIPLIN: If it's in the record. 18 Sorry to harp, but -- 19 COMMISSIONER COX: I -- that was going 20 to be one of my questions was, what was it that this 21 person did in 2001 or was involved in? 22 MR. BLEDSOE: What the allegation was 23 was that the head of the agency was doing some things 24 to help allow people to get licenses and things 25 that -- beyond their outside rules more quickly than 0183 1 they would have gotten them or getting licenses maybe 2 when they were not entitled to them. That matter was 3 not investigated. The allegation regarding my client 4 were investigated, according to the testimony of 5 Mr. Martinez. 6 COMMISSIONER COX: Okay. Then the -- 7 was this something that Mr. Atkins said he did or 8 somebody else said he did? 9 MR. BLEDSOE: Some -- some individual, 10 an informant, a lady who I probably shouldn't mention 11 her name, but who actually came to the Commission. 12 CHAIRMAN CLOWE: And that was in the 13 record. 14 MR. BLEDSOE: That's in the record. 15 That's Marcos Martinez, it's in his deposition. I 16 think Mr. White had it introduced into evidence. 17 CHAIRMAN CLOWE: Now, you both have 18 spoken to, and I think you both agreed, therefore, 19 that it's in the record about the giving up of these 20 records. And Mr. White has said that they never will 21 produce them and you have said that's not true. So 22 for my and Commission Cox's information, is the 23 consolidated Red Men lodges, are they willing and able 24 to give up whatever records the Commission -- the 25 division asks for? 0184 1 MR. BLEDSOE: Now, yes, Mr. Chairman. 2 Let me, if I might, explain that to you. 3 CHAIRMAN CLOWE: Good. I wish you 4 would. 5 MR. BLEDSOE: What had happened was, 6 there was a dispute about whether or not Dos Rios was 7 appropriate. Okay? And the Red Men decided they 8 wanted to have an administrative hearing so that a 9 judge could hear the evidence and make a 10 determination. They retained counsel -- counsel, who 11 was here earlier today -- and that counsel advised 12 them that -- that is what the testimony was, that 13 counsel advised them not to turn over records because 14 it was a matter then going into litigation, so records 15 were not turned over at that time. 16 CHAIRMAN CLOWE: Okay. 17 MR. BLEDSOE: Some records were turned 18 over. All the records that could be found, under 19 those circumstances, were turned over during the -- 20 during the hearing. What the bone of contention that 21 a lottery might have was, you have 45,000 dollars in 22 payments, but the receipts reflect about half the 23 amount, don't reflect the other amount. So there was 24 a bone of contention about that. 25 CHAIRMAN CLOWE: Okay. 0185 1 MR. BLEDSOE: But if you've got not -- 2 record keeping that wasn't good, well, that's a 3 different issue. But those documents were turned over 4 during litigation. They're acting like there are 5 still new documents that need to be turned over. And 6 if I might just briefly go outside of the record -- 7 CHAIRMAN CLOWE: No, no. Don't do it. 8 MR. BLEDSOE: -- I think you need to 9 hear -- well, I'm thinking -- 10 CHAIRMAN CLOWE: You'll hurt yourself 11 if you do -- 12 MR. BLEDSOE: -- okay. Well, I'm 13 thinking, in terms of the records in answering that 14 question. 15 CHAIRMAN CLOWE: Yeah, you were in the 16 record. Now, let me ask you this. In regard to this 17 proposed settlement, you're here supporting. Am I 18 understanding that correctly? 19 MR. BLEDSOE: Well, yes, Mr. Chairman, 20 although we would say, the judge ruled against any 21 costs for the Lottery Commission, so we wouldn't agree 22 with that proposed order. And also, we would ask -- 23 and I'll explain later -- that there not be any kind 24 of close monitoring or anything along those lines of 25 the Red Men. 0186 1 CHAIRMAN CLOWE: So those are the two 2 exceptions to the ALJ's recommendation that you are 3 not supporting, but you are supporting everything 4 else? 5 MR. BLEDSOE: Yes, sir. 6 CHAIRMAN CLOWE: So your client is 7 willing, at this point, to give up these monies that 8 the staff contends were improperly expended. Is that 9 correct? 10 MR. BLEDSOE: Yes, Mr. Chairman. The 11 45,000, what have you, they're willing to go ahead and 12 repay that amount. It may be 47 or 48, I don't know 13 the exact number. But it's in the high 40s. 14 CHAIRMAN CLOWE: I think in this chart 15 here -- 16 MR. BLEDSOE: And even though they 17 disagreed with the opinion, they're willing to go 18 along with the recommendation of the ALJ. I think 19 there were about 80,000 dollars of expenses involved 20 and they said, well, 35,000 were okay and about 45,000 21 were not okay. 22 CHAIRMAN CLOWE: Okay. 23 MR. BLEDSOE: Convention expenses were 24 the main thing where the ALJ ruled in the favor of my 25 clients. 0187 1 CHAIRMAN CLOWE: Okay. I think 2 Commissioner Cox would like for you to continue, and I 3 would too, if you'll just make it as brief as 4 possible, make your salient points for us, please. 5 MR. BLEDSOE: Thank you, Mr. Chairman. 6 The -- so there is a real problem with 7 enforcing the law and taking someone's license. And 8 you've got a law where the whole world, including the 9 Commission, has admitted it's unclear, it's vague, it 10 doesn't give proper guidance to individuals as to what 11 is allowable and what is not. And, again, if you go 12 and look at the arrangement that I have submitted to 13 you, that is, what this was all about that got this 14 whole thing started, I think you can see that even if 15 you disagree with it, that there is no reason why a 16 fraternal organization should not think that it could 17 undertake a leasing arrangement like that to benefit 18 their organization, their members, and other 19 individuals who are deserving. But the statute did 20 not define who is needy, did not define who is 21 deserving. That is one of the biggest problems 22 identified by the administrative law judge, and that's 23 one of the biggest problems identified by your Bingo 24 Advisory Commission, that's a problem, that's an 25 issue. So I think that enforcing that would be a 0188 1 problem. 2 So we think it would be 3 unconstitutional to enforce that policy, because an 4 individual is not afforded due process of the law when 5 they are penalized for not complying with a vague and 6 indefinite or uncertain law that doesn't provide them 7 proper guidance as to what their conduct should be. 8 Now, secondly, there is a penalty for 9 challenging. What was admitted by the Lottery 10 Commission and all of the -- from Mr. Hare on up 11 through Mr. Sanderson, that the decision to take -- to 12 seek the license of my clients was made because they 13 decided to go and seek an administrative hearing. 14 They admitted that if my clients had agreed with the 15 recommendations of the auditor and simply repaid the 16 money at the time of the original request, this 17 hearing would never have happened and we wouldn't be 18 here. Okay. So -- 19 CHAIRMAN CLOWE: You agree that's in 20 the record? 21 MR. BLEDSOE: Absolutely that's in the 22 record. 23 MR. WHITE: It was -- they stated that 24 they were willing to negotiate with these 25 organizations if they were willing to come into 0189 1 compliance with the law by producing the documents and 2 reimbursing the charitable bingo accounts, but these 3 organizations stated unequivocally they were not going 4 to comply with the law, they were not going to produce 5 the documents. You have a finding by the 6 administrative law judge contrary to what Mr. Bledsoe 7 just told you, that the documents were not produced 8 and have not been produced. 9 CHAIRMAN CLOWE: Okay. 10 MR. WHITE: And they have not 11 reimbursed these funds. So there is not much the 12 Commission can do when you have organizations that 13 say, we are not going to comply with the law, we are 14 not going to produce documents, we are not going to 15 pay charitable disbursements as required by the law. 16 You know, it's either, okay. Never mind. We'll go 17 home, or we'll -- we have to proceed with disciplinary 18 action. 19 CHAIRMAN CLOWE: Okay. 20 MR. BLEDSOE: Mr. Chairman, that's 21 completely inaccurate what Mr. White just stated to 22 you, and let me say, he didn't answer your question. 23 Your question was whether or not that was in the 24 record that it was for the reason that they did not 25 repay the audit amounts. Okay? Mr. Sanderson said 0190 1 that in his testimony. 2 CHAIRMAN CLOWE: Okay. 3 MR. BLEDSOE: Mr. Hare said that in his 4 testimony. That's an argument that we made in our 5 final argument. That is the part of the report of the 6 expert witness, Marsha Metz, based upon the decisions 7 that were made by your agency. And the question 8 wasn't whether you're going to turn over records or do 9 things like that. Based upon the unavailability of 10 records to substantiate various expenses, your clients 11 reached a conclusion that certain amounts needed to be 12 repaid. They told my clients that you need to repay 13 this amount of money, including the Dos Rios money and 14 the convention expenses. My client says, no, that's 15 not appropriate. We want to go to administrative 16 hearing. And it was at that point in time that your 17 staff admits they made a decision that they were 18 not -- they previously were not going to go for the 19 license of my clients, but they decided to go for my 20 clients' licenses then. And so if you look at the 21 record, absolutely that in is the record that that -- 22 CHAIRMAN CLOWE: Well, we've got a 23 disagreement about some fact there, but generally I 24 think that -- that fell in the record. So let's move 25 on off of that. 0191 1 COMMISSIONER COX: Let me just see if I 2 understand here. 3 CHAIRMAN CLOWE: Go ahead. 4 COMMISSIONER COX: You know, I watch 5 Law and Order, and I see the prosecutor and the 6 defense attorneys, they're trying to cut a deal, and 7 he says, you know, you get five to 15 if you'll roll 8 over for this. Otherwise, we're going to go for your 9 throat. And he says, five or 15, or he says, go for 10 my throat. That's kind of what I hear you saying 11 here, that they said, pay up, we'll call it even. And 12 they said -- you said, we're not going to -- your 13 clients said, we're not going to pay up. And they 14 said, okay. Then we're going after your license. Is 15 that kind of what happened? 16 MR. BLEDSOE: Well, that's a different 17 situation if you're talking about a criminal context. 18 Here we're talking about the exercise of your 19 Constitutional rights. You have a First Amendment 20 right of freedom of expression. Article I, Section 8 21 of the Texas Constitution guarantees that. And also, 22 we have to look at the due course of law and due 23 process of law provisions of the Texas Constitution, 24 that -- and the right to access to the public courts 25 and to seek redress of grievances. 0192 1 COMMISSIONER COX: Help me understand 2 how that is different from Law and Order. 3 MR. BLEDSOE: Well, see, what we have 4 here is this. You place a chilling effect on the 5 individual in terms of their desire to exercise their 6 Constitutional rights by saying that if you decide to 7 exercise your Constitutional rights, that instead of 8 actually seeking the amount of money that we think you 9 owe, we're actually going to seek your license. And 10 we're actually going to stop you from being able to do 11 business. That has a chilling effect, and it clearly 12 violates the right of an individual to have access to 13 the courts to seek redress of grievances as provided 14 by the Texas Constitution. So that's a different 15 provision. 16 COMMISSIONER COX: Mr. White, do you 17 agree? 18 MR. WHITE: No, I do not. This agency, 19 like every other regulatory agency, has very limited 20 resources. We go out and we conduct audits, we find 21 violations, but we don't negotiate settlements with 95 22 percent of the licensees -- we have to as a practical 23 matter. Those five percent or less who say, you know, 24 we're not going work with the agency, we're not going 25 to come into compliance, and we're forced to go to 0193 1 hearing, spend 50,000, 100,000 dollars of the 2 taxpayers' money and -- proving the violations, yes, 3 we will ask for a harsher penalty. You know, we could 4 ask for revocation in every case where there is a 5 violation, and we would have a hearing on virtually 6 every violation, and obviously, that's not a practical 7 solution to anything. We have to settle the 8 overwhelming majority of the cases. And those 9 organizations, individuals who say, no, we're not 10 going to cooperate with the Commission, we're not 11 going to come into compliance, we don't think we have 12 to, we think we're above the law, and we pay the money 13 to go to hearing and prove the violations, those 14 individuals and persons need to face the consequences. 15 COMMISSIONER COX: Thank you, 16 Mr. Chairman. 17 CHAIRMAN CLOWE: Continue, Mr. Bledsoe. 18 MR. BLEDSOE: Thank you, Mr. Chairman. 19 So we feel that there are two 20 Constitutional impediments for you making a decision 21 to take someone's license away, because of vague, 22 unclear and indefinite statutes that don't give proper 23 guidance as to what their conduct should be; and 24 number two, because your decision would have a 25 chilling effect on the exercise of the Constitutional 0194 1 rights that licensees and the citizens of this state 2 actually have. So we think that would be part and 3 parcel of any kind of litigation or appeal that would 4 emanate from this case if it goes on further from 5 today. 6 But I also want to point you to one 7 thing that's in the record, the expert witness report 8 of Marsha Metz. Marsha Metz is a tax practitioner, 9 former CPA -- former IRS employee, actually was a 10 trainer for IRS besides being an agent. And she is a 11 tax lawyer and a CPA. And her expert report was 12 somewhat illuminating in a number of ways, because she 13 talked about the chilling effect that the policy has 14 on the exercise of Constitutional rights, and why she 15 thinks that's inappropriate. She talked about how the 16 agency's interpretation of inurement was off base and 17 not appropriate. And she talked about why the 18 Dos Rios arrangement was indeed -- was indeed 19 appropriate in light of the statutes and rules that 20 were in place at the time. 21 Now, importantly, there had been rules 22 that had been previously in place to define charitable 23 purposes. Those rules, for whatever reason, were 24 repealed. And so you have individuals who were of the 25 belief that a certain kind of interpretation continued 0195 1 to exist, but it did not. 2 Now, one thing that was clear in the 3 evidence in the case, and that is, that the agency 4 admitted that they did nothing to publish the policy, 5 they did nothing to educate individuals about what 6 would or would not be a proper charitable purpose. 7 There were no mailers and no information that was 8 actually sent out saying that you could or could not 9 do these things. So one other thing that is not 10 contradicted in the record that shows the good faith 11 that my clients have is that in one of the conventions 12 that your -- that the Lottery Commission was invited 13 to a Red Men convention to make a presentation, and at 14 that convention they bring in an Internal Revenue 15 Service agent. That Internal Revenue -- 16 CHAIRMAN CLOWE: Now, is this in the 17 record? 18 MR. BLEDSOE: That's in the record. 19 It's in the record. And at that convention -- at that 20 convention, the -- for the first time the lottery says 21 that because you're a fraternal organization and not a 22 charitable 501(c)(3) organization, there will be 23 different treatment of what you can and cannot do 24 under the charitable distribution laws. Because 25 you're a 501(c)(3), you're inherently charitable in 0196 1 nature, but there is a difference if you're a (c)(8) 2 or a (c)(10) and have some other 501(c) designation. 3 But, of course, your staff has carved out exceptions 4 for the American Legion, exceptions for the VFW, 5 exceptions for the volunteer firemen, so they've done 6 that separate and apart from what they stated that 7 day, and that's in the record. 8 So but what is not objected to and what 9 there is no disagreement about is that my clients were 10 clearly surprised and shocked and didn't know that. 11 And so at that time, they had the belief that they 12 could operate the same as a 501(c)(3) and that under 13 the current law it's clear that if you spend money, 14 okay, that -- that is consistent with your 501(c) 15 purpose, that that is an acceptable charitable 16 distribution. So under your current law that would be 17 appropriate, under the previous law, I think arguably 18 it was, but if it's a confusing law, again, therein 19 lies the problem. 20 Now, also I want to point to you what 21 is in the testimony of the Internal Revenue Service 22 agent, who was designated by your staff as an 23 employee. And I took the deposition of that 24 individual, and I was shocked, the individual pretty 25 much supported all of the positions that we had. 0197 1 COMMISSIONER COX: Let me ask about 2 this person. This was an IRS agent that was 3 designated by our staff as an employee? 4 MR. BLEDSOE: No. Excuse me. As a 5 witness. As a witness. If I said employee, I 6 misspoke. Okay? And once the deposition took place, 7 your staff sought to exclude the individual as a 8 witness in the case. The judge ended up allowing the 9 deposition to take place, and then he pretty much 10 indicated that -- that you can allow -- you can rent 11 something, you can lease something from a member of an 12 organization that as long as it's a fair price for it, 13 there is not a problem. But all the issues and things 14 that have been raised by your organization weren't 15 indeed appropriate. 16 MR. WHITE: And that is outside the 17 record. What the IRS agent was testifying to was what 18 constitutes a business expense for purposes of IRS 19 taxes, not what constitutes a charitable disbursement 20 under the Bingo Enabling Act. They are two completely 21 different -- apples and oranges, what is a business 22 expense under the IRS code, and what is a charitable 23 disbursement under the Bingo Enabling Act. 24 CHAIRMAN CLOWE: I thought I read that 25 in the record, the testimony to that effect. 0198 1 MR. WHITE: There was testimony by the 2 IRS agent that business expenses -- what is a business 3 expense under the IRS code. He did not testify as -- 4 in fact, he was -- 5 CHAIRMAN CLOWE: They did -- he or she 6 did testify to that fact? 7 MR. WHITE: As to what is a business 8 expense under the IRS code. 9 CHAIRMAN CLOWE: Yes. 10 MR. WHITE: Yes. 11 CHAIRMAN CLOWE: Okay. They were there 12 on the record. You're disputing what the testimony 13 was -- 14 MR. WHITE: That it was in regards to 15 what is a charitable disbursement. He did not testify 16 in any way, shape or form as to what is a charitable 17 disbursement under the Bingo Enabling Act. 18 MR. BLEDSOE: I didn't say that. I 19 didn't mean to suggest that. I didn't say anything 20 about that. My point was -- 21 CHAIRMAN CLOWE: I don't think y'all 22 are going to agree -- 23 MR. BLEDSOE: -- about the inurement 24 issue. I didn't even speak on that issue, so I'm not 25 sure where that comes from. 0199 1 CHAIRMAN CLOWE: I understand where I 2 think you're both coming from. 3 MR. BLEDSOE: Okay. 4 CHAIRMAN CLOWE: Can you kind of sum it 5 up for us, Mr. Bledsoe? 6 MR. BLEDSOE: Well, I have a few more 7 points I need to make. I will try to be as quick as I 8 can, Mr. Chairman. 9 CHAIRMAN CLOWE: Go ahead. 10 MR. BLEDSOE: The -- let me say here, 11 too, that indeed if the client is instructed to do 12 something by a lawyer that that client ought to be 13 able to do that. If you've got a problem with that, 14 it should be the lawyer's. If someone is told, let's 15 give documents up in discovery, that we don't give 16 them up at this stage, that you would be undermining a 17 client's right to seek the advice of counsel, and that 18 that would be an unconstitutional action on your part. 19 Now, after the administrative law judge 20 made the decision, you know, the agency did not file 21 objections in a timely basis. I think about eight 22 days late in filing objections. And I think about 61 23 days ago, the judge decided to go ahead and stick with 24 the original decision. What we're saying is this. My 25 clients want to work with you. Mr. Hare -- I asked 0200 1 Mr. Hare, at the end of his testimony, this is in the 2 record, can you work with my clients? 3 Yes. In fact, I like your clients. We 4 get along. 5 You know, these are good folks. And 6 they are providing a lot of benefits to a lot of good 7 people. The record shows just innumerable 8 distributions to many, many very worthy individuals 9 and organizations, schools, police departments. 10 They've done a noble job. You cannot just replace my 11 clients with other individuals to try to carry on the 12 same purpose in that area. You would be doing a 13 disservice to those people who are the beneficiaries 14 of their good works over the years, because they know 15 how to do what they're doing. We know that the 16 proposal for decision wasn't all in our favor, but the 17 judge listened to the evidence, the judge attempted -- 18 the judge tried to be very fair. He tried to be fair 19 to the agency, the judge tried to be fair to the 20 client. And so, in that regard, we think that it 21 would be the appropriate thing to follow through and 22 go along with that recommendation and allow things to 23 start on an equal footing, so we don't have the kind 24 of negativity that we -- that we have at this point. 25 My clients will agree to repay the monies. That won't 0201 1 be a question. That won't be a problem. I think 2 under -- again, I point you to the fact that what you 3 will be doing, if you decide to take their license at 4 this point, would be, you would be taking their 5 license for something they could clearly do under the 6 current law, and that would be truly contradictory. 7 And the -- again, the testimony was, my clients made 8 every record available that they had available to -- 9 to the agency. And -- in terms of the invoices. The 10 invoices that they didn't have that were with the 11 trustee, they got those invoices and turned those over 12 during litigation. There were no more invoices that 13 were to be -- that were to be turned over. My clients 14 have no concern and no problem in making all the 15 records available. And, in fact, the people who 16 control their records -- and this is in the record -- 17 are bookkeepers who are bookkeepers for many other 18 licensees, bingo licensees with your organization. 19 And they stated that they did -- they handled this 20 matter no different from how they handle other 21 matters, and these people are not members of my 22 client's organization or anything like that, and they 23 said, the records that -- that the records were 24 available, made available to the client. So if you 25 want to say, well, we wish you had more records 0202 1 available, that's one thing. But my client never has 2 not -- decided not to give records, or what have you. 3 That's just not right. It's not supported by the 4 record. 5 MR. WHITE: If I might respond very 6 briefly, just two minutes, to two important items -- 7 issues, if that's okay. 8 CHAIRMAN CLOWE: Yeah, go ahead. 9 MR. WHITE: The first is, Mr. Bledsoe's 10 comment towards the end that, you know, under the 11 current law these distributions would be permitted. 12 That is absolutely untrue. And it also goes to the 13 issue as whether or not -- you know, the issue of -- 14 the definition of whether it constitutes a charitable 15 disbursement was vague and unclear at the time. I'm 16 not sure if it was or was not, but in regard to that, 17 it was absolutely clear that charitable disbursements 18 could not be distributed to officers, directors, or 19 members of an organization, has been -- it's in 20 writing, it is still there, it is in the statute, it 21 was in the statute, and that has not changed. And 22 that was what the judge found, that they disbursed 23 45,000 of charitable bingo money to one of their own 24 members for his own use. 25 CHAIRMAN CLOWE: Okay. 0203 1 MR. WHITE: And that has not changed in 2 the new statute, it was in the old statute, and it is 3 clear and unambiguous and it has always been clear and 4 unambiguous. And that's -- I'll stop there. 5 MR. BLEDSOE: That was not a finding, 6 but I dispute that. 7 CHAIRMAN CLOWE: Okay. This is a good 8 time to take a break. A short break. 9 (RECESS.) 10 CHAIRMAN CLOWE: We'll come back to 11 order. 12 Come back up, Mr. White, Mr. Bledsoe, 13 please. 14 Counselor, I want to take first steps 15 first. Where are we in regard to the issue of 16 ex parte communication and what Mr. Bledsoe's 17 statement was in regard to further deliberations of 18 this issue at this time? 19 MS. KIPLIN: Well, I think, if there is 20 an issue -- of course, I asked that it be put on the 21 record because I thought it was something that both 22 parties ought to know about, but -- and given an 23 opportunity to respond. Mr. Bledsoe has indicated he 24 wanted to think about it, and I think he can continue 25 to do that. Where you are now is consideration of 0204 1 entry of an order, and -- 2 CHAIRMAN CLOWE: And we're free to go 3 forward with that, even though Mr. Bledsoe hasn't 4 answered my question as to whether he has any problem 5 with that? 6 MS. KIPLIN: Yes, I think you are. 7 COMMISSIONER COX: But I don't think I 8 want to, because I -- I don't think we should waste 9 everybody's time if he is going to come back and say, 10 well, I have a problem with that and therefore it's 11 all -- it doesn't count. 12 MS. KIPLIN: Well, I can tell you 13 that -- 14 COMMISSIONER COX: So I think we ought 15 to give him time to make his decision and then go 16 forward after that. 17 MS. KIPLIN: And that's certainly the 18 prerogative of the Commission. You have several 19 approaches. I mean, I -- you have listened to 20 argument of counsel. I don't know if you're planning 21 on asking any additional questions, but there are 22 several options that are available to you 23 procedurally. You can vote and enter an order that's 24 consistent with what Mr. Bledsoe -- 25 CHAIRMAN CLOWE: We know what those 0205 1 options are, but we're not there yet. We're talking 2 about Mr. Bledsoe's position in regard to the possible 3 ex parte communication. We've got to deal with that 4 first. That was where Mr. Commissioner Cox was. And 5 he said he didn't want to go forward until Mr. Bledsoe 6 resolved what his position was. Did I understand you 7 correctly? 8 COMMISSIONER COX: Exactly. 9 CHAIRMAN CLOWE: And I'm respectful of 10 that. 11 Mr. Bledsoe, where are you in regard to 12 that determination? I want to treat you fairly on 13 that, but what -- what is your position as of now, 14 regarding that? 15 MR. BLEDSOE: Well, I haven't had an 16 opportunity to really look at the statute, and I don't 17 want to do anything to really forestall and prevent 18 you all from acting. I don't know what -- in terms of 19 you're saying, giving me some time to look at it. I 20 know that you and Commissioner Cox have been very 21 balanced in all of the questions and his analysis -- 22 CHAIRMAN CLOWE: Well, I'll give you 23 two options to try to help you out on this. We can go 24 forward with our agenda and you can come back later 25 this afternoon if that gives you enough time, or if it 0206 1 doesn't, we'll stop this deliberation at this point in 2 time and take it up next month. 3 MR. BLEDSOE: Okay. 4 CHAIRMAN CLOWE: Can you decision-make 5 in regard to those two options? 6 MR. BLEDSOE: I think I may be partial 7 to next month at this point. 8 CHAIRMAN CLOWE: All right. Do you 9 have any objection to that, Mr. White? 10 MR. WHITE: No, sir. 11 CHAIRMAN CLOWE: Counselor? 12 MS. KIPLIN: No. I think that's an 13 action that you all can take just to go ahead and pass 14 this item and take it up for additional consideration 15 at next month's meeting. 16 CHAIRMAN CLOWE: Is that all right with 17 you, Commissioner Cox? 18 COMMISSIONER COX: Yes, sir. 19 CHAIRMAN CLOWE: Okay. Thank you both 20 very much. We'll put this on the docket for next 21 month. Mr. Bledsoe, if you're able to communicate 22 with our general counsel to advise her of what your 23 position is in regard to this matter so when we put it 24 on the docket, we'll know where we are. 25 MR. BLEDSOE: Okay. Thank you. 0207 1 COMMISSIONER COX: Mr. Chairman, and 2 Counselor, if this is appropriate, I -- I'm not turned 3 on, am I? 4 I know you asked me to write a memo of 5 my discussion with Billy to see if it matched up with 6 his, and I didn't write that memo because I told you 7 that everything that we said -- she called me back, 8 and I asked Billy, would he get Ms. Kiplin and they 9 called me back, and we've talked about this thing. 10 And she called me back in about 30 minutes and by that 11 time, I had read far enough into this material to have 12 found everything that Billy had told me. So I told 13 her, I'm not -- I don't want to write it all down 14 because it's all in here. He didn't tell me 15 anything -- and what he told you that he told me is a 16 longer list than I could have remembered. But I know 17 it was all familiar information. Just for your 18 information, Mr. Bledsoe. 19 MR. BLEDSOE: And I appreciate -- and 20 one thing -- two other things, if I might ask. One 21 is, is there a way of getting actually a transcript of 22 whatever Mr. Atkins said earlier so I could look at it 23 and understand more so, because I'm really going on 24 memory. And I guess the other thing would be, 25 would -- because I know one thing that you had asked 0208 1 for, I think you were concerned, Mr. Cox, about 2 whether things were or were not in the record, and 3 since there is a 30-day time period, possibly, to 4 provide you something with -- in writing that -- with 5 citations to the record so you can see clearly what is 6 in the record and what is not in the record. 7 COMMISSIONER COX: And I would have to, 8 of course, defer to counsel on what should be done 9 there, but I certainly appreciate that offer. 10 MS. KIPLIN: If I might respond. I 11 think it's up to the Commission, if you want to invite 12 that kind of communication and contact from Mr. 13 Bledsoe. And I'm confident Mr. Bledsoe would copy 14 Mr. White on whatever communication, so that wouldn't 15 be a problem. And then I think it would be only fair 16 that you give Mr. White an opportunity to respond to 17 whatever Mr. Bledsoe is putting in writing. And 18 that's just -- 19 CHAIRMAN CLOWE: Do you want to do 20 that? 21 COMMISSIONER COX: I think that if I 22 had half a page of what each of them thought was 23 really important that would sure help me. 24 CHAIRMAN CLOWE: I'm comfortable with 25 that. With the understanding, it's got to be within 0209 1 the record. Okay? 2 MR. BLEDSOE: So what is the length? 3 CHAIRMAN CLOWE: I beg your pardon? 4 MR. BLEDSOE: What's the limit on the 5 length? 6 CHAIRMAN CLOWE: Well, he said half a 7 page, but you might make it a page. I think he would 8 probably accept that. 9 MS. KIPLIN: If I might be able to work 10 with the two counsel and can impose some kind of time 11 deadline so it's not coming in at the eleventh hour 12 and disadvantaging people and so forth. 13 CHAIRMAN CLOWE: And further, 14 Mr. Bledsoe, I understand that you wanted what Billy 15 said in the transcript. I'm going to ask the reporter 16 when she thinks the transcript would be available. 17 MS. KIPLIN: If I might just go ahead 18 and make the request on the record for that portion, 19 his statements, to be expedited, as well as what 20 Commissioner Cox just put on the record about what his 21 recall is, those two parts. 22 CHAIRMAN CLOWE: Very good. That will 23 give it to you right away. 24 MR. BLEDSOE: Sure. And thank you, Mr. 25 Chairman -- 0210 1 CHAIRMAN CLOWE: Thank you both. 2 Now, Mr. Bledsoe, before you leave, you 3 have filed a Witness Affirmation Form also in 4 regarding the item number 22, which is the 5 Commission's executive session. Could you enlighten 6 me on what your interest is there? 7 MR. BLEDSOE: Well, I think there is a 8 lawsuit that was filed that's related to this lawsuit, 9 the Michelle Sanchez lawsuit. It's Michelle Sanchez, 10 et al, at the end, where, in my view, the lottery used 11 a statute that was clearly applicable only to federal 12 agencies to try to get documents that were involved in 13 this litigation, and in that litigation, so 14 improvidently filed a lawsuit. I think the lawyers 15 for the Attorney General are actually here today. 16 CHAIRMAN CLOWE: Well, it hasn't been 17 the practice of the Commission to have presentations 18 in the executive session. And Counselor, can a 19 representation be made in writing to the Commission or 20 what would be the proper format to Mr. Bledsoe's 21 question? 22 MS. KIPLIN: Well, I think we are 23 represented by counsel of record, and I would think 24 it's more appropriate for Mr. Bledsoe to communicate 25 to our attorney. And -- nor would it be allowed, 0211 1 under the Open Meetings Act, for Mr. Bledsoe to enter 2 into executive session. That item is noticed to 3 receive the legal advice from your lawyer. And, of 4 course, if there are people who don't fit within the 5 scope of that attorney-client relationship, then it 6 blows the privilege and it obviates the need to go 7 into executive session. So what I would think would 8 be a better approach is for Mr. Bledsoe to communicate 9 through counsel of record, which is David Mattox, and 10 he is here -- 11 CHAIRMAN CLOWE: Could you do that, 12 Mr. Bledsoe? 13 MR. BLEDSOE: Yes, Mr. Chairman, I can 14 do that. 15 CHAIRMAN CLOWE: Thank you very much. 16 Commissioner Cox, we have reached item 17 number seven -- 18 COMMISSIONER COX: Only to seven. 19 CHAIRMAN CLOWE: Only seven, and we 20 have a long way to go. I just wonder if you would 21 like to go executive session at this time -- oh, we 22 have one more contested case. We had public persons 23 here, and as a courtesy, I would like to cover that, 24 and then we'll go into executive session and give 25 everybody a break. 0212 1 Next we'll take up item number 24, a 2 case represented by the letter T, docket number 3 362-05-4840.B, Consideration of Motion for Rehearing 4 and VFW Post 837 Auxiliary Highland Southeast. 5 MS. KIPLIN: And, Commissioners, if I 6 might just for the record. I know the respondent 7 is -- ma'am, I'm thinking you're not a lawyer. 8 MS. LUNA: No, I'm not. 9 MS. KIPLIN: Okay. So I want to 10 just -- and I think you were here, so you've seen how 11 the argument takes place. 12 MS. LUNA: Yes. 13 MS. KIPLIN: And I want to make sure 14 that you know about the record, and I think I've put 15 on there what it really is all about and what occurs 16 in the hearing -- 17 MS. LUNA: Yes, ma'am. 18 MS. KIPLIN: And I guess with that, 19 I'll -- 20 CHAIRMAN CLOWE: And Mr. White, I'll 21 ask you to start with your statement and the staff's 22 position, please. 23 MR. WHITE: Yes, sir. Just very 24 briefly. The staff believes that the motion for 25 rehearing should be denied. This case involved VFW 0213 1 Post 837, that failed to timely submit quarterly 2 reports for fees three times within one year. There 3 is a rule that says revocation of the license under 4 those circumstances is mandatory. It went to hearing. 5 The administrative law judge recommended that the 6 license be revoked. The Commission adopted that 7 recommendation that the ALJ revoke the license. The 8 organization has filed a motion for rehearing, but has 9 offered no real reason to have a rehearing. No real 10 errors were allegation. It was basically simply a 11 request, could we have a rehearing. And in view of 12 the fact that no errors were alleged in that request, 13 and no real basis for having a rehearing was offered, 14 I believe there is nothing the Commission can do other 15 than deny the request for rehearing. 16 CHAIRMAN CLOWE: And are you Mrs. Luna? 17 MS. LUNA: Yes, sir. 18 CHAIRMAN CLOWE: And Ms. Luna, you have 19 stated that you are not an attorney, but you have been 20 here and seen the prior case, so you understand that 21 the Commission is happy to have your comment. 22 MS. LUNA: Yes, sir. 23 CHAIRMAN CLOWE: It's necessary to stay 24 within the facts as were determined by the record, and 25 hopefully you can do that. And we would be glad now 0214 1 to hear from you. 2 MS. LUNA: Sure. I will be as brief as 3 possible. 4 MS. KIPLIN: I'm sorry. I'm being 5 urged to -- and I thought you had, but just in an 6 abundance of caution, to make it clear what item we 7 are on on the record. I know you said item 24.T. 8 CHAIRMAN CLOWE: Just a minute. Let me 9 restate that to make sure I'm calling the right item. 10 Under agenda item 24, it's my understanding that it's 11 20 -- it's 24, the letter T. 12 MS. LUNA: That's correct. 13 MS. KIPLIN: And that's the Matter of 14 VFW Post 837 -- 15 CHAIRMAN CLOWE: That's what I read, 16 yes. 17 MS. KIPLIN: Okay. I apologize. 18 CHAIRMAN CLOWE: Stay awake then. 19 MS. KIPLIN: Yes, sir. 20 CHAIRMAN CLOWE: Ms. Luna? 21 MS. LUNA: Yes. I'll be as brief as 22 possible. 23 First of all, I'm the treasurer for the 24 Ladies Auxiliary, Post 837, and I thank y'all for even 25 letting us appear here today, for making room on your 0215 1 busy schedule. I based my request for a rehearing to 2 see if you all would reconsider your decision based on 3 just compassion and understanding that it was not our 4 intention not to comply with the law. We have an 5 exemplary record with the Lotto Commission. We've 6 been conducting bingo for many, many years. 7 There was a lot of disorganization 8 within our volunteer organization, and I also -- the 9 third report, that was late, and it is in the record 10 that it was late, and I'm not here to dispute the 11 tardiness of it. During that period of time, I was 12 given the report. I had a very stressful time in my 13 life. My granddaughter had been diagnosed with a 14 brain tumor. And I -- everything is fine. She got 15 operated and everything, but honestly, I was blank 16 during that time period. And that third report, I was 17 ignorant of the fact that three reports in one year 18 late, you know, I wasn't aware of any of that. It was 19 pure ignorance on my part on that respect. But I 20 never did see any penalty letters or anything 21 regarding the first two reports that were late. I was 22 completely unaware of that. 23 The basis of the -- the reasoning 24 for -- also, for this rehearing is based on page three 25 of a letter dated June 30th, which says, the ALJ 0216 1 therefore recommends revocation of respondent's 2 license to conduct bingo. Respondent may reapply for 3 such a license after one year. However, if the 4 Commission has any latitude to exercise discretion in 5 imposing the penalty prescribed by Rule 402.580(1), 6 consideration should be given to the relative benefits 7 and detriments of applying that sanction to this 8 respondent. 9 And that's what I'm asking for now, for 10 a reconsideration. We do serve the community well. I 11 brought my journals to represent -- you know, to prove 12 that even -- during the time these reports were late, 13 we did have the money in the account. So it was just 14 strictly disorganization and on that last report, you 15 know, I did have a big problem. So with that, I'm 16 just going to close with asking that you reconsider 17 revoking the license. Perhaps maybe giving us a 18 penalty amount that we can, you know, write a check 19 for. Revoking our license for a year would really 20 affect the community. We do work with orphanages, you 21 know, Christmas in July. We do Christmas baskets for 22 the needy. Many -- you know, veterans. We do care 23 packages for the veterans that are out serving in 24 Iraq. This is what our monies are used for. We 25 definitely do not deviate from -- from that part of 0217 1 our bingo program. We also sponsor a nursing home. 2 So there would be a lot of effects. All of us who 3 work the bingo program are strictly on a volunteer 4 basis. I'm the bingo caller, you know. Just -- we 5 all do it voluntarily. We have nothing to gain 6 monetarily if the license is taken away from us. I 7 mean, it's not like I'm going to be missing a check or 8 something that I get paid for doing. It's just a 9 matter of consider -- if you would, please reconsider 10 based on the fact that we weren't deliberately trying 11 not to comply with the law. It was just an innocent, 12 honest mistake on an organization that was a little 13 disorganized at the time. 14 CHAIRMAN CLOWE: Thank you, Ms. Luna. 15 And you say you did get the letters? They came to 16 you? 17 MS. LUNA: I did not on the -- I was 18 not treasurer for the organization until July of 2004. 19 I believe my term began like July 3rd. It's always 20 after a state convention. And I got the files from 21 the previous treasurer. And until we received letters 22 like December -- sometime in December 2004, I wasn't 23 aware of any -- and I looked back on the records and I 24 brought copies of what I looked at. I saw no 25 correspondence letting anybody be aware that, hey, 0218 1 this report is late. You know, you owe us X number of 2 monies for penalties, or anything. In fact, looking 3 back, the report that I'm taking complete blame for 4 being late, there are penalties assessed on that and 5 interest assessed on that, but I saw no evidence of 6 that on the first two quarters that were late. I feel 7 like if -- if we had -- you receive that type of 8 notification, it would have been a definite red flag 9 on our part. Although, I admit they were late and 10 I'll... 11 CHAIRMAN CLOWE: Thank you. 12 Mr. White, what does your record 13 indicate in that regard? 14 MR. WHITE: In terms of notice of the 15 late quarterly reports being due? 16 CHAIRMAN CLOWE: Yes. 17 MR. WHITE: I cannot say, sir. I 18 don't -- 19 MS. KIPLIN: Is your mike on? 20 MR. WHITE: I do not -- I can't, off 21 the top of my head, tell you whether or not, you know, 22 they were -- where they were sent and if they were 23 sent. 24 CHAIRMAN CLOWE: Can you help us with 25 that, Mr. Atkins? 0219 1 MR. ATKINS: Mr. Chairman, I was not at 2 the hearing and didn't have benefit of the testimony. 3 Our practice is to send those notifications to the 4 license -- to the address of record. 5 CHAIRMAN CLOWE: And how many letters 6 would have gone out normally prior to Ms. Luna's 7 receipt of this letter of December of '04, based on 8 the record? 9 MR. ATKINS: Based on the record, I 10 don't know if that's in the record. I mean, I -- we 11 normally -- and I'm going to look to Mr. Sanderson to 12 make sure that I recite the right procedure, but when 13 a quarterly report form is not timely filed, we send 14 notice to the licensee at the address of record, and 15 if there is no subsequent response to that notice, we 16 would issue a show compliance letter. It sounds 17 like -- and, again, just based on Ms. Luna's 18 comments -- that what may have happened is, we may 19 have sent the notice and the organization may have 20 responded to that notice or may have subsequently, 21 after the due date, filed the quarterly report form. 22 What has been triggered here is the fact, in the 23 Charitable Bingo Administrative Rule 402.600, I 24 believe, they've been late three times. 25 CHAIRMAN CLOWE: Three times. 0220 1 MR. ATKINS: Yes, sir. 2 CHAIRMAN CLOWE: And that -- 3 MS. LUNA: And we admit that. 4 CHAIRMAN CLOWE: Yeah, I understand. 5 And were there any, to your knowledge, 6 other violations? 7 MR. ATKINS: There were no other 8 violations to my knowledge, no, sir. 9 CHAIRMAN CLOWE: Any to yours, 10 Mr. White? 11 MR. WHITE: No, sir. 12 CHAIRMAN CLOWE: Any questions, 13 Commissioner? 14 COMMISSIONER COX: Do we send those 15 letters return receipt requested? 16 MR. ATKINS: The -- let me start to 17 answer as Mr. Sanderson comes up. I don't believe 18 that the notice letters go out certified, return 19 receipt requested. 20 MR. SANDERSON: Phil Sanderson, 21 Assistant Director for the Charitable Bingo Division. 22 The notice of prize fees due, the 23 initial letter that goes out, is not certified or 24 return receipt requested. If that is ignored, then we 25 do send out the show compliance letter. 0221 1 COMMISSIONER COX: Now, ignored. You 2 are making a -- 3 MR. SANDERSON: An assumption, yes. 4 They don't respond. We get no response to the bill 5 that is sent out. Then we do a show compliance 6 letter, which is sent out certified, return receipt 7 requested. 8 COMMISSIONER COX: Okay. Now, in this 9 case what happened? 10 MR. SANDERSON: Without having all the 11 documents in front of me, I would only be making 12 assumptions at this point. I could go look real quick 13 and get back -- 14 COMMISSIONER COX: Well, what would 15 have happened if everything went as it should have? 16 MR. SANDERSON: There are several 17 scenarios. One, if the organization files and pays a 18 prize fee after the due date, in some cases they may 19 automatically include the late penalty, and in that 20 case, there would be no notice go out because they 21 would have been paid up. If the organization filed 22 and paid the prize fees after the due date, we would 23 send out the notice of prize fee due for the penalty 24 amount, but since it was late, if they paid that 25 amount, then there would be no further communication 0222 1 with them. 2 COMMISSIONER COX: Okay. So it is 3 possible that the letters went to somebody, and we've 4 all been members of volunteer organizations where 5 whoever was supposed to get the mail lost it or the 6 dog ate it, or whatever. It is possible that the dog 7 ate these letters, that these folks filed these 8 returns late, that they didn't know they were -- the 9 clock was running on them and the third time is the 10 charm, and the hammer comes down. 11 MR. SANDERSON: That is a possibility, 12 yes, sir. 13 MR. ATKINS: The only exception I would 14 make to that, Commissioner Cox, regarding them not 15 knowing that the third time around the hammer comes 16 down is the fact that it is clearly stated in the 17 rule, and there is an expectation that the 18 organizations and individuals with those organizations 19 are familiar with the rules and requirements. 20 COMMISSIONER COX: Okay. 21 MR. ATKINS: That's the -- 22 COMMISSIONER COX: Well, Mr. Chairman, 23 I guess the question I would ask is the one that the 24 administrative law judge asked. Do we have any 25 latitude? 0223 1 CHAIRMAN CLOWE: I think that's a good 2 question. Our general counsel has left. 3 MR. ATKINS: She didn't go far. 4 CHAIRMAN CLOWE: Okay. Was the 5 petition for rehearing a letter from Ms. Luna? 6 MR. WHITE: Yes, sir. 7 CHAIRMAN CLOWE: And she not being an 8 attorney, she simply made a request for a 9 reconsideration, I suppose, for some general term, and 10 that didn't embody the basic legal requirements for a 11 proper petition? 12 MR. WHITE: That's correct. 13 CHAIRMAN CLOWE: Okay. Counselor, 14 Commissioner Cox has asked, do we have any latitude 15 under the law. 16 MS. KIPLIN: Not under the rule. I 17 mean, that's an expression of your policy and I would 18 be hard pressed to advise you to go against a 19 Commission promulgated rule, in terms of the outcome, 20 of the penalty outcome. And I think we've talked 21 about this before in connection with another case, and 22 the reason that the Commission not -- not current 23 members but, you know, the Commission made up of 24 former members, decided to go ahead and make that an 25 expression of policy. And so that rule is your policy 0224 1 and what you believe is an appropriate penalty outcome 2 given a three -- the late payment on three in a year. 3 CHAIRMAN CLOWE: Commissioner Cox, my 4 recollection of the history is, when I first came on 5 this board, we had many more of these type cases come 6 before the Commission than we've had recently. I 7 think the Bingo Division has improved their addresses 8 and it's really through their educational program as 9 much as anything, I think, the heightened awareness 10 has been achieved in the fact that these reports have 11 to be made and made timely. My recollection is, the 12 Commission has voted to not take a license. We had to 13 do that more frequently, that is, vote on these 14 matters, as I said, when I first came on the board. 15 More recently, we've done it very infrequently. And 16 my recollection is, within the last year, we've had 17 one case where we voted to rescind the license or -- 18 what's the word? Cancel a license? 19 MS. KIPLIN: Revoke. 20 CHAIRMAN CLOWE: Revoke a license. And 21 the situation was very similar to that which we find 22 in this case. 23 Steve, I think you were the staff 24 attorney assigned to that. I'm trying to remember 25 whether there were some other violations in regard to 0225 1 that matter or not. Can you recall? 2 MR. WHITE: I'm sorry. I cannot 3 remember. 4 CHAIRMAN CLOWE: It's -- I think the 5 Counselor has given us leeway that it's a policy issue 6 with us, and we can decide it if we wish. The things 7 that -- am I correct in that? 8 MS. KIPLIN: Well, I would say that if 9 you want to decide that you want to repeal that policy 10 because it's a promulgated rule, you really need to 11 direct the staff to bring forward to you a repeal of 12 that rule, or amendment to that rule, or a revision of 13 the rule that -- 14 COMMISSIONER COX: But that wouldn't 15 help Ms. Luna. 16 MS. KIPLIN: No, sir, it wouldn't. But 17 that is an expression of policy that you all have made 18 that you're asking all to follow, and it's -- a rule 19 has the force and effect as the statute. 20 CHAIRMAN CLOWE: So we don't have 21 policy discretion in this case? 22 MS. KIPLIN: No, sir, not -- 23 CHAIRMAN CLOWE: Under the rules. 24 MS. KIPLIN: Not in this case, but I 25 sense, I guess, the feelings regarding this particular 0226 1 case and, frankly, the one prior to that. And it may 2 be that you all want to consider modifying that rule, 3 repealing that rule, or keeping that rule. 4 COMMISSIONER COX: Okay. So what I 5 hear you saying is, we can't do what Ms. Luna wants us 6 to do. 7 MS. KIPLIN: No, sir, not given the 8 facts that were found. 9 COMMISSIONER COX: Is there anything 10 that we can do to help Ms. Luna and her organization 11 get back to -- get on track earlier, give them a 12 provisional license to operate on -- Billy, is there 13 anything we can do to help them? 14 MR. ATKINS: Not that I can think of, 15 Commissioner Cox. I don't know if they would be 16 eligible for -- if the Commission denied the motion 17 for rehearing and the revocation stood, I don't know 18 if they would be eligible for temporaries after that? 19 MR. SANDERSON: It's my understanding 20 they would not. 21 MR. ATKINS: For one year. 22 MR. SANDERSON: For one year. 23 CHAIRMAN CLOWE: Because the rule 24 states that you can't operate for one year. 25 MR. SANDERSON: The statute states. 0227 1 CHAIRMAN CLOWE: The statute states. 2 MR. SANDERSON: You can make a -- the 3 statute says you can make an application one year 4 after the revocation or the denial. 5 CHAIRMAN CLOWE: Ms. Luna, I'm afraid 6 we're in a box on this. I think you're hearing that 7 we understand your plight and the situation you had 8 personally. 9 MS. LUNA: Sure. 10 CHAIRMAN CLOWE: And we want to be 11 responsive, but understand the statute and the rule, 12 we're bound to follow them. And if we do something 13 other than follow it, it would be an improper act. 14 Counselor, have you any further advice 15 for us? 16 MS. KIPLIN: No. Other than the 17 suggestion that you might want to consider changing 18 your rule and, therefore, changing your stance on this 19 particular aspect. 20 CHAIRMAN CLOWE: And that's -- again, 21 that's not in time to help Ms. Luna? 22 MS. KIPLIN: No, sir, it's not. 23 CHAIRMAN CLOWE: Billy, what is your 24 comment on that type of a consideration? Where would 25 you come down on that? 0228 1 MR. ATKINS: Mr. Chairman, I don't 2 think that I would necessarily advise the Commission 3 to amend that rule. This, unfortunately, is the point 4 where I get to look like the Grinch who stole 5 Christmas, but neither I nor anyone on my staff is 6 unsympathetic to Ms. Luna and her situation, as well 7 as the other organizations who may have legitimate 8 personal reasons for not having been able to comply 9 with the Act. But the fact of the matter is that, as 10 the General Counsel mentioned earlier -- or I believe, 11 Mr. Chairman, when you were giving a history, this 12 agency had a long history of organizations who were 13 not timely filing or paying their quarterly tax 14 returns. And the Commission at the time decided that 15 the way to address that was to develop a very clear, 16 very strict policy that they would follow. And we 17 have done that. There have been a number of 18 organizations that routinely we take action against 19 for failing to file timely three times within a 20 calendar year, who subsequently, one, don't show at 21 the hearing or, you know, never file a motion for a 22 rehearing. I just think that any amendment to that 23 rule that tried to open it up would be going down a 24 slippery slope and you would have every organization 25 up here their pleading case. And that's certainly 0229 1 within the Commission's -- 2 CHAIRMAN CLOWE: And that's what we 3 had, as I say, when I first came on this board. I 4 remember it very clearly. And I do think the bingo 5 education effort that the staff has mounted has really 6 improved the situation, plus the correctness of 7 addresses that makes certain these letters get to 8 people timely, and that's important. 9 MR. ATKINS: And also -- I appreciate 10 that, Mr. Chairman. Also, Terry Shankle that manages 11 that division is extremely accommodating, and her 12 staff, also, in working with the organizations, making 13 sure that they know how to complete the form and get 14 them in in a timely fashion. I would agree that -- 15 you know, I think we've done as much as we can, you 16 know, to help the groups. We're, of course, you know, 17 open to any other suggestions. 18 COMMISSIONER COX: Well, while we're 19 there, Mr. Chairman, I do have some suggestions. 20 CHAIRMAN CLOWE: Yes, sir. 21 COMMISSIONER COX: One is, I think that 22 these letters should all go out a return receipt, 23 unless that has some fiscal impact. 24 MR. ATKINS: All letters. I'm going to 25 assume you're talking about all the notices. 0230 1 COMMISSIONER COX: I'm talking about 2 the one that -- all notices, yes. All that -- 3 everything that's going to have -- that could 4 potentially help somebody keep their license, I would 5 like to have all the assurance we can that they're 6 going to get that letter. 7 And the other is, if the -- if the 8 clock is ticking on somebody because they've got one 9 or two, I think we should send them a letter telling 10 them, you've got one or two and you need to be real 11 careful. Reiterating the rule, making sure, once 12 again, that they see it. 13 MR. ATKINS: And I believe, 14 currently -- I'm going to double check, Commissioner 15 Cox, but I believe currently we are doing that. We 16 are informing the organization, particularly if it 17 comes to an opportunity to show compliance letter, 18 that, you know, this is your -- your second. One more 19 and your license is subject to revocation. 20 COMMISSIONER COX: And I would like to 21 see a file full of little green cards. 22 MS. LUNA: May I interject something? 23 I mean, I respect your decision and, you know, abiding 24 by the law. But would it be fair for me to ask if 25 there are copies in the record of penalty letters that 0231 1 we have received as a result of the reports being late 2 the first two times? 3 CHAIRMAN CLOWE: Sure. 4 MS. LUNA: Certified or not? 5 CHAIRMAN CLOWE: You can produce those, 6 can't you, Phil, or Mr. White? 7 MR. SANDERSON: Yes, sir. We can get 8 copies of those letters. 9 CHAIRMAN CLOWE: Sure. That's fair. 10 MS. LUNA: I know that our address of 11 record is 4436 Valley Field, in San Antonio, Texas. 12 And -- because I would like to know for future 13 references who might have gotten a hold of those 14 letters, if indeed they were mailed, in order to start 15 cleaning up our act as well. 16 CHAIRMAN CLOWE: And, Ms. Luna, I think 17 you can sense that the Commissioners are sympathetic 18 to your plight -- 19 MS. LUNA: I understand. 20 CHAIRMAN CLOWE: -- but you must 21 understand, we're bound by the law and we can't -- we 22 can't depart from that. 23 MS. LUNA: That's fine. I respect 24 that. 25 CHAIRMAN CLOWE: I move that we reject 0232 1 the petition for rehearing. 2 COMMISSIONER COX: Second. 3 CHAIRMAN CLOWE: All in favor, please 4 say aye. The vote is two-zero in favor. 5 Commissioners Cox, if you're agreeable, 6 at this time we'll go into executive session. 7 COMMISSIONER COX: Yes, sir. 8 CHAIRMAN CLOWE: At this time, I move 9 that the Texas Lottery Commission go into executive 10 session to deliberate the appointment, employment, and 11 duties of the Executive Director and/or Deputy 12 Executive Director pursuant to Section 551.074 of the 13 Texas Government Code. 14 To deliberate the duties of the Acting 15 Executive Director pursuant to Section 551.074 of the 16 Texas Government Code. 17 To deliberate the duties and evaluation 18 of the Internal Audit Director and Charitable Bingo 19 Operations Director pursuant to Section 551.074 of the 20 Texas Government Code. 21 To deliberate the duties of the General 22 Counsel pursuant to Section 551.074 of the Texas 23 Government Code. 24 To receive legal advice regarding 25 pending or contemplated litigation and/or to receive 0233 1 legal advice pursuant to Section 551.071 (1) (A) or 2 (B) of the Texas Government Code and/or to receive 3 legal advice pursuant to Section 551.071 (2) of the 4 Texas Government Code, including but not limited to: 5 Patsy Henry versus Texas Lottery Commission 6 Linda Cloud versus Mike McKinney et al. 7 James T. Jongebloed versus Texas Lottery Commission 8 Russell Verney versus Carol Keeton Strayhorn, et al. 9 GameTech International, Inc. versus Greg Abbott, 10 Attorney General of Texas, et al. 11 Michael McDaniel, et al. versus Northstar Bank of 12 Texas, et al. versus Elite M & S, et al. 13 In regard to a Matter Involving the Assignment of 14 Lottery Prize of Walter Gonzalez 15 Michael Sanchez, et al. Texas Lottery Commission, et 16 al. 17 Employment law, personnel law, procurement and 18 contract law, evidentiary and procedural law, and 19 general government law. 20 Is there a second? 21 COMMISSIONER COX: Second. 22 CHAIRMAN CLOWE: All in favor, say aye. 23 The vote is two-zero. The Texas Lottery Commission 24 will go into executive session. The time is 25 1:26 p.m., the date is September 28th, 2005. 0234 1 (EXECUTIVE SESSION.) 2 CHAIRMAN CLOWE: We'll come back to 3 order. The Texas Lottery Commission is out of 4 executive session. The time is 2:57 p.m. 5 Is there any action to be taken as a 6 result of the executive session? If not, let's move 7 on to item seven, report, possible discussion and/or 8 action on the agency's financial status. 9 MR. GRIEF: Mr. Chairman, if I could, 10 at this point in the meeting I would like to 11 officially introduce Ms. Kathy Pyka to the Commission. 12 Kathy has joined the Commission in the position of 13 controller. She has practiced governmental accounting 14 for 19 years. She holds a B.B.A. degree from 15 St. Edwards University and is a licensed certified 16 public accountant. She most recently served as the 17 Deputy Executive Director at the Texas Railroad 18 Commission, and in that capacity, she also served as 19 the Chief Financial Officer. She was employed at the 20 Railroad Commission for almost eight years, and her 21 previous positions include Deputy Director for 22 Accounting and Reporting at the Texas Workforce 23 Commission, as well as Director of Accounting at the 24 Texas Department of Commerce. So with great pride, I 25 introduce you to Kathy. 0235 1 CHAIRMAN CLOWE: I think we have both 2 met her and welcome you again to the Commission, and 3 we're happy to have you here. 4 MS. PYKA: Thank you so much, 5 Mr. Chairman. 6 COMMISSIONER COX: And, Mr. Chairman, I 7 would like to say how pleased I am not only to have 8 Kathy, but that we now have a controller. I don't 9 know what other State agencies have a controller, but 10 I think that the person who is responsible for 11 financial matters at this agency, if not in others, 12 needs to have a strong sense that their mission is 13 control. The financial types of duties in State 14 government are typically handled by the Comptroller of 15 Public Accounts. We do very little here at the agency 16 level in the area of finance, but we do a lot in the 17 area of control. And we look forward to working with 18 you. 19 MS. PYKA: Thank you, Mr. Commissioner. 20 MR. GRIEF: And Commissioners, Kathy 21 started last Monday, and on that same date, we had an 22 organizational change that was implemented. The 23 Financial Administration, of which Kathy will be the 24 director of, is now moved separate and apart from the 25 Administration Division, and Kathy will be a direct 0236 1 report to the Deputy Executive Director, myself. 2 CHAIRMAN CLOWE: Very good. 3 MR. NAVARRO: And with that, I'll give 4 my report. Good afternoon, Commissioners. Again, for 5 the record, my name is Benito Navarro. I'm the 6 Financial Accounting and Reporting Manager. 7 I'll refer your attention to tab seven, 8 titled Agency Financial Status. Under that report -- 9 that tab, you'll find a report of transfers to the 10 Foundation School Fund and allocations of unclaimed 11 prizes for the month of August. August lottery sales 12 revenue and other amounts transferred amounted to 13 116.7 million dollars, bringing the total cash 14 transfers to the State for '05 to 1.077 billion 15 dollars. This represents a 3.1 percent, or 33 million 16 dollar increase over fiscal year's 2004 total of 17 1,044,000. 18 The total for 2005 is comprised of 19 several amounts. First, we'll start with 1.016 20 billion dollars transferred to the Foundation School 21 Fund, 10 million dollars transferred to the State's 22 Multi-category Teaching Hospital, 21.9 million to the 23 general revenue fund, 28.7 million to the Health and 24 Human Services Commission's graduate medical program, 25 for the last three amounts, 10 million, 21.9, and 28.7 0237 1 are all unclaimed prizes. 2 Of the 1.016 billion transferred to the 3 Foundation School Fund, there was an estimated 24.3 4 million dollars transferred in unspent administrative 5 funds. Revenue from sales totaled 976 million, and 6 that's cash basis transfers. This represents a 1.8 7 percent decrease from fiscal year 2004 total 994 8 million dollars in transfers to the State from sales. 9 Again, transfers from unclaimed prizes 10 increased by 19.8 million from fiscal year 2005 to 11 '04. This represents an increase of 49 percent. 12 Behind the transfer report you'll find 13 the report of lottery sales -- 14 COMMISSIONER COX: Ben, I've got a 15 question. 16 MR. NAVARRO: Yes, sir. 17 COMMISSIONER COX: I see that we 18 transferred in '04 to the Foundation School Fund a 19 little over a billion. 20 MR. NAVARRO: Yes, sir. 21 COMMISSIONER COX: I see in '05 we 22 transferred to the Foundation School Fund a little 23 over a billion. And yet I think I remember seeing 24 today that in both of those years, our bottom line was 25 a little under a billion. 0238 1 MR. NAVARRO: That was transfers 2 strictly from sales, Commissioner. When you include 3 the unspent administrative funds of 24.3 million 4 dollars, we get up to a billion 16. 5 COMMISSIONER COX: Thank you. 6 MR. NAVARRO: Behind the transfer 7 report, you'll find a report of lottery sales 8 expenditures and transfers from fiscal years 1992 to 9 date. Total cash basis transfers to the State through 10 August of this year totaled 12.9 billion dollars. Of 11 that amount, 7.6 billion has been transferred to the 12 Foundation School Fund. 13 Finally, behind the divider page, 14 you'll find the Texas Lottery Commission's budget 15 reports for the period September 1st, 2004 through 16 August 31st, 2005. Both lottery and charitable bingo 17 operation expenditures and commitments are tracking as 18 expected. Expenses through August 31st, 2005, do 19 include accruals from major vendors only. We are 20 currently in the process of finalizing the year end 21 accruals and those budget reports will be adjusted for 22 the next Commission meeting. 23 Commissioners, this concludes my 24 report, and I'll be happy to answer any questions you 25 may have. 0239 1 CHAIRMAN CLOWE: Thank you. 2 MR. GRIEF: Mr. Chairman, could I add 3 one other thing? 4 CHAIRMAN CLOWE: Sure. 5 MR. GRIEF: I just want to publicly 6 thank Ben for his service to the agency. He has done 7 an admirable job of stepping in during the interim 8 period of time and serving as the Acting Financial 9 Administration Manager. Many thanks to you, Ben. 10 MR. NAVARRO: Thank you, sir. 11 CHAIRMAN CLOWE: And we join in that, 12 Ben. Thank you very much. 13 Next, item eight, report, possible 14 discussion and/or action on the lottery terminal 15 functionality, including the quick pick feature for 16 all games and/or impact to players. 17 Mr. Anger. 18 MR. ANGER: Good afternoon again, 19 Commissioners. For the record, my name is Michael 20 Anger and I'm the Lottery Operations Director. 21 I would like to give you an update on 22 the status of the agency's review of the GTECH 23 terminal functionality issue that affected Pick 3 24 sales on June 16th. As previously reported, GTECH is 25 contracting with Deloitte & Touche to conduct an 0240 1 independent third party review of the Pick 3 matter at 2 the request of the agency. Deloitte & Touche is 3 expected to complete their review and submit a report 4 of their findings to GTECH soon. GTECH has committed 5 to provide this report to the agency by October 15th. 6 Additionally, Doctor Eubank, the 7 agency's statistical consulting services vendor, is 8 nearing the completion of the first two phases of his 9 review of the quick pick functionality on Texas online 10 games. These two phases, as you may recall, include 11 an analysis of a substantial sample of Pick 3 quick 12 pick data for the period prior to June 16th, and 13 Pick 3 quick pick data since that time. Deloitte & 14 Touche oversaw the extraction and delivery of this 15 data from GTECH's system and its transfer to 16 Doctor Eubank for his analysis. Upon completion of 17 his analysis, Doctor Eubank will provide the 18 Commission with a full report of his findings, and I 19 anticipate, from discussions with Doctor Eubank, that 20 he will have completed his findings and be prepared to 21 present his information at the October Commission 22 meeting. 23 And that concludes my report. I would 24 be happy to answer any questions that you have. 25 CHAIRMAN CLOWE: Thank you, Michael. 0241 1 Next, item nine, report, possible 2 discussion and/or action on the lottery advertising 3 and promotions. 4 Ms. McCullough. 5 MS. McCULLOUGH: Good afternoon, 6 Mr. Chairman, Commissioner. 7 CHAIRMAN CLOWE: Good afternoon. Is 8 that microphone on? 9 MS. McCULLOUGH: It should be on. 10 Maybe I'm not close enough to it. Is it on right now? 11 In regard our current advertising 12 efforts, we're currently off air. Our next 13 advertising campaign will run October 10th through the 14 23rd and will focus on our Megaplier feature reminder 15 campaign. Live reads are currently running 100 16 percent Lotto Texas. 17 In regards to our promotional 18 activities, we have a number of promotions scheduled 19 for September, including the State Fair, which is the 20 Texas Lottery's, as you know, largest promotional 21 event. Also, one item to note. The Fort Bend County 22 Fair, which was scheduled to run September 20th 23 through the 24th was canceled due to Hurricane Rita. 24 And at this time I would like to update 25 you, if it pleases the Commission, on the dual board 0242 1 pilot test. We've reported on this item at previous 2 Commission meetings, but we have some and footage to 3 see. 4 As was reported previously, there are 5 currently eight boards up in Texas for the pilot test 6 on the dual message boards, four boards in Amarillo, 7 three boards in Corpus Christi, and one board in 8 Seminole. And we have pictures that are of these 9 completed boards. These are just samplings of boards. 10 This one happens to be in Corpus Christi, but it gives 11 you an idea of the message that is communicated with 12 these boards. Previous boards not included in the 13 dual test just have one jackpot on them, and, of 14 course, these have two. This is another sample from 15 the Amarillo market. 16 This is the Seminole board, and as you 17 can see, it's different from the Amarillo and Corpus 18 Christi boards. The size of this board is smaller, 19 and therefore, there wasn't enough room to put the 20 logos that you saw on the other boards. 21 In terms of measuring the effectiveness 22 of these boards, we're currently in the middle of a 23 three-wave research study that we are conducting with 24 IPSOS-Reid. The first phase was conducted prior to 25 the Mega Millions campaign, the second phase was 0243 1 conducted post the Mega Millions campaign. The third 2 phase, we are going to conduct in mid November, in 3 addition to sales analysis that will be conducted six 4 months after the boards are in market, and we'll be 5 measuring scales against the time period and the 6 jackpot levels. 7 That concludes my presentation. I'm 8 happy to answer any questions. 9 COMMISSIONER COX: Chelsea, when we 10 went into Mega Millions, and I think that may have 11 been before you were here, so if you don't know the 12 answer, tell me. I remember being told that we 13 believed we needed to split the Lotto Texas budget -- 14 or Lotto Texas billboards with Mega Millions rather 15 than split each one. We would put Mega Millions on 16 one and Lotto Texas on another. And now we're trying 17 this. Are we trying something that nobody thought of 18 before or what is -- what has come down there? 19 MS. McCULLOUGH: My understanding from 20 staff who was involved in those initial -- 21 COMMISSIONER COX: And actually, 22 maybe -- 23 MR. GRIEF: I believe Mike Anger has 24 something to offer in that regard. 25 MS. McCULLOUGH: I'll do my best to 0244 1 explain what I know so far and, hopefully, Mike can 2 actually add additional comment. 3 I understand that that was a financial 4 decision. And that we have started this dual test, 5 the pilot test, essentially in answer to that to 6 measure the effectiveness of putting two messages on 7 one board before implementing that across multiple 8 markets, so we can test the effectiveness without 9 expending too much revenue. 10 COMMISSIONER COX: It seems like that's 11 what we would have done the first time. 12 MS. McCULLOUGH: Mike, I think you can 13 answer that. 14 MR. ANGER: Commissioners, it's my 15 understanding that -- that at the time that we brought 16 Mega Millions to Texas, the decision was made to split 17 the current existing boards supporting Lotto Texas 18 essentially down the middle. I don't have the exact 19 numbers in front of me -- 20 COMMISSIONER COX: But pretty close to 21 down the middle. 22 MR. ANGER: We have about 120 -- 23 COMMISSIONER COX: What I was told was 24 that they weren't big enough to put both of them. I 25 didn't hear anything about a cost number. 0245 1 MR. ANGER: I -- I received a copy of a 2 memo -- this is one of the things that we looked into 3 when the advertising function came into lottery 4 operations, and I received a copy of a memo that had 5 been provided to the agency by DDB Dallas that did a 6 cost assessment of the conversion of these boards. 7 And it is expensive to do these conversions, largely 8 due to the sunshine boxes that receive the satellite 9 transmission to report the jackpots. And we're 10 essentially doubling the number of those on these 11 boards. So there was a cost analysis that appears -- 12 that came into the agency, and I'm assuming it was at 13 least a part of the decision-making process in 14 splitting those boards. The decision was made not to 15 go to the expense of converting the boards over. We 16 felt like -- and I know that you have raised this in 17 past discussions, Commissioner -- that there was an 18 opportunity to advertise both products and 19 communicate. We employed a strategy with the jackpot 20 boards in the areas where they're deployed where we 21 try to receive a reach of about 50 percent, which 22 essentially means that of the commuter traffic in that 23 community, we're trying to reach about 50 percent of 24 the commuters in any given community. And so when we 25 split those boards in half, we are reaching those 0246 1 commuters, but we're not reaching them about the two 2 products, we're only reaching them about one. So this 3 test, we've converted two markets fully for the number 4 of boards that they have, so all that commuters who 5 are seeing those boards on a daily basis are seeing 6 both the Lotto Texas and the Mega Millions product. 7 COMMISSIONER COX: So -- so it looked 8 to me like from those pictures, they're not too small. 9 MR. ANGER: No, not at all, sir. 10 COMMISSIONER COX: Thank you. 11 CHAIRMAN CLOWE: Thank you both. 12 Next, item ten, report, possible 13 discussion and/or action on HUB and/or minority 14 business participation, including the agency's 15 Mentor/Protege program. 16 MS. BERTOLACINI: Good afternoon, 17 Chairman, Commissioners -- Commissioner. For the 18 record, my name is Joyce Bertolacini and I'm 19 Coordinator of the TLC's Historically Underutilized 20 Business Program. 21 In your notebooks today are the July 22 and August monthly HUB minority contracting activity 23 reports, which include all fiscal year 2005 24 expenditures paid from September 1st, 2004 through 25 July 31st and August 31st respectively. Our total 0247 1 qualifying expenditures as of August 31st, 2005, were 2 157.8 million, and our estimated HUB minority 3 utilization was 36.8 million, which equates to 23.35 4 percent. 5 I wanted to mention to you that the 6 fiscal year 2005 annual statewide HUB report will be 7 released by the Texas Building and Procurement 8 Commission on October the 15th. I have already 9 reviewed a draft version of the report and I will be 10 providing more detailed analysis to you once the 11 official report has been released. 12 I'm also pleased to announce that the 13 Texas Lottery Commission was honored by the Texas 14 Association of African-American Chambers of Commerce 15 as one of five State agencies that spent the most 16 dollars with African-American-owned businesses in 17 fiscal year 2004. The Commission received a plaque of 18 appreciation from the TAACC at their seventh annual 19 conference in Austin on September 9th of 2005. 20 And I don't have any updates for you 21 today on the Mentor/Protege program, but I would be 22 happy to answer any questions that you might have. 23 CHAIRMAN CLOWE: Where do we rank, 24 Joyce, in the '05 ranking? 25 MS. BERTOLACINI: I was afraid you were 0248 1 going to ask that. I'm hesitant to talk about the 2 results of the report before the official release. 3 However -- 4 CHAIRMAN CLOWE: That's all right. You 5 don't have to. 6 MS. BERTOLACINI: I don't really see 7 that anything will change for us, but I can tell you 8 that we have experienced a slight decrease this year. 9 We've been on an upward trend for about the last five 10 years and, understandably, as happens with lottery and 11 everything else, there can be little downturns. It's 12 only about a three percent change, but I'll have more 13 facts and figures for you next time. 14 CHAIRMAN CLOWE: Very good. Thank you 15 very much. 16 Next, item 11, report, possible 17 discussion and/or action on the agency's contracts. 18 Mr. Jackson. 19 MR. JACKSON: Good afternoon, 20 Commissioners. For the record, my name is Tom 21 Jackson, Purchasing and Contracts Manager. 22 In your notebook under agenda item 23 number 11, is a report on prime contracts that has 24 been updated for your review. And I would be happy to 25 answer any questions. 0249 1 CHAIRMAN CLOWE: Thank you, Tom. 2 Next, item 12, report, possible 3 discussion and/or action on the demographic report on 4 lottery players. 5 Mr. Fernandez. 6 MR. FERNANDEZ: Good afternoon, 7 Mr. Chairman, Commissioner Cox. My name is Mike 8 Fernandez. I'm the Director of Administration. 9 And what I would like to do, briefly, 10 this afternoon is to give you an update or inform you 11 that we have recently entered into an interagency 12 agreement with the University of Texas at Arlington 13 School of Urban and Public Affairs for the conduct of 14 a demographic study. This study will be led by Dean 15 Richard Cole, who is the dean of the school and also a 16 professor. As you know, we are required by statute to 17 conduct a demographic study every two years, and we 18 have. And as you may remember, staff recommended that 19 we do this annually because of the interest and 20 information gleaned from that study. So we have gone 21 forward and entered into this interagency contract. 22 This year, a little different from last. As you may 23 recall, we -- the survey base last year was 1200, and 24 that was done, certainly, because of the timing. But 25 this year it's back at 1700. So the base survey is 0250 1 1700. 2 If you have any questions, I'll 3 certainly try and answer them. 4 CHAIRMAN CLOWE: When will it be 5 completed, Mike? 6 MR. FERNANDEZ: Our target is to bring 7 it in front of the Commission in January. 8 CHAIRMAN CLOWE: Very good. Thank you. 9 COMMISSIONER COX: I do have a 10 question. 11 Mike, last year there were some changes 12 in the questions asked. 13 MR. FERNANDEZ: Yes, sir. 14 COMMISSIONER COX: Will these people be 15 asking the same questions Texas Tech asked last year? 16 MR. FERNANDEZ: Yes, they will, 17 Commission. What we -- in our discussion, what they 18 did is they went back and reviewed all of the 19 questions, so we're looking for continuity in terms of 20 that. And as you may remember, one of the things that 21 we changed were the income ranks, and what we did is 22 we went to census income ranks on that so there will 23 be continuity -- 24 COMMISSIONER COX: So we run a -- a 25 balance there between consistency and getting the 0251 1 maximum creativity, if you will, from the new folks, 2 but I would encourage that if they want to ask 3 different questions that they make -- put those in the 4 category of new questions, but give us continuity on 5 the old ones. 6 MR. FERNANDEZ: Absolutely. And as -- 7 I know in discussions with, certainly, Mr. Grief and 8 the Commission, next year we will look to go to the 9 University of Texas-San Antonio, to Stephen Murdoch, 10 who is a state demographer. And we have talked with 11 Stephen, that's in Article 9, that requirement, and we 12 have talked with him over the past two years, and in 13 recent discussions, he just didn't have the survey 14 component. But he assures us that next year he will 15 be prepared to undertake this. 16 CHAIRMAN CLOWE: Thank you, Mike. 17 Next, item 13, consideration of and 18 possible discussion and/or action on the security 19 study of the lottery. 20 Mr. Grief. 21 MR. GRIEF: Commissioners, with your 22 permission, Catherine Melvin will cover this item 23 under her report. 24 CHAIRMAN CLOWE: Very good. Next, item 25 15, consideration of and possible discussion and/or 0252 1 action on the broadcast studio and Production Services 2 procurement. 3 Mr. Grief. 4 Mr. Jackson. Pardon me. 5 MR. JACKSON: Once again, for the 6 record, my name is Tom Jackson, Purchasing and 7 Contracts Manager for the agency. 8 Commissioners, a contract has been 9 signed with M&S Works, Incorporated for the drawing 10 studio and production services, and has an effective 11 date of January 1, 2006. 12 If you have any questions, I'll be 13 happy to answer those. 14 CHAIRMAN CLOWE: That's an extension? 15 MR. JACKSON: No, sir. That's a new 16 contract. 17 CHAIRMAN CLOWE: New contract. 18 MR. JACKSON: Yes. The current 19 contract was extended to January 1st. The new 20 contract will take effect January 1st, for two years, 21 with two one-year options. 22 CHAIRMAN CLOWE: Two one-year options. 23 MR. GRIEF: We went out for bids on 24 that one. 25 COMMISSIONER COX: Did it go up or 0253 1 down? 2 MR. JACKSON: It went down, sir. 3 CHAIRMAN CLOWE: Very good. Thank you, 4 Tom. 5 Next, item 16, report, possible 6 discussion and/or action on the agency's communication 7 of drawing results. 8 MR. GRIEF: Commissioners, this item 9 really involves customer service and efficiency. 10 Currently, when the members of the public call in to 11 our 1-800 customer service hotline and they request 12 winning numbers and want to find out what the numbers 13 that were drawn for that week or night, they're told 14 that the results are not available on the hotline, and 15 that's been our longstanding practice. There are 16 risks associated with giving that information out 17 verbally over the telephone. However, we tell those 18 members of the public who call in that there are many 19 other sources for them to go to for those numbers, our 20 agency website, the newspapers, retailers, there are 21 some third party hotlines that are set up in various 22 towns and cities across the state, et cetera. But 23 that's frustrating for many of our callers, and they 24 express that frustration to us on a regular basis. 25 And the fact of the matter is that some of our callers 0254 1 don't have access to a personal computer, and lottery 2 retailers are not always cooperative in providing 3 those winning numbers to the people who come into the 4 stores, but in particular, on the telephone. As a 5 point of reference, approximately 25 percent, or three 6 to 400 calls per week come in to our customer service 7 hotline related to requests for draw results. So it's 8 a significant portion of what we have to deal with on 9 our hotline. You may recall that back in December of 10 2002, we discontinued the use of a 1-900 number for 11 the public to use to call in and get draw results. 12 For a fee, they were able to use that 1-900 number and 13 get those results. At the time that we made that 14 decision, we had been notified by the provider of that 15 service that effective in January 2003, that provider 16 was no longer going to provide the billing and 17 collection piece of that service. And when we 18 received that notification, we performed a 19 cost-benefit analysis, and based on that analysis, we 20 discontinued that service, due to an anticipation of 21 an increased financial burden to the agency in 22 continuing that service, and that callers would have 23 to be charged an amount so high to compensate for that 24 cost that they probably wouldn't want to use it 25 anyway. Our decision was also based, again, on the 0255 1 availability of those other sources of the information 2 that I have previously laid out for you. 3 But now we think we can do a better job 4 in this area and we think we can do it without being 5 cost prohibitive for the agency. Our proposed 6 solution is to provide our customer service hotline 7 staff with the ability to transfer calls directly to 8 an internal prerecorded results line whenever a 9 request is made for those numbers by the caller. That 10 approach would benefit the agency and the public by 11 freeing our hotline staff to better handle our core 12 business of telephone calls, namely, licensing, 13 accounting, and how to play information for our 14 players, et cetera, and by giving the public immediate 15 free access to the drawing results during our normal 16 business hours. We'll make our best efforts to ensure 17 the accuracy of that information on the prerecorded 18 line, and we will be using the same technology that's 19 currently in place to transfer the drawing results and 20 numbers to our website and to send that information 21 out to the media. And, in addition, we're going to 22 work with our legal staff to develop an appropriate 23 disclaimer to put on the prerecorded line. Putting 24 that process into place is going to cost the agency an 25 approximate 30,000 dollar one-time programming fee 0256 1 under an existing State contract. And I plan on 2 implementing that change as quickly as possible, and I 3 would welcome any feedback or suggestions you might 4 have. 5 CHAIRMAN CLOWE: Thank you, Gary. 6 Next, item 20, consideration of and 7 possible discussion and/or action on external and 8 internal audits and/or reviews relating to the Texas 9 Lottery Commission and/or the Internal Audit 10 Department's activities. 11 Ms. Melvin. 12 MS. MELVIN: Good afternoon, Chairman, 13 Commissioners. I have a few items to update regarding 14 external reviews of the agency. As reported in 15 previous Commission meetings, we continue to await 16 results from the Comptroller's post-meeting audit 17 regarding the annual financial audit, which also 18 includes the Mega Millions agreed-upon procedures. 19 The State Auditor's Office is responsible for that 20 audit this year. They have contracted with the firm 21 Maxwell, Locke & Ritter to perform that work and we 22 have an entrance conference tomorrow that Commissioner 23 Cox will be attending. 24 And then the bi-annual security review 25 after -- as Mr. Grief mentioned, after the last 0257 1 Commission meeting, upon direction from the 2 Commissioners, we sent a letter to the State Auditor's 3 Office requesting delegation of authority relating to 4 the required bi-annual security review. The State 5 Auditor's Office responded to our request, stating 6 that they intended to conduct the review themselves, 7 likely with the assistance of a contractor. That 8 contractor hasn't been named yet and we haven't signed 9 and interagency agreement yet. We don't have an 10 anticipated start date yet, but we anticipate that 11 review should begin soon. 12 And then -- excuse me. Finally, the 13 State Auditor's Office has stated that two additional 14 reviews are included in their audit plan that they 15 have presented to the Legislative Audit Committee for 16 approval. The first is a review of Lotto Texas 17 jackpot advertising and prize payment, and then also a 18 review of the agency personnel policies and practices. 19 In my most recent communication with the State 20 Auditor's Office, they indicated that these reviews 21 were tentatively scheduled to begin January and April 22 2006, respectively. 23 And that concludes my presentation. I 24 would be happy to answer any questions. 25 COMMISSIONER COX: Catherine, did you 0258 1 want to talk about advertising auditing? We had a 2 discussion yesterday or the day before of what UT had 3 suggested, that we weren't auditing contracts and that 4 they believe we should be, and I asked you what -- 5 just kind of what are we doing, what is any other 6 agency doing, et cetera. Are you able to give us at 7 least a partial report on that right now? 8 MS. MELVIN: I can give you a partial 9 report if that pleases you. 10 COMMISSIONER COX: If that's okay with 11 the Chair. 12 MS. MELVIN: Let me answer the first 13 part. Since our meeting, I wanted to go back and look 14 at what other -- what prior audits or reviews have 15 been done in that area. And then also, I read the 16 recommendation, and this is the recommendation number 17 six from the report, and read the entire report so 18 that I would have that recommendation placed in 19 context. So I have a couple of thoughts about that 20 too. 21 Regarding specific audits of our 22 advertising vendors, I'm not aware of any audit or 23 review work that has been done in that area, 24 specifically to audit them. However, I believe that 25 there has been audit work and review work related to 0259 1 our agency's advertising expenditures. For example, 2 the Comptroller's audit. The Comptroller's Office 3 routinely performs post payment audits of agencies, 4 and for our agency, those advertising expenditures 5 would likely be included. I know, for this most 6 recent post payment audit, advertising expenditures 7 were included. So those were examined during that 8 review and they would be examined for appropriate 9 supporting documentation, did they meet the 10 Comptroller's guidelines and requirements for State 11 payments. Both the State Auditor's Office and 12 Internal Audit in the past has done some very limited 13 scope review work, related to the agency's advertising 14 expenditures. So there has been some work done there. 15 Looking at recommendation number six, 16 it's still very early for me to give you maybe a very 17 good answer to your question about what we as an 18 agency should be doing to audit the advertising 19 agencies. And I certainly want to talk to the 20 University team in how they -- and understand better, 21 because I think, like you, Commissioner, I got the 22 impression that there is something very specific that 23 they are referring to with that type of auditing that 24 they were recommending. But I went back and looked at 25 our contracts with the advertising agencies, and three 0260 1 things, I guess, I wanted to point out. One, was to 2 make sure we have the ability to audit, and we 3 certainly do. The contracts have a provision that 4 require the vendors to make their books and records 5 and financial information available to the Lottery 6 Commission, to the internal auditor, to the -- to our 7 external auditors, to the State Auditor's Office. And 8 I think it also asks them to have those records 9 available for a period of five years after termination 10 even. 11 The second thing I wanted to look at 12 was, do we have teeth, and in those contracts there 13 are sanctions and -- sanctions, a remedies schedule, 14 and provisions for liquidated damages. So -- and, you 15 know, those are very neatly laid out in those 16 contracts. 17 And then the last thing I thought was, 18 as part of our assessment, was to look at, what are 19 the types of -- or what current activities do we have 20 that look like auditing. I mean, audit can be used as 21 more of a generic word, but agency staff have contract 22 and monitoring management efforts that are in place 23 that look a lot like auditing and have some components 24 of that. And so just looking at the contractual 25 requirements, for example, I found a provision that 0261 1 requires an annual cost review. It requires the 2 vendors to submit audited operational costs of the 3 Texas Lottery accounts. The contract requires the 4 vendors to submit detailed supporting documentation 5 with their monthly or their regular invoices, and then 6 finally, there is several provisions related to -- and 7 this is a wonderful control mechanism, but to have up 8 front lottery approval of expenditures, whether it's 9 the budget that's developed, a marketing plan, or the 10 job cost estimates. So I think there is a lot of 11 controls on our end related to those contracts and 12 expenditures that we can exercise. 13 COMMISSIONER COX: Okay. Now, when you 14 say "can," you're speaking prospectively. Are you 15 telling me we've had the right to exercise those and 16 to require those in the past and we haven't exercised 17 them or required them? 18 MS. MELVIN: Well, I want to use my 19 words carefully because I haven't audited our use of 20 those provisions. You know, management can probably 21 speak to that better than I can. I want to say 22 that -- 23 COMMISSIONER COX: Well, it would 24 seem -- one of the things I think I heard you say is 25 that they're supposed to have somebody -- a CPA, I 0262 1 guess -- audit their annual something and furnish that 2 to us. Was there one in the file? 3 MS. MELVIN: There is -- the provision 4 in the audit -- or I'm sorry. The contract provision 5 states that the vendor must submit audited operational 6 costs of the Texas Lottery account. 7 COMMISSIONER COX: Is that all it says? 8 It doesn't say audited by a CPA, and were you able to 9 determine whether we had in the file such a report? 10 MS. MELVIN: I had limited time to 11 review, but I did ask for the most current report, and 12 I did receive a report of our DDB vendor. 13 COMMISSIONER COX: Okay. So what I 14 would like, among other things, for our next meeting, 15 is for you to go through and work with the 16 Comptroller's Office as appropriate. I know that part 17 of this may be the Comptroller's Office or the 18 contract management office, whatever other office 19 within the agency has cognizance of this, and let's 20 find out how we stand with respect to using the teeth 21 that we already have in the contracts. As well as I 22 think you're going to provide us with some 23 recommendations as to what you think we ought to be 24 doing to properly exercise the fiduciary 25 responsibility that UT has pointed out to us. 0263 1 MS. MELVIN: Absolutely. One last 2 comment about the arrangement -- or our compensation 3 arrangement. I think the team touched on, you know, 4 looking at different compensation arrangements. 5 Fundamentally, I believe that our compensation 6 arrangement is cost reimbursement, cost reimbursement 7 with a commission on top of that. And, typically -- 8 I'm sure you're aware -- cost reimbursement 9 relationships are probably the most audit intense. 10 They require the most audit efforts on the part of the 11 paying entity, the contracting entity. And so that 12 can be done several ways, and sometimes you see where 13 the audit of those costs doesn't happen until the back 14 end, at some point in the future, maybe once a year, 15 or by sample or periodically, like that. 16 What I have seen in our processes is 17 that we actually require that supporting documentation 18 with the invoices. So staff, in effect, are auditing, 19 quote, auditing those invoices as they go along. So I 20 think that's -- that's another important control, I 21 think, to consider in that whole umbrella of contract 22 monitoring. 23 COMMISSIONER COX: Absolutely. 24 CHAIRMAN CLOWE: Very good. 25 COMMISSIONER COX: Gary, is there 0264 1 anything you or any of your staff want to say or 2 undertake to do with respect to those contractual 3 audit provisions that are in the existing advertising 4 contracts? 5 MR. GRIEF: No. Other than to say, 6 we'll work very closely with Catherine and Kathy and 7 take a look at all those issues and help as much as we 8 can. 9 CHAIRMAN CLOWE: Thank you, Catherine. 10 Next, item 21, consideration of and 11 possible discussion and/or action on the appointment 12 and employment of an executive director. 13 Ms. Diane Morris will make a report on 14 that as Director of Human Resources. 15 MS. MORRIS: Good afternoon. The 16 scheduled interviews for the applicants for the 17 position by the Executive Director search committee 18 were to have been held earlier this week, on Monday. 19 Unfortunately, due to the recent events with the 20 hurricanes, those were canceled. They have been 21 rescheduled for October the 14th and for -- on Friday. 22 They will be held here in Austin, Texas. Eight 23 candidates have been selected and identified to be 24 interviewed. To date, the agency has received 123 25 applications. 0265 1 As a reminder, the members of the 2 Executive Director Search Committee, of course, being 3 chaired by our Chairman, Tom Clowe, and the other 4 members of the search committee are Gerald Busald, 5 John Edwards, David Heinlein, Francisco Hernandez, 6 Rick Johnson, Anthony Sadberry, Leticia Vasquez, and 7 Betsy Whitaker. And that's the end of my report. 8 CHAIRMAN CLOWE: And Commissioner, I'm 9 sorry, I was looking at this agenda while Diane was 10 speaking. If I'm repeating what she said, I beg your 11 pardon. We had the original meeting scheduled for the 12 26th. It's now scheduled -- postponed and rescheduled 13 for October the 14th due to the impact of 14 Hurricane Rita. My anticipation is that the committee 15 will meet and come forward with some kind of a 16 ranking. An additional meeting may be necessary or it 17 may not, but there is a clear understanding that this 18 search committee is functioning as that, to make 19 recommendations to the Commissioners, who will be 20 responsible for the hiring. And we appreciate very 21 much the participation of all of the members of the 22 search committee and their public service. In 23 addition, the candidates who have applied, over 120 at 24 this point in time, and those that will be interviewed 25 on October the 14th. 0266 1 Do you have any questions or comments 2 about that procedure? 3 COMMISSIONER COX: No. Diane has kept 4 me well informed of what is going on, and I'm very 5 grateful to you for the good work that you're doing in 6 leading that process. 7 CHAIRMAN CLOWE: My pleasure. Thank 8 you. Thank you, Diane. Thank you for your good work. 9 I inadvertently skipped -- I guess I 10 must have gone to sleep. 11 Item 17, report, possible discussion 12 and/or action on lottery drawing survey and/or the 13 agency's website. 14 Ms. McCullough, can we call you back, 15 please. 16 MS. McCULLOUGH: Yes, sir. 17 CHAIRMAN CLOWE: And then, Nelda, I was 18 wondering where you were on this, and I'll be calling 19 on you next. 20 MS. McCULLOUGH: Thank you, 21 Commissioners. For the record, my name is 22 Chelsea McCullough. I'm the Creative Coordinator for 23 the Texas Lottery Commission. 24 I would like to take this opportunity 25 to provide you with an update in regard to the 0267 1 television broadcast survey. This is an item that was 2 reported on in previous Commission meetings, and we 3 have some new information. 4 In March of last year, we received 5 results from the television station survey that was 6 sent out and received from all of the 74 stations in 7 the state of Texas. The results of these surveys is 8 that 89 percent, or most stations, never air live 9 drawings. Second, third and fourth are highlighted 10 here, and a little bit more positive. Most stations 11 do air our winning numbers. Some stations post 12 winning numbers on their website, about 50 percent, 13 and about 50 percent provide links to our website. 14 Two, three and four are highlighted 15 because essentially we feel that we can impact these 16 in a positive way. In regard to number one, most 17 stations never air live drawings. We believe that is 18 because of the cost of the media. Stations do not 19 receive compensation for airing live drawings, 20 therefore, they can obtain additional revenue from 21 advertising that they run in that time period. In 22 regards to efforts on positively impacting the area of 23 winning numbers and posting the website -- the winning 24 numbers on the website and the link to the website, 25 we're working with media relations and creating an 0268 1 outreach campaign, essentially, to have a better 2 communication with these stations so that they know 3 that that is an option to them and how we can increase 4 participation from them. 5 Another immediate step that we have 6 taken is to update the website so it shows the current 7 stations that are airing drawings. From the website 8 previously, a couple of changes have been made. This 9 is the top of the website. In the next slide it shows 10 a little bit more of the detail. The changes include 11 the number of stations have substantially decreased. 12 Also, due to inconsistencies in the broadcasts, 13 instead of putting specific times when the drawings 14 are aired because, you know, the Texas Lottery is not 15 in control of that, the stations are simply listed 16 instead of putting the actual times that they are -- 17 that they are broadcast. 18 Thirdly, station identifications have 19 been added. Those were provided by the stations. So 20 it's just a little bit more detailed. Instead of just 21 the call numbers, KDFA, for example, Channel 12. 22 And finally, we added a disclaimer -- 23 I'm sorry. It doesn't come across well on this slide, 24 but we have it broken out in a little more detail. 25 The disclaimer reads, stations voluntarily broadcast 0269 1 the Texas lottery drawings. Participation in airing 2 daytime and nighttime drawings is at the discretion of 3 the local television affiliates. And this is an 4 effort just to show people who are visiting that 5 website that stations are not mandated to show those 6 drawings and that it is at the station's discretion. 7 That does conclude my presentation and 8 I would be happy to answer any questions. 9 COMMISSIONER COX: Chelsea, when we 10 surveyed these stations, did we ask that 89 percent 11 anything about why or did we just assume why? 12 MS. McCULLOUGH: No, sir. There was a 13 secondary survey that was sent out, and we received 14 the results of that survey in May. We're currently 15 going through it and looking at how to implement the 16 results of those surveys, you know, amongst our 17 efforts. 18 COMMISSIONER COX: Okay. Did -- how 19 long is the feed that we send out right now? 20 MS. McCULLOUGH: The entire feed, I 21 believe, depends on the drawing date. And I'd 22 probably want to talk to our drawings manager just to 23 make sure that I'm reporting the information correctly 24 to you, but I believe on average it's about ten 25 minutes. 0270 1 COMMISSIONER COX: Ten -- no. I'm 2 sorry. But I was asking the duration. How long -- if 3 I put it on, how much time am I taking out of my 4 station's life on Wednesdays and Saturdays if I air 5 that drawing? 6 MR. ANGER: Commissioner, I believe I 7 can answer that question. 8 For the record, my name is Michael 9 Anger. I'm the lottery operations director. 10 Our feeds for the live broadcasts range 11 in time from approximately a minute and a half up to 12 two minutes. So in an affiliate's broadcast, if 13 they're looking at that as a chunk of time in their 14 broadcast, they're either giving up news footage time 15 or they're giving up almost an entire commercial 16 segment. Typically, a commercial segment is a 17 two-minute break in the broadcast, usually made up of 18 four 30-second spots. So if it's a two-minute airing 19 night, for instance, during Mega Millions night, then 20 we would take up that full two-minute chunk of time. 21 And we did get responses back from the stations and 22 those responses ranged from the concern about the 23 economic expense to those stations, and the comment 24 that the public doesn't clamor for those drawings 25 broadcast in the same way that maybe they once did. 0271 1 We used to get a great deal of coverage statewide for 2 all of our drawings broadcasts, and over time, what we 3 have seen is that has dwindled. And as Chelsea laid 4 out, we've updated our website reflecting that. But 5 we've seen a significant reduction in those stations 6 who are willing to cover the drawings at all, or that 7 have greatly reduced the times that they cover the 8 drawings. Maybe they pick up the feed when a jackpot 9 is high and they think it's a newsworthy event. It's 10 more hit and miss now in the type of coverage we're 11 receiving. 12 COMMISSIONER COX: Have we considered 13 giving them a menu? You can have the full deal, or 14 you can have the shortened version that comes up 30 15 seconds late, or you can just flash on the winning 16 numbers? 17 MR. ANGER: That's one of the things 18 we're looking at. One of the things that we put out 19 in the survey was to receive some feedback, and this 20 is something we talked to you about several months 21 ago, but we talked about the possibility of animating 22 the drawings results, not -- 23 COMMISSIONER COX: That's another 24 issue. 25 MR. ANGER: But -- but, you know, 0272 1 conducting an animated result that would be shorter 2 than would be -- 3 COMMISSIONER COX: Right know I'm just 4 talking about giving them a picture or the last two 5 seconds or whatever of the live drawing. 6 MR. ANGER: And you're talking about a 7 snapshot of the results. Correct? 8 COMMISSIONER COX: Exactly. 9 MR. ANGER: Yes, sir. And that's 10 another one of the things that we're doing. Right now 11 we have a snapshot that comes up on the screen and it 12 comes up between games being drawn. And so if we have 13 multiple games drawn, which we do in every evening 14 drawing, there is a results screen that pops up and it 15 shows the results for the game that was just drawn, 16 and then the games are added as it progresses through 17 the broadcast. What we've seen is that a lot of times 18 the station affiliates will pick up that feed or that 19 snapshot in the middle of the broadcast and not show 20 the results for all of the games drawn on that night, 21 just showing some of the games. And so we're looking 22 at that very thing, to try to find a way to create a 23 snapshot that's more friendly for the station 24 affiliates, through the satellite feed, to pull the 25 snapshot we want them to get. And also to put the 0273 1 numbers out there in easier ways for them and continue 2 to communicate with them about easier ways that we can 3 provide those to them, that maybe they can roll it 4 into their crawl during the newscast. But, 5 essentially, to get the very best coverage we can for 6 the drawing results. 7 COMMISSIONER COX: Thank you. 8 CHAIRMAN CLOWE: And that snapshot 9 is -- was the second line in your report, wasn't it, 10 Chelsea? 11 MS. McCULLOUGH: That's correct. 12 CHAIRMAN CLOWE: On the statistics, 13 that you had a larger number of stations that did, in 14 fact, carry that. 73 -- 15 COMMISSIONER COX: Oh, that's what that 16 is. Okay. 17 CHAIRMAN CLOWE: Which is respectable, 18 I think, but it follows the 89 percent that don't -- 19 never carry lives. 20 COMMISSIONER COX: Got you. Okay. 21 CHAIRMAN CLOWE: And that's just, what? 22 Five seconds or ten seconds? 23 MR. ANGER: Yes. 24 CHAIRMAN CLOWE: Very brief. 25 MR. ANGER: It's very brief. Probably 0274 1 less than that, Commissioner. It -- when I have seen 2 it, they'll pop up that results screen right as 3 they're closing a segment as they're exiting out for 4 commercials, and so it's maybe two seconds it flashes 5 up the numbers. 6 CHAIRMAN CLOWE: So that really 7 satisfies the demand for the winning numbers. They 8 don't have to see the roll. 9 COMMISSIONER COX: Okay. 10 CHAIRMAN CLOWE: And what was the cost 11 of the renewal of the broadcast studio for a two-year 12 basis? 13 MR. ANGER: I would have to defer to 14 Tom Jackson on the exact amount, Chairman. I know a 15 rough number, but I wouldn't want to -- 16 CHAIRMAN CLOWE: Tom, can you give us 17 that number? 18 MR. JACKSON: For the record, my name 19 is Tom Jackson, Purchasing Contract Manager. 20 Commissioner, I believe that annual 21 contract is 1.4 million. The contract. 22 CHAIRMAN CLOWE: I think that with this 23 kind of lack of coverage, the issue could very easily 24 be raised, you know, is that 1.4 annually justified. 25 What are we getting for that. What would your answer 0275 1 to that be? 2 MR. ANGER: The services that we 3 receive is the filming, production and distribution 4 via satellite feed of the live drawings broadcast. 5 The broadcast company also puts together the feed that 6 goes out on our website where players can go out and 7 actually view the drawing. After the drawing has 8 taken place, they can go out and view a clip or a 9 stream of what took place in the drawing itself, so 10 they can review and watch that drawing. Those are the 11 services we currently receive. 12 We are looking to them with regard to 13 this survey to assist us in being more creative in 14 finding more effective ways to communicate out results 15 so that we can increase those numbers we've received 16 back in the survey. 17 CHAIRMAN CLOWE: Well, Michael that is 18 a nice, soft answer. But a million four a year, when 19 nobody, virtually, covers the live drawings, and what 20 they do air is a picture of the results, which could 21 be produced for a lot less than a million four, and 22 the fact that players might want to go and get a tape, 23 I would like to see how many really want to look at 24 those tapes. This is an economic justification that 25 is very difficult in my mind. You know, we had this 0276 1 discussion when we moved the studio on these premises. 2 Although we saved money in doing it, the question was, 3 why do you have all this, from the legislature. And 4 we said we were trying to get broadcasts carried and 5 the players wanted to see it. I think it's an 6 ongoing, fair question. 7 How do you feel about that, 8 Commissioner Cox? 9 COMMISSIONER COX: I couldn't agree 10 more. 11 CHAIRMAN CLOWE: I really think, Gary, 12 we've got to look at this again. We made a really 13 hard effort to get live coverage and it's just not 14 there. And I just wonder if it's not a fair thing to 15 look at and see how we can save money and provide what 16 it is people really want. I don't want to get locked 17 into doing something just because we've always done 18 it. And we have always had a live drawing that was 19 broadcast for an uplink for the stations that would 20 pick it up. And I think it's a fair question for a 21 member of the legislature to ask, what is the bang for 22 the million four a year. 23 MR. GRIEF: And can I share my opinion? 24 CHAIRMAN CLOWE: Yes, I would love to 25 have it. 0277 1 MR. GRIEF: I think deciding whether or 2 not to air those drawings, I think just to put it to 3 paper economically and look at what is up there, it's 4 a no-brainer. It's not the absolute right thing to do 5 economically, but I think it's a bigger issue than 6 that. I think it's a major policy decision. Perhaps 7 at the Commission level, perhaps at a legislative 8 level, I'm not sure. But there are many people who 9 don't ever look at those drawings, but I think the 10 minute a decision might be made to discontinue 11 broadcasting those drawings out, you might see a 12 tremendous upswell of people who complain about that 13 issue. So I think it's a hard thing to put to a 14 cost-benefit analysis type process. I think part of 15 why we do this is it goes to the heart of the State 16 Lottery Act about the integrity and security of the 17 drawings, making them available to the public. So I'm 18 not sure if it's just a cost of doing business or if 19 it's something we can look at from a pure numbers 20 perspective and make a better decision on that. 21 CHAIRMAN CLOWE: And it might be a 22 question, Mike, that could be added to the demographic 23 survey. Or it might be the subject of a marketing 24 focus group to get feedback from the players. 25 MR. GRIEF: Also, we've got an 0278 1 opportunity now, and maybe this will be more under 2 Nelda's report, under the legislative report, we're 3 being asked by at least one office to provide ideas 4 for interim committee charges to look into. Coming up 5 with -- with things that we would like them to look 6 into and perhaps have a hearing on and talk about. 7 Maybe this would be something that we could mention to 8 them in that regard. 9 CHAIRMAN CLOWE: Well, I would 10 certainly be happy to hear from the legislature. I 11 think the players are really the people who would be 12 the ones that the legislators would be listening to 13 and the people that we ought to be listening to. And 14 I hate to keep doing something that we've always done 15 unless there is continuing justification for it and 16 it's a good business practice. I raise the issue for 17 the kind of thoughtful discussion we're having now and 18 ask you to look at it and see how you feel about it, 19 come back and talk to us about it when you're ready. 20 MR. GRIEF: We will do that. And I 21 just want to be clear for the record. You're not 22 asking us to explore random number generators or 23 animating the drawings in any way. That's not what 24 you're asking us to do. Correct? 25 CHAIRMAN CLOWE: Not doing that, but we 0279 1 want you to always be looking at best practice. 2 MR. GRIEF: Very good. 3 COMMISSIONER COX: I would say this 4 about that. If you consider that to be part of the 5 larger policy issue that we've talked about, then I 6 think you should study it. 7 MR. GRIEF: And we have put some study 8 into -- I'm talking about changing the way we conduct 9 the drawings, but taking the results of those drawings 10 that are done in that studio and putting them into an 11 animated format where you might could reduce all of 12 our drawings for an evening down into a 15 or 13 20-second spot that a station might be more willing to 14 pick up than what we currently offer them. And we 15 have stopped that work and that research. We would be 16 happy to include that again as a part of your request 17 today, if that's what you want. 18 COMMISSIONER COX: I think we've got 19 two questions here. One is, who cares about what 20 we're doing now. And do the people who care about it 21 care enough -- do they care a million four worth, or 22 however you quantify that kind of stuff. And the 23 other is, would they care about that other thing. I 24 think that's a second issue. 25 CHAIRMAN CLOWE: I agree with that. 0280 1 Two questions here. 2 Let me tell you. You were here and you 3 remember when we moved the studio here, there was a 4 substantial question, if not a controversy, about why 5 did you do that, how much money did you save, what is 6 the benefit of live drawings. And I think Ms. Cloud 7 was the Executive Director at that time, if I 8 remember, and she had to give considerable testimony 9 about that. And it was referred to the State 10 Auditor's Office for further study, was it not? 11 MR. GRIEF: I can't -- I know that the 12 Council on Competitive Government looked at that 13 issue. 14 CHAIRMAN CLOWE: That's what it was. 15 That's what it was. It was un -- it underwent 16 considerable scrutiny. 17 MR. GRIEF: Yes, it did. 18 CHAIRMAN CLOWE: And one of the strong 19 justifications was, control. We discussed this at a 20 recent meeting, the old situation over there was not 21 nearly what we have here today. We have control. So 22 we have security, we have a first class operation. 23 Although that operation was successful and never 24 failed, we feel better about it being on premises and 25 under our control and having our security. But we 0281 1 always held out in our discussions that we would 2 uplink to more stations and get better coverage. And 3 the numbers that Chelsea has given us say it's not 4 happening. And I understand why. When you give up 5 two minutes of prime commercial time, that's not 6 something the station willingly will do. And we're 7 not going to pay for it, we have made that decision. 8 I think we ought to be looking at what 9 is best practice, constantly. And I would like to put 10 this subject on the table for scrutiny. 11 COMMISSIONER COX: And, Mr. Chairman, 12 is the fact that we're going to -- not going to pay 13 for it, is that off the table? 14 CHAIRMAN CLOWE: Not at all. Not at 15 all. That could be a part of this study. 16 COMMISSIONER COX: Maybe we should be 17 paying for it. Maybe it's the best advertising buck 18 we could spend. I don't know. 19 MR. GRIEF: We'll certainly look into 20 those issues. 21 CHAIRMAN CLOWE: Okay. Great. 22 Anything further lady and gentlemen? 23 MR. JACKSON: No. 24 MS. McCULLOUGH: No, sir. 25 CHAIRMAN CLOWE: Ms. Nettles, did you 0282 1 want to comment? 2 MS. NETTLES: Yes, sir, I did want to 3 comment. Commissioner Clowe, I'm Dawn Nettles with 4 the Lotto Report from Dallas. And I did want to offer 5 my opinion about what y'all were just discussing about 6 the satellite coverage, the expense of 1.2 million 7 dollars. 8 There are some expenses that you 9 absolutely have to endure in a business. It's kind of 10 like what they were talking about earlier on the 11 advertising. Some of it is for product sales and some 12 of it is to establish a name. If you were to ever 13 pull those off, you never know in that day how many 14 future times that the TV stations will decide, we want 15 to air these drawings again. They did air it for 16 many, many years, and it was the length of time that 17 the drawings ended up taking and the order that the 18 drawings were filmed, and then changing them about. 19 The actual Lotto Texas drawing, I don't believe it 20 takes a minute and a half. I think it's a -- a 21 30-second or a 20-second drawing, from the time that 22 you start on the Lotto Texas all the way through? And 23 the TV stations, if they could get to that, they may, 24 on the Wednesday and Saturday nights, air those 25 drawings again, if they can get to the film and edit 0283 1 it in time. At one point, if you'll recall, they used 2 to have the drawings at 9:59 p.m., remember? And then 3 they changed it to the 10:12? Do you remember the 4 reasons for it, Gary? Anybody? Do y'all recall that? 5 CHAIRMAN CLOWE: Yes. 6 MS. NETTLES: Okay. Well, anyway, the 7 Lotto Texas drawing only takes -- it does not take a 8 minute and a half to air. And I think that that is 9 your best investment and probably would be if you 10 would check into simply airing the Wednesday and 11 Saturday night Lotto Texas draws. I believe it would 12 give you a return and increase your sales, because you 13 need that exposure. People don't tune in because they 14 don't expect to see them on TV any more. They're not 15 there. That's why the TV stations are telling you 16 that. But the drawings do not take that long, and the 17 people need to see those balls coming out of that 18 machine. And that's what -- one area that you can get 19 yourselves up. That's not the main area, but that is 20 a good area. And I just wanted to throw that in. 21 Don't cancel that. 22 CHAIRMAN CLOWE: Thank you. 23 Next, Nelda, is item 19 -- sorry about 24 that -- report, possible discussion and/or action on 25 the 79th legislature. 0284 1 MS. TREVINO: Good afternoon, 2 Mr. Chairman and Commissioner Cox. For the record, 3 I'm Nelda Trevino, the Director of Governmental 4 Affairs. 5 In your notebook is copy of a report 6 related to the agency's legislative implementation 7 project. A final review was held at a recent 8 directors' meeting and the tasks related to the 9 agency's legislative implementation project have been 10 completed. I would like to thank Melissa Villasenor, 11 the project coordinator, and all the staff who were 12 involved in this agency project. 13 There are two other items I would like 14 to mention to you this afternoon. The first relates 15 to the agency's legislative briefings, and as we have 16 in the past, we will be scheduling agency legislative 17 briefings during this fiscal year. These briefings 18 provide an opportunity for executive management to 19 provide regular updates on agency-related matters to 20 legislative offices. Our first briefing for this 21 fiscal year is scheduled for next week, October the 22 6th, and a copy of the draft agenda is included in 23 your notebook. 24 The second item I wanted to mention 25 relates to House and Senate interim committee charges. 0285 1 And as you know, the time period between regular 2 legislative sessions is referred to as the interim. 3 During the interim, the Speaker of the House and the 4 Lieutenant Governor assign what is referred to as 5 charges for House and Senate committees to review. A 6 charge is similar to an assignment to study and 7 possibly conduct hearings on a particular issue or a 8 particular area under the committee's oversight. 9 Interim charges are typically assigned during the fall 10 and we will keep you advised once those interim 11 charges are announced by the Speaker and the 12 Lieutenant Governor. 13 And this concludes my report and I'll 14 be happy to answer any questions. 15 CHAIRMAN CLOWE: Thank you, Nelda. 16 Next we'll go to item 24, but let's 17 take a short break, and then, Mr. White, we'll be 18 ready to deal with these cases. 19 (RECESS.) 20 CHAIRMAN CLOWE: Mr. White, we are now 21 to item 24, consideration of the status and possible 22 entry of orders in the cases represented by the 23 letters A through K, and M through S. Will you take 24 us through that, please. 25 MR. WHITE: Yes, sir. For the record, 0286 1 my name is Stephen White. I'm the Chief of 2 Enforcement. 3 Today you have before you 11 -- 4 actually, 12 lottery cases, 11 of which are proposals 5 for decision issued by the various administrative law 6 judges. They all involve failure to have sufficient 7 funds in the retailer's account to pay for lotto 8 tickets. In all 11 cases, the ALJ recommended 9 revocation of the retailer's license and the staff 10 recommends that you go along with the recommendation 11 of the ALJ and revoke the licenses of these 11 12 retailers. 13 CHAIRMAN CLOWE: And those are dockets 14 represented by the letters A through K, are they not? 15 MR. WHITE: I believe, yes, sir. Yes. 16 CHAIRMAN CLOWE: I recommend the 17 adoption of the recommended order by the ALJ in 18 letters -- dockets represented by the letters A 19 through K. 20 COMMISSIONER COX: And then there is 21 one agreed -- 22 CHAIRMAN CLOWE: Wait a minute. 23 MR. WHITE: I apologize. 24 COMMISSIONER COX: That was a motion. 25 Second. 0287 1 CHAIRMAN CLOWE: All in favor, please 2 say aye. The vote is two-zero in favor. 3 Okay. Steve, go ahead. 4 MR. WHITE: I'm in a hurry today. 5 Okay. And then there is one agreed order involving 6 the lottery, and that involves Farmersville Shell. 7 Farmersville Shell allowed the purchase of lottery 8 tickets with a credit card, and we have an agreed 9 order for a seven-day suspension of that retailer's 10 license. 11 CHAIRMAN CLOWE: That is case number 12 2005-4708, represented by the letter S? 13 MR. WHITE: Yes, sir. 14 CHAIRMAN CLOWE: All right. 15 MR. WHITE: And then we have six bingo 16 agreed orders. I can go through them individually if 17 you like, but they all involve various violations of 18 the Act and rules. All of them are agreed orders in 19 which the staff is recommending that they be entered. 20 Do you want me to go through those individually? 21 CHAIRMAN CLOWE: No, sir. 22 I recommend the adoption of the 23 recommended order in cases represented by the letters 24 M through S. 25 COMMISSIONER COX: Second. 0288 1 CHAIRMAN CLOWE: All in favor, please 2 say aye. The vote is two-zero in favor. 3 We'll sign these orders now, and then, 4 Gary, we'll call on you next. 5 Thank you, Steve. 6 MR. WHITE: Thank you. 7 MS. KIPLIN: S was the lottery -- the 8 Farmersville Shell that it previously adopted, so -- 9 CHAIRMAN CLOWE: Yes. 10 MS. KIPLIN: I would like to point out 11 for the record on those agreed orders, on the bingo 12 side. Those are -- and I know you haven't passed any 13 penalty guidelines, but know, when you enter any 14 order, including agreed orders, it is an expression of 15 your policy, and so what you're doing is you're 16 framing the appropriate penalty for particular types 17 of violations of the Bingo Enabling Act. And the 18 reason that I'm emphasizing that is because that's 19 what the Bingo Division is really looking to in terms 20 of setting out those ranges for penalties and penalty 21 guidelines. 22 CHAIRMAN CLOWE: Thank you, Counselor. 23 Kim, will you check these and make sure 24 we didn't miss any. 25 Next, item 25, report by the Acting 0289 1 Executive Director and/or possible discussion and/or 2 action on the agency's operational status, North 3 American State and Provincial Lottery Association, and 4 FTE status. 5 Mr. Grief. 6 MR. GRIEF: Commissioners, I have just 7 a few items to report to you today. First, I'm very 8 pleased to report that all of our agency staff came 9 through the recent inclement weather in east Texas 10 safe and unharmed. Several of our field offices were 11 closed last Thursday and Friday, including Beaumont, 12 Houston, Victoria, Corpus Christi, and McAllen. All 13 did reopen for business this past Monday, with the 14 exception of Beaumont, which may not be opening until 15 next week. 16 The GTECH field staff experienced a 17 similar situation. My understanding from GTECH is 18 that all of their staff are also safe and accounted 19 for, and several of their offices were also closed 20 last Thursday and Friday as well, with all reopening 21 this past Monday. Of course, our sales, as we 22 previously discussed, were significantly impacted last 23 week. You saw earlier today that we had about a 23 24 percent decline in our weekly sales, a 50 percent 25 decline in the Houston district, and added to that 0290 1 decline was the fact that the Mega Millions jackpot 2 was hit and we started over on that roll cycle. Our 3 Lottery Operations Division has also prepared a 4 standard inclement weather plan, which we will provide 5 relief to retailers in the appropriate situations for 6 those who may have been impacted by the weather to the 7 point that their business activity was interrupted, 8 such as the inability to make bank deposits where we 9 could sweep their account, or damage to their ticket 10 inventory, or where they had structural damage to 11 their business where they might have had inventory 12 that was stolen, or where there were other unavoidable 13 possible delays in getting their lottery proceeds to 14 us in a timely manner. We always handle those issues 15 on a case-by-case basis and we grant that relief when 16 the situation warrants it. 17 We have also received word from GTECH 18 that as of yesterday, the initial shipment of the 19 Texas Hold 'Em instant game that we were briefed on 20 today for the Houston and the Victoria districts has 21 been delayed until next Monday. And there are also 22 four sales territories in the Houston district that 23 have not yet resumed regular ticket shipments to 24 retailers. This includes some areas east of Houston 25 and Port Arthur, as well as the Beaumont area. We're 0291 1 going to be monitoring those retailers. We're going 2 to ask GTECH to resume those regular shipments of 3 tickets just as soon as our system detects that sales 4 are again taking place in those retailer locations. 5 In all, and this is a floating number, 6 there appears to be about 400 retailer locations that 7 are out of communication with the GTECH system, for a 8 variety of different reasons, but all related to the 9 inclement weather. 10 Regarding the recent NASPL conference 11 that took place, we did have several staff members 12 that attended that conference. And I have met with 13 each member of the staff who participated, and I 14 believe it was beneficial for each of them to attend. 15 They came back with many ideas and concepts they 16 picked up at the conference on topics such as jackpot 17 fatigue, beneficiary campaigns, generational 18 marketing -- that was a very hot subject at this 19 particular conference -- problem gambling, 20 advertising, and the like. And we're currently 21 studying the research that they bought back. 22 I'm also very happy to announce that 23 the agency received two Batchy awards at the NASPL 24 conference. Batchy awards are presented to NASPL 25 members for outstanding advertising and business 0292 1 communication achievements. Those awards are named in 2 honor Ralph Batch, who became the first president of 3 the NASPL organization back in 1971, and it was 4 through his efforts that the advantages of lotteries 5 exchanging information and collaborating on joint 6 ventures were first recognized. 7 The first Batchy award that the agency 8 received was in the category of Original Music for TV 9 or Radio, and that was for the jackpot song, the 10 production of which was overseen by Robert Tirloni and 11 DDB Dallas. And the second Batchy award presented to 12 the agency was in the category of Corporate 13 Communication, Player Newsletter, and that was for the 14 July-August edition of Winning. And I have placed a 15 copy of that particular issue of Winning and it's in 16 front of you today. Contributing to the development 17 of that issue were agency employees Karen Blizzard, 18 Dan Castro, and Roger Prather, with instant and online 19 game articles contributed by Aura Andrade and Rene 20 McCoy. 21 In addition to those two awards, we 22 were also a finalist for a Batchy award in three other 23 categories. First, in the category of Corporate 24 Communication and Retailer Newsletter for our July 25 2004 issue of Round Up, with production overseen by 0293 1 Karen Blizzard and Roger Prather with articles by 2 Leticia Vasquez and Teresa Edwards and Aura Andrade. 3 We were also a finalist in the category of Corporate 4 Communication for an Employee Newsletter, for the June 5 2004 TLC Team News, production overseen by Karen 6 Blizzard with articles by Roger Prather, Donna Rose, 7 Aura Andrade, Suzanne Krystopher, and 8 Joyce Bertolacini. And also in the category of TV 9 Off-Line Games, we were a finalist for the scratch 10 dance holiday commercial. The production was overseen 11 by Dale Bowersock, Robert Tirloni, and DDB Dallas. 12 And finally, the agency was also a 13 finalist for a different award, called the Hickey 14 award, which are given for excellence in promotional 15 and strategic marketing. The Hickey awards are named 16 in honor of the late Owen Hickey, an industry leader 17 who is remembered for the creative development of 18 promotional and public relations techniques in the 19 lottery industry. In the category of Audio Visual 20 Presentation, we were a finalist for the TLC 21 promotional video, which was produced in-house by 22 lottery employees Philip Bates and Glenn Hill. And I 23 want to congratulate all of these agency employees and 24 our vendors for their outstanding achievements in 25 those particular areas. 0294 1 And the final item I have for you today 2 is in regards to the Survey of Organizational 3 Excellence. We have made significant progress in that 4 project. The employee workgroup that was responsible 5 for prioritizing the list of potential changes and 6 improvements that could most benefit the agency, 7 submitted those recommendations in the form of what I 8 like to call a top ten, with the top three being 9 identified as significantly the most important to the 10 group. In order, those top three initiatives that 11 were identified by staff that could potentially have 12 an impact on those items in the survey that appeared 13 to be ripe for improvement are, number one, formalized 14 methods other than salary actions for rewarding 15 outstanding performance and achievement; number two, 16 create an agency employee committee to promote 17 employee involvement and service on improving the work 18 environment; and, number three, improve the 19 opportunities for employee training and professional 20 development. And I'm happy to report that the 21 management team has reviewed all three of those items 22 in detail and provided feedback to the committee on 23 the first two, and that feedback has also been made 24 available to all agency staff on our intranet. The 25 staff workgroup is currently reviewing that feedback 0295 1 from management and is developing procedures to 2 implement those ideas within the parameters that have 3 been decided upon by management. 4 And, Commissioners, that concludes my 5 report. 6 CHAIRMAN CLOWE: Any questions? Thank 7 you, Gary. 8 Next, item 26, report by the Charitable 9 Bingo Operations Director and possible discussion 10 and/or action on the Charitable Bingo Operations 11 Division's activities. 12 Mr. Atkins. 13 MR. ATKINS: Thank you, Commissioners. 14 I would like to update you on a couple 15 of items from my report that's in your notebook. As 16 you know, we successfully launched the Bingo Services 17 Center on schedule, on September 1st. We have 18 included in your notebook an activity report that I 19 believe you requested, Mr. Chairman, that shows the 20 number of users who have visited the site. Of 21 particular interest is the number of external users, 22 that is, individuals outside the agency who have 23 created the unique user ID in order to access 24 information specific to a license. As of just a few 25 moments ago, there were a total of 69 external users, 0296 1 so you can see from the report that is in your 2 notebook that that number continues to grow. 3 Additionally, for the week of the 19th 4 through the 25th, there had been a total of 119 public 5 users accessing the Bingo Services Center. Our 6 tracking data shows that the Bingo Services Center 7 having roughly 51 visitors per day, with an average 8 stay of 14 minutes. As you know, we continue to 9 convert our forms and applications that we have on the 10 website into an interactive format. Since we have 11 successfully launched the Bingo Services Center, the 12 staff has been able to spend some additional time on 13 this project, and as of this morning, we have a total 14 of 45 interactive forms on the website. 15 There are two BAC terms set to expire 16 in February of 2006. We've been working with the BAC 17 to more proactively solicit nominations for these 18 upcoming vacancies. One action that we've taken is to 19 insert announcements in the mailout of the quarterly 20 report forms that went to all licensees on 21 September 20th. We'll continue to work with the BAC 22 on this matter. And also, as a reminder, the next BAC 23 meeting is tentatively scheduled for November 2nd. 24 My report also contains two copies of 25 the regular bingo activity report. The first copy 0297 1 runs through August 31st, the end of the fiscal year, 2 with the second copy starting on September 1st. The 3 notebook also contains a summary memo regarding the 4 second quarter 2005 allocations, and I would be happy 5 to answer any questions you may have regarding any of 6 those reports. 7 I would like to give you an update on 8 the development of the division's annual report. As 9 you'll recall, this was an action item for the 10 Charitable Bingo Division that resulted from the 11 agency's business plan. And since House Bill 1138 12 from the 79th legislature regular session contains 13 some provisions relating to an annual report relating 14 to bingo, we were holding off on doing any further 15 work pending the completion of the legislative session 16 and the recent special sessions. We've started again 17 working on this annual report, and we have an 18 anticipated publication date of May 2006. We still 19 believe that we'll be able to incorporate some of the 20 language from House Bill 1138 in this report, and we 21 also anticipate including the BAC in the review and 22 comment on the contents of the annual report. 23 Also, another quick reminder. I 24 mentioned to you earlier the Bingo Division conference 25 is scheduled for the week of October 10th. All of our 0298 1 audit staff will be in town and you're both invited to 2 stop by and visit with them as your schedules permit. 3 Commissioners, I also wanted to discuss 4 briefly the steps the division is taking to be of 5 assistance to some organizations that may have been 6 affected by Hurricane Rita. Of the nine Texas 7 counties that FEMA has declared as disaster sites as 8 of yesterday, four of them contain a total of 52 bingo 9 licensees. The affected counties with the bingo 10 licensees are Galveston, Jefferson, Liberty and 11 Orange. First of all, Charitable Bingo Administrative 12 Rule 402.600 provides for an extension relating to the 13 filing of quarterly reports in the event of a natural 14 disaster. The division is preparing to contact the 15 licensees in those affected counties and inform them 16 of this option to request an extension. Additionally, 17 licensing staff will be monitoring any licenses in 18 those counties that may have renewal dates approaching 19 and offering assistance to those licensees should they 20 need it. 21 Finally, I just wanted to confirm that 22 all of the audit staff from the Houston regional 23 office are all fine. They have not reported any 24 serious damage resulting from the hurricane, either 25 personally or to the regional office, which was open 0299 1 for business on Monday. 2 That concludes my report and I'd be 3 happy to answer any questions. 4 CHAIRMAN CLOWE: Any questions? Thank 5 you, Billy. 6 Next is item 27, public comment. Is 7 there anyone wishing to make comment to the Commission 8 at this time? 9 Is there any further business to come 10 before the Commission at this time? 11 We are adjourned. The time is 4:28. 12 Thank you all very much. 13 14 15 16 17 18 19 20 21 22 23 24 25 0300 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 3RD day of 16 OCTOBER, 2005. 17 18 19 BRENDA J. WRIGHT, RPR, 20 Texas CSR No. 1780 Expiration Date: 12-31-06 21 WRIGHT WATSON & ASSOCIATES Registration No. 225 22 Expiration Date: 12-31-05 1801 N. Lamar Boulevard 23 Mezzanine Level Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 050928BJW