0001 1 * * * * * * * * * * * * * * * * * 2 3 4 TEXAS LOTTERY COMMISSION 5 MEETING 6 7 OCTOBER 31, 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 31ST of OCTOBER, 19 2005, from 9:00 a.m. to 2:40 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 Chairman: Mr. C. Tom Clowe, Jr. 3 Commissioners: 4 Mr. James A. Cox, Jr. 5 General Counsel: Ms. Kimberly L. Kiplin 6 Acting Executive Director: 7 Mr. Gary Grief 8 Charitable Bingo Executive Director: Mr. Billy Atkins 9 10 WITNESS AFFIRMATION FORMS FILLED OUT BY: 11 Mr. Stephen Fenoglio Mr. William T. Smith 12 Ms. Sharon Ives Mr. Robert S. Young 13 Mr. Steve Bresnen Mr. Gerald D. Caldwell 14 Mr. David Heinlein Mr. Earl Markham 15 Mr. Louis D. Kosanovich Ms. Velma Markham 16 Mr. Richard Bunkley Mr. Bruce Weatherford 17 Mr. Don Webb Mr. V.R. Rahm 18 Mr. James F. Johnson Mr. James Irby 19 Mr. Charles F. Hutchings Mr. Kent Hargett 20 Ms. Dawn Nettles 21 22 23 24 25 0003 1 INDEX - October 31, 2005 2 PAGE Appearances.................................... 2 3 AGENDA ITEMS 4 Item Number I.................................. 6 The Texas Lottery Commission will call the 5 meeting to order 6 Item Number II................................. 134 Consideration of an possible discussion and/or 7 action, including proposal, on new rules 16 TAC 402.706 and/or 402.707 relating to Standard 8 Administrative Penalty Guideline and Expedited Administrative Penalty Guideline 9 Item Number III................................ 6 10 Report, possible discussion and/or action on lottery sales and revenue, game 11 performance new game opportunities, and trends 12 Item Number IV................................. 34 Report, possible discussion and/or action on 13 the agency's financial status 14 Item Number V.................................. 36 Report, possible discussion and/or action on GTECH 15 Corporation 16 Item Number VI................................. 38 Consideration of and possible discussion and/or 17 action, including adoption, on amendments to 16 TAC 401.305 relating to Lotto Texas on-line game 18 Item Number VII................................ 57 19 Consideration of and possible discussion and/or action, including proposal, on amendments to 16 TAC 20 401.301 relating to General Definitions and/or on amendments, new rule, and/or repeal on 16 TAC 21 401.304 relating to On-line Game Rules (General) 22 Item Number VIII............................... 108 Consideration of and possible discussion and/or 23 action, including proposal, on repeal of 16 TAC 401.305, 401.307, 401.308, 401.312, and/or 401.315 24 relating to Lotto Texas, Pick 3, Cash Five, Texas Two Step, and Mega Millions on-line game rules, 25 respectively 0004 1 INDEX - CONTINUED - October 31, 2005 2 PAGE 3 Item Number IX................................. 112 Report, possible discussion and/or action on 4 possible future Lotto Texas game concepts 5 Item Number X.................................. 133 Report, possible discussion and/or action on the 6 lottery terminal functionality, including the quick pick feature for all games and/or impact to players 7 Item Number XI................................. // 8 Report, possible discussion and/or action on lottery advertising and promotions 9 Item Number XII................................ // 10 Report, possible discussion and/or action on HUB and/or minority business participation, including 11 the agency's mentor/protege program 12 Item Number XIII............................... // Report, possible discussion and/or action on the 13 agency's contracts 14 Item Number XIV................................ // Report, possible discussion and/or action on the 15 procurement of advertising services and/or extension of existing contracts 16 Item Number XV................................. // 17 Report, possible discussion and/or action on the agency's drawings and/or broadcasts 18 Item Number XVI................................ 176 19 Report, possible discussion and/or action on the 79th Legislature 20 Item Number XVII............................... // 21 Consideration of and possible discussion and/or action, including approval of the FY 2006 Internal 22 Audit Activity Audit Plan, on external and internal audits and/or reviews relating to the Texas Lottery 23 Commission and/or on the Internal Audit Department's activities 24 25 0005 1 INDEX - CONTINUED - October 31, 2005 2 Item Number XVIII.............................. 176 Consideration of and possible discussion and/or 3 action on the appointment and employment of an Executive Director 4 Item Number XIX................................ 181 5 Commission may meet in Executive Session 6 Item Number XX................................. 183 Return to open session for further deliberation and 7 possible action on any matter discussed in Executive Session 8 Item Number XXI................................ 183 9 Consideration of the status and possible entry of orders in Dockets A through Y 10 Item Number XXII............................... // 11 Report by the Acting Executive Director and/or possible discussion and/or action on the agency's 12 operational status, and FTE status 13 Item Number XXIII.............................. // Report by the Charitable Bingo Operations Director 14 and possible discussion and/or action on the Charitable Bingo Operations Division's activities 15 Item Number XXIV............................... // 16 Public comment 17 Item Number XXV................................ 187 Adjournment 18 19 Reporter's Certificate......................... 188 20 21 22 23 24 25 0006 1 OCTOBER 31, 2005 2 CHAIRMAN CLOWE: Good morning. It's 3 October 31st, 2005. Commissioner Cox is here. My 4 name is Tom Clowe. We'll call this meeting of the 5 Texas Lottery Commission to order at 9:00 a.m. 6 Commissioner Cox, with your agreement, 7 there are some people who want to make comments to the 8 Commission regarding item two on the agenda and we 9 might call that later in the meeting, if you have no 10 objection. 11 COMMISSIONER COX: No. 12 CHAIRMAN CLOWE: Then we'll go on to 13 item number three, report, possible discussion and/or 14 action on lottery sales and revenue, game performance, 15 new game opportunities, and trends. 16 MS. PYKA: Good morning. For the 17 record, my name is Kathy Pyka. I'm the Controller for 18 the Texas Lottery Commission. With me to my right are 19 Robert Tirloni, Products Manager, and David Sizemore, 20 Research Coordinator. 21 Our first chart this morning reflects 22 revenue from sales and net revenue to the State for 23 the period ending October 27th, 2005. This report 24 reflects eight weeks of fiscal year 2006 activity. 25 Total sales through the eight-week period amounted to 0007 1 486.1 million, while estimated net revenue to the 2 State for this period will be 122.6 million. Net 3 revenue to the State reflects a four percent decrease 4 in comparison to the 127.8 million dollar figure for 5 the same period in fiscal year 2005. The prize 6 expense as a percentage of sales was 62.8 percent for 7 the current time period as compared to 61.8 percent 8 one year ago. 9 Our next slide includes fiscal year 10 2006 year-to-date sales by game. This chart has been 11 revised to exclude the revenue by game information as 12 previously presented. Following our visit with 13 Commissioner Cox regarding the allocation of 14 administrative expenses, we will continue to study the 15 appropriate presentation of revenue by game before 16 including that again. As noted on this side, 74.3 17 percent of sales, or 361 million, was from instant 18 tickets, with 7.9 percent of sales, or 38.2 million, 19 from Pick 3, followed by 6.8 percent, and 33 million, 20 for Mega Millions, and 5.6 percent, and 27.3 million, 21 from Lotto Texas. And then our next slide simply 22 presents the graphical presentation of the 486.1 23 million dollar sales figure by game. 24 MR. TIRLONI: Good morning, 25 Commissioners. For the record, my name is 0008 1 Robert Tirloni. I am the Products Manager for the 2 Texas Lottery. 3 Commissioners, this next pie chart 4 shows year-to-date instant sales broken down by price 5 point, and for quite a few months I've sat in front of 6 you and told you that we've not seen any type of shift 7 in terms of where the bulk of the sales were coming 8 from, and this month there is a slight shift that I 9 wanted to let you know about. The two- and the 10 five-dollar price points are still making up the bulk 11 of the instant product sales, but there has been a 12 shift in that the five-dollar price point is now 13 reflecting a larger portion of the total. We have 14 seen a slight decline in two-dollar price point, but 15 an increase in the five-dollar price point, and 16 actually an increase in the three-dollar price point 17 as well. 18 I have an update for you this morning, 19 Commissioners, on the strategy that we've been 20 following regarding the Lotto jackpot rolls. We 21 looked at this slide last month and, basically, this 22 is showing how the Lotto jackpot has rolled over a 23 period of time. And you see the -- this green line is 24 back in October, pretty much a year ago, back in 25 October, November of '04, and that's when we were 0009 1 rolling a minimum of one million dollar increments, 2 four, five, six, seven, eight, nine. The red line, 3 which the green is overlapping it, but you can see 4 that the red -- excuse me -- was the first time that 5 we rolled up to eight and then we held the jackpot at 6 the same amount. And that was back in -- in this past 7 summer. And at that time, we adopted the new strategy 8 of staying at four until we could fund the next whole 9 million dollar jackpot increase. And so that's kind 10 of the history of how we've been rolling the jackpot, 11 and now I'll -- I'll kind of translate that into sales 12 impact. 13 You can see the strategy of rolling 14 from four to five, to six, to seven, in the minimum of 15 one million increments has yielded the -- the greatest 16 sales. And the strategy that we're following now, of 17 staying at four until we can fund the next whole 18 million dollar roll, is yielding the least amount of 19 sales. Sales for this roll cycle, or for these rolls, 20 these first six, totaled 13.9 million, and sales for 21 this most recent roll cycle where we were implementing 22 the hold strategy, so to speak, yielded sales of 10.7 23 million. That's a decrease of 3.2 million or 24 approximately 23 percent. And we just wanted to 25 provide you with that update. You will note that 0010 1 there was a roll cycle that started at four, we held 2 at four, and then on the second drawing there was a 3 jackpot ticket sold. This one is kind of an anomaly. 4 This was during Hurricane Rita when we lost a major 5 portion of sales from our Houston sales district. 6 COMMISSIONER COX: Let's look at that 7 again, Robert. Now, help me understand the difference 8 between the blue and the purple on the bottom scale. 9 MR. TIRLONI: Okay. First, let me say, 10 the solid line is the trend. The dotted line is the 11 actual sales. So the blue line was a roll cycle that 12 started on a Wednesday, in late August, and so we 13 started at four on Wednesday, we held at four for 14 Saturday, and we continued at four million levels 15 until we could fund the roll to five, which occurred 16 on the fifth drawing in the cycle. 17 COMMISSIONER COX: Okay. 18 MR. TIRLONI: This next one, again, 19 it's -- these are all apples-to-apples comparisons, 20 because they're all starting at four and they're all 21 starting on a Wednesday. This next one started in 22 late September, also starting at four. You'll notice 23 that the sales for that first jackpot level are 24 significantly lower. The same is true for the second 25 four, significantly lower than -- than the previous 0011 1 time. Now, the third time that we're at four, you see 2 on the later roll cycle the dip is not as drastic as 3 it was on -- well, on the previous times. And then 4 the cycle continues onwards. The trend line on this 5 one also seems to -- to be more positive than on the 6 previous one. It has got somewhat of a steeper slope 7 than on the previous roll cycle that took place at the 8 end of August. 9 CHAIRMAN CLOWE: I think the answer is, 10 those are two different drawings of six each, where it 11 stayed at four million until sales justified moving 12 it. And I think what you're telling us is, the second 13 one was not as down as the first one. 14 COMMISSIONER COX: I heard him say that 15 the second one was more down than the first one. 16 MR. TIRLONI: Well, what I -- I'm 17 sorry. Let me -- what I was trying -- the numbers 18 that I gave you were comparing the -- the old strategy 19 from a year ago, in the fall, compared to what we're 20 currently doing right now. 21 COMMISSIONER COX: Let's just stay on 22 the bottom scale. 23 MR. TIRLONI: Okay. 24 COMMISSIONER COX: The purple and the 25 blue. 0012 1 MR. TIRLONI: All right. 2 COMMISSIONER COX: The blue is an 3 earlier date than the purple one? 4 MR. TIRLONI: That's correct. 5 COMMISSIONER COX: So what you've got, 6 basically, is that for the first two draws, you had 7 significantly lower sales, then the gap narrowed. 8 MR. TIRLONI: That's correct. 9 COMMISSIONER COX: Do you know why? 10 MR. TIRLONI: One hypothesis that's 11 been put forward is that we had a jackpot ticket sold 12 at six million dollars on this drawing, and then we 13 turned around and had a four million jackpot ticket 14 sold on this drawing, so that could have had an impact 15 on sales, based on the fact that there were two 16 jackpot tickets sold in close proximity. But I don't 17 know -- I don't know that I can validate that in terms 18 of actual data. That's a hypothesis that's been -- 19 COMMISSIONER COX: That's -- that could 20 tell us several things, couldn't it? Were there any 21 external events going on? Hurricanes, anything of 22 that nature? 23 MR. TIRLONI: On this -- on this cycle 24 that took place in mid September, there was 25 Hurricane Rita. 0013 1 COMMISSIONER COX: Okay. 2 MR. TIRLONI: But not on -- not on this 3 cycle that started here on the purple line, no, there 4 was not. 5 COMMISSIONER COX: So you could not 6 detect, on the purple one, any geographical disparity. 7 It was down everywhere. 8 MR. TIRLONI: No, sir. 9 COMMISSIONER COX: Okay. Well, what 10 is -- seems to be clear, although you would have to 11 have a lot more data to say this for sure, is that 12 people like for the advertised jackpot to increase. 13 MR. TIRLONI: I would agree with that 14 statement. 15 COMMISSIONER COX: And what we see, I 16 guess, is that when we get to six, on either scale, 17 sales are about the same level. 18 MR. TIRLONI: You know, I'm thinking 19 that it's possible that once you get out of that 20 holding pattern, so to speak, and you roll to five and 21 then you roll to six, there may be -- there may be the 22 reaction from the public that the jackpot is rolling 23 again and it's rolling in million dollar increments 24 again, so you may start to recover some of those sales 25 that were lost at the -- at the starting fours. 0014 1 COMMISSIONER COX: Okay. Now, Robert, 2 why did you stop these at the one, two, three, four, 3 five, sixth draw? 4 MR. TIRLONI: We can certainly project 5 this out further for future meetings. 6 COMMISSIONER COX: Why don't we take it 7 out further next month, and let's see if seven is the 8 same as seven, and eight is the same as eight. Like 9 six was the same as six. 10 MR. TIRLONI: We'll certainly do that 11 for next month. We'll take it out even further. 12 COMMISSIONER COX: Well, Mr. Chairman, 13 to answer your question, I don't know. 14 CHAIRMAN CLOWE: I wondered if he was 15 trying to lead us to a conclusion, which I think you 16 correctly stated, that the players like it better when 17 the jackpot goes up every time that there is a roll. 18 Was that your attempt, Robert? 19 MR. TIRLONI: Well, that was part of my 20 attempt, to be able to illustrate that under the old 21 method or the old way that we used to roll the jackpot 22 in million dollar increments, in these four or five 23 comparisons, that has pretty obviously yielded -- 24 yielded the best results in terms of sales. 25 CHAIRMAN CLOWE: I think that was the 0015 1 inference that was given in many discussions that have 2 taken place here, and I think what you're showing now 3 is some further indication that that is the case. It 4 begs the question, regarding rulemaking, what if that 5 practice is adopted. What is the impact on the -- on 6 the reserve fund. Because you're advertising dollars 7 that your sales are not generating, so if you get hit, 8 you've got to make up the difference out of your 9 reserve prize fund. 10 MR. TIRLONI: If -- that's correct. If 11 the rule that is up for consideration for adoption 12 today were to be adopted, we would be guaranteeing the 13 jackpot amounts from the starting point all the way 14 through, and then we would be -- yes, you're correct. 15 If there is a jackpot winning ticket sold and the 16 funds are not available, based on sales, to cover that 17 jackpot amount, we would be utilizing the reserve to 18 cover that. And then long-term, if for some reason 19 the reserve were depleted, the adoption of that rule 20 would allow us to use other funds to ensure that that 21 jackpot winner received, at a minimum, the advertised 22 jackpot amount. 23 COMMISSIONER COX: Okay. Then that's 24 going to be a question that I have when we get to that 25 rule, thus, now that we can go beyond the reserve 0016 1 where we get -- approval to go beyond the reserve, 2 does that mean the reserve is no longer needed and 3 should be taken back into income, or should it be kept 4 on the balance sheet and used until it's either 5 depleted or some other action is taken. But what this 6 seems to say is that if the rule is adopted that's 7 proposed today, and giving the public protection 8 against advertised jackpots that sales will not 9 support, then management might be well-advised to 10 adopt a different strategy on the advertised jackpots. 11 MR. TIRLONI: That's correct. And, 12 Commissioners, I was going to mention this under the 13 agenda item for the rule, but it -- it seems like this 14 might be the appropriate time. Lottery operations 15 products staff has worked closely with the Office of 16 the Comptroller and with Kathy Pyka and her staff on a 17 recommendation that we have submitted to the Acting 18 Executive Director to do just that, to resume minimum 19 one million dollar jackpot rolls, if indeed the rule 20 that is up for your consideration for adoption today 21 is -- is actually adopted. 22 CHAIRMAN CLOWE: And I want to say, 23 Commissioner Cox, it seems to me that at a time that I 24 was on this board early on, we had a situation where 25 we had a rule where we paid what was the advertised 0017 1 jackpot, and where there was a sale, a shortfall, we 2 had to go into the reserve prize fund. And there was 3 a question in my mind of fiscal responsibility 4 relative to the adequacy of that fund. And at that 5 time, there wasn't a discussion about, well, there are 6 other funds that are available. We -- in my mind 7 anyway, we were looking at the reserve prize fund as 8 being the source of monies to make up that shortfall. 9 And there was a concern in my mind as one Commissioner 10 about, if we deplete that fund, where do we go. 11 COMMISSIONER COX: Exactly. 12 CHAIRMAN CLOWE: And so maybe, Gary, 13 you have a better memory than I do, or possibly Kim, 14 am I reciting that recollection correctly or 15 incorrectly? 16 MR. GRIEF: I think you're reciting it 17 correctly, Mr. Chairman, and I do think our thinking 18 at that point was somewhat limited in that regard. I 19 think we were all focused on the fact that once that 20 reserve was depleted, we didn't have anywhere else to 21 go. And I think the understanding that we've gained 22 at the current time and the clarification that's being 23 considered by the Commission, if you adopt the rule 24 that is before you today on Lotto Texas, will address 25 just that issue. 0018 1 CHAIRMAN CLOWE: Okay. Well, that's 2 good, then. If we open this up enough, we'll leave it 3 like it is for the time being and pick it up as we get 4 into another item. 5 COMMISSIONER COX: Good. 6 MR. TIRLONI: Commissioners, we did 7 want to make you aware about the lottery start-up that 8 has taken place in the state of Oklahoma. Sales did 9 start in Oklahoma, October 12th, with approximately 10 1200 retail outlets. The Oklahoma lottery launched 11 with four instant games at the one-, two-, three-, and 12 five-dollar price point, and they are anticipating an 13 on-line game start-up in approximately eight or nine 14 days, nine or ten days, and that anticipated launch is 15 with a Pick 3 style game. We are going to be doing 16 some monitoring and some sales tracking, and 17 Doctor Sizemore is here this morning to talk to you 18 about that project. 19 CHAIRMAN CLOWE: Before you leave that 20 subject, who is their operator? 21 MR. TIRLONI: Scientific Games. 22 CHAIRMAN CLOWE: What do they pay their 23 executive director? 24 MR. TIRLONI: I don't know the answer 25 to that question, Commissioner. I'm sorry. 0019 1 CHAIRMAN CLOWE: Did he donate his 2 25,000 dollar signing bonus to the people of Oklahoma? 3 MR. TIRLONI: I read about that bonus. 4 I don't know -- I don't know what he did with it, 5 though. 6 COMMISSIONER COX: Okay. Is there 7 anybody who knows what the compensation of the 8 Oklahoma executive director is? 9 MR. GRIEF: I've read published reports 10 that he has an annual salary of 175,000 dollars a 11 year. He also, as I've read, qualifies for a 25,000 12 dollar bonus when the first instant ticket is sold, 13 and an additional 25,000 dollar bonus when the first 14 on-line ticket is sold. 15 COMMISSIONER COX: Okay. How big do 16 you think that lottery is? 17 MR. GRIEF: We have over 16,000 18 retailers; they have 1200. 19 COMMISSIONER COX: And when do you 20 think they'll have the build out, Gary? 21 MR. GRIEF: I'm probably not educated 22 enough to know, but from the reports that I've read 23 and what I've heard in the -- in the industry, is I 24 think the goal is around 3,000. I think that -- from 25 what I understand, that may be a very ambitious goal. 0020 1 COMMISSIONER COX: So all other things 2 being equal, it would seem that they're going to 3 generate three to four hundred million in revenue. 4 CHAIRMAN CLOWE: I think that's right. 5 COMMISSIONER COX: Or sales. 6 CHAIRMAN CLOWE: I think that's -- 7 MR. GRIEF: That's about the number 8 that I've seen reported as far as projections go. 9 COMMISSIONER COX: So it's going to be 10 more or less one-tenth the size of the Texas Lottery. 11 MR. GRIEF: That would be about 12 correct. 13 COMMISSIONER COX: Thank you. 14 CHAIRMAN CLOWE: And, Robert, on your 15 third slide, you showed us total year-to-date sales of 16 486.1 million. What is the comparable sales for the 17 prior period? 18 MS. PYKA: For the prior period one 19 year ago is 487.6 million. 20 CHAIRMAN CLOWE: Where is that? 21 MS. PYKA: On the first slide. 22 MR. TIRLONI: I'll also tab back to it 23 in the presentation. 24 CHAIRMAN CLOWE: Okay. I -- no, I've 25 got it. That's fine. Let me just find it here. 0021 1 On the revenue from sales and net 2 revenue to State, is that the slide? 3 MS. PYKA: Yes, sir. The very first 4 row, sales, 487.6 million at 10-23-2004, and 486.1 5 million -- 6 CHAIRMAN CLOWE: Oh, I see it now. 7 Thank you. I had failed to pick it up. 8 And the net contribution or sales 9 contribution, as you have titled it, is down from 10 186.3 million to 180.9 million? 11 MS. PYKA: That is correct. 12 CHAIRMAN CLOWE: And that continues to 13 be the result of the increase in instant sales where 14 the return to the State is lower than on other game 15 activities. So that's a trend that although the 16 overall sales number is relatively close, there is a 17 reduction in net to the State? 18 MR. TIRLONI: Yes, sir, that's correct. 19 CHAIRMAN CLOWE: Okay. Thank you. 20 DR. SIZEMORE: Good morning, 21 Commissioner, Chairman. I am David Sizemore, Research 22 Coordinator for the Texas Lottery Commission. 23 And I have the pleasure of presenting a 24 very brief methodological design to give a picture of 25 what we will be doing to analyze sales trends along 0022 1 the Texas and Oklahoma border. And based on a very 2 simple hypothesis that we might expect sales trends 3 to -- sales to decline along the border, we proposed a 4 two-pronged research design to examine both trends and 5 leakage of lottery sales after Oklahoma's start-up. 6 The first part of this method will be essentially a 7 very general effort to understand the extent to which 8 Texas Lottery sales have changed during a one-year 9 pre- and post-Oklahoma lottery period. And that 10 includes essentially the first two bullets that you 11 see up there. The intention, of course, will be to 12 identify any sales shifts that occur during this 13 period, after Oklahoma's start-up. We might expect 14 that Texas Lottery sales in the region would, in fact, 15 decline in association with Oklahoma's start-up. 16 The second more specific approach will 17 be essentially used to examine what we might call the 18 best performing retailers along the border. The nine 19 retailers noted at the -- in the last bullet will be 20 analyzed with reference to having performed well over 21 recent years, being essentially the top 20 performers. 22 And this too will be also tracked one year pre- and 23 post-Oklahoma's start-up. 24 Finally, we will also supplement this 25 research with an analysis of Lotto Texas and Mega 0023 1 Millions jackpots for the same time period. 2 Essentially, we'll be looking at similar jackpot sizes 3 and sales trends associated with those jackpot sizes. 4 Thank you. Are there any questions? 5 COMMISSIONER COX: Is that the total on 6 Texas and Oklahoma? 7 DR. SIZEMORE: The total of? 8 COMMISSIONER COX: Is that the last 9 slide you have available? 10 DR. SIZEMORE: Yes. 11 COMMISSIONER COX: Okay. When was the 12 Louisiana lottery initiated, Gary, do you remember? 13 MR. GRIEF: Not very long before we 14 started. We started in '92. I'm guessing maybe late 15 '90 or early '91. And I remember that only because we 16 had someone from the Louisiana lottery here at 17 start-up that was assisting us that had just recently 18 gone through start-up. 19 COMMISSIONER COX: Okay. And New 20 Mexico was started? 21 MR. GRIEF: After us, but I'm not sure 22 exactly how much longer after us. 23 COMMISSIONER COX: Okay. Why don't we 24 go back to the New Mexico start-up and see what kind 25 of impact that had, and then see how that compares to 0024 1 the impact Oklahoma is having. Just -- I don't know 2 whether it would yield anything or not. 3 DR. SIZEMORE: Okay. 4 COMMISSIONER COX: And I wonder if it 5 would be worthwhile, Gary, if we monitored the border 6 with Louisiana on an annual basis just to kind of look 7 at that. 8 MR. GRIEF: We can easily do that. 9 DR. SIZEMORE: GTECH has actually done 10 a brief study of leakage across the Louisiana and 11 New Mexico borders. I would be happy to forward that 12 to you if you would like to see it. 13 COMMISSIONER COX: All right. Maybe 14 just include it in this comparison next month and 15 we'll go from there. 16 DR. SIZEMORE: Okay. 17 CHAIRMAN CLOWE: And you mentioned Mega 18 Millions there at the end of your comment. What was 19 the relationship when you brought that name up? 20 DR. SIZEMORE: Simply to compare 21 similar size jackpots with reference to sales. So if 22 we have a high jackpot for one of the games, over time 23 were we going to see similar sales patterns of, let's 24 say, last year on October 5th -- is the jackpot -- are 25 sales associated with high jackpots going to be the 0025 1 same as they are after Oklahoma's introduction, when 2 the jackpots high or low or -- 3 CHAIRMAN CLOWE: I think that that's a 4 question that I would ask of you, that -- I assume 5 when you say, track lottery sales one year pre- and 6 post-Oklahoma, you're talking about total sales. All 7 offerings. 8 DR. SIZEMORE: Well, at this point, we 9 have some data gathered up on just instant tickets, 10 because that's really all that they're doing right 11 now. Isn't that right? One-, two-, three- and 12 five-dollar tickets? 13 MR. TIRLONI: I think that's right. 14 DR. SIZEMORE: And then over time we'll 15 take the same approach, essentially, to the on-line 16 games, so that we have -- 17 CHAIRMAN CLOWE: But are you comparing 18 just instant tickets for Texas to instant tickets for 19 Oklahoma? 20 DR. SIZEMORE: Right now that's what 21 we're doing. Correct. 22 CHAIRMAN CLOWE: Okay. So you're just 23 cutting that part out that's available in Oklahoma. 24 DR. SIZEMORE: Yes, sir. 25 CHAIRMAN CLOWE: You see, I question 0026 1 the validity of this, because we're increasing our 2 instant sales in tickets substantially. We're driving 3 a concentrated effort there. So you've got Oklahoma, 4 where Commissioner Cox has identified, I think 5 correctly, maybe ten percent the size of Texas, and 6 all they've got is instant tickets. 7 DR. SIZEMORE: Right. 8 CHAIRMAN CLOWE: And then you bring in 9 Mega Millions, and I think we did more to affect our 10 sales of on-line games, particularly maybe one or two 11 games, when we adopted Mega Millions, than maybe 12 either Oklahoma, Louisiana or New Mexico will have in 13 the way of an impact. So I want to raise these 14 questions in your analysis, too. 15 DR. SIZEMORE: Okay. 16 CHAIRMAN CLOWE: And what I'm hoping to 17 do is get you to open it up and not get too myopic 18 about the effect of one state on us, but things that 19 we're doing internally that may have a greater impact, 20 but there is the impact of the other states as well. 21 Does that -- is that okay with you. 22 COMMISSIONER COX: Absolutely. And I 23 think that, at the same time, that I would be looking 24 not just at on-line games here if they only have 25 on-line games there. I think it is possible that 0027 1 people might satisfy their need to buy lottery 2 tickets, if they're Oklahoma residents, by buying just 3 the Scratch-Offs and passing up the chance to buy 4 on-line games if they have to drive all the way to 5 Texas -- all the way to Texas to do that. Okay? So I 6 wouldn't assume that it's going to be tit for tat 7 on -- by product line. 8 CHAIRMAN CLOWE: That's right. 9 DR. SIZEMORE: So you would prefer to 10 analyze the -- just the general sales trends over all 11 games? 12 COMMISSIONER COX: Do both. 13 DR. SIZEMORE: Do both, specific and 14 general approaches? 15 COMMISSIONER COX: Yes. 16 DR. SIZEMORE: Okay. 17 CHAIRMAN CLOWE: And my recollection is 18 that Louisiana is a Powerball state. Oklahoma doesn't 19 have any affiliation. What is New Mexico? 20 MR. GRIEF: Powerball. And all 21 indications are that Oklahoma will soon be joining 22 Powerball. 23 CHAIRMAN CLOWE: They'll be going to 24 Powerball soon. Okay. 25 DR. SIZEMORE: But then we might expect 0028 1 that if they have the higher jackpot on-line games, 2 that -- that would have some kind of an effect, I 3 would expect, negative effect on Mega Millions sales 4 here. Although -- 5 COMMISSIONER COX: Or Lotto Texas or 6 all of the above. 7 DR. SIZEMORE: Correct. 8 COMMISSIONER COX: I think your 9 hypothesis needs to be expanded, or your hypotheses 10 need to be increased so that we're looking not just at 11 one versus one, but one versus all. 12 CHAIRMAN CLOWE: That's right. And we 13 ought to be in Powerball, too. What was their jackpot 14 here just a couple of weeks ago? 15 MR. TIRLONI: 340 million, I believe. 16 CHAIRMAN CLOWE: Well, wasn't it the 17 second highest they've ever had? 18 MR. TIRLONI: I believe that's correct. 19 CHAIRMAN CLOWE: Just think of the 20 sales we lost when that -- I guess Mega Millions would 21 kick us out, wouldn't they? 22 MR. GRIEF: I'm not sure what they 23 would do, Mr. Chairman. 24 COMMISSIONER COX: Has Powerball 25 approached us about joining Powerball? 0029 1 MR. GRIEF: They did initially. 2 COMMISSIONER COX: Not since we've 3 joined Mega Millions? 4 MR. GRIEF: No, sir. That would -- we 5 would be breaking the mold if we did that. 6 COMMISSIONER COX: Well, we've done it 7 before and we may do it again. And I think we should 8 at least understand our options. And while it looks 9 to me like, right off the bat, that the best situation 10 would be what Chairman Clowe says, and that would be 11 the both, it looks like if we're going to pick one, 12 with three Powerball states around us, it probably 13 wouldn't (inaudible). But just because I guessed that 14 doesn't mean the analysis is right. 15 MR. GRIEF: I think back to the time 16 when we joined, I think I was the one who suggested 17 that we might pursue both, but we were, I think, 18 grounding that with some negative responses from the 19 Mega Millions folks. 20 CHAIRMAN CLOWE: Yeah. They don't want 21 us to do that. They've never had anybody in with 22 both. But, you know, it's like selling anything else, 23 the -- the more choices you have to your buyers, the 24 better your inventory. And I guess I said 25 facetiously, they would kick us out. I guess maybe 0030 1 they would if we tried to join Powerball, but to a 2 state having both of those, it seems like to me you 3 have another attractive game to offer. 4 MR. GRIEF: Take advantage of all the 5 opportunities for the high jackpots. 6 COMMISSIONER COX: I would sure hate to 7 give up Coke just because Pepsi wanted me to. 8 MR. GRIEF: I'll be happy to revisit 9 that issue if it's the pleasure of the Commission. 10 CHAIRMAN CLOWE: I think we would like 11 to know. You know, I still think they're eventually 12 going to go together. I think when they get over 13 their personal pride in ownership, it makes sense that 14 they join and come together, and that would be as 15 close as there might be to a national lottery. They 16 would really have all of the states. But until their 17 leadership is ready for that, we're just talking about 18 it among ourselves. But I don't think it's a bad idea 19 to talk about it among ourselves and acknowledge what 20 we see might develop at some point in time in the 21 future, and not just take what is given us. 22 MR. GRIEF: I'll do some studying on 23 that. 24 CHAIRMAN CLOWE: Stir it up a little. 25 MR. GRIEF: Yes, sir. 0031 1 MR. TIRLONI: Commissioners, this 2 concludes this agenda item. We would be happy to 3 answer any other remaining questions that you may have 4 at this time. 5 CHAIRMAN CLOWE: Well, 6 Commissioner Cox, what do you have? 7 COMMISSIONER COX: I think I'm good 8 right now. 9 CHAIRMAN CLOWE: I want to bring up the 10 fact that we had the issue of the advertised jackpots 11 and the sales-generated numbers, and that there was a 12 question of the confidence of the players in the 13 lottery. There was a question of how that would 14 affect sales. And it appears that that's not a 15 lasting negative impression on a wide scale with the 16 players at this point in time. Can you quantify that 17 for us? 18 MR. TIRLONI: I don't know if I can 19 quantify it. I think what I -- I think what I can say 20 is that staff believes -- staff believes that at this 21 point in the game, the players that are playing at the 22 base jackpot levels are -- are truly our core base 23 players that are in there drawing after drawing, 24 regardless of what the jackpot amount is. I think the 25 impact of state -- the strategy of holding at the 0032 1 fours has had some impact, and we may have driven 2 some -- some core players away with that strategy. 3 And -- well, as I said a few minutes ago, hopefully, 4 the recommendation that we have made regarding the 5 adoption of the rule today, we'll -- we'll be able to 6 stop any decline and maybe bring us back to the point 7 that we were at prior to implementing that strategy. 8 But I think where we're at now is, the people that are 9 playing at those starting levels are truly the core 10 players that have been with the game for quite a while 11 and -- and are sticking with it. 12 CHAIRMAN CLOWE: I think, 13 Commissioner Cox, we're doing a number of things here 14 at one time. We're talking about the games and the 15 attractiveness of them and how to create a variety, 16 and then we're also acknowledging that we've had a 17 disruption in the leadership of the agency around an 18 issue that dealt with the honesty and the integrity of 19 the Commission, and that in the surveys that 20 Ipsos Reid has done for us, we saw that level of 21 confidence drop, and then it's come back up. And at 22 the same time, we have a search underway now for an 23 executive director, and we have, through the search 24 committee, conducted some interviews, and that process 25 is ongoing. And one of the things that we have said 0033 1 is that we want to find a person as the executive 2 director who will help re-establish the image, the 3 perception of integrity and honesty, and I think that 4 is another thing we're doing as we work on these games 5 through the staff's efforts. And they all come 6 together. You just don't do one or the other. You 7 must bring all of that to the table, to the players of 8 the state, and we're regaining some ground, I think. 9 And we need to keep that focus and continue in that 10 effort. 11 MR. TIRLONI: And I think resuming the 12 minimum one million dollar jackpot rolls will -- will 13 also lend itself to -- to that strategy and to that 14 philosophy in the players' minds, in the public's 15 mind. 16 COMMISSIONER COX: Gary, do you have -- 17 are you planning, as part of your report, to show 18 those Ipsos Reid comparisons of confidence in the 19 lottery? 20 MR. GRIEF: I was not, but I would be 21 happy to. 22 COMMISSIONER COX: I think it would be 23 great if you did. I was very encouraged by the trend. 24 MR. GRIEF: Very good. I'll make sure 25 those are a part of my report today. 0034 1 COMMISSIONER COX: All right. Good. 2 CHAIRMAN CLOWE: I think that's 3 everything we had. Thank you all very much. 4 MR. TIRLONI: Thank you. 5 CHAIRMAN CLOWE: Next is item number 6 four, report, possible discussion and/or action on the 7 agency's financial status. 8 MS. PYKA: Good morning. Just for the 9 record again, my name is Kathy Pyka, the Controller 10 for the Lottery Commission. 11 Tab four does include information on 12 the agency's financial status. The first report 13 reflects transfers and allocations to the Foundation 14 School Fund, and also the allocation of unclaimed 15 prizes as of October 2005. Total transfers to the 16 State amounted to 81.5 million through October. This 17 represents an 8.9 percent decrease from the same 18 period transferred in October 2004. 19 The second page of your notebook 20 reflects the detailed information for the monthly 21 transfers. Of the 81.5 million dollar transfer to the 22 State, 80.5 million was the amount transferred to the 23 Foundation School Fund, with the balance of 933,000 24 transferred from unclaimed lottery prizes. 25 Our next document in the notebook 0035 1 provides you the calculation of the monthly transfer 2 amount, arriving at the 71.7 amount for the month of 3 September alone. 4 And then our final document within this 5 section of the notebook includes a report of lottery 6 sales, expenditures, and transfers from fiscal year 7 1992 to date. On a cash basis, the total amount of 8 transfers to the Foundation School Fund through 9 October of this year totaled 80.5 million, the 10 cumulative transfer to the Foundation School Fund 11 amounting to 7.7 billion. 12 The next item behind the pink divider 13 in your notebook is the agency's fiscal year 2006 14 monthly finance summary for the period ending 15 September 30th, 2005. This notes that the 16 Commission's 2006 Lottery Commission budget from the 17 lottery account is 182.3 million. Of that amount, 18 four percent has been expended and committed through 19 the month of September. And then with our bingo 20 operations funded by general revenue, their budget is 21 13.5 million, with 1.9 percent expended and committed 22 through the first period. Each of these expenditure 23 categories does track with the reportings for one 24 month of the first fiscal year activity. 25 Commissioners, this concludes my 0036 1 presentation. May I answer any questions? 2 CHAIRMAN CLOWE: Thank you, Kathy. 3 MS. PYKA: Thank you, Commissioners. 4 CHAIRMAN CLOWE: Next is item five, 5 report, possible discussion and/or action on GTECH 6 Corporation. Mr. Grief. 7 MR. GRIEF: Commissioners, this morning 8 I want to bring to your attention information relating 9 to GTECH Corporation, who is the lottery operator for 10 the Texas Lottery. On September 12th, 2005, GTECH 11 issued a press release disclosing that it had received 12 an indication of ownership interest from an 13 unidentified party, and its board of directors was 14 evaluating its strategic options. In a conference 15 call that I had with Bruce Turner, who is president 16 and CEO of GTECH, on October 17th, I understood from 17 Mr. Turner that the proposed ownership change could be 18 concluded by as early as January 2005, if the change 19 goes forward. 20 We will continue to communicate with 21 GTECH on this matter, and we will be relying on the 22 contract that we have with GTECH as our guide. And we 23 will continue to keep you informed as that situation 24 unfolds. I'm sorry. January 2006, is when the 25 transaction may be completed. 0037 1 COMMISSIONER COX: Gary, the -- it 2 seems to me that the ownership of GTECH is a critical 3 factor in the perception of the integrity of how the 4 Texas Lottery is operated. You and your staff would 5 agree? 6 MR. GRIEF: Absolutely. 7 COMMISSIONER COX: And, to me, I think 8 that we need to do everything that we possibly can to 9 ensure ourselves that that perception of the integrity 10 is maintained at the highest level. 11 MR. GRIEF: I completely agree, 12 Commissioner. Those efforts are ongoing, and we will 13 take that matter very seriously as we work through 14 this issue. 15 CHAIRMAN CLOWE: And I -- I certainly 16 agree with Commissioner Cox. And I think to the 17 extent that we even need to go beyond perhaps the 18 expertise that we have in this agency relative to 19 corporate law, by reaching out to the Attorney General 20 and perhaps asking them to do what is necessary to 21 obtain counsel relative to those issues. These are 22 corporate transactions that are extremely complex in 23 many cases, and we need to be able to look beyond the 24 corporate veil to see what is happening in this change 25 of ownership. We're entitled to do that, as I 0038 1 understand it, by the terms of our contract, and we 2 are conducting due diligence that's reasonable and 3 prudent on behalf of the agency and in behalf of the 4 people of the State. So we should not take this 5 lightly, as Commissioner Cox has said, but delve into 6 it in detail and make certain we're satisfied this 7 transaction is acceptable to the State of Texas. 8 MR. GRIEF: We will do just that, 9 Mr. Chairman, and we will be sure to reach out and 10 obtain the necessary outside resources to handle the 11 matter thoroughly and completely and to the 12 satisfaction of the Commission and the State of Texas. 13 CHAIRMAN CLOWE: Thank you. 14 Next, item six, consideration of, 15 possible discussion and/or action, including adoption, 16 on amendments to 16 TAC 401.305 relating to Lotto 17 Texas on-line game. Ms. Kiplin. 18 MS. KIPLIN: Commissioners, at an 19 earlier Commission meeting, I believe it was in July, 20 you all voted to propose amendments to the Lotto Texas 21 on-line game. We received no comments regarding the 22 proposed amendments. And the staff is recommending 23 that today you do adopt the amendments to the game 24 without changes to the text as it was published in the 25 September 2nd, 2005, issue of the Texas Register. We 0039 1 did hold a public comment hearing, and we had no 2 appearances. And we received no comment either 3 through the public comment hearing, through the 4 on-line public comment forum that we posted, or 5 through the mail or fax to me. 6 COMMISSIONER COX: Mr. Chairman, I have 7 a question that was generated by the report of the 8 Associated Press. I'm going to quote from that. It 9 says -- it's talking about the guarantees to the prize 10 winners. The grand prize winner will be paid either 11 the advertised jackpot or the jackpot based on sales, 12 whichever is greater. And that is exactly what I 13 believe the rule says or what we wanted it to say. 14 But the Associated Press goes on to say, the 15 guarantees would apply to jackpots paid with a 25-year 16 annuity, not to winners who choose the immediate cash 17 option payment. 18 Now, it was my understanding that we 19 were providing protection to all winners. This 20 question -- this statement from the Associated Press 21 would seem to say that if we advertise, let's say, 22 eight million, that the annuitant would be assured of 23 obtaining an annuity based on eight million, even 24 though sales were, say, only 6.4 million. But that 25 the winner of -- on a cash option would receive a cash 0040 1 option based on the lower, 6.4. And I have a question 2 of staff as to whether this report in the 3 Associated Press is, in fact, correct. 4 MR. NAVARRO: Good morning, 5 Commissioners. For the record, my name is 6 Benito Navarro. 7 And I read the article this morning 8 that you provided, and I don't believe that that 9 statement is correct. We are guaranteeing all prizes, 10 annuitized or otherwise. You know, the player still 11 has to make the selection, when they purchase a 12 ticket, to either have their prize paid out as a cash 13 value option or as an annuity. And so once that 14 determination is made, the lottery will, in fact, pay 15 the winner the greater of the advertised jackpot 16 amount, or sales, depending on what selection was 17 made, either the cash value option or the annuitized 18 option of the prize. So in the scenario that -- in 19 the scenario that you laid out, Commissioner Cox, 20 if -- if the annuitized or advertised jackpot was, in 21 fact, eight million dollars, and we had sales that 22 supported some amount above eight million dollars 23 in -- on an advertised jackpot, if the player selected 24 a cash value option, he would get -- or she would get 25 the amount of the prize pool available to support 0041 1 that -- you know, that prize, whether it's the sales 2 amount or the annuitized amount. So I -- you know, 3 that statement in the paper is definitely not correct. 4 COMMISSIONER COX: Okay. Now, what I 5 hear, Benito, is that when you and your staff and when 6 Robert and his staff compute the jackpot, they would 7 compute it that way. 8 MR. NAVARRO: Correct. 9 COMMISSIONER COX: But what I would 10 like to hear from counsel is that that is the way the 11 rule is written. 12 MS. KIPLIN: Commissioner, it's my 13 understanding that is the way the rule is written. 14 There was quite a bit of collaboration on this rule. 15 That is the intent of the rule, regardless of whether 16 it's a -- an installment payment over 25 years, or the 17 lump sum, it will be the greater of the two. The 18 advertised jackpot, as defined, is that amount that 19 the Commission posts over the 25 years. But I think 20 there are two references in the rule -- maybe I could 21 direct you, if I could, to, say, page three, at the 22 bottom, and that's the definition of jackpot amount. 23 COMMISSIONER COX: Okay. 24 MS. KIPLIN: And that's actually what 25 the -- what the amount would be that's paid. It talks 0042 1 about the greater or the advertised of the jackpot 2 based on the sales. Advertised, of course, is the 25, 3 but the second sentence is intended to make it clear 4 that it really does depend on the payment option. 5 And then if you go to page seven. 6 COMMISSIONER COX: And let me -- let me 7 just digest this if I can, Kim. 8 MS. KIPLIN: Sure. 9 COMMISSIONER COX: The amount actually 10 paid will either be a winner's share of the advertised 11 jackpot, or a winner's share of the jackpot based on 12 sales, determined in part by the cost of securities, 13 depending on the payment option and consistent with 14 the provisions of the rule. Okay. That seems okay. 15 Now, let's go seven, did you say? 16 MS. KIPLIN: Yes, sir, page seven. 17 COMMISSIONER COX: Okay. 18 MS. KIPLIN: And then if you'll look at 19 capital Roman numeral three. 20 May I approach. 21 COMMISSIONER COX: Right here? 22 MS. KIPLIN: Yes, sir. 23 COMMISSIONER COX: Okay. The 24 Commission will pay the greater of either the 25 advertised jackpot or the jackpot based on sales, 0043 1 determined in part by the cost of securities. That's 2 the same wording. 3 MS. KIPLIN: Yes. 4 COMMISSIONER COX: The amount actually 5 paid will either be a winner's share of the advertised 6 jackpot, or the winner's share of the jackpot based on 7 sales determined in part by the cost of securities, 8 depending on the payment option, consistent with the 9 provisions of the rule. Okay. You tell me that's 10 what it says, huh? 11 MS. KIPLIN: Yes, sir. And it's my 12 understanding -- and I'll defer to Mr. Navarro -- but 13 the -- depending on the payment option is intended to 14 link it to an individual who opted to be paid a lump 15 sum. 16 MR. NAVARRO: Absolutely. 17 MS. KIPLIN: And then he can explain 18 the methodology by which you -- you arrive at that 19 number. 20 COMMISSIONER COX: Okay. So, Benito, 21 what you're going to say here is that if we advertise 22 eight million, then the winner that selects an annuity 23 is going to get an annuity, the future value of which 24 is eight million. 25 MR. NAVARRO: Correct. 0044 1 COMMISSIONER COX: And the cash winner 2 is going to get eight million divided by the annuity 3 factor. 4 MR. NAVARRO: Absolutely. 5 COMMISSIONER COX: Okay. 6 MR. NAVARRO: Which is -- which is our 7 present practice. I mean, it's not any different, 8 except that now we're guaranteeing all the prizes as 9 opposed to just the first four. And so the 10 calculation is not any different. And so it's -- if 11 we had sales support, we advertised an eight million 12 dollar jackpot, and we had, you know, a prize pool 13 amount of say, six million, well, that -- you know, if 14 it was an advertised -- if it was -- if it was an 15 annuitized prize, that 6.2 would, you know, probably 16 pay out about 12 million if you annuitized that out. 17 And so that if the player, in fact, selected the cash 18 value option, he or she would be entitled to that 6.2. 19 COMMISSIONER COX: Okay. Now, 20 Mr. Chairman, are you -- are you okay with that one? 21 I think I am. 22 CHAIRMAN CLOWE: I think I am, too. 23 COMMISSIONER COX: My second question 24 relates to something that I thought I saw, but I can't 25 find now, and that had to do with conservative 0045 1 computation of the jackpot. Is that in here? 2 MS. KIPLIN: Can I direct you to -- 3 what is it on. Page three. 4 COMMISSIONER COX: Okay. 5 MS. KIPLIN: And it will be the last 6 sentence under B.1. And it says, the Commission shall 7 develop internal procedures intended to ensure that 8 advertised jackpots are based on the fair and 9 reasonable projection of sales. 10 COMMISSIONER COX: Okay. Did I read 11 somewhere that that said conservative? Fair and 12 reasonable is what it should be. 13 MS. KIPLIN: I think that was the 14 discussion that you all had at the Commission meeting 15 regarding the use of those words, and you all worked 16 out language, and the language that you worked out was 17 the fair and reasonable. 18 COMMISSIONER COX: Okay. Well, 19 conservative might have been the way to go while we 20 were waiting for this rule to pass, but fair and 21 reasonable, that is right down the middle, is 22 certainly the right way to go now. 23 MR. GRIEF: Commissioner, counsel has 24 reminded me, that rule was present in earlier drafts. 25 And at your suggestion, you made a very good point 0046 1 that that word was not the appropriate -- the best 2 word to use in that regard. And that's when we moved 3 to fair and reasonable. 4 COMMISSIONER COX: Okay. Thank you for 5 helping my memory on that. 6 MR. GRIEF: And mine, too. 7 COMMISSIONER COX: Mr. Chairman, that's 8 all the questions I have. 9 CHAIRMAN CLOWE: And I think your point 10 there goes to the issue of what the advertised jackpot 11 is going to be relative to what sales are. And then 12 when we have a shortfall and we're paying the 13 advertised jackpot, we need to go to the reserve prize 14 fund. And the policy that the staff adheres to will 15 deal with how liquid that fund is, and if it lives. 16 Could we have some discussion on that? 17 MS. KIPLIN: Yes. I think that's part 18 of the rule, and the earlier -- the rule as it exists 19 right now -- of course, we're in a middle of a 20 rulemaking -- limited y'all's ability, one could make 21 the argument, from going beyond the prize reserve 22 fund, that the State Lottery Account provision in the 23 statute, Section 466.355, allows for you to use monies 24 generated by the sale of lottery tickets for prizes. 25 It also contemplates a lottery prize reserve fund. 0047 1 And so that limiting language, I believe, has been 2 removed so that it's clear that if you go through the 3 prize reserve fund, you will be able to access money 4 from the sale of lottery tickets to pay what you have 5 guaranteed, which is the greater of -- of the two, the 6 jackpot based on sales or the jackpot as advertised. 7 Is that responsive to your question. 8 CHAIRMAN CLOWE: It is responsive as 9 far as the mechanics of it, and I understand what I 10 think you have explained by way of the mechanism. But 11 I'm now wanting some discussion about the practice and 12 the issue of control, and not letting ourselves get 13 into a situation like I remember being in a great many 14 years ago where we were short in the prize reserve 15 fund. And I would like some discussion about that and 16 the fiscal policy that the staff will adopt and the 17 oversight that the Commission will have of that. 18 COMMISSIONER COX: And would this be 19 the appropriate time to address the question of, are 20 we just going to do away with the reserve fund and 21 recognize that this allows us to deal with 22 appropriated lottery funds, or are we going to let it 23 go until it's exhausted, or is there some point in the 24 future is it going to go away? What is the -- what is 25 the future of the prize reserve fund? 0048 1 MR. GRIEF: Well, we're starting to -- 2 to blur together about three different agenda items. 3 COMMISSIONER COX: I understand. I 4 understand. 5 MR. GRIEF: And I'm happy to talk about 6 those if it's the Commissioners' pleasure to talk 7 about them. 8 COMMISSIONER COX: Does this rule allow 9 us to go beyond the prize reserve fund if it is 10 depleted? 11 MR. GRIEF: Well, I'll speak from 12 management's perspective, and I'll let counsel speak 13 to it as well. My understanding now is that I don't 14 believe we were ever limited to the prize reserve 15 fund, but by virtue of our language in our rule, that 16 led us to that conclusion some years ago. Now, under 17 this rule that's up for adoption, we are clarifying 18 that we are not limited by the prize reserve fund, 19 that we can reach to the State Lottery Account. 20 COMMISSIONER COX: Okay. 21 MR. GRIEF: As we go further through 22 the agenda items today, you're going to hear us talk 23 about the general on-line game rule, and you're going 24 to hear us talk in -- in concept only about the future 25 of Lotto Texas. And when we get to that discussion, 0049 1 about the future of the Lotto Texas game, you're going 2 to hear us talk about not having a prize reserve fund. 3 And when you don't have a prize reserve fund, where 4 monies come from is from the sale of tickets, from the 5 State Lottery Account, and if you exceed paying out in 6 prizes what your sales generate, what that hits is 7 your prize payout percentage. And we have had an 8 analysis done by our outside vendor in that regard, if 9 we were to remove the prize reserve fund and what that 10 impact would be to our prize payout percentage. I 11 think you might have heard Robert say earlier today, 12 his staff has provided me with a proposal under the 13 new Lotto Texas rule that's up for adoption today, and 14 I haven't finished my review of that proposal and I 15 haven't given them my feedback yet. My understanding, 16 in talking to Robert and to Michael Anger is, their 17 recommendation is to keep Lotto Texas at a starting 18 jackpot of four million dollars and roll that jackpot 19 in one million dollar increments, and operate under 20 the umbrella of our rule, which allows us to guarantee 21 our advertised jackpots. We view that -- and, of 22 course, we can't predict what the outcome will be of 23 the Commission's action on any future proposed rule 24 for Lotto Texas or the results of any future opinion 25 from the Attorney General, for example, on things we 0050 1 may or may not do, but we -- we predict and we're 2 hopeful that we'll be operating under a prize reserve 3 fund for Lotto Texas for just a short time, a matter 4 of months, hopefully. And once we -- yes, sir. 5 COMMISSIONER COX: Gary, my question 6 is, should we even have it for a few months, or should 7 it disappear now, because we -- having clarified that 8 we can go beyond it, has it become superfluous and is 9 it irrelevant? 10 MR. GRIEF: Understanding the goals of 11 the Commission in adopting this new rule, I think I 12 would like to defer to counsel to see what a change 13 today might do to us as far as the timeline. 14 MS. KIPLIN: Well, I think it will 15 require redrafting the rule and recommending that you 16 all adopt the -- the rule with changes as proposed. 17 And -- 18 COMMISSIONER COX: You don't think this 19 rule presently does away with the reserve fund? 20 MS. KIPLIN: No, I don't think so. I 21 think if you turn to page seven, for example, it 22 references the Lotto prize reserve fund. And it's -- 23 I'm looking at Roman numeral four that discusses, if 24 you have insufficient funds after using available 25 funds and, specifically, that on -- references the 0051 1 Lotto Texas prize reserve fund. 2 COMMISSIONER COX: Okay. So it's still 3 in the mix, superfluous thought it may be. And what 4 you want is a rule that specifically says, it's gone. 5 And if that's the case, I agree. 6 MR. GRIEF: Very well. 7 CHAIRMAN CLOWE: I'm on a different 8 track. And I understand what Commissioner Cox and you 9 are talking about, Gary, and I defer to his judgment 10 in that. I would like to hear some discussion when 11 that item comes up on the agenda. But my efforts and 12 I won't even say it's my concern, but I have a deep 13 interest, is in the oversight that the Commissioners 14 are obligated to exercise over this decision making 15 relative to the advertised jackpot. And we have an 16 example this year of decisions that were made that I 17 for one, and I think I can say Commissioner Cox agrees 18 with me, viewed those decisions as bad decisions that 19 were made by staff. And there were staff 20 recommendations to make those decisions. And I think 21 I used the word gatekeeper, referring to an individual 22 who I think the Commissioners were looking to for 23 those decisions. Where is the comfort that I am 24 looking for relative to that under this rule? 25 MR. GRIEF: I think I'm on track with 0052 1 you now, Mr. Chairman. 2 We have no plans to change our 3 advertised jackpot approval process at this time. If 4 the Commission moves forward and adopts this rule, 5 then the final sign-off on the advertised jackpots 6 will continue to rise to the Commissioner level. I 7 believe that process is working well. As a matter of 8 practicality, Commissioner Cox is normally the 9 Commissioner who approves those advertised jackpots. 10 He and I have had numerous discussions about the 11 strategy and the approach that we take to that. And I 12 think, starting with the staff, and then with my 13 review, and then with the final review of Commissioner 14 Cox or yourself, I think there will be a gatekeeper in 15 place and there will be all those due considerations 16 given to -- to fiscal matters. 17 CHAIRMAN CLOWE: And then what I think 18 I'm hearing is that there will be the decision making 19 in that structure of advertising a jackpot that's 20 higher than the sales are indicating on the first four 21 rolls. Is that a correct sense? 22 MR. GRIEF: I think that's correct. I 23 just haven't had a chance to read and fully digest the 24 staff's recommendation, but I -- I believe that is 25 what they're recommending. I support that in theory, 0053 1 and I'll certainly, as we start a new jackpot roll and 2 that comes up, as we roll through those cycles, there 3 will be discussions, either with yourself or with 4 Commissioner Cox, whoever has approval. 5 CHAIRMAN CLOWE: Well, I think Robert 6 was very clear in his answer to my question that that 7 is where he was leading the Commissioners in his -- 8 his charts that Commissioner Cox questioned him about, 9 and that's what he wants. Commissioner Cox said he 10 took the impression that the players like seeing it 11 increased by a million every time, and I think Robert 12 said, yes. And so I think that's where we are headed 13 in this practice that we're talking about as a result 14 of the proposed adoption of this rule. And I'm okay 15 with that. I'm not opposed to it. But if that occurs 16 and we see a constant eroding of either the prize 17 reserve fund, or if it's abolished and we're using 18 Commission funds to make up that shortfall, I want the 19 Commissioners to be aware of that. I want that to be 20 another issue that comes to the surface. And it 21 hasn't been a factor in our thinking for a long time. 22 But if we're dipping in as we move through those first 23 four rolls, or even beyond, I want the Commissioners 24 to be aware of that and exercise that oversight. 25 MR. GRIEF: I can assure you that you 0054 1 will be aware. I will personally make sure that you 2 are aware of any issues that arise out of that. 3 CHAIRMAN CLOWE: Let's do it in a way 4 that it is a little more formalized, and that will be 5 for your benefit as well as the Commissioners. Let's 6 add that to the form that the Commissioner is now 7 signing off on, and let's make it where there is a 8 shortfall, explicit, on an ongoing basis of what the 9 shortfall is that's being accepted if there is a 10 recommendation at that point, and what the cumulative 11 shortfall or the depletion of monies is as a total to 12 date on a fiscal year basis. 13 Does that make sense to you, 14 Commissioner Cox? 15 COMMISSIONER COX: Yes, sir. 16 CHAIRMAN CLOWE: Is that beneficial? 17 COMMISSIONER COX: Sure. And for 18 the -- the amount of time that we have that's left, 19 let's pay a lot of attention to it. 20 CHAIRMAN CLOWE: You're just using some 21 deficit financing is what you're doing. And I want 22 that to be highlighted, and I'm sensitive, from a 23 Commissioner level, about being aware of that and 24 being informed of that. I was surprised this year and 25 it made me very unhappy, and I -- I don't want 0055 1 Commissioner Cox and me or whoever our new 2 Commissioner might be to be surprised in the future. 3 MR. GRIEF: We'll make sure that is 4 added to our form. We'll highlight that appropriately 5 and identify that, and we'll give that some thought 6 and probably work with Commissioner Cox to make that 7 form the best it can be. 8 CHAIRMAN CLOWE: Yeah. 9 COMMISSIONER COX: Mr. Chairman, I 10 would add my agreement with what Gary said about the 11 process currently. I think it works very well. We've 12 had several situations where Gary and I discussed the 13 staff's recommendation and chose to take a more 14 conservative approach than staff had recommended. So 15 I think we are very much on the same page and I think 16 the process is working well. 17 CHAIRMAN CLOWE: That's great. And I 18 draw great comfort from that. And I think -- I wish 19 we had had that process in place a long time ago. I'm 20 really comfortable by that relationship of reporting 21 and approval. 22 MR. GRIEF: Very good. 23 CHAIRMAN CLOWE: Okay. I think we have 24 now covered all of my questions. Anything further? 25 Commissioner Cox, we have a member of 0056 1 the public who wishes to speak on this issue. Is that 2 agreeable with you? 3 MS. KIPLIN: May I -- may I just put 4 some thoughts on the record. And that is that you're 5 at a point now of adopting, and if you accept comment 6 on this -- this outstanding rulemaking, it will more 7 likely than not require me to summarize that comment 8 and then provide an agency response, and I think it 9 will impact our ability to proceed today. 10 CHAIRMAN CLOWE: And I believe you had 11 indicated that there was a comment period and there 12 were no comments forthcoming during that period. And, 13 in addition, there were no submitted comments, written 14 comments. Is that correct? 15 MS. KIPLIN: Yes. It was a 30-day 16 public comment period. We had a public comment 17 hearing. There were no appearances. We received no 18 comment as required to be submitted pursuant to the 19 preamble, which was an on-line public comment forum, 20 or the more traditional way, mail or by fax. And so 21 my concern is that if you accept comment now at the 22 time of considering adoption, we'll be -- we'll be put 23 in a position where we need to go ahead and summarize 24 that comment, provide agency response, and so forth. 25 And I think, consistent with your past practice -- 0057 1 CHAIRMAN CLOWE: I got you. 2 Commissioner Cox, based on that, I feel 3 like I would like to move on this issue. I'm ready to 4 go forward. 5 COMMISSIONER COX: I am, too. 6 CHAIRMAN CLOWE: So I would move the 7 adoption of this rule. 8 COMMISSIONER COX: Second. 9 CHAIRMAN CLOWE: All in favor, please 10 say aye. Opposed, no. The vote is two-zero in favor. 11 MS. KIPLIN: Commissioners, we'll file 12 that -- the rule with the Register and it will be 13 effective 20 days after filing. 14 CHAIRMAN CLOWE: Very good. We'll now 15 take a ten-minute break, please. 16 (RECESS.) 17 CHAIRMAN CLOWE: We'll come back to 18 order. And I want to acknowledge on the record that 19 the Commissioners have signed the order relative to 20 the adoption on amendments to 16 TAC 401.305, relating 21 to Lotto Texas on-line game. So that order is 22 effective. 23 Next we'll go to item number seven, 24 consideration of and possible discussion and/or 25 action, including proposal, on amendments to 16 TAC 0058 1 401.301, relating to General Definitions and/or 2 amendments, new rule, and/or repeal on 16 TAC 401.304 3 relating to On-line Game Rules (General). 4 MR. GRIEF: Commissioners, as you know, 5 for some time staff has been diligently reviewing 6 options relating to changing the Lotto Texas game to 7 make it more attractive to our players. And under a 8 separate agenda item, you're going to hear more about 9 staff's ideas related to that specific game. However, 10 while considering changes to that game, we came up 11 with an idea that we believe will be helpful in 12 improving not only Lotto Texas, but all of our on-line 13 games. 14 As you know, our instant ticket games 15 continue to prosper. Commissioners have commented in 16 past meetings about the creativity and success of 17 those games in stark contrast to that of our on-line 18 products. A big part of our success in the instant 19 ticket games can be attributed to the variety and the 20 frequency of our different product offerings. For the 21 instant ticket games, the Commission has a general 22 game rule in place. And game procedures are filed 23 related to each new instant ticket game in the Texas 24 Register, before the sale of each new game begins. 25 And that allows us to respond quickly to the market 0059 1 and rapidly introduce new games or game changes that 2 appeal to our players. And what we're asking for you 3 to consider today is allowing us to implement a 4 similar business practice for the on-line products. A 5 practice that will allow us to try out new ideas or 6 experiment with different play options, and generally 7 do business in a similar manner as we do for our 8 instant ticket product. 9 What you have before you for 10 consideration is a new general on-line game rule that 11 would allow us just that flexibility. And the staff 12 is aware of the need for Commission oversight on 13 certain aspects of the on-line games, and we have 14 tried our best to identify those items in the proposed 15 on-line game rule. Our staff is prepared to provide 16 you with a detailed overview of this proposal, and our 17 legal counsel is also going to have more information 18 to share with you about a proposed request or an 19 opinion from the Office of the Attorney General. And 20 I'm prepared to turn this presentation over to 21 Robert Tirloni and Sarah Woelk, unless you have 22 questions at this time. 23 MS. WOELK: Thank you, Commissioners. 24 My name is Sarah Woelk. I am an Assistant General 25 Counsel. And one task Robert and I have is to try to 0060 1 keep straight what rule we're talking about. What you 2 just took action on and adopted is a rule that will 3 take effect in 20-plus days and govern Lotto Texas 4 specifically until that rule is replaced. What Robert 5 and I are talking about is a rule that might replace 6 not only the Lotto Texas rule, but all of the current 7 on-line game rules. So there is a -- there are 8 actually three different documents that you'll be 9 asked to take action on. One is a repealer of all of 10 the on-line game rules, one is the proposed adoption 11 of a new rule governing on -- all on-line games, and 12 the third is some changes to definitions to make the 13 other changes work. 14 Gary explained the concept here. What 15 we have -- the current rule governing on-line games 16 sets out procedure under which staff develops new 17 games and documents them, publishes the procedures in 18 the Texas Register, and those issues never come before 19 the Commission for Commission action. What we're 20 proposing here is a similar concept for on-line games. 21 It's similar, however, in that -- that this draft rule 22 actually builds in some Commission action. Unlike the 23 rule governing instant games, this rule, although it 24 would take game decisions out of the Texas Register 25 rulemaking process, it would require that major 0061 1 decisions about game changes be approved by the 2 Commission before the Executive Director could approve 3 game procedures. 4 And Robert has prepared a PowerPoint to 5 sort of walk you through the -- some more details of 6 this concept. 7 MR. TIRLONI: Good morning again, 8 Commissions. For the record, my name is 9 Robert Tirloni. I am the Products Manager for the 10 Texas Lottery Commission. 11 Just to review the -- the current 12 process on the on-line game side of our business, 13 staff bring you, the Commissioners, on-line game 14 concepts for -- for new games, or we bring you game 15 modifications. And we bring those to you in the form 16 of a proposed rule. With your approval, that proposed 17 rule is then published in the Texas Register, which 18 begins a public comment period for 30 days. Any 19 comment that is submitted during that 30-day period is 20 summarized and then we come back to you. The proposed 21 rule is presented to you for your consideration for 22 adoption, and often, historically, this is 23 approximately a 90-day process. And then, if you 24 choose to adopt the rule, there is a 20-day effective 25 period. So this is the process that we're -- that we 0062 1 currently follow with our rulemaking for on-line 2 games. 3 As we have just discussed, our instant 4 game introduction processes is quite different. There 5 is a general instant game rule, which pretty much 6 talks about how instant games are played, the 7 different play styles, how they're -- how those 8 tickets are validated, how prizes are paid, but we 9 don't bring you every instant ticket concept that we 10 want to introduce or launch at the Texas Lottery. 11 What we -- what we do do is, we do file and publish 12 game procedures in the -- in the Texas Register prior 13 to an instant game being distributed to licensed 14 lottery retailers for sale to the public. 15 So what would be the benefit of us 16 changing the way we conduct our on-line business. 17 COMMISSIONER COX: Robert, let me ask 18 you to back up just a minute there to that last slide. 19 MR. TIRLONI: Sure. 20 COMMISSIONER COX: Why do we publish 21 the game procedures in the Texas Register? 22 MS. WOELK: I think that -- and I 23 wasn't here when that -- the instant game rule was 24 adopted, but I do think it's important for there to be 25 an official source that players and the public can go 0063 1 to if they want to understand exactly what the terms 2 of a game are. So we built that into instant rule and 3 proposed in the current rule that it would be a matter 4 of public record exactly how the game is -- has been 5 developed and designed and it's being operated. 6 COMMISSIONER COX: And are these game 7 procedures also available on our website? 8 MR. TIRLONI: They are not available on 9 the Texas Lottery's website. 10 COMMISSIONER COX: So it seems to me 11 that what we have done is publish them in a relatively 12 obscure place, at least for me, and not put them in 13 the obvious place. 14 MS. WOELK: That would be pretty easy 15 to -- to change, to add them to our website. 16 COMMISSIONER COX: Okay. And that -- 17 you know, as to putting them in the Texas Register, 18 great, if that's an appropriate thing to do, but I 19 think the players, for general purposes, it would be 20 better and more accessible on the website. 21 MR. TIRLONI: We can certainly begin 22 doing that with the -- with the instant game 23 procedures. 24 COMMISSIONER COX: Okay. 25 MR. TIRLONI: So what would be the 0064 1 benefits of us transitioning and having our on-line 2 games operate in a similar fashion to our instant 3 games. And Gary touched on these, Commissioners. 4 But, basically, it would enable us to have more 5 expeditious introductions of our on-line games in 6 terms of new games, new concepts, and/or changes or 7 modifications to existing games. It would allow staff 8 the ability to experiment with new ideas, new concepts 9 that come up from our on-line gaming vendor, and it 10 allows us to be responsive to public interest and make 11 changes quicker. 12 But what would be the role of you, as 13 the Commissioners, under this new proposed structure. 14 Well, the Executive Director must obtain approval from 15 the Commission before approving game procedures or 16 changes -- or changes to game procedures that involve 17 any of the following. So we would come to the 18 Commission if we were going to introduce a -- a new 19 on-line game, or if we were going to change an 20 existing game matrix or a play style, if we were going 21 to change the means of selecting the winning 22 combination of symbols or numbers that would require 23 your approval, if we were going to change the price of 24 a play, other than a change made in connection with 25 the promotional bonus or add-on feature, we would come 0065 1 to you. So let me give you a brief explanation of 2 that. If we were going to, let's just say for example 3 purposes, make a Cash Five wager two dollars instead 4 of one dollar, we would come to you for approval 5 for -- for that game procedure. That's what that is 6 referencing. If there was going to be a short-term 7 promotion that might impact the price of a play, then 8 under this proposed structure, we would not come to 9 the Commission for approval on that. Change in the 10 frequency of drawings, change in the prize structure, 11 again, this is very similar to the price of a play 12 item. If it was a change in the prize structure that 13 would go on from a certain point forward, we would 14 come to the Commission for -- for that level of 15 approval. If it was a change in the prize structure 16 for a short-term promotion, the Executive Director 17 would be able to approve that procedure. If there was 18 a change in the percentage, if any, of sales that was 19 allocated to a prize reserve fund, that would require 20 your approval. And, lastly, if there was going to be 21 a change in the payment options that were available in 22 a game, we would come to you for approval on that 23 feature as well. 24 So just to go through -- 25 COMMISSIONER COX: Robert. 0066 1 MR. TIRLONI: Yes, sir. 2 COMMISSIONER COX: I guess this might 3 be the appropriate time to ask you to go back. 4 MR. TIRLONI: Sure. 5 COMMISSIONER COX: On the fourth 6 bullet, the bottom one on the left. 7 MR. TIRLONI: Uh-huh. 8 COMMISSIONER COX: I need to 9 understand -- I understand what a promotional item is 10 and you've told me that was a temporary or short-term 11 thing. I need to know what a bonus or add-on feature 12 is. 13 MR. TIRLONI: For example, if we wanted 14 to -- you know, there are all -- they kind of overlap. 15 If we wanted to run a promotion where you could buy 16 five Lotto Texas tickets for the price of four. 17 COMMISSIONER COX: And I would call 18 that a promotion. I would call a Megaplier an add-on 19 feature. 20 MR. TIRLONI: Yes. And if we were 21 going to -- if we were going to add something like a 22 Megaplier, I think that would fall under the change in 23 game matrix or play style, so we would be bringing 24 that -- we would be bringing that request to you as 25 the Commission. 0067 1 COMMISSIONER COX: Well, those two, 2 bonus and add-on feature, are very fuzzy for me. 3 MS. WOELK: I think Gary had some 4 thoughts about what we wanted to cover there. 5 MR. GRIEF: And that's -- that's the 6 purpose of proposing a rule, Commissioner. My 7 thought, my understanding of that, is that a mega -- a 8 multiplier feature is exactly an add-on feature. And 9 that was one of the items that we were contemplating 10 that would not have to be brought in front of the 11 Commission. But if the Commission feels differently 12 about that, we can easily move that across to the 13 other -- to the other page. 14 COMMISSIONER COX: To me, that is what 15 Robert said, it's a change in the play style or in the 16 game matrix, or something to that. I -- I am not 17 comfortable with not knowing about changes as 18 important as adding a Megaplier feature to Lotto 19 Texas. 20 MR. GRIEF: See, and I -- I would like 21 to try to clarify. The not knowing, I view that as 22 different than approval. I think, certainly, any 23 change to any of the games is something that needs to 24 be brought to the attention of the Commission, if 25 nothing more than as timely and relevant information. 0068 1 What we're talking about here is formal approval in a 2 Commission meeting of any of these items. And, 3 Commissioner, if -- if you're thinking that the 4 Commission needs to and wants to have authority to 5 formally approve add-on features, bonus features, then 6 we can easily move those over to -- to the Commission 7 approval area and take those out of the discretion of 8 the Executive Director. 9 COMMISSIONER COX: Well, the -- the 10 whole purpose of this thing is to enable a much more 11 rapid response to market conditions and I am in total 12 support of that. I -- at the same time there is a 13 two-tier process, one of which, the first tier of 14 which, or things like the promotional items, would 15 give the Executive Director instant authority to 16 change. The other would require that -- might require 17 as much as a month's time before the change could take 18 place. Would that be your understanding? 19 MR. GRIEF: Yes, it would. 20 COMMISSIONER COX: And I would really 21 like to give the Executive Director as much authority 22 as possible to make minor changes, if you will, and 23 temporary promotions and experiment. You know, last 24 month or the month before, Chairman Clowe challenged 25 you to try different things, try new things, and 0069 1 that's what I think this will let you do. And yet I 2 am not comfortable with leaving something as important 3 as the potential for a Megaplier feature on Lotto 4 Texas to the staff's discretion. So I don't know how 5 we change that, and maybe we just change it based on 6 what we agree that means. I don't know that the words 7 have to be changed as long as we have an understanding 8 that things that are of that magnitude fall up into 9 change in game matrix, and other things like five for 10 four, or on Gary's birthday, or that kind of thing are 11 promotional and do not require Commission approval. 12 MS. WOELK: The simplest way to change 13 the words in the three places this occurs is to change 14 it to read, any temporary promotional feature, and 15 delete the words, bonus or add-on. That -- that 16 narrows quite a bit of the scope. 17 MR. GRIEF: I've got to agree. That 18 would be the easiest way to change it. 19 COMMISSIONER COX: That works for me. 20 MR. GRIEF: Okay. 21 COMMISSIONER COX: Then if you want to 22 try a Megaplier for Lotto Texas on a temporary basis 23 and see if it works, you would have the authority to 24 do so. 25 MR. TIRLONI: So to talk a little bit 0070 1 about the -- the process that we're considering. The 2 on-line game rule, this new concept that we're 3 proposing, if -- if the Commission approves this rule 4 for publication today, the rule will publish in the 5 Texas Register, and like any rulemaking, public 6 comment can be submitted. Staff believes that the 7 proposed rule will be ready for your consideration for 8 adoption in early 2006. And if the Commission chooses 9 to adopt that rule, staff will then present game 10 procedures for each of the five on-line games. The 11 procedures for all of the on-line games, except Lotto 12 Texas, will not change the way the games operate. So, 13 basically, what we'll be doing is taking the on-line 14 game rules and converting them to procedures. The 15 Lotto Texas game procedure that we'll -- that we will 16 be presenting at that time will be a recommendation to 17 change the current game matrix. And if the proposed 18 rule is adopted and the procedures are approved, we 19 would then ask the Commission to consider the repeal 20 of the existing on-line game rules, because then at 21 that point, basically, we would be operating under 22 game procedures, so we would no longer need the game 23 rules. And then if all of this falls into place, the 24 on-line product category or the on-line product -- 25 products will operate in a very similar fashion to our 0071 1 instant products line or our instant products 2 category. 3 MS. WOELK: And then one added feature 4 that Gary mentioned is, we have a drafted a request 5 for an Attorney General opinion to seek confirmation 6 that our idea that the way we operate instant games 7 is -- is acceptable as part of -- as appropriate 8 procedure. I think staff's view is that the -- the 9 rulemaking process has to kick in once someone buys a 10 ticket, and then you will regulate the rights and 11 responsibilities between the Lottery Commission and a 12 ticket purchaser. But before that, the game design -- 13 that the statute makes pretty clear that the game 14 design, exactly how games work, is a matter that can 15 be decided in a process less time consuming than 16 actually the rulemaking process. But we are proposing 17 to get the clarification from the Attorney General. 18 CHAIRMAN CLOWE: Is that it? 19 MR. TIRLONI: Yes, sir. That concludes 20 the comments we wanted to make. We would be happy to 21 try to answer any questions that you might have. 22 COMMISSIONER COX: Mr. Chairman, I have 23 a -- I want to speak in favor of this. 24 CHAIRMAN CLOWE: Please do. 25 COMMISSIONER COX: If that's 0072 1 appropriate. 2 I've been at several meetings where all 3 of the appropriate vendors and all of the appropriate 4 staff addressed changes to Lotto Texas. And at the 5 most recent of those meetings, and there were folks 6 from all over the country there talking about changes 7 to Lotto Texas. And there were -- there was a slate 8 of changes proposed that would have changed virtually 9 every feature on the game, because every feature of 10 the game is -- was brought into question and somebody 11 thought they had a better way of doing it. And the 12 reason that there was so much anxiety about making so 13 many changes, I believe, was that the present change 14 process is so burdensome that once you make a change, 15 you live with it for a year, because it takes six 16 months to find out what effect it has, if you can 17 measure the effect, as he shows, another three or four 18 months to get it approved, and before you've got the 19 change, it's a year down the road. And what was being 20 proposed were so many changes that if it had worked, 21 we wouldn't have known what worked, because we were 22 changing six different things. And at the and of that 23 meeting, I think everybody was about equally 24 frustrated, and Robert brought up the idea, what if we 25 just had a rule -- change in the rule that said that 0073 1 we could make changes as we considered appropriate. 2 Then we could change one thing and monitor it, we 3 could change another thing and monitor it. We could 4 fine tune the game, as opposed to every change being 5 like the Normandy Invasion. And, to me, that was just 6 a -- a way of clearing the air totally and saying, 7 this is what we should have been doing all along. And 8 Sarah has done a wonderful job of putting that idea 9 into this rule, and I think it's exactly what we need 10 to be doing. 11 CHAIRMAN CLOWE: Thank you. 12 I would like to ask some questions. 13 How did we get started in this procedure? I think 14 it's clearly to be understood that for the instant 15 games, there is a procedure. For the on-line games, 16 there is a rule. And Sarah has indicated that we're 17 going to need to ask the Attorney General if this 18 change falls within the scope of our authority. How 19 did we get started this way? What got us down this 20 path the way we are? 21 MS. KIPLIN: Commissioners, I'll -- 22 when I began in 1993, the Comptroller was still 23 overseeing the lottery. And the model, as I recall, 24 was the on-line game rule, and then at that point, 25 Lotto Texas, and then they were in the process of, I 0074 1 believe, adopting Pick 3. The instant game were 2 instant game procedures. And I can't give you any 3 other information other than that as -- from a 4 historical perspective. I probably recall, 5 anecdotally, the issue had to do with moving these 6 instant games quickly. That to try to include in a -- 7 in an instant game rule or to have rules using that 8 word "rule" for each of the instant games, that from a 9 business operating model, really -- you really 10 couldn't accomplish it because of the rulemaking 11 timeline. And that the standards in -- for the 12 instant games were in the instant game rule. And 13 that's the best of my recall, and that may be -- that 14 may be off. 15 MR. GRIEF: Would you like me to add to 16 that, Mr. Chairman? 17 CHAIRMAN CLOWE: Yeah. Because from 18 what I'm hearing to this point from Kim -- and thank 19 you for that effort -- is that it just wasn't 20 practical for the instant tickets, but as we developed 21 the on-line games, this lengthy procedure was 22 practical. And I want to get some of the 23 practicalities of that as we go through this 24 discussion. Okay, Gary. 25 Did I hear you right, Kim. 0075 1 MS. KIPLIN: Yes. And the only other 2 thing that kind of came into my mind had to do with, 3 at that time, there -- the sales for Lotto Texas were 4 on, as best I can recall, a constant incline. There 5 wasn't a need to -- to go back and, you know, revisit 6 the Lotto Texas game. And really, from my 7 recollection, the real focus was on creation of new 8 on-line games. 9 CHAIRMAN CLOWE: Yeah. I think that's 10 a -- that's a good follow-up point. 11 MR. GRIEF: And my -- I think I have 12 similar comments. Just my -- my recollection, when we 13 started selling tickets in May of 1992, we developed 14 the instant game rule and procedures for all the 15 instant games that followed. There was a tremendous 16 amount of buildup in November of '92, just for one 17 game on the on-line side, Lotto Texas. There was a 18 lot of time and effort put into creating that game 19 rule for Lotto Texas. After that game got up and 20 launched, then you had another buildup of time, 21 months, if you will, for the next game, which I think 22 was Pick 3. And then a similar process as we evolved. 23 As we kept adding on the on-line games, you had a rule 24 development process that occurred. 25 I know Sarah and I have talked about 0076 1 her research that she has drafted this rule. When we 2 started, as in every state that starts a lottery, 3 there is a tremendous push to get things up and going. 4 And there is a lot of reach out to other states to 5 look at their language and what they did and their 6 rules. And so the Comptroller's Office, which was 7 actually doing that for us at the time, was grabbing 8 language from other states and incorporating that. 9 And whatever they saw out there in other states, 10 that's what they did, because you didn't, quite 11 frankly, have time to reinvent the wheel. And you 12 only had a certain number of weeks or months to get 13 the lottery started. 14 I have noticed, and I'll give you this 15 example, in Oklahoma where they're -- they have moved 16 to this model that we're proposing for you today on 17 their on-line games. They are proposing an 18 overarching on-line game rule and procedures for 19 on-line games. And I believe that based on probably 20 the research that they did and what we've done, I 21 believe that -- that they're seeing that as the most 22 practical way to approach it, just like we do with the 23 instant product. As time goes on, you will see a 24 continual melding of the two products anyway, as the 25 technology becomes greater and greater. I think it 0077 1 just makes good sense to move in that direction, to 2 have them done in a uniform fashion. 3 COMMISSIONER COX: Mr. Chairman, we 4 asked several months ago, when we were looking at the 5 present Lotto Texas rule, why is there the division 6 between indirect prize expense and direct prize 7 expense, which is confusing language that didn't seem 8 to serve any purpose. And if I recall, the answer we 9 had from the staff was, we don't know. Basically, the 10 same thing Gary said. Somebody way back there before 11 any of us reached out and grabbed somebody else's rule 12 because they were in a hurry. 13 CHAIRMAN CLOWE: Well, I agree with 14 everything you've said, and it sounds to me like 15 you've been doing something about this, and I've just 16 been talking about it. And I -- I have some questions 17 as to the protection of interested parties in this 18 regard. 19 First of all, it appears to me that you 20 are being responsive to the idea that we need to be 21 able to innovate and create attractiveness and change 22 these on-line games from time to time, without the 23 Invasion of Normandy being involved. That's a good 24 example. And the eight action items that you said 25 there were Commission responsibilities, in my mind, 0078 1 seem to be everything that you could think of that was 2 significant. That's the way I would categorize this, 3 that there wouldn't be anything significant that would 4 occur that the Commission wouldn't be made aware of in 5 oversight. Is that fair? 6 MR. GRIEF: Yes, sir. 7 CHAIRMAN CLOWE: Is there anything 8 beyond those eight that you can think of that would be 9 a significant event that isn't included? 10 MR. GRIEF: Perhaps it would be helpful 11 for -- Sarah would probably be the best person to give 12 you the items that would be under the discretion of 13 the Executive Director, to hear that laundry list. 14 CHAIRMAN CLOWE: I think that would be 15 helpful. 16 MS. WOELK: I might start from a 17 different perspective and explain where we came up 18 with the list, generally. I looked at all the 19 current -- our current rules plus the rules from other 20 states to see what kinds of things seemed to be on the 21 table to decide about games at all. And we think we 22 came up with the things that are of considerable 23 public interest and the players are really concerned 24 about on this list. I would say, if we thought of 25 something else later, it would certainly be brought to 0079 1 the Commission to seek approval, even if the rule 2 didn't require it. So that there would be that. But 3 the -- the -- some of the things we list is the -- the 4 circumstances under which money from one draw would be 5 carried forward to a next. That's the concept that 6 used to be hidden in long terms like direct and 7 indirect and rollover, and we have reduced that to, 8 basically, what happens if you've got money left over 9 you -- and how that gets carried forward. That's a 10 procedure issue. The -- the information that has to 11 be on a ticket, when you can cancel a ticket, which is 12 currently a concept like it is in Pick 3. When you 13 can sell tickets for advanced play. When you can sell 14 tickets -- multi-draw tickets. Those are all -- and 15 promotional items. Where claims have to be presented, 16 which ones have to come to Austin. Things about, more 17 or less, the minor details of how the game works. And 18 multi-draw and advanced play are both rules that I 19 learn now, from talking to Robert, and multi-draw are 20 criticals which involve -- which down the road you're 21 trying to change games. So you might find that you 22 don't want to -- to sell so far forward in the future 23 if you're finding you're changing your games more. 24 And that -- those kinds of changes, how the ticket 25 looks, those are built into the procedures and not 0080 1 carried forward to Commission approval. And I suppose 2 there is even lesser issues that weren't really -- 3 aren't covered in any of the current on-line game 4 rules at all, and you generally have them in written 5 procedures. And I think the idea is, as you go on, 6 you would realize there are more things that may need 7 to be in procedures. Anything that's -- anything that 8 you find you're uncertain about what you're supposed 9 to be doing need to be written down somewhere. And 10 the questions -- or we can do that in procedures, or 11 is that the magnitude that we need to come before the 12 Commission. But I think -- I mean, we sat down and 13 had a pretty long meeting trying to decide what we 14 thought were the issues that have generally been of 15 considerable concern and -- and tried to put those on 16 the Commission approval side. 17 COMMISSIONER COX: Mr. Chairman, I was 18 in that meeting. 19 CHAIRMAN CLOWE: And you were 20 satisfied? 21 COMMISSIONER COX: Yes. We -- we 22 started with a list that had, I think, five items for 23 Commission approval and, let's say, 23 items that were 24 in staff's discretion, and we went through those one 25 by one and, I think, ended up with eight, three more 0081 1 that required Commission approval, and 23 fewer that 2 the staff had discretion on. 3 CHAIRMAN CLOWE: So in your opinion, 4 based on your work with this group, there was a clear 5 definition between significant items that would come 6 to a Commission's attention, and more what I would 7 call operational items, that would be under the 8 discretion of the Executive Director. 9 COMMISSIONER COX: Yes. It was very 10 clear -- there were certain items that were very 11 clear. What color a play slip is was never on the 12 table for us. But, really, the one item that we got 13 to that we didn't quite have a finalization on the 14 words was the one that we just covered, the what is an 15 add-on feature and what is a bonus. And I think that 16 the temporary -- the word, temporary, that Sarah 17 suggested there, is the appropriate solution to get 18 that where it belongs. 19 CHAIRMAN CLOWE: And I thought, as you 20 commented, that the multiplier feature would be a 21 matrix change. I saw it coming and I think there was 22 a second. 23 COMMISSIONER COX: Yes, sir. 24 CHAIRMAN CLOWE: Then I want to go to 25 another question relative to the abandonment of 0082 1 rulemaking for each of these on-line games. That 2 practice, cumbersome and lengthy as it is, has always 3 given the public an opportunity to speak to changes. 4 How is the public's interests called for in this 5 proposal? How will interested parties be able to have 6 a forum to express their thoughts about procedural 7 changes in the on-line games? 8 MR. GRIEF: Well, first, this rule that 9 is in front of you today, to move to a general on-line 10 game rule, will go through the normal process. 11 CHAIRMAN CLOWE: I understand that. 12 MR. GRIEF: There will be a public 13 comment period -- 14 CHAIRMAN CLOWE: What I'm -- but I'm 15 wondering where you are right now with provision for 16 public input. 17 MR. GRIEF: Similar to where we are 18 with the instant tickets. We take public input 19 through a variety of methods. We receive phone calls, 20 we receive written correspondence, e-mailed 21 correspondence, and from time to time, we have 22 interested members of the public come to a Commission 23 meeting and give comments on general items. Once in a 24 while, it does apply to our games. Other than that, 25 Sarah, is there anything you can -- 0083 1 MS. WOELK: Well, I think that they -- 2 one thing we discussed is that a pretty convincing 3 expression of the public's view is whether they buy 4 the tickets or not. And I think one thought we had is 5 that seeking -- and we're -- certainly, that would be 6 included, seeking public view up front, that maybe 7 when it's out on the street and they just don't buy 8 the tickets, that's the strongest statement we have 9 from the public that they didn't like the idea. And 10 this new concept allows you to say, okay, we heard the 11 public loud and clear. We're going to try something 12 different or return to where we were. So I think -- I 13 think there is a thought that the public, in terms 14 of -- there are other public interests other than just 15 whether or not they buy tickets. What -- but the 16 thing we have been trying to establish is, do people 17 like this game, and we've done that with lengthy focus 18 groups. And I think this creates a little smoother 19 environment for saying, well, the best way to test it 20 is to actually put it out there and see if people buy 21 it. 22 COMMISSIONER COX: Mr. Chairman. 23 CHAIRMAN CLOWE: Yes, sir. 24 COMMISSIONER COX: One of the things 25 that paralyzed us in trying to get this matrix change, 0084 1 this last matrix change, the one that we will do next, 2 in place, was that even the extensive public opinion 3 work, the focus groups, et cetera, that Ipsos Reid 4 does, were inconclusive. One focus group would say X, 5 another focus group would say Y. And the -- when you 6 have your public hearings, you're going to hear from a 7 few people. You might even hear from a bunch of 8 people. Often they have a certain conclusion, but 9 you're not going to hear from the adult population of 10 Texas and adjoining states and people passing through. 11 We can't poll them all. And if we did, one of the 12 things that we've learned is that what they tell us 13 and what they buy are different things. 14 So I think Sarah expressed it very 15 well. You know, we have to gauge the market the best 16 we can, just like Procter & Gamble gauges the market, 17 and just like any other company selling a consumer 18 product has to gauge the market, and folks are going 19 to let us know and we want to know in a lot of 20 different ways, but the ultimate test is, did they buy 21 it. 22 CHAIRMAN CLOWE: That's right. 23 COMMISSIONER COX: And this enables us, 24 if they don't buy it, to quickly change the product, 25 rather than taking another year to be able to make a 0085 1 change. 2 CHAIRMAN CLOWE: And I'm very 3 responsive to that and I think that that's well said. 4 And I think, Sarah, that you gave a good answer, that 5 people vote with their pocketbook, and that, in truth 6 and in fact, they're currently voting against 7 Lotto Texas because it's not attractive. And we've 8 tried, through the Normandy Invasion procedure, to 9 change that game, I guess, now, what is it? Three 10 times. And we're still not doing what I have been 11 asking for, and that is, to turn it around. 12 But I have an inner voice that says, 13 this is the public's business, and this is change. 14 And I want to get that inner voice satisfied that, for 15 all the reasons that you have come up with -- and, 16 Commissioner Cox, your comments are eloquently 17 stated -- that we are satisfying a public need to 18 participate in this and to be involved that is, if not 19 formalized through going through the 30-day comment 20 period, there is a reaching out, there is an effort on 21 the behalf of the staff and the people who are 22 involved in this process to take input as the process 23 unfolds, before we get to the issue of, well, I don't 24 like that game and I'm not going to buy the tickets. 25 If you do that, you are successful in the end result. 0086 1 Coca-Cola forgot to do that when they went to the new 2 Coke, and they had to go back and change and come up 3 with Classic Coke. And they misread -- they didn't 4 get their population input of buyers. And I would 5 like to express this because we're in the discussion 6 period right now. We're not doing anything on this 7 today, except possibly a vote to publish it. But I -- 8 I have an inner voice that's saying, make it easy for 9 the public to enter into the process and to give you 10 their comments as you work on these projects. And, 11 Commissioner Cox, I think you're right. It's -- it's 12 hard to get a broad based comment and it's hard to get 13 those people who are really buying, and I think we 14 have an obligation to make that effort as much as we 15 can, and I would like to see some effort expended 16 along those lines. 17 Then I would like to ask in more detail 18 about the request of the Attorney General's opinion. 19 I understand it's contemplated that it would be 20 requested relative to our practice and our procedure. 21 Give me the bottom line on that, a little firmer 22 definition. We've been doing this procedure on the 23 instant tickets, we've been doing rules on the on-line 24 games, and what is the real question behind the 25 Attorney General's request for an opinion? What is it 0087 1 we're going to be asking them? And help me understand 2 that change clearer. 3 MS. WOELK: Okay. Ultimately, there 4 are certain things that agencies have to do by rule, 5 and that pinpointing that can be a little difficult, 6 where that line is, sometimes. I -- but first you 7 have to go to your own statute and see if it clarifies 8 what has to be done by rule. And I would say that you 9 read the lottery statute, it says a lot of things 10 about the Executive Director decides to do this or the 11 Executive Director decides to do that. The 12 implication is that the drafters of that statute 13 thought that the Executive Director would be designing 14 the games and those would be designed through the rule 15 process. Historically, for some reason, we have made 16 a distinction between instant and on-line games in 17 terms of the process they went through. But there 18 is -- there is no legal reason in the -- either the 19 statute or in the rulemaking rules that would suggest 20 one has to be treated one way and one has to be 21 treated another. In fact, as far as I can tell, the 22 distinction between instant and on-line was never even 23 recognized in the statute until a few years ago when 24 they added a provision about how long a ticket was 25 valid until you had to pay off. So I -- the 0088 1 distinction in the way the design was handled was 2 based on practice, not on anything in the law that 3 suggested one was required to go through one process 4 and one was required to go through another. So the 5 question is, ultimately, were we correct in regard to 6 instant games, that design of games is not the type of 7 issue that needs to be resolved in the rulemaking 8 process. Because for many years, the Commission has 9 operated on the assumption that game design decisions 10 weren't the kinds of agency decisions that had to be 11 made in the rulemaking practice -- in the rulemaking 12 process. So I think that there is just some 13 concern -- probably a lingering legal issue is, by 14 doing it one way for many years and not another, you 15 somehow commit yourself forever to doing it that way, 16 and I think that was sort of a larger concern. I'm 17 pretty comfortable about reading the statute and we 18 were starting out fresh. They're -- the statute makes 19 it pretty clear that game design decisions are 20 internal management decisions, but because for 12 21 years or so they have been handled as part of the 22 rulemaking process, I think we wanted to get some 23 comfort that just our internal practice somehow didn't 24 bind us, therefore, for all time to continue that 25 practice. 0089 1 CHAIRMAN CLOWE: And I think that's a 2 good position to be in, just wanting to make certain 3 that if the Commission wants to do this, it's legal 4 and it's proper to do it. 5 And I think you gave a good 6 explanation, Gary, about reaching out, as the lottery 7 grew very rapidly, and taking in -- pardon me -- 8 practices that came from perhaps other states. 9 And, Commissioner Cox, I think you're 10 on target. We need to be able to do these things 11 timely and correctly. The issue is, to me, can we 12 involve the public properly and can we be within what 13 is legally correct. What is the odds of the Attorney 14 General saying, we won't opine on this, but the agency 15 can do what it wants to do? 16 MS. WOELK: Well, I -- you know, I 17 reviewed just opinions that have been issued in the 18 last couple of years, and I think there is a chance 19 they'll way -- I think we've structured the question 20 in the right way to say, are we correct in our 21 conclusion that these kinds of decisions were left to 22 the Executive Director. I think that's a question 23 they can give us an up or down, yes or no, on. I 24 think it's possible we'll get an answer, which is, 25 it's your job in the first instance to figure out how 0090 1 this has to be done. But that's -- then that would be 2 you job to -- 3 CHAIRMAN CLOWE: I think that's very 4 likely. 5 MS. WOELK: Yeah. 6 Let me add one thing about public 7 comment. To the extent that any major change would be 8 noticed up for a meeting, people would have the normal 9 notice that that was coming up for a meeting, if you 10 were doing it in a process outside the rulemaking 11 process, you wouldn't have to turn people away at the 12 meeting from discussing it for failure to have -- for 13 not having availed themselves of the official public 14 comment mechanism. So I think you could at least 15 argue that you could have more meaningful and 16 on-the-spot public comment if it -- because I think 17 the rulemaking process actually can disadvantage 18 people to suddenly realize what is going on and want 19 to comment when a decision is about to be made. So 20 there is that to be said for a slightly different 21 approach to where these things would be discussed -- 22 CHAIRMAN CLOWE: That's an excellent 23 point. And in itself it is cumbersome at times and 24 maybe doesn't encourage people really to express 25 themselves and feel like it's effective. I think 0091 1 that's an excellent point. 2 COMMISSIONER COX: It is. And, Sarah, 3 help me remember. The agenda has to be published how 4 far in advance of the meeting? 5 MS. WOELK: To be published eight days 6 or seven. 7 MS. KIPLIN: It's -- it has been to be 8 published seven days in advance, but you can't count 9 the day you filed and you can't count the day of, so 10 it works out to be nine. 11 COMMISSIONER COX: Okay. So let's say 12 that -- let's say this rule has passed and we're a 13 year down the road, and Gary wants to bring some 14 changes to the board for consideration. X number, 15 nine days before, the agenda has to be published that 16 says that Gary is going to do this, and by what day 17 would the public have access to Gary's 18 recommendations? 19 MS. KIPLIN: In the form of a game 20 procedure? 21 COMMISSIONER COX: Yes. 22 MS. KIPLIN: That -- well, of course, 23 the day that the meeting's notice is posted begins to 24 give the public notice that that topic will be 25 considered if it's coming to the Commission for 0092 1 approval. It -- if it's not one of those, we'll file 2 those procedures, and I'm hearing, also, post them on 3 our website. The -- similar to the instant game, we 4 would not begin to sell tickets under the new game 5 procedure until the game procedure has actually been 6 printed in a publication of the Register. And so 7 there is potentially a two-week delay from the day 8 that it's filed with the Register and the date it 9 actually presents itself. 10 COMMISSIONER COX: Okay. What I was 11 trying to get at, Kim, was, nine days before we will 12 consider it, it has to go on a piece of paper that 13 says we're going to consider it. 14 MS. KIPLIN: That's correct. 15 COMMISSIONER COX: How many days before 16 would the document -- that someone would make an Open 17 Records Request and obtain Gary's recommendation? 18 MS. KIPLIN: Well, that invites 19 another -- another, I guess, factor, which is, he may 20 still be working on his recommendation and there may 21 be an exemption to the Open Records Act. Let's assume 22 that's not the case and it's going to be produced. A 23 person could submit an Open Records Request and the 24 Act requires it to be produced promptly. I believe 25 there is a ten-day threshold, and I -- I believe our 0093 1 Open Records coordinator has -- has provided 2 information responsive to a request on an earlier -- 3 earlier timeline. It depends on the nature of the 4 request, obviously, and where she -- where she is in 5 queue. We take open records requests in queue, and 6 begin to work -- you know, and, of course, when the 7 information comes in, we provide it as it's -- as it's 8 coming in. And I don't -- that might be too lengthy 9 of a timeline. 10 COMMISSIONER COX: Well, would it make 11 any sense for us to have a procedure, or even a rule, 12 that X number of days before this meeting, Gary's 13 proposal, the Executive Director's proposal would be 14 posted on the website? Giving the public a reasonable 15 period of time to provide written comment and to 16 appear at this meeting with prepared comments. 17 MS. KIPLIN: And maybe -- and I'll 18 defer to, Sarah. She's -- she is the attorney that's 19 actually been assigned to this project. But it may be 20 that what the Commission might want is to include that 21 kind of provision in the on-line game rule itself. 22 COMMISSIONER COX: Okay. 23 CHAIRMAN CLOWE: That's exactly the 24 kind of thing that I hope we might come up with. I 25 don't want the public to be blindsided. I want what 0094 1 you're thinking. 2 MR. GRIEF: Can I seek some 3 clarification on your request, Commissioner? 4 CHAIRMAN CLOWE: Yes. 5 MR. GRIEF: Are you -- in doing just 6 what I heard, are you looking to put in the same 7 processes that we do now for official comment? That 8 is, a summary of the comment by the agency, a -- a 9 response back from the agency on the written comment, 10 or are you just looking to give the public an 11 opportunity to comment and those are then, in fact, 12 provided to the Commissioners as information? 13 COMMISSIONER COX: Well, I'm going to 14 throw that one back at you, Gary, and your staff. 15 What I was trying to do was -- was describe what I 16 heard Sarah saying, which I think is a very worthwhile 17 addition to this process. And whether it be formal or 18 informal, that the public know what you're going to 19 recommend enough in advance that they could provide 20 us, either in writing or at this meeting, with 21 meaningful comment that we could consider and that you 22 could consider in determining whether this is really 23 something we want to go ahead with or not. Now, 24 certainly, we look to the public as to how they vote 25 their dollars, we look to the Ipsos Reids and other 0095 1 marketing research that we do, and we, I'm sure, 2 receive comments at our retailer meetings. There are 3 lots of places we get information from the players of 4 what they want and what they don't want. But this 5 would, I think, recognize, as Chairman Clowe says, 6 that public comments -- the formal public comment 7 process is valuable and we should incorporate it in 8 this process. 9 CHAIRMAN CLOWE: And this is a good 10 discussion, because it's not an easy decision to come 11 up with. Now, I think they've clearly identified that 12 the publishing of the agenda is not adequate notice to 13 the public, nine days before the meeting. It doesn't 14 give the public the time to examine and get ready and 15 be here. There has got to be something prior to that. 16 And if, in my mind, you and the staff are doing your 17 job, you will be reaching out and getting input before 18 you are proposing something that has significant 19 change as part of its makeup. There is a balance 20 there, and it's not easy. But it hasn't been easy in 21 the past. And we have wrestled with, for example, the 22 changing of the Lotto Texas matrix. My recollection 23 from the first time we tried to do it, we decided not 24 to do it after we had a town hall meeting. And then 25 after a while, we decided to do it. And then we did 0096 1 it again. And we always decided in our votes what we 2 thought was the right thing to do, but we've always 3 gotten good comment on -- or we've gotten no comment, 4 which is comment in and of itself. And I just -- I 5 think it's difficult. And I think Commissioner Cox is 6 doing the right thing in putting this back to you. 7 And the Commissioners will want to feel that the 8 public has been involved and has participated, whether 9 it's pro, con, neutral, or whatever, before they're 10 comfortable with one of these significant changes. 11 And that's sort of the burden that comes with the 12 opportunity to do this. And I think, again, 13 Commissioner Cox stated all the good reasons for 14 flexibility and, hopefully, a positive result inuring 15 from that. 16 MR. GRIEF: And I think, Mr. Chairman, 17 based -- and I understand you may not be through with 18 your questions and discussion, but based on that fact, 19 I think we would want to spend some more time on the 20 drafting of this rule. 21 COMMISSIONER COX: Gary? 22 MR. GRIEF: I'm not sure we can fix 23 that today, and I think staff was prepared -- we were 24 somewhat anticipating it may take us more than just 25 one run at asking the Commission to propose this rule. 0097 1 COMMISSIONER COX: Well, let's see if 2 we can, because changing this -- you know, we can't 3 change -- Lotto Texas needs change. And we can't 4 change -- well, we -- this is the boat that we have 5 chosen to try to get us across the river to change 6 Lotto Texas. And I would really like to get that boat 7 moving. 8 Now, is it possible that we could agree 9 in concept as to what your procedure will be, that is, 10 that at that nine-day frame when the agenda goes out, 11 it says, there is going to be a change to one of these 12 on-line games, that it would just be our practice that 13 your proposal would go -- would go on the website that 14 day or it would wouldn't go on the agenda? 15 MR. GRIEF: I could certainly agree 16 with you on that. I would just ask the legal team to 17 help us through the process. 18 MS. WOELK: Well, I think I may have 19 heard that you would like it to actually be part of 20 the rule. The -- 21 CHAIRMAN CLOWE: No. No. 22 MS. WOELK: Okay. I didn't hear that. 23 CHAIRMAN CLOWE: No. I'm expressing 24 simply a desire to include the public and receive 25 input, but I'm not going to suggest the structure. 0098 1 MS. WOELK: Okay. Because if it needs 2 to be in the rule, it should probably be added before 3 adoption is considered today, because I think that's 4 arguably a material change. I don't think it's very 5 hard to ask -- sentence something like, the Executive 6 Director must post on the Commission website any 7 change for which the -- he seeks Commission approval 8 at least 15 days before the meeting in which the 9 Commission will consider the matter. I mean you -- if 10 you -- I also heard a suggestion that nine wasn't 11 enough, so if you -- if you want to actually have a 12 posting of the -- 13 CHAIRMAN CLOWE: Well, my thought is, 14 before you make the publication in the Texas Register, 15 the nine-day period starts to run. You know what you 16 want, you have got it tick-tight and patted down, and 17 why not give the public the earliest opportunity to 18 view it that you can. I don't want an impression that 19 the train is leaving the station when it's published 20 in the Texas Register and commenting is -- is a waste 21 of time. I would like to -- yeah, 15 days sounds good 22 to me. 23 COMMISSIONER COX: I would be perfectly 24 happy approving this rule for comment with the 25 suggestion that -- that Sarah made. 0099 1 CHAIRMAN CLOWE: Yeah, and I -- I think 2 you're on the right track there. I think, you know, 3 we want to get something started here. In approving 4 the rule for consideration, we have one person who 5 wants to speak against it and I think that's good. We 6 ought to start the comment today. 7 COMMISSIONER COX: Sure. 8 CHAIRMAN CLOWE: And I think so many 9 times we pass these things and nothing happens for the 10 longest time. I would like to see something started, 11 which is what you and I have been asking for. That 12 puts it back in your court. 13 MR. GRIEF: I think we're ready to move 14 forward. For example, we are able to put on-line on 15 the website, as the General Counsel has mentioned, an 16 area where people can make on-line comment. Perhaps 17 we can come up with a procedure that will allow some 18 number of appropriate days for people to make those 19 comments prior to the item coming up for Commission 20 consideration. 21 CHAIRMAN CLOWE: And how does that run 22 concurrent with the request for the Attorney General's 23 opinion? You're not going to get that in 30 days, are 24 you? 25 MS. WOELK: That's a theoretical 0100 1 possibly, but it's a -- probably unlikely. Right. 2 And if -- but I think the idea is that we would send 3 that out quickly and hope for the best there, but 4 there is always that -- that mystery factor in the -- 5 in the timeline. 6 CHAIRMAN CLOWE: But you're not going 7 to suggest the Commission act until the opinion is 8 received once it's requested. Right? 9 MS. WOELK: I think the idea was 10 that -- actually, the way the opinion is drafted, it 11 actually says, the Commission had proposed rules. So 12 it anticipates that the rule would have been proposed 13 and be laying out there for public comment. That, 14 obviously, can be changed. But, yeah, I think the 15 idea is it would stay out there in its pending form 16 until we heard back. 17 CHAIRMAN CLOWE: Okay. 18 MS. KIPLIN: But I do need to put one 19 time limitation out there for you all. And that is 20 that once a rule is proposed and published, the agency 21 must act on that proposal within 180 days or it's -- 22 it expires, it's withdrawn. 23 CHAIRMAN CLOWE: Yeah. And my 24 anticipation would be that they would. Okay? 25 Any further questions? 0101 1 COMMISSIONER COX: No. 2 CHAIRMAN CLOWE: Ms. Nettles, would you 3 come up, please, and talk to us about your feelings on 4 that? 5 MS. NETTLES: Good morning, 6 Commissioners. For the record, my name is 7 Dawn Nettles, and I'm with the Lotto Report out of 8 Dallas. And I have sat here and listened to you all 9 talk about this, and you've asked some very good 10 questions, to which I appreciate those. And, 11 Commissioner Clowe, I truly appreciate your concern 12 where the people of Texas are concerned. 13 The first thing I heard was that -- let 14 me make sure I understand this correctly. You're 15 trying to do away with the rules, more or less, and 16 turn them into procedures rather than rules. And you 17 started out by explaining that on the scratch tickets, 18 that those were procedures, and they were posted in 19 the Texas Register prior to selling the tickets. 20 Well, I hate to be the one to tell you all this, but 21 that is not always the case. There are many times 22 that those scratch tickets start selling that they 23 have never been posted in the Texas Register. And I 24 know that because I track them. And I know exactly 25 when they start, when they appeared in the Texas 0102 1 Register. That's been a serious problem with me for a 2 very long time. 3 But I -- all the same, I can understand 4 why there would be procedures for scratch tickets, 5 because they're just little pieces of paper and they 6 have different designs. And I can understand that 7 that is not a major deal for procedures. But as far 8 as the on-line games, switching over to procedures, 9 and from what I saw, I am really opposed to that. 150 10 percent. The reason is, if you all will recall over 11 the -- what I call the cheated winners issue. And the 12 internal -- the auditors here did a report, and in her 13 report she stated that there had been so many internal 14 policies on how to calculate the jackpot prize that 15 she couldn't even keep track of all of them. Do y'all 16 recall that? I hope so, because the internal policies 17 and procedures in this agency change quite frequently. 18 I can recall a time that a rule was proposed in May of 19 2001, and they wanted to do a -- they wanted to switch 20 over and guarantee the jackpot amount and only pay the 21 advertised jackpot amount. That took nine months to 22 adopt. I fought it tooth and nail, because I wanted 23 to make sure that the people of Texas got their share 24 of sales back. And there was no way to make for 25 certain that when the jackpot went up to 30, 40, 50 0103 1 million, that they couldn't underestimate sales and 2 the player that won would not get his share of sales 3 for his -- for the amount allocated to the winner. 4 That is also the case on the Mega Millions game. I 5 don't think that you should ever do anything on these 6 on-line games. On these procedures, this is a no, no, 7 because this agency is notorious for changing their 8 procedures. The -- the rule that finally got adopted 9 in February of 2002, did finally say that they would 10 guarantee the greater of either, the amount allocated 11 or the investment cost, which is the way that I term 12 that. That was fair, it was foolish, but they did it, 13 and that didn't really matter. 14 Y'all also said that -- I saw while ago 15 something about frequency of draws. Are y'all saying 16 that the Commission, through procedures, can change 17 the frequency of draws? Did I understand that right? 18 Could somebody just answer it, if that's a procedure? 19 Is that on the list of procedures? 20 CHAIRMAN CLOWE: That was one of the 21 significant events that would require Commission 22 approval. 23 MS. NETTLES: Okay. The number of 24 draws would require -- and it would be in the rule, 25 not procedures? 0104 1 CHAIRMAN CLOWE: It would be in the 2 procedures. 3 MS. NETTLES: So you're talking about 4 taking everything that's in the rule, the amount 5 allocated to each prize category, and changing it to a 6 procedure where there -- it doesn't go through the 7 rulemaking process? 8 CHAIRMAN CLOWE: Everything would be 9 covered under the general rule, and the procedures 10 would govern each game. 11 MS. NETTLES: Would the rule spell out 12 how many draws per week, just like it does now? 13 CHAIRMAN CLOWE: No. No, it would not. 14 MS. NETTLES: Okay. Oh, no, sir. I 15 beg you. Y'all are trying to restore integrity up 16 here. And this is a people's game. And for them to 17 be able to make these changes -- I heard you -- 18 Commissioner Cox, I respect your wanting to change 19 Lotto Texas. I agree with you wholeheartedly. I've 20 been calling for it for the last two years. Now, what 21 I would like to know, you all just adopted a new rule 22 to guarantee jackpots. Why didn't that rule change 23 the matrix? Why has this Commission wasted that time? 24 And you say, you've got to do this -- 25 CHAIRMAN CLOWE: Ms. Nettles, that's 0105 1 not really what we're talking about here. If you want 2 to make a comment about this discussion, it's 3 appropriate. 4 MS. NETTLES: Well, I am. He did make 5 it on this discussion. He just said it while ago. 6 CHAIRMAN CLOWE: But you're asking -- 7 you're asking the question and you're into an area 8 that's not covered by this agenda item. I -- 9 MS. NETTLES: Okay. Well, I'm really 10 confused, then, because Commissioner Cox said we need 11 to get this -- get Lotto Texas changed and we can't 12 until we adopt this rule. I don't understand that. 13 CHAIRMAN CLOWE: Okay. 14 MS. NETTLES: I mean, you did just say 15 that, didn't you, Commissioner Cox? Did I 16 misunderstand? 17 CHAIRMAN CLOWE: I don't think the 18 Commission is in a position to answer your questions. 19 We're in a position to take your comments. 20 MS. NETTLES: Okay. Well, and early on 21 in the conversation, too, I -- again, I know she came 22 back and addressed it, where that months ago they 23 couldn't address the issue about indirect and direct 24 categories. Well, I even explained that the very 25 first time it came up, and that just has to do with 0106 1 what carries over. The indirect amount is what wasn't 2 won in the last draw. The direct is what comes from 3 the current draw sales. 4 But in the interest of the people of 5 Texas, we need these rules and we need the -- the 6 30-day comment period. I do not -- I can't even 7 believe that y'all would sit here and consider, given 8 everything that's happened, allowing this much leeway 9 to staff. I thought that staff was going to come more 10 to the Commission for direction. And this right here 11 is just giving them complete 100 percent leeway on 12 changing anything they want to by way of internal 13 policies and procedures. And that has been a problem 14 for a very long time. And -- and the question while 15 ago about the open records, where -- maybe you, 16 Commissioner Clowe, or -- I'm not sure; maybe it was 17 Commissioner Cox -- asked, is it proper or could 18 somebody, from the time that they found out that there 19 was a change in the procedures, could they obtain 20 through open records. And Kim said, well, they're 21 supposed to be prompt. Well, Commissioners, let me 22 tell you. There is nothing prompt when it comes to me 23 and my open records requests at all. Never has been. 24 I have -- I have -- the last trends report that I 25 received was dated the 8th of October. And I've made 0107 1 open records requests and it's way past its ten days. 2 I have requested copies of the applications for the 3 executive director's job. I guarantee you, they wait 4 ten or 11 days and then they get it in the mail. The 5 last time it got lost in the mail and it took me three 6 weeks to get it. 7 CHAIRMAN CLOWE: That's not really 8 germane to what we're talking about. 9 MS. NETTLES: I -- no, sir -- but, yes, 10 sir, it is, because you very clearly asked -- 11 CHAIRMAN CLOWE: Okay. Let's move on 12 if we may. 13 MS. NETTLES: Okay. I -- I beg you. 14 CHAIRMAN CLOWE: You've made that 15 point. 16 MS. NETTLES: Okay. Please don't adopt 17 this rule. 18 CHAIRMAN CLOWE: Thank you. 19 MS. NETTLES: Please don't propose it. 20 Please don't approve it for proposal. Please let the 21 people of Texas in on our games. Thank you. 22 CHAIRMAN CLOWE: Thank you. 23 Any further discussion? 24 COMMISSIONER COX: No, sir. 25 CHAIRMAN CLOWE: I move the adoption of 0108 1 this proposed rule for publication, 16 TAC 401.304. 2 COMMISSIONER COX: I second. 3 CHAIRMAN CLOWE: All in favor, please 4 say aye. Opposed, no. The vote is two-zero. 5 MS. WOELK: Could we get some 6 clarification? Is that proposed with the addition of 7 the word, "temporary" in three places, in addition of 8 the clause that I read aloud to you? 9 CHAIRMAN CLOWE: That's correct. And 10 with the discussion that's been held here relative to 11 the subjects that the Commissioners wanted further 12 exploration on. 13 COMMISSIONER COX: Temporary, 15 days. 14 MS. WOELK: That's actually been added. 15 MS. KIPLIN: And so my understanding is 16 that what you've -- what you've done is, you've voted 17 to propose for public comment the changes as in -- by 18 you all. 19 CHAIRMAN CLOWE: That's correct. 20 MS. KIPLIN: Okay. 21 CHAIRMAN CLOWE: Next is item number 22 eight, consideration of and possible discussion and/or 23 action, including proposal, on repeal of 16 24 TAC 401.305, 401.307, 401.308, 401.312 and/or 401.315 25 relating to Lotto Texas, Pick 3, Cash Five, Texas Two 0109 1 Step, and Mega Millions on-line game rules, 2 respectively. 3 MS. WOELK: I'm sorry. Are you -- what 4 I'm worried about is, we missed the definition of 5 section -- 6 MS. KIPLIN: 301? Yeah. 7 MS. WOELK: -- that last item. 8 MS. KIPLIN: Mr. Chairman, I'm sorry. 9 Under item number seven, staff was requesting your 10 action on two different rules -- 11 CHAIRMAN CLOWE: So it's covered here? 12 MS. KIPLIN: We -- we can certainly 13 bring it up here. We sure can. If you will include 14 the consideration and possible discussion and/or 15 action, including proposal, on amendments to 16 Texas 16 Administrative Code, Section 401.301, relating to 17 general definitions. 18 CHAIRMAN CLOWE: Okay. I'm not clear 19 on what you're asking. 20 MS. KIPLIN: I'm sorry. 21 CHAIRMAN CLOWE: It seems like to me 22 that we've taken the step of publishing for comment. 23 Now, is this necessary? 24 MS. KIPLIN: Well, under item seven, 25 there were two rules that we wanted to propose for 0110 1 public comment. One, were changes to the general 2 definition rule to be consistent with the new version 3 of 304. And in your earlier vote, I heard 401.304. I 4 did not hear action on 401.301. And it may just be 5 that my hearing is just not good. And I'll defer to 6 Ms. Woelk -- 7 CHAIRMAN CLOWE: You're correct, and I 8 should have stated 301. I think I stated, what? 304? 9 MS. KIPLIN: Yes, sir. And it would be 10 on both that we were looking for action. 11 CHAIRMAN CLOWE: Yeah. And I -- and I 12 just overlooked that in my recitation, so let me go 13 back and propose that, and include 401.301 as well, 14 which was my original intent. 15 MS. KIPLIN: Thank you. So you're -- 16 COMMISSIONER COX: And is there a 17 second? 18 CHAIRMAN CLOWE: All in favor, say aye. 19 Opposed, no. The vote is two-zero. All right. Now, 20 I've picked that up. Do we need to go into item 21 number eight? 22 MS. WOELK: Yes. You need to propose 23 the repeal of that list of rules for public comment. 24 CHAIRMAN CLOWE: Okay. 25 MS. WOELK: It's a companion piece, 0111 1 the -- that you need to do that. 2 CHAIRMAN CLOWE: So this is a necessary 3 item to bring these up for repeal as we consider the 4 new rules. 5 MS. WOELK: Because it all needs to 6 move as a package. 7 COMMISSIONER COX: Okay. That's 8 your -- 9 MS. WOELK: Yeah. 10 COMMISSIONER COX: -- your bottom -- 11 MS. WOELK: Right. 12 COMMISSIONER COX: -- yellow line over 13 there. 14 MS. WOELK: It's Robert's line, uh-huh. 15 CHAIRMAN CLOWE: Is there any 16 discussion? 17 COMMISSIONER COX: No, sir. 18 CHAIRMAN CLOWE: So moved. 19 COMMISSIONER COX: Second. 20 CHAIRMAN CLOWE: All in favor, please 21 say aye. Opposed, no. The vote is two-zero in favor. 22 And a break time. Very good. 23 (RECESS.) 24 CHAIRMAN CLOWE: Let's come back to 25 order, please. 0112 1 Robert, I'm going to call on you next. 2 Next we'll take up item number nine, report, possible 3 discussion and/or action on possible future 4 Lotto Texas game concepts. 5 MR. TIRLONI: Good morning, once again, 6 Commissioners. My name is Robert Tirloni. I am the 7 Products Manager for the Texas Lottery Commission. 8 This morning I'm going to start off by 9 giving you a brief history of the Lotto Texas game, 10 and give you staff's thoughts on a game change 11 recommendation that would take place under the new 12 process that we just discussed, if that process is 13 adopted by the Commission. 14 Again, some brief history just to make 15 sure everybody is on the same page about the game and 16 how it has progressed and changed over the years. 17 Lotto Texas was first introduced in November of 1992. 18 It was a six-digit matrix. Players chose six out of 19 50 numbers. The prize pool was 50 percent of Lotto 20 sales. There was an annuity period; it was 20 years. 21 And the game did have a prize reserve and it was two 22 percent of the prize pool. 23 Four years later, in 1996, there was a 24 rule change. Now, that rule change did not change the 25 way the game was played, but it did make two changes 0113 1 to the game. One of those was the cash value option 2 feature was introduced at that time. So that players 3 could choose to receive a lump sum as opposed to an 4 annuity payment, and at that time, the annuity was 5 increased from 20 to 25 years. 6 It was in the year 2000 that the game 7 was changed for the very first time. The matrix 8 changed from a six of 50 to a six of 54. Sales for 9 that new matrix started in July of 2000. The prize 10 pool increased to 55 percent of Lotto Texas sales and 11 the six-of-54 game also had a prize reserve fund; it 12 was two percent of the prize pool. 13 That game remained in existence for 14 just about three years, a little shy of three years, 15 and the game was changed for the -- the second time in 16 May of 2003, and that was when the bonus ball matrix 17 was introduced. And that's the current game that we 18 have today. It's a five-of-44, one-of-44. The prize 19 pool on this game is 52 percent of Lotto Texas sales. 20 This game, the current game, does have a prize 21 reserve, as we discussed earlier, and it's just shy of 22 two percent of the prize pool. 23 So what has happened to Lotto Texas 24 since we made the bonus ball change? I wanted to show 25 you a -- a bar graph, which paints a picture. Lotto 0114 1 Texas average draw sales at the four million dollar 2 starting jackpot level have decreased a little bit 3 more than 30 percent since the bonus ball matrix was 4 introduced in May of 2003. And that's compared to the 5 average during the six-of-54 matrix. So you see, we 6 have seen a substantial decrease at those starting 7 jackpot levels. The average sales went from 3.7 8 million to 2.6 million. And I have another line chart 9 or line graph that directly correlates to this, and 10 this -- this line graph is very telling, to me at 11 least, I hope it is to you. It compares the -- it 12 compares roll cycles and all of these roll cycles, 13 again, as I like to say, are apples to apples 14 comparisons. They're all 11 draws. They all start on 15 Wednesdays. And they all start at four million 16 dollars. The green line that you see here, this is 17 under the six-of-54 matrix, this roll cycle started in 18 December of 2002, and went into January of 2003. And 19 through the first 11 drawings, this roll cycle sale -- 20 the sales for this roll cycle were 86.7 million. And 21 you see, by the time we got to the 11th drawing, the 22 jackpot was advertised at 53 million dollars. 23 The next line, the orange line, is the 24 first full roll cycle after the bonus ball matrix was 25 introduced. So we -- we made the change in May of 0115 1 2003, to the five-of-44, one-of-44. This roll cycle 2 started in June of 2003. And you see, by the time we 3 got to the 11th drawing, the advertised jackpot was 28 4 million dollars, and the sales for this time period 5 was 44.8 million dollars. So from this roll cycle 6 which started, you know, December of '02, January of 7 '03, to this roll cycle, which was the first full roll 8 cycle after the change was made, some five to six 9 months later, we saw a drastic decline in the sales, 10 from 86.7 to 44 million, and obviously, a huge 11 decrease in what the advertised jackpot was at that 12 point in the roll cycle. 13 This last blue line on this chart is a 14 roll cycle that began in May of 2005. And, again, 15 this is under the current matrix, but you can see we 16 have suffered -- we have suffered further decline, and 17 by the 11th drawing in this roll cycle we were at 15 18 million dollars, and sales for this period were 24.8 19 million dollars. 20 So what staff believes has happened is 21 that from the six-of-54 to the bonus ball matrix, we 22 have driven off -- and I think I had talked about this 23 a little bit earlier -- we've driven off and we've 24 decreased the play at the lower starting jackpot 25 levels. And we believe we have also impacted the core 0116 1 player or the base player of the game when we made the 2 change to the bonus ball matrix. 3 COMMISSIONER COX: Okay. Robert? 4 MR. TIRLONI: Yes, sir. 5 COMMISSIONER COX: Where would -- if 6 you were to interleave the entry into Mega Millions, 7 would it go between the green and the orange or 8 between the orange and the blue? 9 MR. TIRLONI: Right here where I'm 10 pointing. This is in -- this is in June, July of 11 2003, this orange line, and Mega Millions started in 12 December of 2003, in Texas. 13 COMMISSIONER COX: So we already knew, 14 even before we went into Mega Millions, that the 15 players didn't like the bonus ball. 16 MR. TIRLONI: On the Lotto game, that's 17 correct, yes. 18 COMMISSIONER COX: And yet the various 19 things that were changing were such that it didn't 20 seem advisable to us to go back and change that, 21 because too many other things were changing at that 22 time. 23 MR. TIRLONI: I would say that that's 24 correct, yes, sir. 25 COMMISSIONER COX: So if we had had the 0117 1 authority to make the change, with the staff 2 recommendation and the Commission approving it, we 3 probably would have taken corrective action a whole 4 lot sooner than we've been able to, under the current 5 rule. 6 MR. TIRLONI: I would agree with that 7 statement as well. 8 To address these issues, in this past 9 year, in May of 2005, we -- we conducted player 10 research, quantitative and qualitative, and I always 11 like to explain the difference. The qualitative is 12 more of the focus group style, where people are 13 sitting around the table talking to a moderator about 14 their opinions, answering questions that the moderator 15 is asking. That's compared to quantitative, where 16 it's more of a larger group setting, where they're 17 actually putting pen to paper and answering questions 18 about their spending, or about their opinions, about 19 their purchasing habits. We conducted these in three 20 Texas cities, McAllen, Dallas and Houston. And in 21 order to give pretty much the public an opportunity to 22 participate in sharing their opinions, we also 23 conducted research through our own website. So 24 anybody coming to the TLC website was able to click on 25 a link that would take them to a survey about -- and 0118 1 it was the same survey that the people in McAllen, 2 Dallas and Houston saw. And basically, this was to 3 ensure a large enough sample size and to provide an 4 opportunity for public input to this research. 5 So what did we test back in 2005, in 6 May of 2005? We tested the current game versus the 7 six-of-59 game. The results of that survey -- or that 8 research, I should say, were that 52 percent of the 9 people responding preferred the six-digit game. They 10 preferred the six-of-59 game. And 47 percent 11 indicated that they either preferred the bonus ball or 12 that they didn't have a preference at all. And most 13 interesting -- the most interesting outcome, though, 14 was that those who preferred the six-of-59, when 15 questioned, indicated that while they preferred the 16 game and the play style, that didn't necessarily mean 17 that they were going to spend any more on the game. 18 So, basically, the research that was conducted was 19 pretty much inconclusive in terms of providing staff 20 direction on making a game change recommendation at 21 that time. 22 COMMISSIONER COX: And that 52/47 23 section up there certainly doesn't help explain why 24 those lines fell like they did after the change. 25 MR. TIRLONI: That's correct. 0119 1 COMMISSIONER COX: Although, it could 2 be that one percent preferred the 54, five-of-44, plus 3 one-of-44, and 46 had no preference, even that would 4 seem to -- to indicate sales shouldn't have fallen as 5 much as they did. 6 MR. TIRLONI: And as drastically as 7 they did. 8 So I've just told you that pretty much 9 that research was inconclusive. And from attending 10 some of those research sessions, the word I like to 11 use is indifferent. The players that I witnessed 12 firsthand were pretty indifferent about the game 13 options that they had in front of them. But there was 14 useful information learned from this research that I 15 would call somewhat general in nature, but it provided 16 general guidance to staff, and there are three main 17 points. Players expressed feelings of general 18 aversion to complete distaste for the bonus ball 19 feature of the five-of-44, one-of-44. They just do 20 not like the bonus ball on Lotto Texas. In regards to 21 a six-digit matrix, players report that they like 22 picking numbers from one field. They find that to be 23 appealing, and they seem to like the chances of 24 winning better on a -- just a straight, one-field 25 matrix. And lastly, they pretty much expressed that a 0120 1 six-digit, one-field matrix is just plainer, easier, 2 and simpler to understand and to play the game. 3 With that knowledge, we pretty much 4 went back to the drawing board, so to speak, and 5 started considering different options. We considered 6 a six-of-54 matrix, which from the early part of the 7 presentation, was obviously one of the games -- the 8 Lotto games that was run in Texas. We considered a 9 six-of-52 matrix. And we considered numerous other 10 features about the game. We considered a match two 11 prize, which would have been a first on the Lotto 12 game. We considered multipliers and spiel add-on 13 games to the base game. We toyed with the number of 14 drawings that could be held per week. And we also 15 evaluated how the roll cycle progressed in terms of 16 one million dollar rolls, less than one million dollar 17 rolls. And we -- we tried to consider as many options 18 that we could. 19 We also reached out to numerous other 20 jurisdictions in North America. And we -- the problem 21 was, we really couldn't find data from all of the 22 other jurisdictions to support any of the changes that 23 I just discussed that we were considering. If we 24 found a state that introduced a match-two prize, and 25 gave away a free ticket, so to speak, the game was so 0121 1 different from what we were considering, we really 2 couldn't use that data. For example, we found one 3 state that had this option, but their jackpot started 4 at less than a million dollars. So we really couldn't 5 draw very firm conclusions from the data that we 6 collected from all of these other states. 7 If we introduced the game matrix with 8 numerous other features, that kind of presents another 9 challenge. And, Commissioner Cox, I think you said 10 something about this earlier, if you introduce a game 11 with four or five, or five or six new features, 12 simultaneously, and the game is doing well or if it's 13 not doing well, it's pretty difficult then to discern 14 which feature worked or which feature didn't work, and 15 that makes it difficult to decide how you would change 16 the game moving forward. So, basically, we took a 17 step backwards and we decided to rely on what we know. 18 And what we know is, the sales loss that I showed you 19 much earlier in the presentation, the drastic decline 20 in sales that occurred after we introduced the bonus 21 ball matrix in May of 2003. 22 So, basically, what we are -- what are 23 we recommending -- and, again, this is going to fall 24 under this -- the new process that we discussed in an 25 earlier agenda item, if adopted, and I'll lay that out 0122 1 in a few slides. But, basically, what we're 2 considering is -- or recommending is, reintroduction 3 of a six-of-54 game matrix. We believe that this will 4 allow us to monitor sales to determine if the sales 5 that were lost back in '03 due to the introduction of 6 the bonus ball game, are able to be recovered. 7 We are planning -- I talked a lot about 8 different features that we considered. We will be 9 planning to introduce new features over time, 10 gradually, utilizing the game procedure process that 11 we just discussed, and this will allow us to evaluate 12 the sales impact of those features. So as we 13 introduce a game feature, we'll be able to pretty much 14 create our own -- our own data in a live test 15 environment -- or in a live environment. 16 So what are the benefits. The first 17 one I pretty much just touched on. We'll be able to 18 know if the game, the base matrix itself and the game 19 features are working. And it'll also allow us to plan 20 and experiment with new ideas and new concepts, and as 21 we put those concepts and those new ideas to work with 22 the base matrix, to know if indeed they are working. 23 The major selling point of a six-of-54, the main -- 24 the main message would be that the six-digit game is 25 back and the Lotto Texas game no longer has a bonus 0123 1 ball associated with it. That message came through 2 loud and clear from the players. Jackpot odds are 3 greatly improved for the player. And it also finally 4 allows us to differentiate within our on-line product 5 mix. Over time, we have naturally progressed to 6 having, out of five on-line games, three of which are 7 bonus ball style games. Texas Two Step was introduced 8 long ago as a bonus ball style game, in May of 2001. 9 Staff performed research in late 2002, which led us to 10 the recommendation of the bonus ball game on Lotto, 11 and then after a multi-state legislation was signed 12 and we proceeded with joining Mega Millions, we ended 13 up with another bonus ball style game. So staff feels 14 that this will finally allow us to get Lotto back to a 15 six-digit, one-field game, and also allow us to 16 position Lotto Texas differently from the other games. 17 This is just for reference purposes. 18 This is the six-of-54 matrix that we will be 19 recommending to you down the road. As I talked about, 20 the jackpot odds greatly improved for the player. The 21 jackpot odds are about one-in-25.8 million. It's 22 exactly what they were under the old matrix. There is 23 four prize tiers. The lowest prize tier is a 24 five-dollar guaranteed prize for matching three 25 numbers. And the overall odds are one in 71, and this 0124 1 game is designed with a 50 percent payout game -- as a 2 50 percent payout. 3 For reference purposes, this is the 4 current Lotto Texas matrix. Jackpot odds on the 5 current game are one in almost 48 million. Of course, 6 the main difference between the bonus ball matrix and 7 the six-digit matrix are the number of prize tiers. 8 The current game does have a payout of 52 percent. 9 There is one main difference in our 10 recommendation. And the one main difference between 11 the recommended matrix and the previous six-of-54 12 matrix and the recommendation is that the new 13 six-of-54 will not have a prize reserve fund. 14 We have asked Doctor Eubank to complete 15 a roll analysis to project what the payout will be 16 under this matrix, since there will not be a reserve 17 fund, and he has projected that payout to be 18 approximately 53 percent. Now, this payout was based 19 on Doctor Eubank starting the jackpot at four million 20 dollars and rolling in a minimum of one million dollar 21 increments and continuing to pay a jackpot winner the 22 greater of the advertised jackpot or the jackpot based 23 on sales, as we have discussed today. 24 COMMISSIONER COX: So, Robert, what 25 that is saying is, we're setting it out to be 50, but 0125 1 because we're going to subsidize some jackpots at the 2 early level, it's really going to compute out to 53. 3 MR. TIRLONI: That's absolutely 4 correct, yes, sir. 5 MR. GRIEF: Robert, if you would, 6 clarify what type of sales Doctor Eubank used in his 7 analysis on that prize payout. 8 MR. TIRLONI: He basically used the 9 sales that we are experiencing right now on the Lotto 10 game. And he pretty much held those constant. He 11 basically used our jackpot estimation worksheet that 12 tracks all of our sales by day, and he used that to do 13 all of his statistical analysis. So his sales -- the 14 sales that he used are -- are realtime sales that we 15 are experiencing now. They're not sales projections. 16 COMMISSIONER COX: And he is not 17 anticipating any big bump from going back to the six. 18 He saying that -- you know, that might occur, but 19 we're not going to factor it into the estimates we 20 make right here. 21 MR. TIRLONI: That's correct. Because 22 we wanted to be able to have his roll analysis present 23 the most accurate picture, and we felt that keeping 24 sales constant at the levels that we're experiencing 25 today was the most conservative way to have him 0126 1 perform that analysis. 2 So basically, here is the -- here is 3 the game plan. And, again, a lot of these items today 4 have overlapped, but the rule that you just approved 5 for publication, 401.304, should be ready for 6 consideration for adoption sometime in early 2006, and 7 if that rule were adopted, at that time, staff would 8 bring the Commissioners a revised Lotto Texas game 9 procedure, that if that game procedure were approved, 10 would change the game as I have described today in 11 this presentation. 12 And that concludes this presentation. 13 We're more than happy to answer or address any 14 questions that you would like to ask. 15 CHAIRMAN CLOWE: Who do I fire? 16 MR. TIRLONI: Who do you fire? 17 CHAIRMAN CLOWE: Who is the person who 18 recommended we change it in the beginning? You know, 19 when -- 20 MR. TIRLONI: Which time? 21 CHAIRMAN CLOWE: In private enterprise, 22 when you get a proposal -- we changed it for a good 23 reason in the beginning. You've got to fire somebody, 24 because they, you know, have to go. Who is that 25 person? 0127 1 MR. GRIEF: Guessing that -- or hoping 2 that you're speaking in jest, I believe that I was 3 serving as the Acting Director at the time, but -- 4 CHAIRMAN CLOWE: The first time. 5 MR. GRIEF: The first time. But the 6 people that -- and this is a great example of -- of 7 something we've tried to bring home. The results of 8 our focus group testing led us to make that change. 9 CHAIRMAN CLOWE: Okay. I am in jest. 10 But I -- but I do have to bring that point up. You 11 know, we did research, we had GTECH involved. They 12 were in favor of it. You know, and we thought we were 13 doing the right thing. And so now we're going back. 14 And I think it makes the point that when you do 15 something and it doesn't work, you've got to change 16 it. You've got to do something else. And so I -- I 17 just think it would be less than diligent if I didn't 18 say, I'm really sorry that we wasted all this time, 19 but Commissioner Cox makes the point that going back 20 may not bring sales up. But we've got to try. 21 My question is, we may be wrestling 22 with 304 for some time. Why not a rule to change 23 Texas Lotto on its own and let that be in the process? 24 MR. GRIEF: We could certainly work on 25 that concurrently. We were hopeful that the earlier 0128 1 process would -- would allow us to do that more 2 timely, but I think I -- hearing what we've heard 3 today, I think it would be practical to have them -- 4 two processes going -- 5 CHAIRMAN CLOWE: Yeah. Because, you 6 know, we've got a lot of ground to plow, it looks like 7 to me, to get that worked out. And we started today, 8 which was good work. And as we go through that, we 9 may see some delays, and I don't know how Commissioner 10 Cox is going to vote, but I'm in favor of making this 11 change and I would like to see a rule so that we start 12 on it and have that running concurrently. 13 COMMISSIONER COX: Well, I like that 14 idea so much that I would ask, how long would it take 15 your staff to put a rule together and is -- is it 16 possible to consider that today or would we need -- is 17 the notice inadequate, Counsel? 18 MS. KIPLIN: Well, the notice may not 19 be inadequate as it relates to the 305 -- well, this 20 one repealed -- but what I can tell you is that you 21 can't have two rulemakings on the same subject matter, 22 and I've got a Lotto Texas rule that you've adopted 23 amendments on today. You've got to let that run 20 24 days before it's effective, and then you can move 25 forward. 0129 1 CHAIRMAN CLOWE: That will be the next 2 meeting. 3 MS. KIPLIN: Yeah. 4 COMMISSIONER COX: The next meeting 5 would have been the earliest we could have done that 6 anyway. 7 MS. KIPLIN: Right. 8 CHAIRMAN CLOWE: Well, then -- 9 MR. TIRLONI: And Commissioner -- 10 COMMISSIONER COX: I totally agree with 11 Chairman Clowe. 12 CHAIRMAN CLOWE: I think, then, the 13 sense is that the Commissioners are in favor of this 14 change and they would like to see it on the agenda at 15 the next meeting, a proposed rule. 16 MR. TIRLONI: And we -- and Product 17 staff has -- has been working with Legal. We all -- 18 we have -- we have a draft of that, so that should be 19 very easy to carry out for the November meeting. 20 CHAIRMAN CLOWE: Very good. 21 Ms. Nettles, did you want to make a 22 comment on this subject? 23 MS. NETTLES: For the record, my name 24 is Dawn Nettles, and I'm with the Lotto Report out of 25 Dallas. 0130 1 And I do want to briefly comment on -- 2 on the proposal or their game plan that they have 3 here. I am definitely in favor of changing Lotto 4 Texas. It is something that has been needed for a 5 very long time. 6 I would like to throw out a couple of 7 things for you all to consider as you're doing this 8 rule or making your plans on it. First of all, when 9 the -- when Texas first started the Lotto Texas, it 10 was a six-in-50 game. And it did very well. But when 11 they went to change it to six-in-54, the people by the 12 droves, by the thousands, told you not to change their 13 game. They did not want that change. What you didn't 14 see on the slides is the sales difference between 15 six-in-50 versus six-in-54, how they fell. And it 16 fell tremendously, and it was for the same reason that 17 they fell for the five-in-44, which is, it was -- it 18 was opposed by the people to increase the odds of the 19 game. So the people -- they would take six-in-54 any 20 day over five-in-44. But if you really wanted a true 21 test to find out what would happen, I would really 22 strongly recommend that you go six-in-52. Be that as 23 it may, whatever odds you go with, that is fine. But 24 I did -- I am opposed to the five-dollar prize, the 25 guaranteed prize. And let me explain why I say 0131 1 this -- or I don't know how they're going to structure 2 it for sure, but I'm pretty sure that it'll be as it's 3 always been. The five-dollar guaranteed prize, if 4 they allocate so much money for that prize, then there 5 is no guarantee that the people of Texas will really 6 see their share of sales. If they structure it in the 7 manner that Cash Five is done -- Cash Five is a fair 8 game. It has fair payouts and people do, in fact, see 9 50 percent of sales. What they do is, when they 10 guarantee that prize for Cash Five, they take it 11 straight off the prize pool, and then they take the 12 balance of the prize pool and allocate so much of each 13 of the four of -- or the three-of-five, four-of-five 14 and five-of-five winners, and that's how much money 15 that the -- the players divide. That is very fair. 16 And I would recommend or like to recommend that Lotto 17 Texas be done that way, too. And then that way, the 18 people of Texas are guaranteed that they will receive 19 their share of sales. I don't believe that your sales 20 will increase as much with six-in-54. They will 21 definitely increase because you will get some -- some 22 people back, but you forget about all of those people 23 you lost when you switched to six-in-54. And this 24 Commission was told without a doubt that the people 25 will quit playing. And I know because I brought you 0132 1 the comments in. And they opposed it. So it makes 2 common sense to me that rather than to take them back 3 to six-in-54, that you try a six-in-52 because you can 4 justify that by the population. And the people would 5 understand that, and I really think that that -- and 6 would have -- we're really not going to have that many 7 more winners. You will have more than what you have 8 under five-in-44, but you're not going to have that 9 many winners. But you'll get -- if you want to 10 increase monies for the State, and you want to make 11 the people happy, you really need to go with 12 six-in-54. And you need to guarantee that the people 13 receive their share of sales. 14 Now, they've lowered the percentage 15 from 52. It's gone from 50 percent of sales to the 16 players, supposedly -- but the players have never seen 17 that much -- to 55 percent, then down to 52. Now it's 18 going to 50 percent. 50 percent is fair. I don't 19 have a problem with 50 percent. 50 percent for the 20 people and 50 percent for the State is absolutely 100 21 percent fair. But we need to guarantee that we're 22 going to see that 50 percent. And we don't have that 23 now. And we don't have that with the rule that you 24 changed today, earlier. But that was my opposition to 25 it, is that there was no guarantee that the people are 0133 1 going to see their share of sales. So I really am 2 thrilled that you're going to come back next month 3 with the rule change for Lotto Texas, because Texas 4 deserves -- and you're losing so much money out there, 5 and people want to play. I know, I hear from them in 6 droves every day. So I'm real thrilled to hear you're 7 going do that, but I hope that you'll really consider 8 and discuss with staff those couple of changes that I 9 have suggested. Okay? 10 CHAIRMAN CLOWE: Okay. Thank you, 11 Ms. Nettles. 12 MS. NETTLES: Thank you very much. 13 CHAIRMAN CLOWE: Next, item ten, 14 report, possible discussion and/or action on the 15 lottery terminal functionality, including quick pick 16 feature for all games and/or impact to players. 17 Mr. Anger. 18 MR. ANGER: Good morning, 19 Commissioners. For the record, my name is 20 Michael Anger, and I'm the Lottery Operations 21 Director. 22 I would like to provide you with an 23 update on the status of the agency's review of GTECH 24 terminal functionality related to the quick pick 25 feature. Commissioners, Doctor Eubank has completed 0134 1 the majority of his analysis of data sets extracted 2 from the GTECH system under the supervision of 3 Deloitte & Touche for the Lottery's on-line games. 4 Doctor Eubank identified some concerns during his 5 testing related to some of the data sets that he 6 evaluated. This information has been communicated to 7 GTECH Corporation, and GTECH has reviewed 8 Doctor Eubank's information and -- and conducted 9 additional testing of their own. At this time, there 10 is not agreement on this information. However, GTECH 11 has agreed to provide Doctor Eubank with additional 12 data and information regarding the system operation 13 and their methodological testing procedures for 14 Doctor Eubank to conduct a more thorough analysis of 15 this matter to allow him to draw final conclusions. 16 On completion of this review, Doctor Eubank will 17 attend the Commission meeting to present his findings. 18 That concludes my report. If you have 19 any comments or feedback on that. 20 CHAIRMAN CLOWE: Thank you. 21 MR. ANGER: Thank you. 22 CHAIRMAN CLOWE: Next, we'll go back to 23 item number two, consideration of and possible 24 discussion and/or action, including proposal, on new 25 rules 16 TAC 402.706 and/or 402.707, relating to 0135 1 Standard Administrative Penalty Guideline and 2 Expedited Administrative Penalty Guideline. 3 Ms. Joseph. 4 MS. JOSEPH: Good morning, 5 Commissioners. My name is Sandy Joseph. I'm 6 Assistant General Counsel. 7 Before you today are draft documents 8 prepared for submission to the Texas Register, in 9 order to propose adoption of two new rules, 16 10 TAC Section 402.706, and 402.707, relating to Standard 11 Administrative Penalty Guideline, and Expedited 12 Administrative Penalty Guideline. The purpose of the 13 new rules is to provide guidance for administering an 14 administrative penalty to persons that violate the 15 Bingo Enabling Act or the Charitable Bingo 16 Administrative Rules, and also to provide an 17 alternative disciplinary procedure for certain 18 violations of the Bingo Enabling Act and the rules, in 19 which the Director seeks to facilitate an expeditious 20 resolution of cases and encourage settlements. 21 The draft rules before you today are 22 the same as those presented to you at your last 23 meeting on September 28th. At that time, you elected 24 to postpone consideration of the rules in order to 25 afford some persons who were disadvantaged by the 0136 1 hurricane and wanted to be here to provide comments. 2 I believe some of those people are probably here 3 today. If you do vote to propose these rules to be 4 published for public comment, we will have a public 5 hearing, which we have now scheduled for November 30th 6 at 11:00 a.m., in order to receive verbal, oral public 7 comments. In addition, we would receive written 8 public comments for a period of 30 days. I do 9 recommend that you propose the rules for consideration 10 for adoption. 11 CHAIRMAN CLOWE: Any questions? 12 COMMISSIONER COX: No, sir. 13 CHAIRMAN CLOWE: There are 14 approximately, I think, 25 individuals who have filled 15 out witness affirmation forms. And to my knowledge, 16 all of the individuals who have been able to fill out 17 a form have registered against the proposed rules, but 18 except for three, they do not wish to offer written or 19 verbal testimony. So I will call on the three, in 20 this order, who have wished to address the Commission: 21 Mr. Fenoglio, Ms. Ives, and Mr. Bresnen. 22 MR. FENOGLIO: Good afternoon, 23 Commissioners. For the record, my name is 24 Stephen Fenoglio. I'm an attorney in Austin, Texas, 25 and I represent over 750 charitable and business 0137 1 organizations involved in bingo. 2 Thank you for considering this item. 3 It's Halloween, as you know, today, which is, 4 interestingly enough, a very popular day to conduct 5 bingo, and while we anticipated having about 50 people 6 here, I understand a lot of them are involved in bingo 7 promotions related to the Halloween carnival 8 atmosphere that occurs. We do have -- I believe, 9 there were possibly up to 30 people who -- who were 10 here earlier, and we agreed that we'll limit our 11 comments within the industry in an effort to expedite 12 this matter. 13 We continue to be opposed to the 14 proposed rule for a variety of reasons. First, we 15 still don't know what the impact of the proposed rule 16 would be on administrative penalty cases. You will 17 recall, Commissioners, that I sent a very pointed 18 letter, in April of '05, expressing a number of 19 concerns about this proposed rule to the three 20 Commissioners. One of the issues that I raised then 21 and I continue to raise it is, we know because we've 22 had cases that have come up to the Commission, how the 23 penalties are assessed today. We don't know, with the 24 new rule, how they'll -- how that will change. We 25 have had comment from the staff that it would be 0138 1 disingenuous for the industry to conclude that if the 2 new rules were in place that the penalties wouldn't be 3 increased. So we know the penalties are going up, but 4 we don't know how much. 5 As a part of the -- a number of 6 meetings that occurred between some of the industry 7 representatives, including me, and the staff, I 8 circulated three different penalty cases in an effort 9 to try to determine what the impact would have been if 10 the cases had occurred under the penalty matrix rule 11 that's being proposed now. Staff initially said they 12 would be -- they would respond. They then 13 decided to -- changed their minds and said, we're not 14 going to respond because that -- those cases are old 15 and we're not really sure what the facts were at the 16 time. That leaves the industry with a very 17 disquieting sense of what will happen once the other 18 shoe drops, if, in fact, the rule is adopted. 19 There is also a provision in the 20 proposed rule that causes us concern, and that's 21 subparagraph (i)(5)(E), the acknowledgment of the 22 violation as one of the impacts that the Commission or 23 the staff would consider in recommending a violation. 24 We have -- this Commission has accepted a 25 recommendation of the largest single bingo penalty 0139 1 against a manufacturer for alleged price fixing, in 2 which the manufacturer did not agree to any violation. 3 So what is the impact that will have in future cases, 4 we don't know. And when we don't know, the industry 5 is concerned. 6 Within the penalty matrix, there is no 7 penalty recommendation for any manufacturer or 8 distributor on the -- on the penalties. And, again, 9 I'm representing here, primarily, charities and 10 lessors, so you've got a lot of penalty 11 recommendations for charities and lessors. And I've 12 made the point before, and I'll continue to make it, 13 that most of the charities are either volunteers 14 representatives or relatively low-paid workers. And 15 relatively low paid meaning, eight to 12, 14 dollars 16 an hour. At ten dollars an hour, that would be, if it 17 were a full-time job -- and very few jobs in the 18 charitable bingo industry are full-time -- but that 19 would be 20,000 a year, without benefits. 20 We still have the concern that I raised 21 before about the expedited penalty, 402.707. There is 22 some language in there that's punitive and I won't 23 repeat those concerns that I've raised before, but I 24 still have a problem with have very, very short time 25 frame of 20 days for a charity to receive notice of a 0140 1 violation and either agree to it on -- relatively, on 2 the spot, or the option of an expedited penalty is 3 taken off the table. And that's the plain language in 4 subparagraph (e). And I say that with all due respect 5 to the Commission staff, there are cases out there in 6 which the staff has taken over a year to process one 7 of these minor infractions. And the -- the picture 8 is, from the time that the staff notices the violation 9 until it -- it actually get to a hearing, it takes 10 them a year. Yet they expect the charities to make a 11 quick decision on something that has possibly major 12 ramifications in the future, in 20 days. And as we 13 observed before, many charities don't have board 14 meetings on a monthly basis. There are a number of 15 charities that conduct bingo that meet either every 16 other month or quarterly. And so a 20-day window, 17 you're asking a charity to, in advance, approve 18 someone to sign one of these authorizations to settle, 19 not knowing today what those facts might be. 20 CHAIRMAN CLOWE: What did you ask for 21 in that period? 22 MR. FENOGLIO: My recommendation was 60 23 days. I think you can get charity -- and, again, 24 within the context, if you had a violation in the -- 25 of Christmas or December holiday period, most 0141 1 charities don't have board meetings, I think you could 2 get an executive committee together within a 60-day 3 period, but not a 20-day period. 4 CHAIRMAN CLOWE: Thank you. 5 MR. FENOGLIO: There is also the 6 concern that I have raised before, and that is the 7 disparate treatment that low-paid workers and 8 charities that aren't making much money have on their 9 rule and the Commission's own rule on lottery 10 retailers, which is 16 Tex Admin Code, Section 11 401.160. There are huge differences between the 12 penalty matrix rule that this Commission has adopted 13 for lottery retailers. Lottery retailers, in some 14 instances, earn hundreds of millions of dollars a 15 year, a couple of which are publicly traded. You 16 know, 7-Eleven comes to mind, for example. And on 17 very similar violations, the -- the Lottery 18 Commission's rule for lottery retailers is 19 automatically a written warning letter. And just by 20 way of example, under 16 Tex Admin Code, Section 21 401.160, if a licensee refuses or fails to sell 22 lottery tickets during all normal business hours of 23 the lottery retailer during on-line game operating 24 hours -- that's verbatim the quote from the 25 Commission's own rules -- a warning letter is issued. 0142 1 Yet if a charity does a similar act, we know from 2 reported cases that that's a 250 to 500-dollar 3 penalty, again, for a nonprofit organization. And yet 4 the for-profit organization skates by with a warning 5 letter. We don't think that's fair. We don't think 6 that this issue has been fully fleshed out. 7 One other observation on the disparate 8 treatment. I argued early on for a one-year look back 9 period in this proposed rule, in subparagraph (h) of 10 the primary rule. Staff, to their credit, laughed me 11 pretty well out of the room on one-year look back. I 12 came up with a two-year -- we started out with a 13 four-year look back period. It's now a three-year 14 period. Interestingly enough, the lottery's own rule 15 for lottery retailers contains a 12-month, one-year 16 look back period. I don't think there has been 17 someone looking at this issue trying to treat equally, 18 similar licensees. Although, again, I don't think 19 they're similar because you've got for-profit lottery 20 retailers, who are making significant sums of money in 21 that business, versus charities. And you've got 22 charities that are extremely small, conducting bingo 23 three times a week or less, up to a charity -- I'm 24 sorry. Three times a month or less, up to a charity 25 with the maximum they can go, conducting bingo three 0143 1 times a week under a regular session. 2 The final observation, and I'll make it 3 again, is the whole driving force for this was the 4 Lottery Sunset recommendations in the 2001, 2002, time 5 frame. And I cited those before. As the Commission 6 is well aware, Lottery Sunset did not pass in either 7 2001 or -- or 2003 or 2005, rather. And we think this 8 is far premature. 9 I'll be happy to answer any questions, 10 and if the Commission so chooses to have a -- a 11 hearing, in November, we will participate in that. 12 COMMISSIONER COX: Mr. Fenoglio, one 13 general question and then I've got a few specifics. 14 Do you agree that it's good to know 15 what the rules are before you play a game, or should 16 the rules be under the counter and pulled out only 17 when the staff chooses to pull them out? 18 MR. FENOGLIO: I would agree, in a 19 general observation, that it's best for the -- any 20 regulated entity to know what the rules of the game 21 are. 22 COMMISSIONER COX: Okay. So -- so 23 we're not in disagreement on whether there should be a 24 schedule. We're in disagreement on this schedule. 25 MR. FENOGLIO: Commissioners, there 0144 1 are -- and I have tried to determine how many state 2 agencies there are. There are several hundred. Only 3 about 22 have the administrative penalty 4 recommendations in the State. I don't know that I 5 agree necessarily that it's a failure of a State 6 agency that chooses not to have an administrative 7 penalty rule and administrative hearing context. 8 Although, I -- again, I will acknowledge that as a 9 general rule, it's better to know what the rules of 10 the road are than not. It occurs to me, though, that 11 there are some provisions or rules of the road, be 12 they statutory or rulemaking, that you don't need 13 rules for. And within the context, Commissioner Cox, 14 I think you have to step back and look at the -- where 15 the charitable bingo industry is. Five years ago, 16 there were 1900 charities conducting bingo. Today 17 there are less than 1400 charities conducting bingo. 18 Five years ago, there were half the number of 19 administrative rules in place that this agency as the 20 Commission adopted that affected charitable bingo. Do 21 any of those -- do those two -- that converging 22 matters, are there -- is there a quid pro quo of cause 23 and effect? I don't know, but I don't think anyone in 24 bingo would suggest that there is too little 25 regulation. I know there are a lot of people in bingo 0145 1 who think there is too much regulation. 2 COMMISSIONER COX: Well, to me, this 3 isn't regulation. This is just saying, here are the 4 rules of the game. Regulation is, it seems to me, 5 setting out that left-hand column, and all we're doing 6 is adding a right-hand column that says, what is the 7 sanction for not doing what is already there. So I 8 don't see that we're adding any additional regulation, 9 but rather, that we would just clarifying and 10 streamlining the process of assessing penalties once 11 there is a violation of the regulations that already 12 exist. 13 MR. FENOGLIO: I might be willing to 14 agree with you if this process were transparent. But 15 it's not been. And I use, as the best example, we 16 know, if this rule is in place, the staff intends to 17 raise the level of penalties it assesses against 18 charities. That's what the staff has said. I take 19 them at their word. 20 COMMISSIONER COX: Let me see if I 21 understand. What you just said is, we're going to -- 22 there is going to be this one and then these penalties 23 are going to be increased after that? 24 MR. FENOGLIO: Yes. 25 COMMISSIONER COX: Won't that require 0146 1 the approval of this Commission? 2 MR. FENOGLIO: Not if it's an admin -- 3 not if it's an expedited penalty, it won't. Under the 4 proposed draft rule, the staff would approve those. 5 For the main rule, yes, you have to adopt it. 6 COMMISSIONER COX: So that would be 7 opposing this rule, because it might foster another 8 rule, which you would also oppose. Is that what I 9 hear you saying? 10 MR. FENOGLIO: I didn't follow your -- 11 COMMISSIONER COX: I probably didn't 12 say it very well. But I thought I hear you saying 13 that you oppose this rule because it may lead to 14 another rule, and you just want to oppose that right 15 here and now. 16 MR. FENOGLIO: No. I think there are 17 two proposed rules that are being published. I don't 18 know of any other rules that -- 19 COMMISSIONER COX: These increased 20 penalties that you're referring to in the future, 21 that's what I'm characterizing as another rule. 22 MR. FENOGLIO: No. I don't -- I don't 23 think it's another rule. I think it's embedded within 24 these two proposed rules. 25 COMMISSIONER COX: Okay. Wouldn't the 0147 1 staff have the authority to do that now without this 2 rule? 3 MR. FENOGLIO: No. 4 COMMISSIONER COX: Ms. Joseph, could 5 you help me with this? 6 MS. JOSEPH: I don't believe these 7 rules create any new authority. There are no new -- 8 there are no new violations created. There are no new 9 remedies created. 10 COMMISSIONER COX: Mr. Fenoglio, a 11 couple of specifics here. You indicate that there is 12 no scheduled penalties for, I think you said, 13 manufacturers and lessors? 14 MR. FENOGLIO: Correct. In this 15 proposed rule. 16 COMMISSIONER COX: And I have to -- I'm 17 going to have to claim ignorance on -- at two levels. 18 One is, I didn't notice that there wasn't; and, two, I 19 don't know what they would be if they were. 20 Should there be a bunch of rules for 21 those, and is that just something that needs to be 22 added to this by amendment as we further refine the 23 process, or does it make these defective? 24 MR. FENOGLIO: I don't think it makes 25 them legally effective, no, the fact that you exclude 0148 1 a particular licensing class or classes. I just find 2 it odd that all of the proposed penalties deal with -- 3 and they're almost exclusively with a conductor, or 4 charity that's conducting bingo. And it -- I had 5 proposed several penalties for manufacturers or 6 distributors, and those are dropped out. And yet we 7 know, from the experience of this Commission, one 8 manufacturer paid a quarter of a million dollar fine. 9 And I would assume the Commission thought that was 10 fairly serious. So I just -- 11 COMMISSIONER COX: Well, I think I 12 agree with you. I find it odd, too. 13 Ms. Joseph, can you help me with that? 14 MS. JOSEPH: I don't -- I believe you 15 may have suggested -- or Mr. Fenoglio may have 16 suggested those prior to my involvement in those rules 17 early on. I don't recall the suggestion of those. 18 These proposed rules were aimed at, I think, what is 19 the -- the bulk of our activity in terms of 20 enforcement. And as I understand it -- Billy, you may 21 need to correct me if I'm wrong -- I don't believe 22 there are any -- there is a provision for the 23 Commission to audit manufacturers or distributors. Is 24 that correct, Billy? Yes. I wanted to be sure I was 25 right on that. Therefore -- 0149 1 MR. ATKINS: No. I believe there is a 2 provision to audit manufacturers and distributors. 3 MS. JOSEPH: Do we do that? 4 MR. ATKINS: Yes. 5 MS. JOSEPH: All right. I 6 misunderstood a conversation I had recently. I 7 apologize for that, then. At any rate, it was not 8 during my association with this rule over almost the 9 past year, I don't recall that suggestion being made 10 that we needed to add some for manufacturers and 11 distributors. Certainly, the rule could be amended if 12 it was adopted in this form. I don't, you know, 13 believe there is any reason to not go forward with 14 this portion of it. 15 COMMISSIONER COX: Okay. Now, as to 16 the expedited 20-day window, I was unfortunate enough 17 the other day to get a parking ticket on Fifth Street, 18 and it afforded me the opportunity to pay 15 dollars 19 up until my court appearance date or 30 dollars after 20 the court appearance date, and I promptly sent in 15 21 dollars. Is -- would that be a way to do this, rather 22 than, say, 20, which is arbitrary, to say that any 23 time before the hearing you can submit to expedited 24 treatment, and is there a hearing date set when this 25 letter is sent out? How does the thing work? 0150 1 MR. FENOGLIO: My understanding of what 2 they intend to do is -- and typically -- I know staff 3 will interrupt me if I'm wrong -- when the auditor is 4 there at the location that's conducting bingo and he 5 or she observations one of these expedited penalty 6 issues, they would write out a parking ticket, if you 7 will, and give it to the licensee's representative. 8 And then -- and that also is the notice that triggers 9 a contested case hearing. The staff wanted all of 10 this to be, at least as I understand staff, quick. 11 And so that's where they came up with the 20-day 12 notice period. I don't think that is required under 13 the Government Code and notices of -- of hearings, but 14 that's what staff wanted. They wanted, in effect, 15 that quick notice of parking ticket, you decide pretty 16 well on the spot whether you agree or disagree, and 17 then you're off to the races. 18 COMMISSIONER COX: Okay. So it is 19 possible that during the comment period on November 20 30th, come forward and say, hey, 60 is a whole lot 21 more reasonable, and staff could listen to that and 22 might incorporate it into their recommendations, or 23 not, but at least we would know that you thought 60 24 was better than 20. 25 MR. FENOGLIO: You will certainly know 0151 1 what my position is. 2 COMMISSIONER COX: I suspected that we 3 would. 4 And then, finally, the -- almost 5 finally. The lottery rules were or were not taken 6 into consideration when the bingo rules were drafted, 7 Sandy? 8 MS. JOSEPH: Work on these rules began 9 over a year and a half ago. I'm not aware of whether 10 bingo staff itself, prior to my involvement, looked at 11 the lottery rules and compared them. That has not 12 been done during my participation. 13 MS. KIPLIN: If I might speak up just a 14 little bit and -- the lottery -- on the lottery side, 15 unlike like the bingo side, under the Bingo Enabling 16 Act, the Commission has the authority to assess 17 administrative penalties, monetary, but on the lottery 18 side there is no authority. You can -- it's either 19 suspend or revoke. 20 COMMISSIONER COX: Well, we have -- on 21 the lottery side, we have nothing but nuclear weapons. 22 MS. KIPLIN: Well, I mean, I think 23 suspend or revoke, or as Mr. Fenoglio referenced, send 24 a warning letter for things that are not to the point 25 of a -- imposition of a nuclear weapon, and use that 0152 1 approach. I just offer that in terms of the 2 differences underneath the -- these two structures. 3 COMMISSIONER COX: So your view, 4 Ms. Kiplin, is they're not comparable. 5 MS. KIPLIN: Well, they're -- not on 6 that level, I don't believe, on monetary forfeitures. 7 I do think on warning letters and things that are 8 being -- di minimus, yeah, I think that they're -- 9 that can be comparable, and I believe the staff has 10 taken that into consideration on -- on categories 11 where there are warning letters. 12 COMMISSIONER COX: So if there were 13 not, then that could be brought out in the public 14 comment? 15 MS. KIPLIN: Oh, sure. Sure. And 16 if -- if I could go back to the 20-day issue that's 17 been raised. And, Mr. Fenoglio, I remember that being 18 an issue that the 60-day -- or what the number of days 19 ought to be, and my understanding is that the way it 20 was written -- and maybe it's just not artful 21 enough -- is that the statute itself indicates that 22 not later than the 20th day that the person receives 23 notice, the person may accept the recommended penalty 24 or make a written request. So the way it was 25 explained to me is, the 20-day was really an insulated 0153 1 period of time for the respondent by which no action 2 could be taken against the respondent. It insured or 3 guaranteed, if you will, a 20-day time frame. And if 4 I'm wrong, I'm sure Mr. Atkins or Ms. Joseph will tell 5 me. Because that was my understanding of the intent, 6 and if it needs to be better drafted to make that 7 clearer, but it was really to be consistent with the 8 statute that there is not going to be any -- any 9 moving forward on the hearing or anything like that 10 for the 20-day period. 11 And the expedited penalty rule, that's 12 an opportunity for the parties to reach an agreement. 13 It's not the imposition unilaterally of the 14 administrative penalty rule. It's -- obviously, there 15 would still be an opportunity, should there be an 16 objection to the payment of that under an agreement, 17 there would be an opportunity for notice of a 18 contested case proceeding. 19 CHAIRMAN CLOWE: Help me -- my 20 understanding was a little bit different. The 21 respondent had to come back in 20 days and say, okay, 22 I agree and I'll pay it, or it went into the penalty 23 procedure. That's the way I understood it. 24 MS. JOSEPH: That's true. But what 25 would normally happen was, there wouldn't be an 0154 1 opportunity. The way it is now, there is not 2 necessarily that opportunity to go ahead and take care 3 of it as quickly. I mean, right now, everything goes 4 into the hearing procedure. 5 CHAIRMAN CLOWE: Okay. But he is just 6 asking for three times the amount of time the staff 7 granted in the proposed rule. But in that period of 8 time, the 20 days, if they say, okay, we agree, we did 9 it, we won't do it any more and here's -- we'll pay. 10 That's my understanding. I'm not sure what you said, 11 but that's what I understood. 12 COMMISSIONER COX: Kind of like my 15 13 dollars. 14 CHAIRMAN CLOWE: Exactly. Exactly. If 15 you want a trial, then pay it after, it has to be 30 16 bucks plus court costs. 17 COMMISSIONER COX: Right. 18 CHAIRMAN CLOWE: I've been to one, 19 so... 20 MR. FENOGLIO: And if that were -- 21 CHAIRMAN CLOWE: I think the only 22 argument Mr. Fenoglio has with the staff is the period 23 of time. 24 COMMISSIONER COX: It seems so. 25 CHAIRMAN CLOWE: Is that right, Steve? 0155 1 MR. FENOGLIO: On this issue, yes. 2 CHAIRMAN CLOWE: On that issue? 3 MR. FENOGLIO: And if staff's intent 4 was, after this 20-day period, this charity could -- 5 because it took them longer than the 20-day period to 6 get their ducks in order -- 7 CHAIRMAN CLOWE: Then go to a contested 8 proceeding. 9 MR. FENOGLIO: Exactly. There is no 10 other opportunity. And that's clear when you read 11 subparagraph (e), the last sentence, the opportunity 12 for an agreement, in accordance with this section, 13 will expire. Again, talking about the 20-day period. 14 CHAIRMAN CLOWE: The only disagreement 15 is 20 versus 60 days. 16 COMMISSIONER COX: Mr. Chairman, that's 17 all the questions I have. 18 CHAIRMAN CLOWE: Thank you, 19 Mr. Fenoglio. 20 MR. FENOGLIO: Thank you. 21 CHAIRMAN CLOWE: Ms. Ives, will you 22 come up here now? 23 MS. IVES: Good afternoon. My name is 24 Sharon Ives. I'm with Fort Worth Bookkeeping, in Fort 25 Worth, and my office handles over 50 nonprofit bingo 0156 1 organizations. 2 I agree with the different items that 3 Steve Fenoglio has just testified on. I also was one 4 of the members that served on the workgroup for both 5 of the penalty rules. I was opposed then and I'm 6 opposed now. My comment throughout the workgroup 7 meetings was, we are to be helping charitable bingo, 8 not penalizing them. And that's the same testimony 9 today. 10 One of the items, I believe -- I don't 11 want to be repetitive on what Steve had just 12 mentioned. The 20-day item is an issue for me as 13 well. Like Steve stated, a lot of the organizations 14 meet on a quarterly basis. That would give them more 15 time to, like Steve said, get their ducks in a row. 16 I need clarification on -- it says, 17 upon completion of an examination, inspection, audit, 18 or an investigation. Investigation, would that be an 19 A and A on what the local offices -- when they come 20 out to the bingo hall, identify themselves, make sure 21 you have your licenses posted, things like that? 22 Would that be classified as the investigation or an 23 inspection? 24 CHAIRMAN CLOWE: Ms. Ives, we're going 25 to listen to your comments, but we're not going to 0157 1 answer questions today. 2 MS. IVES: Sure. 3 CHAIRMAN CLOWE: If you need help on 4 that, talk to Mr. Atkins. Ms. Joseph will be glad to 5 help you. But the Commission needs to take your input 6 right now. 7 MS. IVES: Yes, sir. Thank you. 8 Basically, that's the testimony today. 9 CHAIRMAN CLOWE: Very good. Thank you, 10 ma'am. 11 MS. IVES: Thank you. 12 CHAIRMAN CLOWE: Mr. Bresnen. 13 MR. BRESNEN: Thank you, Mr. Chairman. 14 My name is Steve Bresnen. I'm here on behalf of the 15 Bingo Interest Group. 16 I subscribe to Mr. Fenoglio's 17 testimony, but I would like to make a couple of 18 additional points. I'll try not to be repetitive. 19 I think the concern of Commissioner Cox 20 about the penalties going up, I think the concern is 21 that under this new procedure and standard chart, the 22 amount of money collected on penalties in the past 23 will be exceeded by penalties in the future, collected 24 under this new rule. I think that's our concern. 25 Now, you know, I know y'all will empathize with what 0158 1 I'm about to say, but when I crossed 50 I started 2 forgetting a lot of stuff that I had seen before. 3 CHAIRMAN CLOWE: Wait until you cross 4 70. The best is yet to come. 5 MR. BRESNEN: I don't really remember 6 the amount of penalties collected as being something 7 that's been prominently reported in the past. So I 8 would be interested to know what -- how much has been 9 collected in the past, and I would like for you guys 10 to watch carefully about what happens in the future 11 under this new rule, should you ultimately approve it. 12 Because that money has to come from somewhere. And, 13 you know, one of the significant elements that has 14 been dropped out of the rule is the source of payment 15 for any penalties under this rule has been opened up. 16 And I thank you for that. But, you know, most of my 17 experience is in the legislative process, and the 18 worst thing you can have happen is to have a Senator 19 present you with their bill and ask you to, you know, 20 tell -- tell them what you think about it. And you 21 don't like the bill, you never liked the bill, you 22 think the idea is fraught with all kinds of problems, 23 and as soon as you start talking about it, you start 24 improving the Senator's work product, and then you're 25 stuck with the bill. So I think, you know, it should 0159 1 be clear that from the get-go, we don't accept the 2 rationale for the bill. Steve talked about the -- 3 where this came from. If you go back and look at the 4 Sunset Commission report where this idea came from, 5 you -- number one, it's part of their uniform 6 recommendations for agencies, but number two, there is 7 absolutely no discussion of the need for it. There 8 has been -- there was no analysis of whether the 9 agency had been inconsistent in the past. And if -- 10 if this is an admission, that we've been inconsistent 11 in the past, that the agency has in its application of 12 these penalties -- well, I'll just leave that sentence 13 hanging. I'm not sure how to finish it. 14 I think in the information that you're 15 being asked to propose, where it says on page -- I'm 16 using the version that I got outside out here, on the 17 second page of the draft, on the third and fourth 18 lines down, that there will be no fiscal impact. I'm 19 assuming that's a fiscal impact on the State. I 20 believe that's what is to be quantified in that line 21 is zero. Well, if it won't change the amount of 22 penalties coming up or down, then you would think the 23 application of the authority to impose penalties would 24 be the same after this rule as before this rule. If 25 that's the case, it seems to me like you're probably 0160 1 being consistent now. So I will question that there 2 is any need for the rule to begin with. 3 Now, in terms, Commissioner Cox, of 4 knowing what the rules of the game are, that -- that 5 would be a real good thing except that this product 6 doesn't do that. The -- I'm looking at 706. Now, in 7 the first paragraph, it says, the person of this -- 8 the purpose of this section is to provide guidance. 9 And then in the -- well, it's the next to the last 10 line on that version, it refers to it as this 11 guideline. And then I believe there is enough wiggle 12 room between words like "may," and things that may be 13 considered and so forth, that I'm not sure what you're 14 achieving in terms of the sort of rigor that you're -- 15 the way you phrased your observation about this seems 16 to imply. And we're not asking for any more rigor. 17 So I -- again, I don't want to fix your product, the 18 agency's product here, because I don't -- I think it's 19 extremely difficult to apply the concept in a context 20 in which the vast majority of participants are 21 volunteers. 22 Ms. Ives, if I could use her as 23 experienced, she's a professional bookkeeper. I think 24 she does a wonderful job. And during the public 25 comment period, I'm going to come back and tell you 0161 1 how wonderful a job she does about a matter that's not 2 listed in -- it's not consistent with this particular 3 item. But the fact is that even the professional 4 bookkeepers are relying on the information that, 5 typically, a bunch of volunteers or low-paid employees 6 are presenting to them. I think it's very difficult 7 in that circumstance to achieve the kind of degree of 8 accuracy that you're probably used to in your 9 professions and that I'm interested in -- or that I'm 10 used to. And so I'm concerned about the inadvertent 11 negligent -- just the flat old mistake, transposition 12 errors. So when I look at the rule, when I see that 13 the staff has made a -- has made a vow to that 14 consideration -- I'm going to try to use the version 15 that you're using there. There is a section that 16 says, in determining the penalty, that -- I'm on page 17 one, two, three, four -- I think it's page five. I'm 18 sorry. Page six. We need a read -- we need a rule to 19 have page numbers on these things. Oh, about 20 two-thirds of the way down the page, one of the things 21 that may be considered is whether a violation was 22 intentional, inadvertent, simple negligence, gross 23 negligence, or the unavoidable result of a -- of a 24 related violation. 25 Well, I like the last phrase there, 0162 1 because, hopefully, that will be -- that will mitigate 2 against stacking the fences. Because if I transpose 3 numbers on my quarterly report, I've made a false 4 entry in the report, and that may affect my 35 percent 5 distribution calculation. Now, that is an unavoidable 6 result of a violation, that I may trigger multiple 7 provisions in the statute, but I'm not sure how the 8 staff will weigh that because it's just something to 9 be considered. Is it an element of proof if the 10 person decides not to go -- not to accept an expedited 11 settlement, or you're trying the case under the 12 penalty rule, is it an element of proof before the 13 SOAH judge that they have to make in order to pick a 14 number between, say, zero and 1,000 dollars? Do they 15 have to prove intentional in order to get the 1,000 16 dollars? And if the respondent proves that it was 17 inadvertent, do they get the zero? I don't know the 18 answer to that and I don't think there is one today. 19 I think the wiggle room and agency 20 discretion has been maximized in the course of doing 21 this rule. And so I think where it started was a 22 flawed suggestion by the Sunset Commission, and its 23 execution is flawed, but not because of the -- of any 24 defect necessarily in the staff's work, it's just damn 25 hard to do, if you'll excuse my -- my French. That's 0163 1 better than the comparison I made to David Heinlein 2 the other day, so hopefully -- he'll appreciate that. 3 Now, I'm looking in the portion of the 4 rule that says -- that reserves your discretion to 5 make the final decision in contested cases. And let 6 me just see if I can put you on the right page number 7 here. I'm on page four, under section -- subsection 8 (e) there down at the bottom. And, you know, I hate 9 to do too much wordsmithing on this in this -- in this 10 public meeting, but, you know, words matter. The 11 sentence says, the Commission shall render the final 12 decision in a contested case and has the 13 responsibility to assess sanctions against licensees. 14 I'm just going to stop there. Who had -- who are 15 found to have violated. 16 I think the overall purpose of this 17 statute is not to close off by rule your discretion in 18 contested cases to do the job that is your job under 19 the Administrative Procedures Act and under the 20 statute. And I understand that. I've explained it to 21 my clients in legal terms and I think they -- they get 22 it. I'm concerned about the phraseology, because I 23 don't think you have the responsibility to assess 24 sanctions. I think you have the discretion to do 25 that, but I don't think you should be bound by that 0164 1 language to assess sanctions, particularly when so 2 many of these violations in a highly complex statute 3 are by volunteers who have made errors for whatever 4 reason. I would like to see capital punishment in a 5 rule for anybody that steals the money. But, you 6 know, what I see here is up to a thousand dollar fine. 7 I don't know if that can be increased, you tell me. 8 Could it be increased? But if somebody steals the 9 money, that's one thing. If someone makes a 10 transposition error or the like, or just messes up, 11 then they shouldn't be penalized and you don't have 12 the responsibility to sanction that person. You've 13 got the authority to sanction them. 14 And let me just call attention to one. 15 This is a -- this is little bit of an, I got you, and 16 I really don't intend it that way. Because under the 17 expedited procedure here, only warnings are referred 18 to in the standard penalty list on that for this 19 violation. But I know and I've got an example here 20 today -- and I know this happens a lot -- is, the 21 agency's field employees are writing up people -- this 22 is October 3rd, 2005. Fairly recently. A letter 23 received by the Jewish Women International 242 Dallas 24 Council that hits them for failing to have the 1-800 25 compulsive gambling number on their card-minding 0165 1 devices. You're required in the statute to have that. 2 That number no longer exists. It's not functional. 3 Dial the number. Now, I gather that the agency feels 4 the need to enforce that because it's still in your 5 statute, and when they defunded the thing and removed 6 it over at the Health and Safety Code or Human 7 Services Code, that they failed to clean up the Bingo 8 Enabling Act in that regard. But the fact is, that's 9 happening out there. Now, people are -- will be 10 having to address that, literally, under the expedited 11 procedure rule, if they don't respond within 20 days, 12 they're off into a hearing about not having a number, 13 a phone number on there that doesn't work anyway. 14 So there is -- my concern is that rules 15 like this, even though they may provide broad 16 discretion, become sort of a lock-step mentality and a 17 place for agency personnel to fix their attention and 18 explain their judgments, when, in fact, another 19 judgment ought to be made on it, given the 20 circumstances. 21 I think there are some areas where 22 you're tying your own hands. Number one, and number 23 two, if the object is to facilitate settlements, then 24 I think you may have some provisions in here that 25 won't do that. I'm looking at these -- I've talked to 0166 1 you about the sanctions provision, how that might tie 2 your own hands. Over in the Administrative Procedures 3 Rule it says, respond within 20 days -- accept the 4 violation within 20 days or go to a hearing. What if 5 somebody wants to negotiate during that time frame, 6 whatever the time frame is, what if they want to 7 negotiate. The director doesn't even have the 8 authority under that to extend the time frame and 9 still let them participate in the expedited rule 10 proceeding, so there needs to be some -- there needs 11 to be a little flex in there to let everybody work 12 together, which I think has pretty well been the case. 13 Not always the case. I think it has been. 14 And I'm -- I'm going to finish up here 15 real quick. I don't really understand the structure 16 of these two rules. The first rule has a very lengthy 17 list of things that convey a standard penalty. And 18 then it has a catchall phrase that says, all of those 19 can be done over under the expedited penalty rule. 20 The second, the expedited penalty rule has a truncated 21 and different list of things that it seems to apply 22 to, but I think, again, it's not necessarily limited 23 to those things. So, frankly, I don't know what that 24 means. I don't know if the different list under the 25 administrative penalty rule -- I didn't see the same 0167 1 violation -- they seem to be two separate lists. So 2 I'm not seeing -- I don't see the -- and correct me if 3 I'm wrong, but I -- they seem to be mutually 4 exclusive, at least in terms of the same violations 5 are not in both lists. I don't know if that means we 6 don't have a standard penalty for those violations in 7 the second rule, except the penalty is listed in that 8 rule, or if maybe they come under the previous rule 9 where there is a range. There is not a range of 10 penalties on the expedited penalty rule, at least the 11 version that I printed off the Internet, there wasn't. 12 So anyway, I'll stand to be corrected if I'm wrong -- 13 wrong on that. 14 And finally, in terms of comparability 15 with the lottery, you're exercising your discretion to 16 put these rules out. You may not have discretion 17 under the Lottery Act to impose a monetary penalty or 18 you may, I don't know. I haven't looked at it, but 19 I'll take Kim's word on it. But you do have the 20 discretion regarding the degree to which you exercise 21 your power to impose sanctions under the Charitable 22 Bingo Act to make them as comparable as you can. And 23 that would be a wise thing to do, given the nature of 24 the participants. 25 I thank you for your time and I'm sorry 0168 1 I went on. As usual, I was longer than I expected to 2 be. 3 CHAIRMAN CLOWE: Thank you, Steve. 4 Any comments or questions. 5 COMMISSIONER COX: No. 6 CHAIRMAN CLOWE: I have a couple of 7 questions. Billy, I think there is an unanswered 8 question out there about manufacturers and 9 distributors. What is the status there? 10 MR. ATKINS: In terms of violations? 11 CHAIRMAN CLOWE: Yes. 12 MR. ATKINS: It was my understanding, 13 Mr. Chairman, that when this -- a draft copy of this 14 rule was first proposed, it contained a list of every 15 violation in the Act or rules with some type of 16 penalty amount assessed to it. And this was when we 17 were in the informal period with the work groups. And 18 I believe that the overriding concern at that time is 19 that the rule, in and of itself, was too long. And 20 that listing all of the potential violations was too 21 overwhelming. And so my understanding -- and I would 22 have to defer to Ms. Joseph, Mr. McDade or 23 Mr. Sanderson -- that what was negotiated in the 24 workgroup sessions is that the rule would contain the 25 most common violations that were uncovered, 0169 1 particularly through the course of audits conducted by 2 the Commission. And inasmuch as, I believe, 3 Mr. Fenoglio referred to it, there are approximately 4 1300 conductors, 1400 lessors, and about 40 5 manufacturers and distributors. The majority of those 6 relate to conductors and lessors. 7 CHAIRMAN CLOWE: Okay. That answers it 8 for me. Thank you. 9 I want to thank you, Mr. Bresnen, 10 Ms. Ives, and Mr. Fenoglio for your presentations, and 11 I also want to thank all of you who have come here 12 today who have not spoken. You are doing what, I 13 think, is important on behalf of your business 14 interests. You have come and appeared and registered 15 your interest, at your own expense and giving up your 16 own time. And that is what we really appreciate and 17 thank you. Even though you didn't speak to the 18 Commission, your presence is noted and we're 19 appreciative of it. I want to say to you that, to my 20 knowledge, this process has been going on about a year 21 and a half. I think there is clearly still some 22 disagreement over the issues that have been identified 23 here. And my sense is that we need to start the clock 24 now on getting some solution. There are some bright 25 minds, obviously, involved in this process, and the 0170 1 only way we're going to come down to a settlement on 2 this, in my mind, is start the clock. 3 So I'm going to move that the 4 Commission adopt the recommendations of staff to 5 publish this rule -- or these rules for comment. I 6 would tell you that I am disposed, just as one 7 Commissioner, to give more time than 20 days on 8 expedited procedure. 9 Is that a proper comment at this time? 10 MS. KIPLIN: Yes. 11 CHAIRMAN CLOWE: I think that the point 12 is well made that it may be difficult for these 13 organizations to come back in 20 days and give a valid 14 response. I think 60 is a little long. Maybe 30 or 15 45 days, but I think a reasonable period of time 16 should be allowed so that an organization, a charity, 17 can see where they are, and respond. And I think the 18 whole purpose of this expedited procedure, as I 19 understand it, is to settle these things quickly and 20 properly and get them behind us. 21 Billy, how many of the charities and 22 conductors are being audited every year? 23 MR. ATKINS: I'm going to have to ask 24 Marshall McDade, the Senior Audit Manager, to address 25 that. 0171 1 MR. McDADE: Good afternoon. 2 Marshall McDade, Senior Audit Manager. 3 Last year, calendar -- fiscal year 4 2005, we conducted 454 audits. Those were distinct 5 audits of various charities and lessors. 6 CHAIRMAN CLOWE: Could one assume, 7 based on that average, then, that you're getting to 8 every charity at least once every three or four years? 9 MR. McDADE: Probably every four years 10 is our goal. 11 CHAIRMAN CLOWE: And I guess that's why 12 you want the look back of the longer period. 13 MR. ATKINS: Well, and that's 14 consistent with other requirements in the 15 administrative rule, and that's part of the 16 justification of that, yes, sir. 17 CHAIRMAN CLOWE: Okay. Well, it seems 18 to me that we ought to do a better job of auditing and 19 get these audits done timely, and find the violations 20 sooner than three or four years. That's just a 21 comment that I would like to make. I think when you 22 hold an entity out on a longer period of statute 23 running, you know, we owe them the service of auditing 24 and getting on with it. And I don't think I could 25 offer a solution at this time, but that's a comment I 0172 1 want to make. 2 I think it's a shame that working 3 together for a year and a half, we haven't gotten 4 closer together than apparently we have, but we've got 5 this comment period if the Commission votes to adopt 6 the recommendation of staff to public the rules. 7 We've got some fine legal minds. I hope y'all will 8 come together and work some solutions on this. I 9 think we need the rules. I think it's time to codify 10 them and put them down. I think -- I understand the 11 argument that Sunset didn't follow up and the 12 Commission didn't pass Sunset, it hasn't passed, but 13 we need the rules. I also understand the argument 14 that you've got volunteers and they're not trained, 15 and they're not full-time. You know, when I was in 16 the trucking business, I used to use that with my 17 dispatchers and my terminal managers and people -- you 18 know, I would paint those pictures and people would 19 just almost be in tears about how we had to work with 20 who we had to work with. But, you know, everybody has 21 got rules and everybody does have to comply. Even 22 Commissioner Cox has got to pay his parking ticket 23 when it comes right down to it. 24 I'm going to move that we adopt the 25 staff's recommends. 0173 1 COMMISSIONER COX: Second. 2 CHAIRMAN CLOWE: Is there a second? 3 All in favor, please say aye. Opposed, no. The vote 4 is two-zero. 5 We're going to move to one last subject 6 before we go into executive session, if -- 7 Commissioner, if that's okay with you. 8 COMMISSIONER COX: Sure. 9 CHAIRMAN CLOWE: And that would be item 10 number 18, consideration of and possible discussion 11 and/or action on the appointment and employment of the 12 Executive Director. Is Ms. Morris here? 13 Nelda, why don't you come on up and 14 give your report while we're waiting for her and we'll 15 use the time. You're ready, aren't you? 16 MS. TREVINO: Yes, sir. 17 CHAIRMAN CLOWE: Let me see. You're 18 number 16, report, possible discussion and/or action 19 on the 79th Legislature. 20 MS. TREVINO: Good afternoon, 21 Commissioners. For the record, I'm Nelda Trevino. 22 I'm the Director of Governmental Affairs. 23 And today I would like to provide an 24 update on several matters as it relates to the 79th 25 legislature. The first relates to interim committee 0174 1 charges. As you know, the Speaker and the Lieutenant 2 Governor assign charges to each committee to study and 3 possibly conduct hearings on a particular issue or a 4 particular area under the committee's oversight. On 5 October the 19th, the Speaker of the House issued 6 interim study charges to each of the 36 House 7 committees. In your notebook is a copy of the interim 8 study charges for the House Committees on Licensing 9 and Administrative Procedures, the Appropriations 10 Committee, and the Committee on Government Reform. 11 I would like to bring to your attention 12 several charges assigned to the House Committee on 13 Licensing and Administrative Procedures. Interim 14 study charge number four states, evaluate the 15 possibility of increased revenues and unintended 16 problems that might result in selling lottery tickets 17 at new alternative locations and recommend any needed 18 statutory changes. Based on preliminary discussions 19 with the committee clerk and in preparation of being 20 responsive to the committee, we plan to review our 21 prior research on fiscal analysis and revenue 22 produce -- on revenue producing initiatives, 23 potentially related to this interim committee charge. 24 While no specific requests have been received and no 25 hearing dates have been announced, we intend to be 0175 1 prepared to respond to any requests for information or 2 testimony related to this interim charge. 3 I also want to note interim study 4 charge number six, and this charge states, monitor the 5 agencies and programs under the committee's 6 jurisdiction. The Lottery Commission is one of the 7 agencies under this committee's oversight, and under 8 this charge, the committee could review and study any 9 program or matter related to the Commission. 10 Also of interest is interim study 11 charge number two, and this charge states, review ways 12 to make Texas' racetracks more attractive to Texans 13 and tourists in order to keep them viable and 14 producing tax revenue for the State. 15 Additionally, there are several -- 16 several charges issued to the House Committee on 17 Appropriations and the House Committee on Government 18 Reform that are applicable to all State agencies. And 19 I would like to bring to your attention interim study 20 charges number one, two, three and four, assigned to 21 the Appropriations Committee, and interim study charge 22 number one, assigned to the Government Reform 23 Committee. We'll be monitoring the activities of 24 these committee interim charges and any hearings that 25 might take place, and we'll certainly keep you advised 0176 1 of any requests made of the agency as it relates to 2 these charges. 3 It is anticipated that the Lieutenant 4 Governor will be assigning interim study charges to 5 each of the Senate committees in the very near future. 6 And, again, we'll provide you information as soon as 7 those announcements are made. 8 The last item I want to report on is -- 9 relates to the agency legislative briefings. And as I 10 reported at the last meeting, we will be scheduling 11 these briefings throughout this fiscal year, and we 12 did hold our first briefing on October the 6th. We 13 had an opportunity to provide some relevant 14 information related to the agency to approximately 24 15 individuals that were in attendance. And, 16 additionally, we provided the information presented at 17 the briefing to those offices that were unable to 18 attend. 19 This concludes my report and I'll be 20 happy to answer any questions. 21 CHAIRMAN CLOWE: Any questions? Thank 22 you, Nelda. 23 Diane, would you come up please, under 24 item 18, and give us a report on the search 25 committee's activities and recommendations, please, 0177 1 ma'am. 2 MS. MORRIS: Yes, sir. On October the 3 14th, the executive director search committee held its 4 interviews in this office. Chairman Clowe, you were 5 one of the members of the search committee. For 6 those -- in case for your record here, it was also 7 Professor Busald participated as a member of the 8 search committee; Mr. John Edwards, from the State 9 Bar; Mr. David Heinlein, from the Bingo Advisory 10 Committee; Mr. Francisco Hernandez, a Commissioner 11 with the Texas Ethics Commission; Mr. Rick Johnson, 12 the president of the Texas Grocery and Convenience 13 Association; Mr. Anthony Sadberry, a former Texas 14 Lottery Commission Commissioner; 15 Ms. Elizabeth Whitaker, also a former Texas Lottery 16 Commission Commissioner, and Ms. Lettie Vasquez, a 17 current employee of the Texas Lottery Commission. The 18 day began a little bit before 9:00, and the search 19 committee ended their work somewhere around 4:00 or 20 5:00. At that time, the search committee visited 21 amongst themselves, if you will. No other members 22 were present, other than the members of the search 23 committee during their visit, after all the interviews 24 had been conducted, and it was after that time the 25 search committee was able to visit by themselves with 0178 1 themselves that four individuals were identified as 2 being recommended to the Texas Lottery Commission 3 Commissioners for y'all's consideration. Four of the 4 candidates were not recommended for further 5 consideration. Now, having said that, that does not 6 mean that even those four that were not recommended 7 could not ultimately be interviewed and considered by 8 the Commissioners and, likewise, certainly, much 9 consideration will be given to the four persons that 10 were recommended, that does not, if you will, 11 guarantee them an interview or further consideration 12 by the Commissioners. However, it's very clear that 13 the search committee has worked very hard. For your 14 purposes, we are continuing to send the applications 15 as we receive them to the members of the search 16 committee. And at this point, 129 applications have 17 been received by the Texas Lottery Commission for the 18 positions. That's the end of my report. 19 CHAIRMAN CLOWE: Thank you, Diane. 20 MR. ATKINS: Mr. Chairman, I want to -- 21 Mr. Chairman, if I could, for the record, I just 22 wanted to clarify one thing. I think Ms. Morris 23 referred to David Heinlein as a member of the Bingo 24 Advisory Committee. 25 MS. MORRIS: Yes, I did. That's 0179 1 incorrect, too. 2 MR. ATKINS: Yes. And I believe you 3 appointed him as a representative of the bingo 4 industry. Mr Heinlein is not presently a member of 5 the Bingo Advisory Committee. 6 CHAIRMAN CLOWE: Thank you for that 7 clarification. 8 MS. MORRIS: Thank you, Billy. 9 CHAIRMAN CLOWE: I would like to add 10 that Commissioner Cox came into the office over the 11 noon hour, and I left the meeting and he acquainted 12 himself with all of the members of the search 13 committee. And I don't know what he talked with them 14 about, but he was there. And we thank you for making 15 that appearance. 16 I wanted to thank again, although I 17 thanked them individually in writing, the members of 18 the search committee for their good work. It's rare 19 to see a group of people come together and work so 20 hard during a day and immediately establish rapport 21 and do the great job for the State of Texas that they 22 did. I did sit in on the interviews, but as Diane has 23 correctly stated, she and I left the room when they 24 did their deliberations and then made the 25 recommendation of four individuals for interview by 0180 1 the Commissioners. It has been made abundantly clear 2 to the group that they are, in fact, a search 3 committee and not a selection committee and that only 4 the Commissioners will be making the selection. 5 Nonetheless, I am, and I'm sure Commissioner Cox is 6 going to take their recommendations quite seriously, 7 and I -- although, I don't know what his plan is, my 8 plan is to interview each of the four individuals, and 9 perhaps others that have made application. We're 10 trying -- and I say "we" in a sense that the 11 Commissioners are trying very hard to select the 12 best-qualified candidate for this individual position, 13 and the posting is open until filled. So there is no 14 limitation on the number of applications that we can 15 receive. We can continue to receive those as this 16 process goes on. 17 Gary Grief is the Acting Executive 18 Director. By law, he can only be in that position for 19 six months, and that period expires somewhere in early 20 January. So we have a clock running on this aspect of 21 what we're about at this time, but we're not going to 22 let that push us -- I think I can say "us." I can 23 say, I will not let that push me into a decision based 24 on that. We may have to deal with that, but we are 25 going to be focused on the best candidate. 0181 1 If you are aware of someone who would 2 be interested in this position, the compensation is 3 capped at 115,000 dollars a year, at this time. I, 4 for one, would appreciate you communicating this 5 opportunity to that individual and urge their 6 interest, because although we have these four 7 recommendations from the committee and we're very 8 respectful of them and, as I say, intend to interview 9 them, we are open to additional applications and will 10 remain so until the position is -- is filled. 11 But, again, I want to thank all the 12 members of the search committee. They did a great 13 job, and that's a real service to the State of Texas 14 when they come in on their own time, at their own 15 expense, and put in the kind of day's work that they 16 did. 17 Any comments, Commissioner Cox? 18 COMMISSIONER COX: I agree with all of 19 that. 20 CHAIRMAN CLOWE: And if you're 21 agreeable, I'm going to move we go into executive 22 session. 23 At this time I move the Texas Lottery 24 Commission go into Executive Session to deliberate the 25 appointment, employment, and duties of the Executive 0182 1 Director, the Acting Executive Director, and/or Deputy 2 Executive Director, to deliberate the duties and 3 evaluation of the Internal Audit Director and 4 Charitable Bingo Operations Director, and to 5 deliberate the duties of the General Counsel, pursuant 6 to Section 551.074 of the Texas Government Code. 7 To receive legal advice regarding 8 pending or contemplated litigation and/or to receive 9 legal advice pursuant to Section 551.071(1)(A) or (B) 10 of the Texas Government Code and/or to receive legal 11 advice pursuant to Section 551.071(2) of the Texas 12 Government Code, including but not limited to: 13 Patsy Henry versus Texas Lottery Commission 14 Linda Cloud versus Mike McKinney, et al. 15 James T. Jongebloed versus Texas Lottery Commission 16 Russell Verney versus Carol Keeton Strayhorn, Greg 17 Abbott, and Reagan E. Greer, in their individual and 18 official capacities 19 GameTech International versus Greg Abbott, Attorney 20 General of Texas, et al. 21 Michael McDaniel, Jeff Schuckers, and William Wilson 22 versus Northstar Bank of Texas, et al. and 23 Northstar Bank of Texas versus Elite M&S, 5395 24 Partners Limited, and Faye Lynn Wilson 25 In re Matter Involving the Assignment of Lottery Prize 0183 1 of Walter Gonzalez 2 Michele Sanchez, et al. versus Texas Lottery 3 Commission, et al. 4 Charles Isbell versus Atkins, et al. 5 Texas Lottery Commission versus Joel Bowen and 6 Associates, Inc. d/b/a JB & Associates 7 Employment law, personnel law, procurement and 8 contract law, evidentiary and procedural law, and 9 general government law. 10 Request for the Attorney General's opinion regarding 11 game rules. 12 Is there a second? 13 COMMISSIONER COX: Second. 14 CHAIRMAN CLOWE: All in favor, please 15 say aye. Opposed, no. The vote is two-zero. 16 The Texas Lottery Commission will go 17 into Executive Session. The time is 1:30 p.m., today 18 is October 31st, 2005. 19 (EXECUTIVE SESSION.) 20 CHAIRMAN CLOWE: The Texas Lottery 21 Commission is out of the Executive Session. The time 22 is 2:30 p.m. Is there any action to be taken as a 23 result of the Executive Session? 24 If not, let's move to item number 21, 25 consideration of the status and possible entry of 0184 1 orders in the cases of dockets represented by the 2 letters A through Y. 3 MS. KIPLIN: Commissioners, in the 4 interest of time, I am not -- I have not received an 5 appearance from anybody in any of these matters. We 6 are not -- asking that we pass item Q, that is the 7 Red Men matter. Item Q, the Red Men matter, we're 8 requesting that you pass until the next Commission 9 meeting. 10 CHAIRMAN CLOWE: All right. Any 11 objection to that? 12 COMMISSIONER COX: No, sir. 13 CHAIRMAN CLOWE: The item is passed. 14 MS. KIPLIN: And then with regard to 15 all of the others, with the exception of item X, 16 that's a motion for rehearing, the staff would just 17 recommend that you adopt the orders, either in the 18 contested case proceedings or the agreed orders. 19 With regard to -- I'll wait if you want 20 to make a motion. 21 CHAIRMAN CLOWE: I move that the 22 Commission adopt the recommended orders represented in 23 the dockets by letters A through P, and R through W, 24 and Y. Is there a second? 25 COMMISSIONER COX: Second. 0185 1 CHAIRMAN CLOWE: All in favor, please 2 say aye. Opposed, no. The vote is two-zero. 3 MS. KIPLIN: And, Commissioners, I 4 would ask that as a consideration of the motion for 5 rehearing in Margie's Grocery and Market, we've 6 already extended this once and -- when Mr. Grief 7 entered the order to extend, we're on the last 45 8 days. The staff at this point would recommend that 9 you overrule the motion for rehearing. I don't 10 believe there is anybody here that is entering an 11 appearance on Margie's Grocery, but -- 12 CHAIRMAN CLOWE: Seeing no one, I so 13 move. 14 COMMISSIONER COX: Second. 15 CHAIRMAN CLOWE: All in favor, please 16 say aye. The vote is two-zero. 17 We'll sign the orders now. 18 MS. KIPLIN: Okay. And just to make 19 sure, on the matter of involving Mr. Rothenburg, no 20 appearance. Right? 21 MR. WHITE: That's what we 22 recommended -- 23 MS. KIPLIN: He voted to enter the 24 staff's recommendation on that matter. And if I'm 25 mistaken, then I'll get it clear right now. 0186 1 MR. WHITE: That's my understanding, 2 too. 3 MS. KIPLIN: Commissioners, just -- 4 just to make sure that we're square with you all. 5 There is a matter, you voted to accept the staff's 6 recommendation on that. And that's -- Mr. White, help 7 me find that. Item J, that -- staff's recommendation 8 is to remove Mr. Rothenburg from the Bingo Registry 9 and impose an administrative penalty. That is not 10 what the ALJ recommended. We did receive the -- the 11 record, including the exceptions on that matter, so I 12 want to make sure that you all -- 13 CHAIRMAN CLOWE: So that was a staff 14 recommendation? 15 MS. KIPLIN: Yes. I want to make sure 16 that you understand that you are -- you are not 17 accepting the ALJ's recommendation on that. 18 CHAIRMAN CLOWE: I'm clear with that. 19 COMMISSIONER COX: I'll not sure I'm 20 happy with that. 21 CHAIRMAN CLOWE: Okay. 22 COMMISSIONER COX: I had some questions 23 regarding that matter, and in the interest of time, 24 maybe we ought to delay it until the next time. But I 25 think unless we have time, Mr. Chairman, to discuss 0187 1 that, I would rather delay it. 2 CHAIRMAN CLOWE: Let's delay it. 3 MS. KIPLIN: Okay. Well, then your -- 4 your vote would be -- your motion and your vote would 5 be to enter all of -- with the exception of the one 6 that -- that we just mentioned, which is item J, 7 Arthur D. Rothenburg. 8 CHAIRMAN CLOWE: Do I make a motion to 9 take that out of the original -- 10 MS. KIPLIN: Would you do that, and 11 we'll carry it forward -- 12 CHAIRMAN CLOWE: I so move. 13 COMMISSIONER COX: Second. 14 CHAIRMAN CLOWE: All in favor, please 15 say aye. Opposed, no. The vote is two-zero. 16 MS. KIPLIN: I apologize for any 17 inconvenience. 18 CHAIRMAN CLOWE: The Commission is 19 going to adjourn at this time. We have some 20 unfinished business, but there is another commitment 21 that the Acting Executive Director and I have at the 22 Capitol, so we will at this time, 2:33, adjourn this 23 meeting of the Texas Lottery Commission. Thank you 24 all very much. 25 0188 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 10TH day of 16 NOVEMBER, 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: 12-31-07 1801 N. Lamar Boulevard 23 Mezzanine Level Austin, Texas 78701 24 (512) 474-4363 25 JOB NO. 051031BJW