0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, JANUARY 16, 2008 § 8 9 COMMISSION MEETING 10 WEDNESDAY, JANUARY 16, 2008 11 12 BE IT REMEMBERED THAT on Wednesday, 13 the 16th day of January 2008, the Texas Lottery 14 Commission meeting was held from 9:04 a.m. to 15 3:03 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONERS 18 C. TOM CLOWE, JR., and DAVID SCHENCK. The following 19 proceedings were reported via machine shorthand by 20 Aloma J. Kennedy, a Certified Shorthand Reporter of 21 the State of Texas, and the following proceedings were 22 had: 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONERS Mr. C. Tom Clowe, Jr. 5 Mr. David Schenck 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 DEPUTY EXECUTIVE DIRECTOR: 8 Mr. Gary Grief 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting Called to Order..... 8 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on 3rd quarter 5 calendar year 2007 bingo conductor information..................................... 82 6 AGENDA ITEM NO. III - Consideration of and 7 possible discussion and/or action, including proposal, on amendments to 16 TAC §402.100 8 relating to definitions......................... 91 9 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action, including 10 proposal, on repeal of 16 TAC §402.705 relating to compliance review................... 93 11 AGENDA ITEM NO. V - Consideration of and 12 possible discussion and/or action, including proposal, on repeal of 16 TAC §402.406 13 relating to exemptions from licensing requirements.................................... 94 14 AGENDA ITEM NO. VI - Report by the Charitable 15 Bingo Operations Director and possible discussion and/or action on the Charitable 16 Bingo Operations Division’s activities.......... 95 17 AGENDA ITEM NO. VII - Report, possible discussion and/or action on lottery sales 18 and revenue, game performance, new game opportunities, advertising, market research, 19 and trends...................................... 96 20 AGENDA ITEM NO. VIII - Report, possible discussion and/or action on transfers to 21 the State and the agency’s budget............... 114 22 AGENDA ITEM NO. IX - Report, possible discussion and/or action on Lottery Operations 23 and Services Contract Amendment No. 8 credit calculation..................................... 118 24 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on Bingo indirect 4 and administrative expenses..................... 122 5 AGENDA ITEM NO. XI - Report, possible discussion and/or action on the 80th 6 Legislature..................................... 123 7 AGENDA ITEM NO. XII - Report, possible discussion and/or action regarding the 8 demographic study of Texas Lottery players...... 47 9 AGENDA ITEM NO. XIII - Report, possible discussion and/or action on the agency’s 10 contracts....................................... 124 11 AGENDA ITEM NO. XIV - Consideration of and possible discussion and/or action on external 12 and internal audits and/or reviews relating to the Texas Lottery Commission and/or on the 13 Internal Audit Department’s activities, including the FY07 Financial Audit and/or 14 Mega Millions agreed upon procedures............ 42 15 AGENDA ITEM NO. XV - Consideration of and possible discussion and/or action, 16 including proposal, of repeal and/or new rule 16 TAC §401.312 relating to “Texas Two 17 Step” On-line Game.............................. 126 18 AGENDA ITEM NO. XVI - Report, possible discussion and/or action on the Mega 19 Millions game and/or contract................... 130 20 AGENDA ITEM NO. XVII - Report, possible discussion and/or action on GTECH 21 Corporation..................................... 8 22 23 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVIII - Consideration of the status and possible entry of orders in: 4 A. Docket No. 362-07-3739 – Ola’s Grocery B. Docket No. 362-08-0407 – A-1 Stop N Go 5 C. Docket No. 362-08-0408 – Cheap Cigarettes Discount B & W 6 D. Docket No. 362-08-0573 – Stop N Shop #3 E. Docket No. 362-06-0004.B – Lisa Garland 7 F. Docket No. 362-07-2747.B – Jackie Cory Simpson 8 G. Docket No. 362-08-0154.B – Veronica Williams 9 H. Docket No. 362-08-991211AM.B – In the Matter of the Removal of Certain 10 Respondents from the TLC’s Registry of Approved Workers: Stephanie Alderidge, 11 Karen Bennett, Christopher Carper, Sr., Christopher Engle, Lana Hale, Angelica 12 Jaramillo, Merlinda Johnson, Angie Navarro, Isabell Ramon, Kimberly Shipman, 13 and Carolyn Torres I. Docket No. 362-08-991211PM.B – In the 14 Matter of the Refusal to Add Names of Certain Persons to the Texas Lottery 15 Commission’s Registry of Approved Bingo Workers: Terri Almond, Stephanie Artiaga, 16 Tiersa Bedwell, Helen Claudel Campbell, Tianna Coleman, Maria Enriquez, Joe Adam 17 Gonzales, Lynda Goodwill, Misha Harris, Charles Hyde, William Jaddatz, Monique 18 Masterson, Linda Marie Nuncio, Dennis Reed, Monica Rivera, Ray Simpson, 19 Suzanna Vargas, Stacy Whatley J. Case No. 2008-135 - Mr. H Food Mart...... 131 20 AGENDA ITEM NO. XIX - Report by the Executive 21 Director and/or possible discussion and/or action on the agency’s operational status, 22 activities relating to the Charitable Bingo Operations Division, agency procedures, and 23 FTE status...................................... 166 24 AGENDA ITEM NO. XX - Public comment............. 166 25 0006 1 TABLE OF CONTENTS (continued) 2 AGENDA ITEM NO. XXI - Commission may meet in Executive Session: 3 A. To deliberate the duties and evaluation of the Executive Director 4 pursuant to Section 551.074 of the Texas Government Code 5 B. To deliberate the duties and evaluation of the Deputy Executive 6 Director pursuant to Section 551.074 of the Texas Government Code. 7 C. To deliberate the duties and evaluation of the Internal Audit 8 Director pursuant to Section 551.074 of the Texas Government Code. 9 D. To deliberate the duties and evaluation of the Charitable Bingo 10 Operations Director pursuant to Section 551.074 of the Texas 11 Government Code. E. To deliberate the duties of the 12 General Counsel pursuant to Section 551.074 of the Texas Government Code. 13 F. To receive legal advice regarding pending or contemplated litigation 14 pursuant to Section 551.071(1)(A) and/or to receive legal advice 15 regarding settlement offers pursuant to Section 551.071(1)(B) of the Texas 16 Government Code and/or to receive legal advice pursuant to Section 551.071(2) 17 of the Texas Government Code, including but not limited to: 18 Shelton Charles v. Texas Lottery and Gary Grief 19 First State Bank of DeQueen et al. v. Texas Lottery Commission 20 James T. Jongebloed v. Texas Lottery Commission 21 The Lotter Ltd Employment law, personnel law, 22 procurement and contract law, evidentiary and procedural law, and 23 general government law Lottery Operations and Services 24 contract Mega Millions game and/or contract.. 166 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXII - Return to open session for further deliberation and 4 possible action on any matter discussed in Executive Session............................ 168 5 AGENDA ITEM NO. XXIII - Adjournment............. 169 6 7 REPORTER'S CERTIFICATE.......................... 170 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 WEDNESDAY, JANUARY 16, 2008 3 (9:04 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 9 o'clock or so. Today is Wednesday, the 16th of 7 January. Chairman Clowe is here. Commissioner 8 Schenck is here. Let's call this meeting of the Texas 9 Lottery Commission to order. 10 And I'm going to do a little juggling 11 with the agenda. First let me recognize that Director 12 Sadberry is ill and out today, and Gary Grief is 13 sitting in, in his place. 14 Let's see. Gary, where is the item 15 that you would like to have first? 16 MR. GRIEF: Mr. Chairman, that would be 17 Item No. XVII. 18 AGENDA ITEM NO. XVII 19 CHAIRMAN COX: Okay. Item No. XVII, 20 report, possible discussion and/or action on GTECH 21 Corporation. 22 Gary Grief. 23 MR. GRIEF: Mr. Chairman, this morning 24 we have Mr. Jaymin Patel from GTECH in, along with 25 other representatives from the company. And I believe 0009 1 Mr. Patel has some opening statements that he would 2 like to make. And then I think he will make himself 3 available for any questions that the Commission might 4 have. 5 CHAIRMAN COX: Okay. 6 MR. PATEL: Thank you, Gary. 7 Good morning, Mr. Chairman, 8 Commissioners. Thank you very much. It's a great 9 pleasure for me to be here today. My name is Jaymin 10 Patel, for the record. I'm the CEO of GTECH 11 Corporation. 12 What I thought that I would do today is 13 to cover four matters with the Commissioners, if 14 that's acceptable to you. I thought I would start 15 with a review of GTECH's management structure, since 16 there have been some changes recently. I thought for 17 the benefit of Commissioner Schenck, I might provide a 18 brief overview of Lottomatica and GTECH in terms of 19 our business and our partnership with Texas since 20 1992. 21 I thought it might be helpful also to 22 talk about some work we've been doing recently in the 23 area of best practices, to work with the Texas Lottery 24 to optimize net revenues for the benefit of the Texas 25 Lottery. And, lastly, I thought I would end with a 0010 1 discussion about our commitment to Texas and how we 2 intend to work with you going forward. So if that's 3 acceptable to you as an agenda, I would like to 4 proceed. 5 CHAIRMAN COX: Okay. 6 MR. PATEL: Thank you, Mr. Chairman. 7 So in terms of the management structure 8 here, I have recently been appointed as the CEO of 9 GTECH. My background, sir, is that I have been with 10 the company for approximately 14 years now. I joined 11 the company in '94 in our UK business. And since that 12 time, I have worked my way up in the company from 13 being in finance, to operations. And I moved to the 14 United States in 1997 to work with the then CFO of the 15 company. So I spent my first three or four years in 16 the company working in our European operations. 17 Having worked with the CFO between '97 and 2000 in 18 various financial capacities, I became the company's 19 chief financial officer in the Year 2000, and I served 20 in that capacity between 2000 and 2007. 21 As you may know, in the middle of 2006, 22 we entered into a transaction with Lottomatica, the 23 leading provider of operations in Italy for instant 24 and lotto games. And Lottomatica took over GTECH in 25 August 2006. At that time I became the chief 0011 1 financial officer of the Lottomatica group and served 2 in that position until early 2007. 3 At that time I transitioned into the 4 president and chief operating officer role of GTECH 5 Corporation. And upon the retirement of Bruce Turner 6 most recently in December of 2007, I was appointed as 7 the CEO of GTECH. So my history with the company is 8 long, and I have approximately 13 to 14 years of 9 experience in the lottery industry. 10 We have a lot of experience in the 11 management team at GTECH. We have a lot of experience 12 in the officers and the team that serves the Texas 13 Lottery. For your information, the people with me 14 here today are Alan Eland, the gentleman over there. 15 Alan is our Senior Vice President of the Americas and 16 reports to me. Alan has been with the company for 17 approximately 22 years and has served in many 18 capacities and operations throughout his career. In 19 fact, between 1992 and 1998, Alan was based here in 20 Texas and worked with the Texas operation, serving as 21 the general manager between '96 and '98. So Alan has 22 many years of experience in the industry and is, you 23 know, very pleased to be part of the management team 24 and to serve the Texas Lottery as our customer and our 25 partner. 0012 1 Scott Gunn is here today as well, who 2 you will know. Scott Gunn has been with the company 3 for 14 years and has worked in our Government 4 Relations organization as well as many operating 5 capacities and is now responsible for our Western 6 Region operations, which includes the Texas Lottery as 7 a customer as well. 8 And then finally, you know Ramon Rivera 9 very well, been with the company for many, many years. 10 Ramon has served the company very, very well in Texas 11 over the last 18 years or so. And we, you know, feel 12 very confident that we have a strong management team 13 that will serve the Texas Lottery very well over the 14 next several years. 15 Just as a refresher for you, Bruce 16 Turner was the CEO of Lottomatica and GTECH. Bruce 17 retired from the company in December of 2007. Bruce 18 is now off running his own personal business. We 19 still remain in touch with Bruce. He is a member of 20 the Board of Directors of Lottomatica, as am I. So 21 Bruce still has some -- either some ongoing 22 relationship with the corporate entity that we are a 23 part of. So that provides you with a background as to 24 GTECH management. 25 In terms of our company and who we are, 0013 1 following the merger with Lottomatica in August 2006, 2 we became a company of approximately $2.4 billion in 3 revenue. We've now measured in Euros, being a 4 European public company, approximately 1.7 billion 5 Euros. And the company really consists of two parts. 6 We have an Italian operating business which runs the 7 Italian lotto and instant ticket business that 8 represents approximately 800 -- 850 million Euro of 9 the 1.7 billion Euro in revenue. And the balance of 10 the business, approximately 950 to a billion Euro 11 revenue, represents GTECH. 12 My colleague, Marco Sala is the 13 Managing Director of the Italian business. As I 14 mentioned earlier, I am the CEO of the GTECH business. 15 So I'm responsible for all of GTECH's activities 16 globally. 17 GTECH Corporation in and of itself is a 18 global provider of technology and services to the 19 lottery industry. We have approximately 100 customers 20 around the world, with approximately 29 now of the 41 21 U.S. states that have lotteries. In terms of our 22 revenue distribution, of the approximately one billion 23 Euro in revenue, 500 million Euro of revenue, or 24 thereabouts, comes from our Americas business in North 25 America and South America, and the balance of the 0014 1 business comes from our businesses internationally, 2 consisting of Europe and Asia. So it's a very well 3 diversified business that is a very strong company, 4 has had consistent strong financial performance over 5 the last several years, which was one of the reasons 6 that the merger with Lottomatica made so much sense. 7 We pride ourselves in running a 8 fiscally strong company and serving our customers 9 well. We have a strong commitment to our customers to 10 maintain investment grade ratings. So both S&P and 11 Moody's have awarded the company an investment grade 12 rating, and it is our intention to maintain that 13 rating to ensure that we have sufficient capital and 14 resources to support our customers' requirements as we 15 service them over time. 16 Please interrupt me if you have 17 questions. I'll be happy to take them as I go through 18 my presentation. 19 As a business, we are also heavily 20 focused on ensuring that we provide up-to-date 21 services and new technologies that will help our 22 customers drive sales for the benefit of good causes. 23 In terms of our investment and research 24 and development, we invest over $50 million a year in 25 research and development, which is more in research 0015 1 and development than all the other companies in the 2 industry combined. And we're very proud of that fact. 3 We believe it's important for us to innovate in terms 4 of best practices and new technologies to help our 5 customers drive sales for maximizing returns to good 6 causes. That's a very strong part of our culture. 7 And I certainly intend to make sure that we maintain 8 that commitment to investing in the future for our 9 business and for our customers. 10 I would like to mention the fact that 11 Mr. Turner, in his previous remarks to this 12 Commission, talked extensively about our corporate 13 governance and compliance procedures in the company, 14 which are very, very important to us. We understand 15 very, very well that our actions, you know, have a 16 role to play and our customers' reputations are formed 17 and how they are viewed in the marketplace. And so we 18 have very strict procedures in our company to make 19 sure that our employees and the people that we work 20 with outside of the company adhere to strict 21 compliance procedures to maintain the reputation and 22 integrity of our business and the enterprises of our 23 customers. 24 In that regard, we have recently 25 appointed Michael Prescott as the General Counsel of 0016 1 GTECH Corporation. Michael has a history with the 2 company for approximately six years and has served the 3 company very well in the compliance and legal areas of 4 our business. So if you would like Michael Prescott 5 to come to Texas to address the Commission, we would 6 be very pleased for Michael to attend. An we'll make 7 sure that he develops a relationship with the right 8 people within the Texas Lottery. 9 So moving on, if I may, to the next 10 part of my presentation. I would like to talk, if I 11 may a few minutes, about our partnership with Texas 12 since 1992. We believe very strongly that it's our 13 role to work with the Texas Lottery to help maximize 14 sales, net revenues, so that we are helping the Texas 15 Lottery maximize returns to good causes; in this case, 16 the school children of Texas. 17 And over the last year or so, we have 18 worked extensively with Gary Grief and with members of 19 his team in providing best practice information to 20 help the Texas Lottery understand ways in which we 21 might drive sales growth that would help maximize net 22 revenues to the State of Texas. 23 In that regard, I understand that we've 24 had approximately five or six meetings at the 25 operational level to talk about best practices in 0017 1 terms of the retail distribution environment, in terms 2 of on-line and instant games. In two of those 3 meetings, Connie Laverty, who is our chief marketing 4 officer, has been present in those meetings. Connie 5 has a strong history in the lottery industry. She's, 6 in fact, worked for Texas and Georgia -- sorry. Not 7 Texas. I'm sorry -- New York and Georgia for 8 approximately 30 years in her career, and she joined 9 GTECH recently. 10 So Connie's background in marketing and 11 helping lotteries grow sales is very strong. And she, 12 I think, has worked effectively with the Texas Lottery 13 team to really help understand how you might be able 14 to change distribution, increase sales through new 15 games and change the mix of games to ensure that 16 ultimately net revenues, so gross sales minus prizes, 17 the net revenue, which is the more important driver of 18 success, is growing for the State of Texas over time. 19 We recognize very fully that in the 20 past, there have been concerns about a misalignment of 21 objectives in terms of GTECH's compensation being 22 based on gross sales, whereas the returns to the 23 school children of Texas are based on net revenue and 24 where, really, focusing our recommendations and 25 attention to ensure that as we present recommendations 0018 1 to you, they are recommendations that will help to 2 rebalance the overall prize payout ratio by 3 essentially growing distribution and the on-line games 4 to ensure that net revenues is what grows over time 5 and, therefore, helps the school children of Texas. 6 So I wanted to address that matter and 7 make sure that you understood that we are working very 8 hard toward those objectives. We have a lot of 9 resources working on that, and we're prepared to 10 continue working with Gary Grief and his team to 11 provide those recommendations to you. 12 If I may, I would like to perhaps wrap 13 up with a discussion about our commitment to Texas. 14 If you'll recall, back in 2006, we entered into what 15 is now called Amendment 8 where, in fact, I believe 16 that we sought to align our interests with the Texas 17 Lottery by ensuring that an element of our 18 compensation is indeed tied to net revenue versus 19 gross revenue, and I really believe that was industry 20 innovation. 21 We are -- I hope you can tell from my 22 comments that we are committed to following through on 23 Amendment 8 by providing recommendations and working 24 with your team to ensure that we're presenting ideas 25 for growth that meet the expectation of growing net 0019 1 revenues. So we view Amendment 8 as a very important 2 amendment, one that's an innovation in the industry. 3 And we're very committed to ensuring that we follow 4 through on our commitments in that regard. 5 We're also very committed to ensure 6 that we apply resources to the Texas Lottery from our 7 experience around the world with this team over here, 8 with Connie Laverty and with the people that we have 9 back in Providence, Rhode Island. We're going to keep 10 committing as many resources as you would like to help 11 gross sales over the next several years. You have 12 that commitment from me. And I hope, you know, you 13 will draw upon those resources as you see fit. 14 I would like to also offer that if you 15 would like, I will come down to visit with the Texas 16 Lottery Commission on a regular basis. If I might 17 suggest, I will come down here perhaps every six 18 months, twice a year, to address the progress that 19 we're making with respect to our partnership, with 20 respect to our progress on Amendment 8 and how that 21 relationship is going. And, of course, I would be 22 happy to deal with other matters at the Commission's 23 discretion. 24 So I thought that would provide you 25 with an overview of who I am, my intention to maintain 0020 1 a high level of service and commitment to the Texas 2 Lottery, and that we are very much focused on helping 3 you strive or maximize returns to the Texas Lottery. 4 Thank you very much. 5 CHAIRMAN COX: Thank you, Mr. Patel. 6 Chairman Clowe. 7 COMMISSIONER CLOWE: Would you like to 8 go first? 9 CHAIRMAN COX: No. I would like for 10 you to. 11 COMMISSIONER CLOWE: Mr. Patel, I would 12 like to thank you for coming here this morning, and 13 your other colleagues for their attendance, and going 14 to the time and the expense of making this 15 presentation. We're grateful for it. I would like 16 for you to understand that the things I'm going to say 17 are said with a smile on my face. 18 MR. PATEL: Yes, sir. 19 COMMISSIONER CLOWE: They may not sound 20 very Texas-friendly. But because you've taken this 21 opportunity to make a presentation to the 22 Commissioners and present your thoughts, I would like 23 to present mine and remind you of some things -- 24 MR. PATEL: Yes, sir. 25 COMMISSIONER CLOWE: -- that I think 0021 1 need to be said on the record and be remembered as you 2 embark on your new role as CEO of the Company. 3 First of all, let me ask you how much 4 stock you own in the company? 5 MR. PATEL: I currently own 180,000 6 shares of Lottomatica, sir. 7 COMMISSIONER CLOWE: And what 8 percentage is that of the total control? 9 MR. PATEL: It is less than one 10 percent. Let me just do a calculation, if I may, in 11 my head. We have 150 million shares in circulation, 12 so that would be probably about .15 percent. I'm 13 doing it in my head. 14 COMMISSIONER CLOWE: So although you 15 serve on the board, the control of the entity remains 16 in the hands of the Italian family and that ownership, 17 does it not? 18 MR. PATEL: Yes, sir. The family 19 company, De Agostini, which is a very old family 20 publishing company, over a hundred years old, they own 21 approximately 58 percent of Lottomatica, and so they 22 have control of the company, although the company is 23 listed on the Milan stock change. So we are required 24 to follow public company rules. We are required to 25 follow Consult rules, which is like the equivalent of 0022 1 our SEC in the United States. And we do maintain all 2 of the controls and reporting requirements of a public 3 company, sir. 4 COMMISSIONER CLOWE: So I bring that up 5 by way of reminding you that I think this is the third 6 or fourth presentation of this type that I've heard 7 since I've been on this board, where the assurances 8 and the promises of performance have been made, and 9 stability has always been one of those items that's 10 been covered. 11 We predicted, I think accurately, that 12 a member of the management team, Mr. Turner and others 13 as well, were not going to stay with Lottomatica for a 14 long time. And it's important for I think us to 15 acknowledge to each other that you are a hired 16 employee and you have the authority and the 17 responsibility of the CEO, but the ownership is the 18 control of the company. 19 MR. PATEL: That is correct, sir. I 20 like to think that I have a lot of influence with our 21 controlling shareholders. We have a very professional 22 relationship. As I mentioned to you before, I'm a 23 membership of the Board of Directors, and so I do have 24 voting rights. 25 And I really feel that the controlling 0023 1 shareholders of the company are very strong 2 professional business people. So when it comes to 3 running the business, they make decisions in the best 4 interest of the company and our customers. And I have 5 never seen a situation where there has been a conflict 6 of interest between what is right for the company and 7 our customers versus what is right for our 8 shareholders. So I certainly acknowledge your point, 9 Chairman Clowe. However, I would say that my 10 confidence level that the controlling shareholders 11 will act with all due propriety is very strong. 12 COMMISSIONER CLOWE: And I'm happy to 13 hear you say that and glad that you feel that way. 14 And I felt the same way, too, when I was a brand new 15 CEO. And then I had a disagreement with the 16 shareholders and with the control of the board, and 17 then I realized where the power lies. 18 MR. PATEL: Yes, sir. 19 COMMISSIONER CLOWE: And it wasn't with 20 me and it isn't with you. 21 MR. PATEL: Yes, sir. 22 COMMISSIONER CLOWE: So knowing the 23 history that I do of the turnover of the leadership of 24 your company, I want to point that out to you and to 25 make you aware of it so that you'll be mindful of the 0024 1 role that you have and remind my fellow Commissioners 2 that we have heard this presentation before. And we 3 must maintain our vigilance on behalf of the State of 4 Texas in regard to the performance of your company. 5 I noted that you have chosen to refer 6 to our relationship as a partnership. 7 MR. PATEL: Yes, sir. 8 COMMISSIONER CLOWE: I don't see it 9 that way. I see it as a contractual relationship 10 where you are contracted to be the vendor of our 11 operation. And to this point, you've done a very good 12 job. 13 MR. PATEL: Thank you, sir. 14 COMMISSIONER CLOWE: And I want you to 15 know that Ramon, in my opinion, has done a good job of 16 representing your company to this agency. But, in 17 fact, we are concerned about your dominance in the 18 industry. And I want you to know that in my opinion, 19 you have outstripped your competitors to the point 20 where it's very difficult for them to bid on our 21 business the way it is bundled at this point in time, 22 and that bothers me. Any time, as a buyer of 23 services, I find myself in a position of only having 24 one supplier, it, as a businessman, is a matter of 25 concern, even if a good job is done at what to my 0025 1 judgment is a fair price. 2 I want to express that concern to you 3 on my behalf, because I think you are striving for 4 dominance, and you are outstripping your competition. 5 And the way this state's gaming program is structured, 6 we're just not seeing any competition come in and bid 7 for this contract, other than yours, in a viable and 8 tangible way. 9 You don't have the solution to that. 10 The solution lies within this state, within this 11 agency and within our Legislature. But it is a matter 12 of concern that touches your company, and I want to 13 mention it in my response to your comments. 14 This state is in its 17th year of 15 gaming now, I believe it is, and the demographics of 16 our players is changing. We're going to hear later on 17 in this agenda a report from a group that's done a 18 study of our players. And my anticipation is, we're 19 going to find fewer people are spending more dollars 20 on our gaming in this state than ever before. 21 As you probably are aware, the on-line 22 games in this state are tired and are not attracting 23 the interest or the players that they did year before 24 year before year before year. Our instant scratch-off 25 tickets now are I think 76 percent of our sales. 0026 1 And where we try to do innovative 2 things like the creation of a ticket that costs $50, 3 to see if that is not attractive to people who wish to 4 game at that level, it brings on a criticism from 5 those people who do not like gaming. And the point is 6 made that the Commission is focusing on people who can 7 ill afford to put dollars in on a discretionary basis 8 to gaming activities. 9 I think it's important for this agency 10 to always be reminded that it is not our position to 11 promote gambling or gaming in this state. It is our 12 position to fulfill the statutes as laid out by the 13 Legislature and conform to the rules that follow those 14 statutes and provide the people of the State of Texas 15 within that framework gaming discretionary 16 opportunities that are fair and honest and consistent, 17 and that's where you serve us as a vendor. 18 Your company has a history of, in some 19 cases, questionable activities, and I think in most 20 instances unproven accusations that have troubled us 21 in the past. I think you are aware, because you were 22 a part of it, that this state probably made the most 23 exhaustive background check -- 24 MR. PATEL: Yes, sir. 25 COMMISSIONER CLOWE: -- of the 0027 1 acquisition of GTECH by Lottomatica of any of those 29 2 states that you mentioned out of the 41 that have 3 lottery operations. I think that our Department of 4 Public Safety, our Attorney General and the outside 5 law firm that we employed did a marvelous job. Your 6 people were very cooperative, and we appreciated that 7 and saw that as a signal that you were not only 8 willing but eager to let us see all the facts that 9 were there to be garnered. And as you well know, we 10 took no action in regard to opposing that acquisition. 11 That was the role that we assumed. 12 But I think the institutional knowledge 13 that I have of our relationship over the years is 14 important to comment on at this time and to urge you 15 to be mindful of the concern that we have about the 16 relationship and make that a part, as long as you're 17 in the position that you're in, to stay in touch with 18 us, communicate with us, and to remember that we're 19 prickly, we're different in this state. We're not 20 like any other state that I know of, in many aspects. 21 And it's because we have people who don't like gaming 22 in this state and they are very outspoken, and we are 23 very respectful of that. And our legislature, our 24 oversight, our leadership, is constantly reexamining 25 this state's activity in gaming positions. 0028 1 So I would add that to balance perhaps 2 the very positive picture that you painted so that we 3 get the entire story and you understand the difficulty 4 of the job that you're now assuming. I hope they're 5 paying you a lot of money. 6 (Laughter) 7 And I hope they give you a lot of 8 stock, because you are going to work very hard and 9 you're going to be put to the test. And I hope you do 10 a real good job, because the better job you do, the 11 better satisfied we'll be. But just remember, we're 12 very demanding, we're going to ask a lot of questions. 13 Some of them may be embarrassing. We'll try to do it 14 with a smile on our face, but we want the best you 15 have. And we want truthfulness and honesty. We want 16 you to be forthcoming, and we don't like surprises. 17 Thank you, Mr. Chairman 18 CHAIRMAN COX: Thank you. 19 Commissioner? 20 COMMISSIONER SCHENCK: Thank you, 21 Mr. Chairman. First let me say, I appreciate your 22 coming as well. I agree Mr. Rivera doing a fine job 23 of representing you here. And I wanted to start by 24 just saying how much I appreciate working with 25 Commissioner Clowe. I've been learning much about the 0029 1 industry. And I can't think of a word that you just 2 said that I would disagree with. And as we go 3 forward -- I've only been here for four months, and I 4 am already sharing some of the concerns Commissioner 5 Clowe just expressed. 6 I agree that it seems to me the 7 functional operations seem to be working quite well. 8 But I have a fairly basic concern. We had a 9 presentation here from Scientific Games a couple of 10 months ago. And that's a large company and one of the 11 few companies that could stand as a potential 12 competitor in this industry. And it didn't seem to me 13 that we got a very firm commitment of their 14 willingness to bid on this, the Texas contract. 15 And I wonder what it is you see that 16 would explain the lack of competition in your 17 industry. Is there a barrier to entry that prohibits 18 even the larger competitors from bidding on contracts? 19 What is it? Why is there what appears to be a lack of 20 efficiency in this market? 21 MR. PATEL: Well, sir, I do believe 22 that in the industry, there are a number of qualified 23 bidders for a contract the size of Texas. There are 24 many companies who have access to capital. They have 25 the resources and they have the experience to be able 0030 1 to bid on an operation this size. 2 COMMISSIONER SCHENCK: Who would they 3 be? 4 MR. PATEL: The companies that you've 5 mentioned I think would -- Scientific Games would be 6 one of those. There are some overseas companies who 7 are also growing in this business as well. 8 You know, we pride ourselves, sir, in 9 doing an excellent job for our customers. And I 10 certainly appreciate all of Chairman Clowe's comments; 11 I take those to heart. But we pride ourselves in 12 working extremely hard for our customers, and we pride 13 ourselves in being successful business people. So we 14 have built a business that is very, very strong. And 15 I think that strength in our business really helps our 16 customers very, very well in terms of our financial 17 strength and how it enables them to maximize returns 18 to good causes. 19 So, yes, I understand that other 20 companies maybe have expressed concerns about their 21 willingness to compete. But I believe, sir, that 22 there are companies in the industry, and outside of 23 the industry as well, that may be viable competitors 24 for the business here. But we certainly intend to 25 provide excellent services to you and to keep 0031 1 demonstrating why we are a very, very good choice as a 2 vendor, and I would hope in some cases a partner to 3 the Texas Lottery. 4 COMMISSIONER SCHENCK: I don't know if 5 you know. My background is in law, and I work in a 6 large law firm. And I have some experience in I'll 7 call competition law. And the theory at least is that 8 conglomerations produce more efficient markets and 9 that we see better competition, even though we see 10 fewer competitors. And unless there is something else 11 operating within the market, you would expect even a 12 sloppy, poor operator who won't provide good service 13 at least eager to step up to the plate and offer a 14 bid, on the theory that they'll make revenue. 15 So I hope that you're right. I hope we 16 will see those people. But to date, I don't think we 17 have. And I'm just sort of curious how we go about 18 identifying them and what it is about the market that 19 makes it difficult to identify them, because as I 20 understand it, there is a good deal of revenue to be 21 earned by you or anyone else as they do this work for 22 us. 23 MR. PATEL: Yes, indeed, sir, there is 24 a lot of revenue to be earned and services that can be 25 provided. All I would say in response, sir, is that 0032 1 there are many large lottery contracts around the 2 world. Every day of the week, every week of the year, 3 we compete for lottery business around the world. We 4 like to believe that we win most of the business, 5 because of the strength of our company and the 6 services we provide. But there are contracts around 7 the world, a lot of contracts that we do not have. So 8 I'm not in a position to speak for other companies. 9 COMMISSIONER SCHENCK: And you bid 10 aggressively for those contracts? 11 MR. PATEL: Yes, sir. We bid 12 aggressively for every contract, because we would like 13 to provide services to customers around the world. 14 And in those bidding situations, other companies, U.S. 15 companies and overseas companies, bid for those 16 contracts as well. So I really can't comment on why 17 other companies should or should not bid in Texas. 18 But I can tell you categorically that when it comes to 19 large bids around the world, both in the United States 20 and around the world, there is plenty of competition. 21 COMMISSIONER CLOWE: Commissioner, 22 could I try to help you on that? 23 COMMISSIONER SCHENCK: Yes, please. 24 COMMISSIONER CLOWE: I don't think 25 Mr. Patel is answering your question. As a business 0033 1 person, let me paint the picture maybe a little bit 2 finer than he is. 3 GTECH has machines in how many of our 4 16000-plus retailers, Mr. Patel? Do you or Ramon have 5 that figure off the top of your head? 6 MR. PATEL: I'm sure Ramon does, off 7 his head. 8 MR. RIVERA: Chairman Clowe, Ramon 9 Rivera, for the record, current development manager 10 for GTECH. 11 Just to repeat the question, sir, it's 12 how many machines do we have it the 16,000 -- 13 COMMISSIONER CLOWE: -- plus retail 14 outlets that we have in the State of Texas? 15 MR. RIVERA: We have approximately 16 18,250 pieces of equipment in those locations, sir. 17 COMMISSIONER CLOWE: That is an 18 extensive investment in hardware in and of itself. 19 Additionally, they have a large staff that calls on 20 these retailers frequently. They maintain and have 21 responsibility for ticket stock. They have a 22 tremendous hardware setup here in Austin. I don't 23 know whether you've had the opportunity to see that. 24 But hopefully, if you haven't, you will. It is 25 impressive. 0034 1 You have a back-up operation in Dallas. 2 MR. PATEL: We do. 3 COMMISSIONER CLOWE: Their downtime 4 record is excellent. And they've received the longest 5 period of contract from this Commission, this agency, 6 that we've ever given anybody in the history of the 7 operation of this lottery. And they've received, as 8 part of that, the lowest price per sale they've ever 9 been paid. They're smart operators. 10 And when you think about the fact that 11 someone has to come in and duplicate the hardware and 12 the personnel or soft expenses, and they probably have 13 to run a year in parallel to be able to make the 14 transition and not have the system fail, it is a 15 daunting challenge. Now, part of the reason it's that 16 way is, our program is bundled. We do very little 17 with 325 employees. 18 What's the current number, Gary, of 19 FTEs? 20 MR. GRIEF: 318.5, I believe. 21 COMMISSIONER CLOWE: Okay. We won't 22 argue about seven. And that's the way the Legislature 23 and the leadership wanted it, not to say that our 24 employees don't do a lot, because they do. But I 25 think I asked you, Ramon, at the last meeting how many 0035 1 employees you had in the State of Texas. And that 2 number was. 3 MR. RIVERA: Slightly under 500, sir. 4 COMMISSIONER CLOWE: And so we have 5 created the matrix, if you will, that GTECH has taken, 6 and it's called the Texas model in the industry, and 7 it's admired and thought to be quite good. But it 8 puts us in the position where if GTECH continues to do 9 their job the way they've done it in the past, I don't 10 know who is going to bid against them -- 11 MR. PATEL: Well, if -- 12 COMMISSIONER CLOWE: Does that help? 13 COMMISSIONER SCHENCK: Yes. The answer 14 seems to be high barriers to entry, particularly since 15 a lot of this expense is hardware expense, machines. 16 I assume you get to depreciate those over a period of 17 years? 18 MR. PATEL: We do. 19 COMMISSIONER SCHENCK: And you probably 20 don't throw them away at the end of the period of tax 21 depreciation -- 22 MR. PATEL: Well -- 23 COMMISSIONER SCHENCK: -- which makes 24 you in a much more competitive position when those 25 machines are still there. 0036 1 MR. PATEL: Well, in fact, just to 2 clarify that point, if I may. Once the contract term 3 has expired, those terminals have come to the end of 4 their natural life, so we do typically scrap the 5 terminals -- 6 COMMISSIONER SCHENCK: Okay. 7 MR. PATEL: -- at the end of the 8 10-year or 7-year contract term. 9 COMMISSIONER CLOWE: It's sort of like 10 a computer. You know, if -- 11 COMMISSIONER SCHENCK: A 286, yes. 12 MR. PATEL: In fact, when bidding for 13 any contract around the world, we are typically 14 starting, you know, from a fresh perspective, because 15 we have to reinvest the capital to be able to put up a 16 new network. 17 COMMISSIONER SCHENCK: And the length 18 of the contract is very significant issue for you in 19 determining whether to bid? 20 MR. PATEL: It's very helpful to us, 21 sir, and very helpful to our customers, because the 22 longer the contracts, the more efficient pricing we 23 can provide, because it provides a longer period for 24 us to depreciate and operate the business. So I think 25 it's beneficial both ways. 0037 1 COMMISSIONER SCHENCK: Can you just 2 tell me where we are in terms of the 29 states in the 3 U.S. in terms of gross revenue for GTECH? 4 MR. PATEL: Sir, you are our No. 1 5 customer in terms of gross revenues for GTECH 6 Corporation. 7 COMMISSIONER SCHENCK: How would that 8 compare, let's say, to your European operations? Do 9 you have a state or nation that's substantially more 10 productive for you? 11 MR. PATEL: The Italian business which 12 is, as I mentioned before, run by my colleague Marco 13 Sala, the Italian business has over 800 million Euros 14 in revenues. So in terms of revenue contribution, 15 it's a much larger business. That revenue 16 contribution comes from three to four contracts. They 17 have different concessions from the Italian 18 government. But in terms of the GTECH business, the 19 Texas Lottery is our largest revenue- generating 20 customer. 21 COMMISSIONER CLOWE: Commissioner, we 22 have one of the lowest per capita sales of the states 23 in the contiguous United States. There is much more 24 potential in this state on a per capita basis, in my 25 opinion, than we see has been achieved in the States 0038 1 of New York, Massachusetts, for example. 2 COMMISSIONER SCHENCK: Do you think 3 that's as a result of advertising or some demographic, 4 some resistance, moral or otherwise, to our 5 population? 6 COMMISSIONER CLOWE: That is a very, 7 very astute question, and the short answer takes about 8 three hours. 9 COMMISSIONER SCHENCK: Maybe it's a 10 little bit of both. 11 CHAIRMAN COX: A short answer is "all," 12 all of the above. 13 COMMISSIONER CLOWE: That's right, 14 Mr. Chairman. 15 COMMISSIONER SCHENCK: Well, I do 16 appreciate you very much for coming. And I'm sure I 17 have a lot more to learn on this topic. And I would 18 appreciate your candor. I would enjoy meeting with 19 your General Counsel. I think you made that offer. 20 MR. PATEL: Yes, indeed, sir. 21 COMMISSIONER SCHENCK: Or I think if 22 there is a time when he could come that will be 23 convenient, I would certainly love to have these 24 discussions with him. 25 MR. PATEL: We will arrange for that to 0039 1 happen. 2 COMMISSIONER SCHENCK: Thank you. 3 CHAIRMAN COX: Thank you. 4 And, Commissioner, I would add to the 5 high barriers to entry, you also have very high 6 switching costs. So with that combination -- 7 COMMISSIONER SCHENCK: When you say 8 "switching costs," you mean the network, the -- 9 CHAIRMAN COX: If we were to change 10 from GTECH to someone else -- 11 COMMISSIONER SCHENCK: Oh, I see. 12 CHAIRMAN COX: -- it would be very 13 awkward. 14 COMMISSIONER SCHENCK: Yes. 15 CHAIRMAN COX: So we're -- you know, I 16 think a term that is used sometime is "technological 17 lock-in." But regardless of whether another firm has 18 the technology, 18,250 something machines would have 19 to come out and 18,250 machines would have to come in. 20 And they would all have to be connected, people would 21 have to be trained. So there are very significant 22 switching costs -- 23 COMMISSIONER SCHENCK: Right. 24 CHAIRMAN COX: -- as well as capital 25 investment. 0040 1 Mr. Patel, I have read a little bit 2 about the situation in New Jersey. And as I 3 understand it, they put out an RFP and your firm and 4 Scientific Games and -- Interlott? 5 MR. PATEL: That's correct, sir. 6 CHAIRMAN COX: -- Interlott bid. On 7 the initial procurement, Scientific Games' bid was 8 about half what yours was, if I remember correctly. 9 And they protested, and the procurement was thrown 10 out, if you will. There was a new RFP. And this 11 time, only your firm and Interlott bid; Scientific 12 Games didn't bid. Can you help me -- do you know what 13 happened there? I know you're not the right person to 14 ask, but that you might know. 15 MR. PATEL: No, sir. Actually, I don't 16 have any idea as to why Scientific Games did not bid 17 for the State of New Jersey's lottery business. As 18 you quite rightly mentioned, they were a bidder in 19 2005, when the first RFP was issued. 20 Just for clarification, if I may for a 21 moment, sir, their pricing was -- prima facie, their 22 pricing was lower than GTECH's. However, the RFP 23 contained a set of complex options that the lottery, 24 in fact, wanted to take up with the vendors. So if 25 you were to add the option pricing on top of the base 0041 1 pricing and look at the normalized pricing level for 2 the level of services that the state actually 3 requested, the pricing differential, sir, was not of 4 the magnitude that you mentioned. So it was actually 5 quite comparable, sir. 6 We're very surprised that Scientific 7 Games did not bid for the business. I really can't go 8 into as to why that didn't happen. In fact, sir, we 9 were just notified yesterday that we are the apparent 10 successful bidder in Pennsylvania, which is again a 11 large sized lottery contract. And Scientific Games 12 was a bidder in Pennsylvania, so I really can't 13 comment as to their absence in New Jersey. 14 CHAIRMAN COX: Well, we appreciate very 15 much your being here. I think that there have been 16 some real meaningful efforts to bring best practices 17 to us to help us make this the best lottery in the 18 world, which is our goal, and we thank you for that. 19 And we look forward to continuation of that kind of 20 effort and those kinds of results. 21 MR. PATEL: Thank you very much for 22 your time. It's a pleasure being here today. 23 CHAIRMAN COX: Thank you. 24 Gary, the next item you would like to 25 take up is Item XIV. Is that correct? 0042 1 MR. GRIEF: Yes, sir, that's correct. 2 AGENDA ITEM NO. XIV 3 CHAIRMAN COX: Okay. Item XIV, 4 consideration of and possible discussion and/or action 5 on external and internal audits and/or reviews 6 relating to the Texas Lottery Commission and/or on the 7 Internal Audit Department's activities, including the 8 Fiscal Year '07 financial audit and/or Mega Millions 9 agreed upon procedures. 10 Ms. Melvin. 11 MS. MELVIN: Good morning, 12 Commissioners. For the record, Catherine Melvin, 13 Director of the Internal Audit Division. 14 Commissioners, I have a few items for 15 you today. The first is, as I reported in previous 16 Commission meetings, the State Auditor's office is 17 conducting follow-up work on a series of audit reports 18 that they had issued in 2006. Last month the auditors 19 held a status conference with agency management. And 20 in this meeting, they shared that the bulk of their 21 audit work has been completed; that is, the field work 22 stage has been completed. And they have more recently 23 shared that they're anticipating a final report 24 release date likely at the end of next month. 25 The second item I have is in the 0043 1 February 2007 Commission meeting, you have requested 2 that in January of each year, that Internal Audit 3 provide a report to this body regarding the agency's 4 conformance to Lotto Texas jackpot policies and 5 procedures during the prior year. Since the 6 compliance with Lotto Texas policies and procedures is 7 included as part of the State Auditor's follow-up 8 efforts, Internal Audit will not be providing that 9 report at this meeting today. 10 However, as per your wishes, I wanted 11 you to know that Internal Audit does plan to do that 12 work on an ongoing basis, and we plan to come before 13 you January each year regarding compliance during the 14 year prior. 15 Do you have any questions? 16 CHAIRMAN COX: I believe that was your 17 request, Chairman Clowe. Is that satisfactory to you? 18 COMMISSIONER CLOWE: It was and it is. 19 Thank you, sir. 20 MS. MELVIN: Okay. Then if there are 21 no questions, I would like to ask Mr. Krchnak, Scott 22 Krchnak from the firm Maxwell Locke & Ritter, to join 23 me. He's here to provide the results of the annual 24 financial audit. 25 MR. KRCHNAK: Thanks, Catherine. 0044 1 Again, my name is Scott Krchnak, for 2 the record. I'm a partner with Maxwell Locke & 3 Ritter. And with me is Kelli Leventhal, who was the 4 manager, also with Maxwell Locke & Ritter, that was in 5 charge of the detailed field work. 6 A couple of brief comments. We have 7 completed our audit of the financial statements for 8 the year ended August 31, 2007, and have rendered an 9 unqualified opinion, which is a clean opinion, that 10 the financial statements are materially correct. And 11 we've also completed the agreed upon procedures for 12 Mega Millions. No exceptions in that testing. 13 Kelli, any . . . 14 MS. LEVENTHAL: Let's see. 15 MR. KRCHNAK: Briefly, we had a 16 detailed exit conference about a month ago in which 17 Catherine was present, Gary Grief was present. Kathy 18 Pyka and Ben Navarro were present. It was about an 19 hour or so we spent going over some of the details of 20 both engagements. I don't know that that's relevant 21 at this meeting. I think the two important things 22 were a clean opinion and no exceptions. 23 Before that, Gary or Catherine, any 24 comments about the exit conference? 25 MS. MELVIN: I have none. 0045 1 MR. GRIEF: I would just say that we 2 really appreciate your work, Scott, appreciate the 3 work of Kelli, the rest of the team. 4 In that meeting, I did check with them, 5 as we have periodically, Commissioners, to make sure 6 the staff has been cooperative, accessible and 7 provided with all the information and resources that 8 they need. And Scott and Kelli have informed me that 9 the agency has indeed done just that. 10 MR. KRCHNAK: With that, I really close 11 our presentation and open the floor to questions, if 12 there are any more detailed questions about the audit 13 itself. Commissioners? 14 CHAIRMAN COX: Chairman Clowe? 15 COMMISSIONER CLOWE: I think the 16 question should come from the Commissioners, if you 17 got all the information you asked for and if the staff 18 was cooperative and if everyone, in your opinion, was 19 forthcoming in regard to the questions and the answers 20 that you were involved with on this audit? 21 MR. KRCHNAK: My answer of that 22 question is yes. But probably the more appropriate 23 person to answer that is Kelli, as she was out in the 24 field every day managing the field work. 25 Kelli? 0046 1 MS. LEVENTHAL: For the record, I'm 2 Kelli Leventhal. I'm an audit associate with Maxwell 3 Locke & Ritter. And, yes, everybody I found was very 4 forthcoming and very helpful. And the turnaround was 5 fairly quick when we had requests, so we definitely 6 appreciate that. 7 COMMISSIONER CLOWE: You're completely 8 satisfied with the results? 9 MS. LEVENTHAL: Yes; yes, I am, sir. 10 COMMISSIONER CLOWE: Thank you, 11 Mr. Chairman. 12 MR. KRCHNAK: I think one thing I would 13 like to add to that, Commissioner Clowe, is this year, 14 I think just due to the nature or the timing of the 15 awarding of the contract and getting that executed and 16 so forth and the Commission actually getting their 17 trial balances closed out, I won't say it was 18 difficult to meet some of the deadlines that we agreed 19 to; it was somewhat challenging. And now that we are 20 actually in place as your auditors, I'm looking 21 forward to next year to more easily achieving or 22 meeting those deadlines that we've agreed to. 23 CHAIRMAN COX: Scott, were there any 24 disagreements on accounting principles? 25 MR. KRCHNAK: No disagreements on 0047 1 accounting principles. 2 CHAIRMAN COX: So that I think pretty 3 well says it was a clean slate, there were no 4 disagreements on accounting principles, there were no 5 efforts to limit the scope of your work, there was no 6 lack of cooperation of any kind? 7 MR. KRCHNAK: That's correct. 8 CHAIRMAN COX: Thank you. 9 Anything further, Commissioners? 10 COMMISSIONER CLOWE: No. 11 COMMISSIONER SCHENCK: No. 12 CHAIRMAN COX: Thank you very much. 13 MR. KRCHNAK: Thank you. 14 MS. MELVIN: Thank you very much. 15 CHAIRMAN COX: Okay. Gary, I believe 16 the next item you would like is Item XII? 17 MR. GRIEF: Yes, sir. 18 AGENDA ITEM NO. XII 19 CHAIRMAN COX: Item XII, report and 20 possible discussion and/or action regarding the 21 demographic study of Texas Lottery players. 22 Mr. Fernandez. 23 MR. FERNANDEZ: Good morning, 24 Mr. Chairman, Commissioners, Mr. Grief. My name is 25 Mike Fernandez. I'm the Director of Administration. 0048 1 As you know, the agency is required 2 every two years to conduct a demographic survey of 3 lottery players. And as you also may know, with 4 perhaps the exception of Commissioner Schenck, the 5 agency has chosen to do this demographic study every 6 year. 7 For the 2007 demographic study, we have 8 engaged the services of the University of Houston. 9 With me this morning I have our chief researcher, 10 Dr. Sizemore. But to present the study developed, 11 conducted by the University of Houston Center For 12 Public Policy, I have their director, Dr. Jim Granato, 13 and also one of the associates, Dr. Richard Murray. 14 And with that, I will turn this 15 presentation over to Dr. Granato. 16 DR. MURRAY: Good morning. For the 17 record, I'm Richard Murray with the University of 18 Houston Center For Public Policy. 19 Basically we were brought on board this 20 year to continue this series of studies that have 21 rotated among various survey centers at public 22 universities in Texas. That means in the business, we 23 have different house effects every year because a 24 different surveying firm is compiling these results, 25 so that's one source of variation. But we have 0049 1 followed up in the tradition of using a pretty 2 standardized questionnaire that repeats the same 3 questions year after year. That gives us a good 4 opportunity for longitudinal analysis where we can 5 look at changes over time. 6 In this survey that was conducted from 7 mid-September to early October 2007, the sample size 8 was about 1,700 persons interviewed. One difference 9 this year, and probably continuing in the future -- at 10 least that would be our recommendation -- was that we 11 expanded the population of persons that we tried to 12 interview by telephone to include cell phone users. 13 One of the things, of course, we're 14 seeing in the telephone surveying industry is the 15 diminishing number of households that have landlines. 16 And particularly younger adults increasingly have only 17 cellular phones, and that's been a real problem for us 18 because, until very recently, it's difficult to 19 interview those folks. But the largest vendor in the 20 industry survey sampling now does provide samples of 21 cell phone users. 22 And we did a mix this time. About 23 90 percent of our interviews were conducted with the 24 traditional landlines and about 10 percent were cell 25 phone interviews. And, actually, the cell phone 0050 1 interviewing went quite well, so our experience there 2 was positive. And we would recommend that in future 3 surveys, that component be continued, because we 4 expect that it will be more and more difficult to 5 contact a representative sample of Texas households if 6 we're only calling landlines. 7 For a sample of this size -- 8 COMMISSIONER CLOWE: May I ask a 9 question? 10 CHAIRMAN COX: Yes, please. 11 COMMISSIONER CLOWE: I would assume 12 that you get the landline numbers from the phone book? 13 DR. MURRAY: No, not -- sir, because 14 there are many unlisted numbers, particularly in large 15 cities now, many households choose not to list. 16 Survey sampling is able to work with the phone 17 industry to find which blocks of residential numbers 18 are in use, without identifying the individual 19 household number. And their sampling procedure that 20 they sell to users like ourselves include unlisted 21 numbers. 22 In some cities like Las Vegas, as much 23 as 80 percent of the residences have unlisted numbers. 24 In Texas, it's smaller. But that's one of the major 25 reasons to use a random digit dial sample, because it 0051 1 does include unlisted telephone numbers, and that's a 2 very large proportion now. 3 COMMISSIONER CLOWE: And then how do 4 you get cell phone numbers? 5 DR. MURRAY: The vendor -- again, 6 Survey Sampling, Inc., they're a Connecticut-based 7 firm -- now sells users samples of cell phones. So 8 they provide the basic list of random numbers. And 9 again, our experience in using it a few months ago is, 10 the sample was good, worked fine, perhaps slightly 11 less difficulty in completing interviews with cell 12 phone users than landlines. 13 COMMISSIONER CLOWE: Thank you. 14 CHAIRMAN COX: Along that same line, 15 with the national and state no-calling lists, there 16 seem to be an increasing number of people who are 17 avoiding that by calling and saying they're doing a 18 marketing survey, to which I quickly terminate the 19 conversation. Do you happen to find the difficulty 20 that they will think you're trying to sell something 21 and they just cut you off? 22 DR. MURRAY: Refusals are a problem. 23 It helps if it's a public university or other non, 24 clearly, commercial entity calling. A lot of people 25 can see the source of the call. 0052 1 CHAIRMAN COX: Yes. 2 DR. MURRAY: But we don't get nearly 3 the cooperative rates we did years ago. The no-call 4 list actually helped surveys such as ours be 5 completed, because it has eliminated a lot of 6 commercial calling, and that was a huge problem in the 7 telephone surveying business. It continues to be a -- 8 completing interviews continues to be a challenge. 9 For a sample this size, the error of margin is about 10 2.4 percent, plus or minus, at the 95 percent 11 confidence level, which is the usual standard in the 12 industry. 13 Based on the survey data, one of the 14 real-world tests we can compare is, we take the 15 numbers that people told us they were playing and 16 spending and match it up to the actual revenue you 17 generate. And we can see there is a difference, as 18 apparently has been the case in previous years. 19 Drawing on the survey data, we would get an estimate 20 of about $4.2 billion in forecast revenue. The actual 21 number I understand is more like $3.9 billion, 3.7, so 22 a difference there of about 10 percent. 23 Probably just dealing with the reality 24 that when you are asking people on the phone to recall 25 how often they're playing, their average level of 0053 1 participation, it's a slight exaggeration. But we're 2 still on the same planet here. They're not giving us 3 wildly different numbers. They're pretty close. But 4 the extrapolation from the players in this survey, 5 which were about 38 percent of the people we spoke 6 with, indicate a slightly higher level of spending 7 than, in fact, was the case. 8 CHAIRMAN COX: So what you've done 9 there is taken the number of people, multiplied by 10 what they said they spent, projected to the population 11 and come out within -- 12 DR. MURRAY: That's correct. About 38 13 percent of the people we spoke with said they had 14 played Texas Lottery games the last year. We asked 15 them, of course, what kinds of games, how much they 16 averaged playing. And the average expenditure of 17 players was about, I believe, $53 a month. If you 18 extrapolate that out to the entire population of the 19 state, it would yield this estimate of about 20 $4.2 billion, which is a bit on the high side. 21 CHAIRMAN COX: And a sanity check like 22 that is something that I appreciate. In the past, one 23 of our demographers didn't made that. When we asked 24 them to make it, I think we found it was a much larger 25 difference than what we found here. I'm very 0054 1 comfortable with this difference. When it was 2 doubled, I wasn't very comfortable with it. 3 DR. MURRAY: That's a good concern, I 4 would think. 5 COMMISSIONER CLOWE: And you said 6 38 percent say they have played, and that is down from 7 last year, isn't it? 8 DR. MURRAY: That is down and down 9 significantly. 10 COMMISSIONER CLOWE: Are you going to 11 cover that? 12 DR. MURRAY: If we can pull up that -- 13 COMMISSIONER CLOWE: I don't mean to 14 get ahead of you. 15 DR. MURRAY: -- chart that's now on the 16 board here. Some of this might be house effects. 17 We're a different surveying firm than did these other 18 surveys. But it looks to me like there is a pretty 19 consistent long-term trend here that has varied a 20 little bit. But the general pattern of public 21 participation is down, and that's very likely 22 reflecting real world. 23 COMMISSIONER CLOWE: I don't want to 24 get off the track, but I want to ask a question that 25 you may want to respond to later on. 0055 1 The real world in my mind is that 2 people are not gaming less in this state, they are 3 gaming in different places. And what comes to mind is 4 the 8-liners, the Internet gaming, the out-of-state 5 casinos and what other illegal gaming that goes on 6 that we don't know about. Is there any way that you 7 can shed any light on that in regard to what is the 8 legal amount of gambling or gaming in this state 9 that's conducted by the Texas Lottery Commission? 10 DR. MURRAY: That's beyond the scope of 11 our survey. As someone who has lived in the state for 12 four years and has occasionally indulged in gaming in 13 this and other states, I think there's a multitude of 14 factors that are driving this overall tendency, most 15 recently the explosion of the Internet and now 16 virtually every household having access. 17 And just to take one particular 18 instance where there's new gaming possibilities, 19 InTrade has political bets on everything you can 20 imagine that's updated every two minutes. And if you 21 think you know the next President of the United 22 States, you can get out your credit card wherever you 23 live and participate in that form of gaming in a 24 Dublin-based website. 25 And you probably can't ever imagine 0056 1 that cork going back in the bottle. So it would just 2 seem to me the real world is going to get increasingly 3 challenging and complex for you gentlemen and the 4 entity. 5 COMMISSIONER CLOWE: The concern I have 6 is that there is a focus on this gaming is taking more 7 dollars from fewer people. And the question is asked: 8 Are you targeting certain people? And our answer is, 9 "Certainly not." But, you know, there are surveys now 10 being conducted by entities that, for example, measure 11 sales in certain zip codes. And the decision has been 12 made in some of those surveys that, "Well, if it sold 13 in that zip code, the person lives in that zip code," 14 and I question the validity of that. 15 But what we're after on this board is 16 factual, real information. And my sense is that what 17 you're telling us here is, fewer people are buying 18 more tickets. But I think more people are gaming more 19 in the state, from what I see. 20 COMMISSIONER SCHENCK: The Department 21 of Justice -- 22 DR. MURRAY: I would agree. But we 23 don't have any data that addresses that question. 24 That would be a different survey to conduct. 25 COMMISSIONER CLOWE: Excuse me, 0057 1 Commissioner. 2 I'm trying to get the broader picture. 3 You know, there are some that just grab what these 4 facts are and say, "Oh, here is the answer." That's 5 not the answer; that's part of the answer. But the 6 answer is much larger than that, and you've got to 7 look at the whole picture. That's the point I want to 8 make as we go along here. 9 Pardon me. 10 COMMISSIONER SCHENCK: I'm sorry. 11 Excuse me. 12 The Criminal Justice Departments around 13 the country do these self-report studies for all kinds 14 of criminal behavior, and they seem to get people to 15 respond. I don't know what the rate of truthful 16 responses is, and I don't know how you could measure 17 it. But it seems to me it would be worth trying to 18 conduct a survey, just getting at the separate 19 question -- which I totally agree is an important 20 one -- of to what extent citizens of this state are 21 participating in other gaming activities, be they 22 legal or illegal, or whether they're on the 23 borderline. And I would like to see that survey. 24 I don't know, Mike, if we have the 25 ability to conduct that, but I think that information 0058 1 would be very helpful. 2 CHAIRMAN COX: Do we have any 3 information on what the percentage of respondents 4 playing any lottery game is nationwide? 5 DR. MURRAY: I don't. 6 But David? 7 CHAIRMAN COX: Do we, David? 8 DR. SIZEMORE: Ask the question again. 9 I'm sorry. 10 CHAIRMAN COX: Do we have this data 11 nationally? 12 DR. SIZEMORE: Not for this year. We 13 don't right now. But I have seen previous states that 14 do collect this sort of material. 15 CHAIRMAN COX: So would you, at a 16 meeting as soon as you can, give us some idea at least 17 how we're stacking up against the rest of the United 18 States? 19 DR. SIZEMORE: National rates? 20 CHAIRMAN COX: Yes. 21 DR. SIZEMORE: And I'm David Sizemore. 22 CHAIRMAN COX: And you can do it if you 23 have some selected states that are similar to Texas, 24 however you choose to slice and dice it. But help us 25 see whether this is similar to what's going on in the 0059 1 rest of the United States or whether we're an 2 aberration. 3 DR. SIZEMORE: Okay. Will do. 4 COMMISSIONER CLOWE: Mr. Chairman, 5 wouldn't the per capita sales be helpful in that mode? 6 CHAIRMAN COX: Sure. You bet they 7 would. 8 COMMISSIONER CLOWE: He's got the per 9 capita sales. 10 CHAIRMAN COX: Yes, we know the per 11 capita sales. But I would like to see the percentage 12 of respondents as well because, you know, one of the 13 things you observed early on is what we're seeing 14 here, is fewer people are playing more; and, yet, we 15 still have a very low per capita compared to 16 Massachusetts, let's say, and a number of other 17 states. 18 COMMISSIONER CLOWE: And the per capita 19 sales would be purchases of legal gaming devices, 20 would it not? 21 CHAIRMAN COX: Well, I think it would 22 cut capital -- if we looked at per capita sales for 23 lottery, it would be; it would be just for lottery. 24 Now, I don't know what kind of numbers -- David refers 25 to some numbers the law enforcement agencies have that 0060 1 may have some of the other kind of data on illegal 2 activity. We've had some estimates done by The 3 University of Texas on 8-liner play in the State of 4 Texas. So there's a lot of stuff out there. 5 And I would just ask, Mike, for you and 6 your folks to put it together for us in any way you 7 think might be helpful to us in understanding these 8 general kinds of questions. 9 MR. FERNANDEZ: Okay. We'll bring it 10 back at the next Commission meeting. 11 CHAIRMAN COX: Pardon me, Professors. 12 MR. GRIEF: Chairman Cox, if I could 13 just clarify -- 14 CHAIRMAN COX: Yes, Gary. 15 MR. GRIEF: -- one number that you're 16 definitely looking for is what is that 38 percent 17 number in other states? 18 CHAIRMAN COX: Yes. 19 MR. GRIEF: I just wanted to make sure 20 we're clear on that. 21 CHAIRMAN COX: What was the 45.4 the 22 year before and the 51 the year before that, 23 et cetera? 24 MR. GRIEF: Very good. Thank you. 25 COMMISSIONER CLOWE: And I'm trying to 0061 1 get in my mind how that relates to the per capita. 2 CHAIRMAN COX: And I think they're 3 different questions. One is, as I see it, Chairman 4 Clowe, what percentage of the people are playing? 5 That's these numbers. The next number is: How much 6 are they playing? And that's the per capita number. 7 COMMISSIONER CLOWE: And I agree with 8 that. And wouldn't they relate to each other? 9 CHAIRMAN COX: You would multiply them 10 together to get the total revenue. 11 COMMISSIONER CLOWE: Yes. 12 CHAIRMAN COX: And that would be 13 something else that you would want. 14 COMMISSIONER SCHENCK: If we want to 15 add an even more interesting layer of complexity to 16 this, we could get the per capita income from the 17 states, to see what kind of disposable assets these 18 people have -- 19 CHAIRMAN COX: Very good. 20 COMMISSIONER SCHENCK: -- state-by- 21 state -- 22 CHAIRMAN COX: That's very good. 23 COMMISSIONER SCHENCK: -- which is 24 available from the statistical abstract of the United 25 States on a year-over-year basis the Census Department 0062 1 sent out. 2 CHAIRMAN COX: Very good. 3 All right. That will give you 4 something to do in your spare time, David. 5 DR. SIZEMORE: Job security. Right? 6 Thank you. 7 DR. MURRAY: This survey instrument, 8 the largest part of it focuses on individuals that 9 said they had played in the last year and does a 10 number of specific probes as to which games they were 11 playing and how about frequently and what the amounts 12 are. 13 And let me turn over to my colleague, 14 Jim Granato, who has looked at these general patterns. 15 There's an awful lot of detail here, so just -- if 16 we're too detailed or too little, just cut us off or 17 move in whichever direction. 18 Jim? 19 CHAIRMAN COX: One thing that I would 20 ask is, I think you told us up front that you had a 21 potential error rate of 2.45 percent. But then some 22 of these detailed numbers, you really can't estimate 23 an error rate, can you? 24 DR. MURRAY: Oh, the error rates would 25 almost always be much, much higher, with the exception 0063 1 of something like Texas Lotto where almost all of the 2 people that played in the last year participated in 3 that game at 85 percent or so, consistent with 4 previous years. But, as you know, some of your games 5 have very low participation rates. 6 CHAIRMAN COX: Right. 7 DR. MURRAY: And so error margins there 8 are on things like how much they're playing, of 9 course, would be much, much greater. 10 CHAIRMAN COX: And it would be helpful 11 to me if you would show us, as you go through these, 12 "Now, these are the ones that are on the 2.45 plus or 13 minus. And these are, "Your guess is as good as 14 mine." 15 DR. MURRAY: Well, the 2.4 percent 16 applies to the total sample. So when we look at just 17 users, that's much smaller, about 1,700. That's 600 18 and something persons I believe. On the error margin 19 on a sample of 600 is roughly plus or minus 4.5 20 percent. 21 CHAIRMAN COX: Okay. 22 DR. MURRAY: It's greater, but it still 23 gives us reasonable confidence that these percentages 24 are pretty close to the real world. 25 CHAIRMAN COX: So there aren't any of 0064 1 these are the plus or minus 50 percent? 2 DR. MURRAY: On some of the games that 3 only have 17 percent participation, we're down into -- 4 that's 120 persons, maybe. 5 CHAIRMAN COX: Okay. The error rate 6 can get quite large? 7 DR. MURRAY: That would probably be 8 about plus or minus 9 percent. 9 CHAIRMAN COX: Plus or minus 9 percent? 10 DR. MURRAY: For a game that had a very 11 low participation rate of, say, 15 or 20 percent. 12 CHAIRMAN COX: Okay. Thank you for 13 that. 14 MR. GRIEF: If I could ask, Chairman, 15 would that also, that relatively higher rate also 16 apply when you start breaking it down by geographic 17 area? 18 DR. MURRAY: Absolutely, because we're 19 a big state and even the Metroplex, our most populous 20 area, that's only maybe 22 percent of respondents. 21 Any subpopulation is going to have a much larger error 22 rate. 23 MR. GRIEF: Thank you. 24 DR. GRANATO: For the record, my name 25 is Jim Granato, and I direct the Center for Public 0065 1 Policy at the University of Houston. I would like to 2 continue with comments on some general findings. 3 Just first of all, on participation 4 rates, we've already seen the figure. It's down from 5 prior years. This is across the board. It's not only 6 for any game. The only game that we see where the 7 participation rate is about the same is in Lotto 8 Texas. The amount spent, the monthly average is up 9 from the prior year, from $51.18 to $53.63. 10 CHAIRMAN COX: That's about four 11 percent. What's was inflation? 12 DR. MURRAY: Officially about two and a 13 half percent. 14 DR. GRANATO: One other thing about 15 this estimate, if you went back to the revenue 16 forecast, what we did was, we -- and since these are 17 based on self-reporting -- and there's going to be a 18 lot of error in self-reporting, especially about 19 specific numbers like this. If we were to knock this 20 down just to say the forecast was $50 -- say they 21 missed it by $3.00, they're off by $3.00 -- those 22 revenue forecasts would be very much in line, then, 23 with what we have heard. 24 So that's a very sensitive estimate on 25 the forecast to recollection. In addition, when we 0066 1 looked at just overall differences between players and 2 non-players, we found that incoming employment stats 3 seemed to be two drivers and that they were 4 statistically significant. And you can reference that 5 on Table 1. But also note that there are differences 6 in various demographic variables for the individual 7 games, and I can note that later on in the 8 presentation 9 For the game results that we do, you 10 can compare to other surveys. And we want to see what 11 was going on -- what's up, what's down -- compared to 12 prior surveys. A word of caution in what I'm about to 13 tell you, our sample sizes are lower this time for the 14 subgroups when we look at specific games, which means 15 that there could be -- even though we see a difference 16 in the number, when you look at the confidence 17 intervals of these estimates, they can overlap. 18 What I'm going to give you is just the 19 point estimates, but be aware that what we see as 20 differences, they may be quite small, or they're not 21 different. That's the other "be aware of." But we 22 wanted to follow other surveys done in the past. We 23 just give you the raw numbers at this point. 24 So in general, compared to the 25 participation rates of last year, again down. But 0067 1 what's interesting is frequency of purchase is up 2 weekly and monthly; it's down yearly. Average time 3 played, the results are mixed. For dollars spent in 4 five of nine games, there's an upward trend in 5 expenditure. 6 Now, when we look at our survey alone, 7 what we have here are variables that are of 8 significance. We're just looking at the people that 9 participate in specific games and look at these 10 various demographic variables to see if there were 11 differences based on these various demographic 12 characteristics. 13 What you see in blue are the ones that 14 are statistically significant; that is, these 15 variables seem to be driving a difference between 16 these groups, these categories, that's not just by 17 chance. So for Pick 3 Day, for example, education,, 18 income, race/ethnicity seem to have a significant 19 effect on participation. 20 For Pick 3 Day, for example, if we were 21 to just look at education, there is a negative 22 relationship. So as you move up the education scale, 23 going from high school to graduate school, 24 participation falls. Likewise, for income and for 25 race/ethnicity, what we saw -- I'm just going to Pick 0068 1 3 Day right now -- there is a difference between black 2 participants -- they participate the most -- then 3 comes Hispanic participants, then white participants. 4 We also have Asian participants following in that 5 regard. But the Asian category is so small that -- 6 just put a little asterisk by that. It will clue you 7 just how small there as a subgroup. Again, if I were 8 to go through all of these, you can see every one of 9 these variables here as a group is a significant 10 driver in differences in terms of participation. 11 Any questions about this? 12 COMMISSIONER CLOWE: People actually 13 answer these questions over the phone? 14 DR. GRANATO: Yes, sir. 15 COMMISSIONER CLOWE: They tell you how 16 much education they have, they tell you -- 17 DR. GRANATO: That' a good point. 18 COMMISSIONER CLOWE: -- what their 19 income is? 20 DR. GRANATO: That's a good question. 21 The answer is most -- depending on what -- some people 22 won't ask -- won't answer, but most do. And we note 23 that in the report. 24 DR. MURRAY: The income question gets 25 the largest refusal rate by far. We get good response 0069 1 on education and race/ethnicity. But many people will 2 refuse the income question. 3 COMMISSIONER CLOWE: And they will 4 identify their race or ethnicity? 5 DR. MURRAY: About 97, 98 percent will. 6 COMMISSIONER CLOWE: Okay. 7 COMMISSIONER SCHENCK: I have some 8 questions. On the tables here I'm working at, it 9 looks to me like you almost have some perfect bell 10 curves on some of these cohorts if you look across 11 them. You say that the playing rate goes down with 12 education. But it seems to me that -- and maybe I'm 13 wondering if I'm reading this right, which is why I'm 14 asking -- that this second page, with less than high 15 school -- am I reading these numbers right? -- that 16 8.46 percent of the people who have less than a high 17 school education are playing or is that the total 18 number of players who are in that cohort? 19 DR. GRANATO: Which table, sir? 20 COMMISSIONER SCHENCK: I'm sorry. 21 Table 1, the third page of it, the demographic 22 factors, education, with 143 respondents. And as I 23 read that, that's 8.46 percent of the 143 respondents. 24 And as I read that, that's 8.46 percent of the 143 25 respondents said yes, they played. 0070 1 DR. GRANATO: Of the total in that 2 cell. 3 COMMISSIONER SCHENCK: Okay. So this 4 is just identifying where the players are coming from, 5 not the rates within the cohorts? 6 DR. GRANATO: (Nods head) 7 COMMISSIONER SCHENCK: Okay. 8 DR. GRANATO: I'll continue with the 9 figures now. What I've done is, the figures here are 10 the same as in the report, so if you want to reference 11 the report. So Figure 1 is Figure 1 in the report. 12 And this again is participation rate for all players, 13 for any lottery game. And you can see the trend is 14 down. 15 In addition, I would also argue that it 16 appears that even if you were to put in the error band 17 between the 2006 participation rate and 2007 18 participation rate, it looks like there is a 19 significant difference here. We have a 2.4 percent 20 margin of error here. And it appears that when you 21 put those two bands together, there is still a gap, 22 which means this is not just a random drop. It 23 appears that it's something systematic going on here. 24 DR. MURRAY: One point I would like to 25 make, in just looking at the ratio of players to 0071 1 non-players, is you often do see a kind of curve, a 2 linear pattern, that people with very little education 3 or a lot of education tend not to be players, it's 4 people in the middle categories. It's the same with 5 income on a lot of the games, that again, people -- 6 you know, understandably, if you have very little 7 income, you're not going to be playing much. But 8 people who also tend to be quite high on the income 9 scale often are not -- players tend to be in the 10 middle. 11 COMMISSIONER SCHENCK: To emphasize 12 your point, am I understanding Table 2 as being the 13 one that I was really looking for, that the highest 14 percentage of players is coming from the "Some college 15 category" -- 16 DR. MURRAY: Yes. 17 COMMISSIONER SCHENCK: -- the lowest at 18 the two ends, which was that you would expect on a 19 bell curve -- 20 DR. MURRAY: Yes. 21 COMMISSIONER SCHENCK: -- and a 22 standard deviation somewhere? 23 DR. MURRAY: You see a lot of 24 non-linear patterns here in the data. 25 COMMISSIONER SCHENCK: And our highest 0072 1 percentage of player, in terms of income, is $75,000 2 to $100,000 a year. That's interesting data. 3 DR. MURRAY: Probably a confluence 4 of -- they're not too well-educated, and thus drop 5 off, but they have enough money to play. 6 COMMISSIONER CLOWE: So it makes me 7 wonder if the people who have some college and make 75 8 to $100,000 a year play more frequently with just less 9 dollars. Am I interpreting that correctly? 10 DR. MURRAY: In Page 11 of the report, 11 Table 2, the table that has "Any Game: Past-Year 12 Lottery Play and Median Dollars," if you look at the 13 income variable, the second cluster of variables 14 there, the highest median dollar spent is in the 15 income categories that start at $20,000 and go up to 16 $50,000. 17 So again, on Page 11, Table 2, any 18 game, that's an interesting factor again there. The 19 low income persons are not reporting spending much, 20 nor are high income Texas respondents. But it's in 21 the 20 to $50,000 range that you have the highest 22 median of participation. 23 MR. GRIEF: If I could ask a clarifying 24 question, Mr. Chairman? 25 CHAIRMAN COX: Please, Gary. 0073 1 MR. GRIEF: My understanding in the 2 first column, the percentage played, the way that 3 question is posed, that's just, "In the past year, did 4 you play any lottery game?" And if a respondent one 5 time purchased a one dollar scatch-off ticket and they 6 remembered that, they might very well answer "Yes" to 7 that question. Is that correct? 8 DR. MURRAY: That's correct. 9 MR. GRIEF: So the response to that 10 question, my point is, does not indicate: Are you a 11 regular player? Are you a frequent player, infrequent 12 player? It doesn't go to that level of detail at all, 13 just, "Did you purchase any type of lottery ticket 14 during the past year, period?" I just don't want 15 anyone to place more emphasis on that -- 16 COMMISSIONER SCHENCK: I think the 17 median dollars spent would be where we would get the 18 next level of relevant data for that cohort of 19 respondents. 20 DR. MURRAY: And again, it's the 21 median, not the mean, because sometimes you have 22 people reporting probably an outrageously large 23 expenditure. And if you average that in, it would 24 balloon up. So this is the median reported. That's 25 many above and below, probably the better statistic. 0074 1 And it does rather consistently show -- again, it's 2 the moderate income individuals tend to report the 3 higher -- 4 COMMISSIONER SCHENCK: Well, what is 5 really fascinating to me is that the cohort, the 6 $20,000 to $29,999 and below are all below the average 7 for the state in terms of participation rate. 8 Everybody above it is above the participation rate, 9 with a balloon at 75 to $100,000. 10 DR. MURRAY: So pretty high 11 participation rates but not spending much money. 12 CHAIRMAN COX: Well, let's just take 13 one number that jumps right out at it. The first 14 line, education less than a high school degree, 15 27.3 percent played; median dollars spent, $61. You 16 don't see a number like that anywhere else. Where are 17 these people in the rest of these cross-sections? 18 DR. MURRAY: That's not a huge number 19 of individuals. So maybe the error margins here are 20 bigger. But it's an interesting number. It does jump 21 out at you, as you say. But that's -- 22 COMMISSIONER SCHENCK: Well, what that 23 tells us is, people with less than a high school 24 diploma are spread pretty widely across the income 25 range. 0075 1 CHAIRMAN COX: That's what it seems to 2 say, and other ranges as well. 3 COMMISSIONER SCHENCK: Well, it's got 4 to be. 5 DR. GRANATO: Also there are various 6 places in the report where we'll identify these, quote 7 unquote, outliers and what we'll remove then to see 8 how the -- and, of course, the mean is very sensitive 9 to that. The median can be sensitive to it as well, 10 and we discuss that in these footnotes. But there 11 will be other games where we -- for example, Native 12 American Indians. There is one sample where there are 13 just seven of them. And they had -- I think their 14 median expenditure was $126. 15 COMMISSIONER CLOWE: Yes, I noticed 16 that. 17 DR. GRANATO: So you will see that kind 18 of volatility with these subgroups. And again, it's a 19 function of the fact that you have few people in these 20 subgroups. And if one person or two people says they 21 spent $400 a month or something of that nature -- 22 COMMISSIONER SCHENCK: What does it 23 take for you to throw out data as unreliable? You 24 said there were some outrageous responses. But if 25 you're getting an average among 7 people of a hundred 0076 1 and something dollars, that's getting pretty close. 2 DR. MURRAY: That category is always 3 going to be greatly -- very suspicious. On the less 4 than high school income, I think we had 39 individuals 5 that said they had played, so that's a big error 6 margin. 7 CHAIRMAN COX: Let me interrupt for 8 just a second. 9 Court Reporter, are you okay? 10 THE REPORTER: I'm good. 11 CHAIRMAN COX: Excuse me. 12 MR. GRIEF: And Commissioner Schenck -- 13 and for you, this might be new information, and I know 14 for the other two, it's old. 15 This is not the only report that's done 16 on this type of data. We worked with another vendor, 17 Ipsos Reid, to conduct what's called a segmentation 18 study that goes, I believe, more to the heart of many 19 of the questions that you're raising: How frequently 20 do certain groups of players play? How much do they 21 play? When they play? And that's the report that's 22 conducted -- how often, Michael? 23 MR. FERNANDEZ: Annually. 24 MR. GRIEF: -- annually as well. We 25 would be happy to set up some time with you and talk 0077 1 to you at greater length about that report as well, if 2 that would be helpful. 3 COMMISSIONER SCHENCK: That would be 4 helpful. And we're augmenting with this survey. Is 5 that the point? 6 MR. GRIEF: This is a statutory 7 requirement that's in the State Lottery Act that we 8 conduct this demographic study. This is helpful, but 9 it's strongly supplemented by various other marketing 10 studies that we conduct on our own initiative to help 11 us market our products. 12 COMMISSIONER SCHENCK: I think -- in 13 fact, yes, we talked about it in the past. I would 14 like to see that data as well. 15 MR. GRIEF: Very good. 16 CHAIRMAN COX: Okay. 17 COMMISSIONER CLOWE: That doesn't take 18 away from the validity of this study -- 19 MR. GRIEF: No, sir. 20 COMMISSIONER CLOWE: -- and the report 21 that these gentlemen are making. 22 MR. GRIEF: Absolutely not. I think 23 there may be some questions, though, that -- my only 24 point is, the Commissioner is asking some questions 25 maybe we can help answer by providing him with the 0078 1 segmentation study as well. 2 COMMISSIONER CLOWE: That's true, Gary. 3 I get back to looking at the whole picture. There are 4 people -- and Commissioner is not doing this, but some 5 people that might look at this and jump to conclusions 6 and draw conclusions. And you have to be careful with 7 that. 8 COMMISSIONER SCHENCK: It would be nice 9 if we had one more column on this table, T2, of what 10 percentage of the Texas population generally exists 11 within the under 12 -- there can't be that many -- 12 well, sadly, maybe there can be a lot of people. 13 DR. SIZEMORE: If I may, we've done 14 that in the past, and the sample sizes have been 15 compared across education levels and income. But we 16 did not do that this year. 17 COMMISSIONER SCHENCK: And we have a 18 total of what? One, two, three, four -- nine income 19 categories. So maybe it would hope roughly 20 10 percent, 11 or 12 percent within each one of these 21 brackets. Is that why you chose the income levels, or 22 is it just round numbers? 23 MR. FERNANDEZ: We usually go with 24 census. 25 DR. SIZEMORE: We usually use census 0079 1 designations or try to approximate those the best we 2 possibly can. 3 DR. MURRAY: Again, we generally used 4 the categories that have been used in the past, for 5 comparability purposes. 6 COMMISSIONER SCHENCK: That makes 7 sense. 8 DR. GRANATO: I do have some more 9 participation figures. But again, if you would like 10 me to continue, we can see the overall trends. 11 Figure 2 in the report is for Pick 3 12 Day. If you want to compare 2006 to 2007, you can see 13 a sharp dropoff. Now, I note for the 2006 survey for 14 this particular game, the sample size was 260. For 15 our survey, the sample size was 115. Okay. So part 16 of this difference is going to be attributed to 17 smaller -- people are just not playing this game as 18 much. 19 CHAIRMAN COX: Well, Gary, didn't we 20 have a significant increase in revenue in Pick 3? 21 MR. GRIEF: We had an increase. I 22 don't know that I would consider it significant but a 23 positive increase, yes, sir. 24 CHAIRMAN COX: So that number says to 25 me there's quite a bit of error in that number, as you 0080 1 mentioned, with the small samples in that. 2 DR. GRANATO: Yes, yes. There's going 3 to be some noise here. 4 Pick 3 Night, you can see again the 5 drop. What's interesting, too, is for some of these, 6 you'll see 2007 tends to match up with 2003-2004, and 7 you can see the kind of pattern here. There seems to 8 be an increase in 2005 and 2006 for some of these 9 games, and now it's come back down again 10 Cash 5, you can see a drop. Lotto 11 Texas, a lot of stability here. 12 The scratch-off game, Two Step. 2007 13 looks a lot like 2004. 14 Mega Millions, 2007 again looks like 15 2004. 16 Megaplier. 17 And that concludes the slide show. 18 DR. MURRAY: Any further questions or 19 follow-up? 20 CHAIRMAN COX: Chairman Clowe? 21 COMMISSIONER CLOWE: I don't think so. 22 I think that's all I have on this. 23 CHAIRMAN COX: Commissioner? 24 COMMISSIONER SCHENCK: No. I just find 25 this very helpful. I really appreciate the 0081 1 presentation and the report that you did. I would 2 like to see the overall population breakdown as 3 paralleling that table, or you can either just 4 photocopy for me the page out of the abstract. That 5 would probably be just as helpful. 6 CHAIRMAN COX: Thank you very much for 7 this work. We really appreciate it. It's very 8 helpful to us. And this is one of the better, if not 9 the best report I've seen in this area. Thank you 10 very much. 11 COMMISSIONER CLOWE: Thank you. 12 DR. MURRAY: Thank you. We enjoyed 13 working on the project. 14 COMMISSIONER CLOWE: Do you both live 15 in Houston? 16 DR. MURRAY: We do. 17 COMMISSIONER CLOWE: How many students 18 are at the University of Houston now? 19 DR. MURRAY: The central campus has 20 about 35,000, and there are about 20,000 at the other 21 three campuses. 22 COMMISSIONER CLOWE: Wow! 23 CHAIRMAN COX: And, Mike, one thing I 24 would observe to the Commissioners: You've offered to 25 get this contracted and moved up a month or so for 0082 1 next year so that we'll have this data well before the 2 meetings -- 3 MR. FERNANDEZ: Yes, sir. 4 CHAIRMAN COX: -- and we'll have an 5 opportunity to review it and perhaps ask better 6 questions than we were able to this time. 7 MR. FERNANDEZ: Absolutely. 8 COMMISSIONER CLOWE: Good work. Thank 9 you. 10 CHAIRMAN COX: Thank you very much. 11 AGENDA ITEM NO. II 12 CHAIRMAN COX: Item II, report, 13 possible discussion and/or action on -- why don't we 14 take about a 10-minute break at this point. 15 (Off the record: 10:37 a.m. to 10:55 16 a.m.) 17 CHAIRMAN COX: Let's come back to 18 order, gotten all the way to Item II, report, possible 19 discussion and/or action on 3rd quarter Calendar Year 20 2007, bingo conductor information. 21 Mr. Miner. 22 MR. MINER: Good morning, 23 Commissioners. For the record, my name is Bruce 24 Miner, Manager of the Bingo Services Center. I'm here 25 to present to you the third quarter figures as 0083 1 reported by licensed authorized organizations. 2 As you'll see, prize payouts for 3 regular bingo in the third quarter were 77.4 percent 4 of gross receipt. Prize payout percentages for 5 instant bingo were 72.7 percent of gross receipts. 6 This chart shows disbursements, other 7 than prizes, as a percentage of net receipts. The 8 highest disbursement continues to be rent payout at 9 24.7 percent, followed by salaries for callers, 10 cashiers and ushers, at 23.2 percent and charitable 11 distributions of 20.2 percent, lease payments to 12 distributors of 11.9 percent, cost of goods sold at 13 7.3, with the remainder of the other expenses all 14 under 7 percent. 15 CHAIRMAN COX: Bruce? 16 MR. MINER: Yes, sir? 17 CHAIRMAN COX: On those rent payments, 18 there is a maximum amount that can be charged per 19 session for rent. Is that correct? 20 MR. MINER: Yes, sir, that's correct. 21 CHAIRMAN COX: Do you know about what 22 percentage of that maximum, if we multiplied the 23 number of sessions times the maximum and then divided 24 that number into the rent expense, what percent would 25 we get? 0084 1 MR. MINER: I don't have that figure. 2 I can get back to you with that information. 3 CHAIRMAN COX: Would you? 4 MR. MINER: This pie chart is a 5 graphical representation of what percentage each 6 expense is as it relates to the total expenses. Once 7 again, it does not include prize payouts or charitable 8 distribution. So you'll see here that salaries, which 9 include janitorial service, callers, cashiers, ushers, 10 security, legal and accounting, account for over 11 41 percent of total expenses, while rent payments are 12 just under 30 percent of total expenses. 13 Instant bingo sales continue to exceed 14 regular bingo card sales. In the third quarter of 15 2007, instant sales represented almost 41 percent of 16 the total sales, while regular card sales represented 17 35.4 percent, and electronics was 23.7 percent. 18 This slide represents the average 19 attendance per occasion for the third quarters of 20 2005, 2006 and 2007. And you'll see the average 21 attendance per occasion dropped between 2005 and 2006 22 and remained the same for 2007. 23 This chart shows comparison of net 24 receipts for the third quarter of each year from 25 2003-2007, net receipts or gross receipts minus 0085 1 prizes. As you can see, net receipts for instant 2 bingo have increased each year over the past five 3 years, while the net receipts for regular bingo 4 continues to decrease for the same period of time. 5 And the green line shows that the overall net receipts 6 have only increased by $1.2 million since 2003. 7 This slide chart is the prize payout 8 percentage for regular and instant bingo for the same 9 period, the third quarter of 2003 to 2007. And as you 10 can see, the payout percentage for the past five years 11 for regular bingo has increased from the 73.4 percent 12 to 77.4, while instant payout percentages increased 13 from 72.5 to 73.4 in 2005, and then decreased to 72.5 14 in '06 and a slight increase in '07. 15 COMMISSIONER CLOWE: Why would that 16 decrease? 17 MR. MINER: The event tickets probably 18 would account for that, with the lower payout 19 percentage. There's a different mix out there that's 20 affecting the payout. 21 COMMISSIONER CLOWE: That's just a 22 random happening? 23 MR. MINER: Yes, sir. 24 COMMISSIONER CLOWE: No change in the 25 makeup of the game, just a random occurrence? 0086 1 MR. MINER: Well, I think it's a change 2 in that the event tickets are being offered with a 3 lower payout, so the payout percentage has decreased. 4 COMMISSIONER CLOWE: So that's a 5 managed result? 6 MR. MINER: Okay. Yes, sir. 7 COMMISSIONER CLOWE: Do you really 8 think that, Bruce? 9 MR. MINER: Well, I don't think it -- 10 we're not managing it. 11 COMMISSIONER CLOWE: Yes. 12 MR. MINER: It's the demand in the 13 industry. 14 COMMISSIONER CLOWE: In the halls? 15 MR. MINER: Yes, sir. 16 COMMISSIONER CLOWE: But you really 17 think that's being managed that way? 18 MR. MINER: I think it's just what's 19 being offered. And there might be an interest in 20 that. There's many variables out there. Could be 21 graphics, could be just location of what's being sold 22 by a local distributor. 23 COMMISSIONER CLOWE: Okay. Is that 24 just sort of an instant response from you? 25 MR. MINER: Yes, sir. 0087 1 COMMISSIONER CLOWE: You haven't really 2 thought that through? 3 MR. MINER: We actually had discussed 4 this previously. 5 COMMISSIONER CLOWE: You had? 6 MR. MINER: So that's a quick response. 7 I can get some additional information to add to that. 8 COMMISSIONER CLOWE: It's just an 9 interesting phenomenon to me, or an occurrence I guess 10 I should say. And I'm wondering why the decision- 11 makers would do that and if it would have a long-term 12 impact on the interest, you know, in those games. It 13 seems to me that it would. Players are very smart. 14 MR. SANDERSON: Let me try to elaborate 15 just a little bit, Commissioner. 16 COMMISSIONER CLOWE: Good. 17 MR. SANDERSON: For the record, Phil 18 Sanderson, Director of the Charitable Bingo Operations 19 Division. 20 And 2002 is when the pull-tab rule was 21 modified to allow for event tickets. And I believe 22 the manufacturers put into the marketplace these event 23 tickets with a higher payout percentage. Regulatory 24 through rules, we have set that the percentage of 25 payout cannot be less than 65 percent. So there's a 0088 1 bottom floor that any ticket produced has to be at 2 least a 65 percent payout. 3 And when the events tabs came out, 4 there were some that were being offered at about 78 to 5 80 percent payout. And as time progressed, new event 6 tabs have been developed, and now we're seeing event 7 tabs being presented for testing and approval that are 8 more in the 70 to 73 percent range. And so the 9 product mix of the tickets out in the market is what's 10 driving that percentage down a little bit. 11 We do have a representative from one of 12 the distributors here that may be able to -- and I 13 think his main duties is instant tickets as it relates 14 to game designs and prize payout structures. And he 15 may be able to answer additional questions if you 16 would like to ask him some questions 17 COMMISSIONER CLOWE: I'm not sure that 18 I want to inquire into that. Thank you, Phil. I 19 think that's really their business, and I don't think 20 it's this board's business. But it's an interesting 21 fact that Bruce has put in front of us. 22 We found in the lottery that when we 23 cut the payout, player interest declined. And because 24 the pull-tabs are such a large percentage of the 25 operation at this point in time, it's interesting to 0089 1 me that if they are doing what you said they're doing, 2 you know, they're playing with something that, from my 3 experience on the lottery side, is sensitive. And I 4 just -- I wanted to gather a little input to be 5 knowledgeable about it. I don't think it's our 6 business, but it is a thing I'm interesting in 7 observing. 8 MR. SANDERSON: I think there's, you 9 know, one thing. When the event tabs came about and 10 we were seeing a large increase in gross revenue but 11 nothing on the bottom line, or not a very large 12 increase on the bottom line, I believe that the 13 charities that conduct these games got with some of 14 the manufacturers and distributors and particularly 15 asked to get that reduced just a little bit to where 16 they had a little bit higher net profit off the 17 pull-tab deals. 18 And so I think that's just a market 19 that the distributors or the manufacturers have worked 20 with the charities to come up with a percentage that 21 is more in line historically. When pull-tabs were 22 without the event tickets, they were around 70 to 23 72 percent. So there was a big increase for a couple 24 of years, but then it's kind of leveled off. 25 COMMISSIONER CLOWE: They're chasing 0090 1 that net, Mr. Chairman. 2 CHAIRMAN COX: Absolutely. 3 COMMISSIONER CLOWE: They're not 4 reducing the rent; they're reducing the payout. 5 Interesting, very interesting. 6 CHAIRMAN COX: It is. 7 COMMISSIONER CLOWE: Thank you, Phil. 8 That's helpful. 9 Thank you, Bruce. 10 MR. MINER: We have added -- let me go 11 back real quick. We've added two additional slides to 12 compare the gross receipts and prize payouts reported 13 for the third quarter in each of the past five years. 14 The first slide shows a trend of gross 15 receipts and prize payouts for regular bingo. As you 16 can see, for the past five years, gross receipts for 17 regular bingo has dropped $14.5 million. And prize 18 payouts have dropped $6.8 million, thus resulting in 19 the higher percentage of payout, as shown on previous 20 slides. 21 This slide shows the instant bingo has 22 had an increase of $32.7 million in gross receipts and 23 an increase of $23.9 million in prize payouts for that 24 same period of time. 25 In your notebook there is additional 0091 1 information from an analysis performed by Susan 2 Beasley, program specialist for the Office of the 3 Controller. It includes some additional spreadsheets. 4 And that concludes my report for this 5 agenda item, and I would be glad to try to answer any 6 questions you might have. 7 CHAIRMAN COX: Thank you very much, 8 Bruce. Good presentation. 9 AGENDA ITEM NO. III 10 CHAIRMAN COX: Agenda Item No. III, 11 consideration of and possible discussion and/or 12 action, including proposal, on amendments to 16 TAC 13 Paragraph 402.100 relating to definitions. 14 Ms. Joseph. 15 MS. JOSEPH: Good morning, 16 Commissioners. For the record, my name is Sandra 17 Joseph, Assistant General Counsel. 18 Before you for your consideration is a 19 proposed amendment to bingo administrative rule, 20 §402.100 regarding definitions. This was prepared in 21 response to a petition for rulemaking from Darin 22 Peters that was approved by the Commission on 23 December 5, 2007. The petition requested that Rule 24 100 be amended to make the language pertaining to a 25 bingo card face contained within the definition of 0092 1 "card-minding device" consistent with the definition 2 of "face" in Rule 402.301 relating to bingo card and 3 paper. 4 Rather than amending the definition of 5 "card-minding device," the draft proposed amendment 6 simply deletes the definition of "card-minding device" 7 in §402.100. Card-minding device is also defined in 8 Rule 302 pertaining to card-minding systems; and, 9 therefore, the §402.100 definition is not needed. 10 The petitioner, Mr. Peters, is in 11 agreement with this approach. The submission prepared 12 for the Texas Register includes notice of a public 13 hearing to be held on the proposed rule on 14 February 6th at 10:00 a.m. The staff recommends that 15 the Commission initiate the rulemaking process by 16 publishing the draft proposed rule amendment in the 17 Texas Register in order to receive public comments for 18 a period of at least 30 days. 19 COMMISSIONER CLOWE: Move the adoption 20 of the staff recommendation. 21 COMMISSIONER SCHENCK: I second the 22 motion. 23 CHAIRMAN COX: Motion has been made and 24 seconded. All in favor, say "Aye." 25 COMMISSIONER CLOWE: Aye. 0093 1 COMMISSIONER SCHENCK: Aye. 2 CHAIRMAN COX: Aye. 3 Motion carries 3-0. 4 MS. JOSEPH: And with your permission, 5 I'll offer you a t-bar at the conclusion of my three 6 presentations. 7 CHAIRMAN COX: Okay. 8 AGENDA ITEM NO. IV 9 CHAIRMAN COX: Agenda Item No. IV, 10 consideration of and possible discussion and/or 11 action, including proposal, on repeal of 16 TAC, 12 Paragraph 402.705 relating to compliance review. 13 Ms. Joseph. 14 MS. JOSEPH: Commissioners, Item IV is 15 a draft proposal to repeal bingo administrative rule 16 §402.705 relating to compliance review. In the recent 17 rule review process, the Commission concluded that the 18 reasons for adopting this rule no longer exist. The 19 rule is no longer necessary, because the subject 20 matter in the rule is now covered in another rule that 21 was adopted this past fall, Rule 402.715, compliance 22 audit. 23 Again, the submission prepared for the 24 Texas Register includes notice of a public hearing to 25 be held on February 6th. And the staff recommends 0094 1 that the Commission initiate the rulemaking process by 2 publishing the proposed rule in the Texas Register in 3 order to receive public comment. 4 COMMISSIONER CLOWE: Move the adoption 5 of the staff recommendation. 6 COMMISSIONER SCHENCK: I second the 7 motion. 8 CHAIRMAN COX: Motion has been made and 9 seconded. All in favor, say "Aye." 10 COMMISSIONER CLOWE: Aye. 11 COMMISSIONER SCHENCK: Aye. 12 CHAIRMAN COX: Aye. 13 Motion carries 3-0. 14 AGENDA ITEM NO. V 15 MS. JOSEPH: Item V -- 16 CHAIRMAN COX: Okay. Go ahead. 17 MS. JOSEPH: Item V is a draft proposal 18 to repeal bingo administrative rule §402.406 relating 19 to exemptions from licensing requirements. Again, in 20 the rule review process, the Commission concluded that 21 the reasons for adopting this rule no longer exist. 22 The rule is not necessary, because the Bingo Enabling 23 Act does not require organizations to obtain approval 24 for exempt status. The submission again includes 25 notice of a public hearing to be held on February 6th 0095 1 at 10:00 a.m. And the staff recommends that the 2 Commission initiate the rulemaking process by 3 publishing the rule in the Texas Register for public 4 comment for a period of not less than 30 days. 5 COMMISSIONER CLOWE: Move the adoption 6 of the staff recommendation. 7 COMMISSIONER SCHENCK: Second the 8 motion. 9 CHAIRMAN COX: Motion has been made and 10 seconded. All in favor, say "Aye." 11 COMMISSIONER CLOWE: Aye. 12 COMMISSIONER SCHENCK: Aye. 13 CHAIRMAN COX: Aye. 14 Motion carries 3-0. 15 AGENDA ITEM NO. VI 16 CHAIRMAN COX: Agenda Item No. VI, 17 report by the Charitable Bingo Operations Director and 18 possible discussion and/or action on the Charitable 19 Bingo Operations Division's activities. 20 Mr. Sanderson. 21 MR. SANDERSON: Good morning, 22 Commissioners. Once again for the record, Phil 23 Sanderson, Director of the Charitable Bingo Operations 24 Division. 25 In your notebook is the report of the 0096 1 bingo activities, indicating the staffing of the Audit 2 section as well as the Licensing section. And then 3 also I would like to note that the BAC meeting is 4 tentatively scheduled for February the 6th at 10:30, 5 and invite the Commissioners to attend individually. 6 And I'll have Ms. Neal contact each Commissioner for 7 availability in schedule 8 Quarterly reports for the fourth 9 quarter of 2007 are due on January the 25th, and the 10 allocations of the prize fees received will be made 11 sometime in the middle of February. 12 With that, I'll be glad to answer any 13 questions. 14 COMMISSIONER CLOWE: No questions. 15 COMMISSIONER SCHENCK: I have no 16 questions. 17 CHAIRMAN COX: Thank you, Phil. 18 AGENDA ITEM NO. VII 19 CHAIRMAN COX: Agenda Item No. VII, 20 report, possible discussion and/or action on lottery 21 sales and revenue, game performance, new game 22 opportunities, advertising, market research and 23 trends. 24 Ms. Pyka and Mr. Tirloni. 25 MS. PYKA: Good morning, Commissioners. 0097 1 my name is Kathy Pyka, Controller of the Lottery 2 Commission. With me to my right is Robert Tirloni, 3 our Products Manager. 4 Our first chart that we have for you 5 this morning reflects revenue from sales and net 6 revenue to the state through the week ending 7 January 5th of 2008. Total sales for this 19-week 8 period amounted to one billion 261.6 million dollars, 9 while estimated net revenue to the state for this 10 period was $467.6 million. Net revenue to the state 11 does reflect a slight increase, as compared to the 12 315.3 figure for the same period in Fiscal Year 2007. 13 Our prize expense as a percentage of 14 sales is reflected at 62.9 percent for the current 15 time period, a decrease of .3 percent as compared to 16 the same period for the last fiscal year. 17 Our next slide summarizes for you the 18 change in sales by game from Fiscal Year 2007 to 2008. 19 A decline from Fiscal Year 2007 sales is just under 20 one percent, or $10.7 million. And the overall 21 $10.7 million decline includes a $13.3 million decline 22 in the instant ticket area, as well as a $2.6 million 23 gain in the on-line game area. 24 While Pick 3 reflects a decline of 25 $10.9 million, the additional of Pick 3 Sum It Up, 0098 1 Daily 4 and Daily 4 Sum It Up reflects an overall 2 $8.4 million gain over our Pick 3 sales from Fiscal 3 Year 2007 during this same time period. We had 4 expected a decline in Pick 3 sales with the 5 introduction of those games in our fiscal note. 6 CHAIRMAN COX: Is the decline that you 7 expected and the amount of revenue from Daily 4 about 8 what you expected? 9 MS. PYKA: We began the fiscal year 10 with the introduction of the game, estimating we would 11 have a 7.1 percent increase with those products and 12 started out with a fairly large increase. And that's 13 starting to taper off. This past week it was at 14 6 percent. 15 CHAIRMAN COX: Pretty close? 16 MS. PYKA: Pretty close. And then we 17 looked at a projected $6 million, and looking at the 18 combined, and looking at in excess of over $6 million. 19 And we have met that every week of the new game. And 20 then we had also projected that 5 percent of our Pick 21 4 -- or Daily 4 sales would be in the area of Daily 4 22 Sum It Up, and that has by far exceeded our 23 expectation. Our Daily 4 Sum It Up sales have been in 24 the range of low being 20 percent, the high being up 25 to 32 percent. So that has done quite well. 0099 1 COMMISSIONER SCHENCK: Kathy, a couple 2 of months ago we had a member of the public come and 3 testify about some concerns about the marketing of the 4 Daily 4 Sum It Up feature and the method of play and 5 whether we were going to make some revisions to the 6 marketing, as I recall. 7 MS. PYKA: Yes. 8 COMMISSIONER SCHENCK: Have we done 9 that now? 10 MS. PYKA: I'll let Robert speak to 11 that from the products perspective. 12 MR. TIRLONI: For the record, my name 13 is Robert Tirloni. I'm the Products Manager for the 14 Commission. 15 Yes, Commission Schenck, the website 16 has been updated. We've put out additional point-of- 17 sale pieces to explain how the pair play works with 18 Sum It Up. And the new how-to-play brochures are 19 being printed. That also provides additional examples 20 of pair play. 21 COMMISSIONER SCHENCK: And have you 22 communicated those changes to the member of the public 23 that came and spoke to us, Ms. Nettles? 24 MR. TIRLONI: I have not personally, 25 no. 0100 1 COMMISSIONER SCHENCK: Have you heard 2 any more from her about her concerns with that 3 feature? 4 MR. TIRLONI: I have not heard any -- 5 after the last Commission meeting where we discussed 6 that, I have not heard anything additional, no. 7 COMMISSIONER SCHENCK: Okay. Thanks, 8 Robert. 9 MS. PYKA: And to wrap up your inquiry 10 about the fiscal note projection, with regard to our 11 Pick 3 Sum It Up, again we had projected 5 percent of 12 our Pick 3 sales would be in the Pick 3 Sum It Up 13 area, and that range has been from 3.2 percent up to 14 4.3 percent. And Robert and his team are planning an 15 advertising initiative in that area in the very near 16 future. 17 Moving to the next slide, this includes 18 our Fiscal Year 2008 year-to-date sales by game. As 19 noted on this slide within the green area of the pie 20 chart, 76.6 percent of our sales were in the instant 21 ticket area, or $966.3 million, followed by 22 7.7 percent of sales, or $97.5 million from Pick 3, 23 followed by 5.9 percent of our sales, or $73.8 million 24 from Lotto Texas. And our Mega Millions product is 25 represented at 4 percent of sales, or $50.8 million. 0101 1 Sales to date for the Daily 4 game are $14 million, 2 and $3.7 million for the Daily 4 Sum It Up. Then 3 again included are the first eight weeks of Pick 3 Sum 4 It Up sales of $1.6 million. 5 With that, Robert will now discus sales 6 by price point. 7 MR. TIRLONI: Commissioners, this next 8 slide gives us a breakdown of the $966 million in 9 instant ticket sales. And we have not seen a change 10 in terms of the price points that are experiencing the 11 greatest sales. The $5.00 price point is still our 12 leading price point, followed by the $2.00 and the 13 $10.00 and then the $1.00. So we've not seen much 14 change in that sequence. 15 I do have some updates for you since 16 our last meeting in early December. Regarding Mega 17 Millions, on Tuesday, January 1st, we did sell a 18 jackpot-winning ticket in Texas. That ticket was sold 19 in Fort Worth at the C Store Sub Express. 20 We were advertising an estimated 21 annuitized jackpot of $33 million. The winning Texas 22 ticket was a Quick Pick cash value option, and the 23 cash value is approximately $20 million. We have been 24 contacted by a potential claimant, and we are working 25 with a potential claimant. The retailer who sold that 0102 1 ticket is eligible for a $330,000 bonus. 2 CHAIRMAN COX: Not bad. 3 MR. TIRLONI: Since that last meeting, 4 we've also had a winning Lotto Texas jackpot ticket 5 sold. That one was sold in San Antonio a couple of 6 days after our last meeting, on Saturday, 7 December 8th. It was sold by a retailer called 8 Phillips Express. That jackpot was advertised at an 9 estimated annuitized $30 million. This ticket also 10 happened to be a Quick Pick cash value option. And 11 the cash value of that prize is approximately 19 and a 12 half million dollars. That claimant has already come 13 forward and claimed their prize. And the retailer in 14 San Antonio is eligible for just under a $309,000 15 bonus for selling that jackpot ticket. 16 I have a few instant ticket updates for 17 you. 18 COMMISSIONER SCHENCK: Sorry, Robert. 19 MR. TIRLONI: I'm sorry, Commissioner. 20 COMMISSIONER SCHENCK: Let me ask what 21 is I'm sure a stupid question. 22 CHAIRMAN COX: There are no stupid 23 questions. 24 COMMISSIONER SCHENCK: And I think I 25 probably know the answer to it. But when we identify 0103 1 the winners of these extremely large prizes, from time 2 to time, I imagine they probably ask us, some of them 3 I'm sure, enthusiastic and surprised. They must have 4 lots of questions about: What do I do? Do I talk to 5 a lawyer? Do I talk to an estate planner? These 6 people's lives are changed in significant ways. Do we 7 have any sort of direction to point them to? I'm not 8 sure that it's our job, and I'm sure it's not our 9 statutory mandate. But what, if anything, can we do 10 to help these people who are experiencing what would 11 hopefully be a life-changing event? But I'm not sure 12 that there is anything. 13 CHAIRMAN COX: Kim might be the one to 14 answer that for you. 15 MS. KIPLIN: Commissioner, if I may -- 16 and our lead prize-winner attorney is here, Deanne 17 Rienstra. But there is a group of people through the 18 winner liaison person that's in Products, as I 19 understand it. That function has kind of moved within 20 the agency, but that's the point of contact for the 21 person who contacts us. 22 And during that first initial 23 conversation, there is, from the legal perspective, an 24 attorney who will join that call, who will discuss 25 with that person, going right into the heart of what 0104 1 you were just asking, which is: You've got time, 180 2 days. We let them know that however they claim that 3 prize is the way that we will pay it -- most of these 4 are cash value. But for those that are taking on the 5 installment, then that does have more of a significant 6 impact in the way that we will pay them -- encourage 7 them to seek legal advice, encourage them to seek 8 financial advice. 9 We are restrained or constrain-limited 10 from recommending attorneys. We are constrained from 11 providing legal advice to them, because we -- 12 obviously, we represent the Lottery and we don't enjoy 13 that kind of a relationship. But we certainly do 14 encourage them -- 15 COMMISSIONER SCHENCK: We can direct 16 them to their local bar associations. 17 MS. KIPLIN: Certainly do; we certainly 18 do. And I generally will say that -- you know, my 19 recommendation is to try to seek out somebody who has 20 got an expertise or specialization in your estate 21 planning or tax law, because of the -- 22 COMMISSIONER SCHENCK: Matrimonial law. 23 MS. KIPLIN: -- circumstances. I 24 really don't go there. You know, we do get the 25 question from time to time: Is it community property? 0105 1 My answer is, "You know, I really don't know." 2 Because that's for a district court judge to decide, 3 you know, in terms of whether it's community property. 4 And I don't know. You know, was it separate property 5 that -- all of those things will go into that 6 determination, so we really don't go there. But we do 7 strongly encourage them, we encourage them to keep it 8 in a safe place. We let them know that they've got 9 sufficient time to make good, well-reasoned, informed 10 decisions, based on their own unique circumstances. 11 If they do choose to create a legal 12 entity to claim the prize, then the attorney -- the 13 agency attorney will work with that attorney to make 14 sure that those documents meet our requirements in 15 terms of all the different provisions that may come 16 into play, the identity of who is there and so forth 17 and so on. 18 So, yes, we do. 19 I generally, if I'm processing 20 somebody -- and I was fortunate enough. I think this 21 was the folks out of San Antonio. Right? 22 MR. TIRLONI: I believe so. 23 MS. KIPLIN: Yes, to process them, and 24 it was quite a hoot. He took it on an individual -- I 25 tried to encourage him not to make any significant 0106 1 life decisions until they've gotten well-informed 2 advice. 3 COMMISSIONER SCHENCK: And they don't 4 need to identify themselves, and we don't identify 5 them? 6 MS. KIPLIN: Not on the initial 7 inquiry. But, obviously, as you come in and, you 8 know, you file a claim, we need to know who you are. 9 COMMISSIONER SCHENCK: Yes, I 10 understand. 11 MS. KIPLIN: There are state debt 12 set-off issues, and there are claim forms that need to 13 be submitted and proper identification, to ensure that 14 you are who you say you are. 15 And generally whoever the attorney is 16 will give them a card -- "And if you have any 17 questions at all, feel free to call." It's one of 18 those moments, especially if they come in inpromptu, I 19 would suspicion, if it were me, the whole thing would 20 be surreal. And so it's only after you leave that you 21 have questions to want to make sure we're available, 22 even on a follow-up to them or to their attorney. 23 COMMISSIONER SCHENCK: And just to be 24 clear, we don't keep cash here? We give checks? 25 MS. PYKA: We do not keep any form of 0107 1 cash here. 2 MS. KIPLIN: Yes. 3 COMMISSIONER SCHENCK: I just wanted to 4 make the record clear on that. 5 MS. PYKA: We have had a request, 6 though, for cash. 7 COMMISSIONER SCHENCK: I don't doubt 8 it. 9 MS. KIPLIN: Yes. So we do try to -- 10 try to do the best we can within the constraints that 11 are imposed on us. Under one of the rules of 12 professional responsibility, we really are, you know, 13 acclimated into the fact that we're state employees. 14 MR. TIRLONI: And, Commissioner, just 15 to add to what Kim said, I have three people on my 16 staff who are tasked with working with these large 17 winners. And it's not only for the on-line games. 18 Any prize over a million dollars has to come here to 19 headquarters for claiming. 20 So some of our $20 and $30 and $50 21 scratch-off tickets have prizes at that level and 22 above. And so typically what happens is, there is an 23 initial phone call, and they pass initial inquiry with 24 the claim center. And then from that point on, people 25 on my staff serve as that liaison with that potential 0108 1 claimant, and they're their point of contact here with 2 the agency. And whenever they have questions or 3 issues that come up, they call the people on my staff. 4 And then they either direct them to Legal or to 5 Kathy's staff, if it's a financial related question. 6 And so they work with these people 7 pretty closely. You know, sometimes we'll have an 8 initial inquiry and it might be seven or eight weeks 9 before the claimant actually comes forward to make the 10 claim. And they're actually working back and forth 11 with staff on a pretty regular basis. 12 So it's an important function for us, 13 because it allows us to develop a rapport with the 14 players and the winners of these prizes. And as Kim 15 said, It's sometimes overwhelming and surreal. And 16 they're a good foundation for these potential 17 claimants to be able to talk to and call in and ask 18 their questions and have their questions answered. 19 COMMISSIONER SCHENCK: Okay. That is 20 informative. 21 COMMISSIONER CLOWE: I would like to 22 add, Commissioner, that the staff really does an 23 excellent job of handling these people. I've sat with 24 a number of winners and visited with them and watched 25 the interaction. 0109 1 And I don't want you to miss the 2 subtlety of the terms that were used. When they 3 initially come in, they're identified as a claimant. 4 They are not identified as a winner until they've 5 vetted. And then when they pass the vetting, they are 6 then declared a winner. 7 And the Commission is protected in that 8 they pose with a ceremonial check, but they don't walk 9 out of here with a check. It goes into a financial 10 institution so there is a record of the transaction. 11 And I don't know if anybody has ever tried to carry 12 the ceremonial check out or not. 13 But, you know, it's a very human 14 experience that is certainly in most cases a once-in- 15 a-lifetime experience. And this staff is very warm, 16 they're very outreaching. I've seen winners who could 17 barely tell you their name and others that acted like 18 it happened every other day. It didn't bother them a 19 bit. But I've never heard a complaint from a winner 20 that they were badly treated or they thought the 21 procedure wasn't proper. They are treated very 22 professionally. 23 And I think it's an excellent question. 24 I'm glad you asked it so that we can give you this 25 information. It's a really important part of the 0110 1 process. And what happens to them after they get the 2 money is another story. It's their money. And, you 3 know, you hear all kinds of good stories and bad 4 stories, but it's their money. That's their business. 5 We have had for years a record of 6 winners. In some cases, they didn't want publicity; 7 they were not photographed. In other cases, they 8 wanted to be part of the record. There was for many 9 years an annual meeting of winners. I think that 10 process has been discontinued. The Commission doesn't 11 fund that, and I don't think it's gone forward. But 12 it's an elite group. 13 And I think the important thing that I 14 would like to stress in trying to help answer your 15 question is, those people are treated very, very well, 16 very professionally. The financial transaction, which 17 is large, is properly handled. And those people leave 18 here with a very positive feeling in my experience, 19 and I've sat with a number of them, talked to them, 20 feeling good about the Texas Lottery. And that's the 21 way we work. 22 CHAIRMAN COX: Thank you, Chairman 23 Clowe. 24 Did that help? 25 COMMISSIONER SCHENCK: Yes. Thank you 0111 1 very much. 2 MR. TIRLONI: Commissioner, I 3 appreciate you making those comments, because my staff 4 does work very, very hard to make the claimants feel 5 the way that you described. I'll make sure I pass 6 that on to them, because they are very dedicated to 7 making sure that these claimants get all the 8 information they need and all the other types of 9 background information that they need. And they're 10 very dedicated to taking these calls and talking to 11 these people. So I appreciate you saying that. 12 Commissioners, I want to let you know 13 about some new instant products that we have coming 14 out over the next few weeks. I Love Lucy is starting 15 on January 14th -- I'm sorry. It started on January 16 14th, just two days ago. We did run a Lucy game a 17 couple of years back. It launched in the summer of 18 2005. We're looking forward to this, to boost our 19 $2.00 price point. 20 As part of this licensed property game, 21 we do get the official Lucy impersonator authorized by 22 the Estate of Lucille Ball. She will be at the San 23 Antonio rodeo on the first weekend in February, and 24 she'll be performing and promoting our ticket. And 25 she'll also be appearing the night before at a Valero 0112 1 retail location, at a customer appreciate day that 2 they're having that evening, during the evening drive 3 time. And she'll also be promoting this game and the 4 lottery while she's there. 5 COMMISSIONER SCHENCK: I assume we're 6 advertising this on the radio in San Antonio? 7 MR. TIRLONI: We are probably going to 8 be doing traffic reads to support that. And there's 9 also signage and point of sale that we've already 10 produced -- it's in the works -- that Valero can post 11 at this location to let their customers know that this 12 is going to be taking place. 13 We also have a game called Sum It Up 14 that's launching at the end of this month. Our hope 15 with this game is that we can use a scratch-off game 16 to cross-promote the add-on feature. As you well 17 know, Sum It Up launched as an add-on feature with 18 Daily 4; then we added it to Pick 3. 19 This game is actually a suggestion from 20 a retailer at a retailer meeting that we had this past 21 summer in the Beaumont area, and he suggested that we 22 develop a scratch game that might help retailers talk 23 about the Sum It Up feature. I thought that was a 24 good idea. And I asked that we create this game and 25 so we'll -- this is our first attempt to do something 0113 1 like this. But our hope is the sales staff and the 2 retailer base can use this to drum up interest in that 3 new add-on feature that's on Daily 4 and on Pick 3. 4 And in February on the 11th, we are 5 launching our NBA ticket. Last year we did our first 6 major league baseball ticket. This is our first NBA 7 ticket. It does feature all three of the NBA teams in 8 Texas: The Spurs, the Rockets and the Mavericks. And 9 this game also gives us some good exposure in the 10 arenas. We get some advertising exposure and we 11 actually get on court and in-arena promotion as part 12 of this package, so we're excited about this. 13 And that is our update on products. 14 But I'm happy to answer any questions that you might 15 have. 16 CHAIRMAN COX: Mr. Grief, Commissioner 17 Schenck wonders whether we'll get any tickets. 18 COMMISSIONER SCHENCK: If there is an 19 NBA championship in Texas, will we be part of it? 20 MR. GRIEF: Well, actually, that's a 21 very interesting question, Commissioner. In years 22 gone by, many years gone by, as part of the agreements 23 with some of the former organizations such as race 24 tracks, horse tracks, other venues, there were some 25 tickets provided. But we found -- and I believe the 0114 1 State Auditor's office confirmed -- that having that 2 element within the mix sometimes can cause problems 3 for the agency -- if not real problems, perception 4 problems. 5 COMMISSIONER SCHENCK: I was largely 6 joking. It's not that I need the tickets. 7 CHAIRMAN COX: I think it's a very good 8 question. 9 COMMISSIONER SCHENCK: Thank you. 10 MR. GRIEF: Invariably someone asks 11 that question when we mention those types of products. 12 COMMISSIONER SCHENCK: Okay. 13 MS. PYKA: That is all we have, 14 Commissioners, until y'all have other questions. 15 CHAIRMAN COX: Thank you, Robert. 16 MR. TIRLONI: Thank you. 17 AGENDA ITEM NO. VIII 18 CHAIRMAN COX: Okay. Item No. VIII, 19 report, possible discussion and/or action on transfers 20 to the state and the agency's budget. 21 Ms. Pyka. 22 MS. PYKA: Thank you. Again for the 23 record, my name is Kathy Pyka, Controller of the 24 Lottery Commission. 25 Tab VIII in your notebook includes 0115 1 information on the agency's financial status. The 2 first report reflects the transfers and allocation to 3 the Foundation School Fund and the allocation of 4 unclaimed prizes for the state for the period ending 5 November 30th of 2007. 6 Total cash transfers to the state 7 amounted to $253.1 million for the first three months 8 of Fiscal Year 2008, and this does represent a minimal 9 increase from the amount transferred in November of 10 two thousand -- and for the amount transferred in the 11 prior year, fiscal year. 12 The second page of your notebook 13 reflects the detailed information for the monthly 14 transfers. Of the $253.1 million transfer to the 15 state, $231.3 million was the amount transferred to 16 the Foundation School Fund, with a balance of 17 $21.8 million transferred from unclaimed prizes. 18 We also included in your notebook a 19 document on the report of the sales, expenditures and 20 transfers from Fiscal Year 1992 to date. Total 21 cumulative transfers to the Foundation School Fund 22 through November of this year totaled $9.9 billion. 23 Commissioners, I also wanted to note, 24 since we prepared the Commission meeting notebook 25 material, we have completed the December transfer. 0116 1 That was done last week. And with that December 2 transfer, we have now exceeded the $10 billion mark. 3 We're at $10,008,000,000. 4 CHAIRMAN COX: $10 billion? 5 MS. PYKA: Yes. 6 CHAIRMAN COX: Gary, are we going to do 7 something to celebrate that? 8 MR. GRIEF: Mr. Heith has -- I believe 9 we've already issued a press release to that effect. 10 Other than that, we don't have anything in particular 11 planned. We are revamping all of our brochures, our 12 website and advertising material to move from $9 13 billion to $10 billion generated. We would be open to 14 ideas if the Commission wanted to do anything special. 15 COMMISSIONER CLOWE: Let's get a new 16 Commissioner. 17 (Laughter) 18 CHAIRMAN COX: Where would he sit? 19 COMMISSIONER CLOWE: Well, we'll find 20 room for him. That's a benchmark. 21 CHAIRMAN COX: Oh, that's great. 22 COMMISSIONER SCHENCK: I do think we 23 should do something. I mean, it's largely as a result 24 of the work that you people have done, the fine work. 25 I mean, $10 billion is a lot of money in anybody's 0117 1 estimation. So I'm open to ideas if you want to do 2 something. 3 CHAIRMAN COX: Well, the other side of 4 the story is that that doesn't even capture the money 5 that we have raised, because -- what? -- $6 billion 6 went into the general fund before Governor Bush made 7 sure that the Foundation was created so that this 8 would all go to education. So we've really raised 9 about -- Kathy, what's the total number? 10 MS. PYKA: I've got the figure here for 11 you. To date the cash transfer amount to the general 12 revenue fund is $5.1 billion. This is through 13 November. So the cumulative transfers have been 14 $15.3 billion to date since the inception of the 15 lottery. 16 CHAIRMAN COX: Well, I hope that Nelda 17 and whoever is talking to the folks over on the Hill 18 will find a way to communicate to them that we've 19 raised $10 billion. And I agree with the 20 Commissioner, if we can find some special way to 21 commemorate this; it would be a good thing to do. 22 MR. GRIEF: We'll do some thinking on 23 that. 24 CHAIRMAN COX: Good. 25 MS. PYKA: Commissioners, the final 0118 1 item under this tab is the agency's Fiscal Year 2008 2 method of finance summary for the first quarter ending 3 November 30, 2007. And this is the first report that 4 we're providing off of the new financial system, so 5 we're at that point of finally doing modified accrual 6 reporting. So I will be reporting not only cash 7 expended but also encumbered, to you. 8 So when we look at our lottery 9 operating budget for Fiscal Year 2008, it's 10 $193.5 million. And of this amount, 79.4 percent is 11 expended and encumbered through the first quarter. 12 And our Bingo Operations budget, funded by general 13 revenue, is $15.2 million, with 35.4 percent expended 14 and encumbered through the first quarter of Fiscal 15 Year 2008. 16 We're on the expenditure pattern that 17 we need to be. We're monitoring this certainly on a 18 daily basis. I would be happy to answer any questions 19 that you might have. 20 CHAIRMAN COX: Thank you, Kathy. 21 AGENDA ITEM NO. IX 22 CHAIRMAN COX: Item IX, report, 23 possible discussion and/or action on Lottery 24 Operations and Services Contract Amendment No. 8 25 credit calculation. 0119 1 Ms. Pyka. 2 MS. PYKA: Thank you, Mr. Chairman. 3 Commissioners, this morning you heard 4 reference to Amendment No. 8, The GTECH Lottery 5 Operations and Services Contract amendment. And I 6 wanted to update this morning on the amount that we 7 have actually that's due to the Commission through the 8 first quarter of Fiscal Year 2008. 9 Section 10.3.3 of the amendment 10 provides us an annual credit to the Commission equal 11 to 12 percent of GTECH's annual incremental revenue 12 from sales over the previous fiscal year for every .1 13 percent increase in prize payout. This quarter we 14 have actually received a credit of $68,934 as a result 15 of this provision of the contract, as there was an 16 increase in prize payout as well as a slight increase 17 in total sales. 18 This is the first time we've actually 19 received a credit under this provision of the 20 contract. Last fiscal year we received credits in 21 10.3.4 that we eventually had to return. But that 22 provision of the contract provides for an annual 23 credit to the Commission equal to four and a half 24 percent of the year-over-year decline in dollar 25 returns to the state, if there is a decline or flat 0120 1 sales, and the weighted payout increase by .1 percent. 2 I wanted to provide you that update and 3 let you know that we have billed GTECH for that 4 credit, and it's on our December 15th invoice. I 5 would be happy to answer any questions that you might 6 have. 7 CHAIRMAN COX: Commissioner, for your 8 information, when I arrived here, I quickly learned 9 that GTECH, as Chairman Clowe pointed out today, earns 10 its fee based on gross sales, but the school children 11 of Texas participate in that revenue. So their 12 incentive, GTECH's incentive, is not aligned directly 13 with that of the school children of Texas. 14 This amendment was a step in that 15 direction in that it addresses one of the factors that 16 causes sales to go up and does not necessarily 17 increase revenue, and that is the prize payout 18 percentage. So this is a tiny step toward that 19 partnership that Mr. Patel referred to and Chairman 20 Clowe corrected him, as I would have, because it's a 21 tiny step toward the right way of doing things. 22 And we hope that as we contract for 23 lottery operator services in the future, that they 24 will be based on a much closer alignment, perhaps not 25 all the way to the bottom line, because there are some 0121 1 expenses that we cannot let them participate in and 2 control, such as our administrative expenses, such as 3 perhaps our advertising. But certainly as to making 4 their fee based on sales less prizes paid out, we 5 would gain a closer alignment and that may be the goal 6 that we have. 7 COMMISSIONER SCHENCK: Okay. I 8 understand. So it seems that the incentive to our 9 periods with GTECH would be to increase sales, 10 regardless of the marginal cost of generating those 11 sales? 12 CHAIRMAN COX: That is what a reading 13 of it would take. And Mr. Patel told us today -- and 14 I have personally witnessed -- that they are 15 correcting a number of sales activities, including 16 some of their salespeople's bonuses, toward net 17 revenue. So they have recognized the difference and 18 are attempting to deal with it in this way and in the 19 way they run their business. But I would feel better 20 as a commissioner if I knew that we had a closer 21 alignment contractually. 22 COMMISSIONER SCHENCK: Thank you. I 23 understand and appreciate that. 24 MS. PYKA: Thank you. 25 CHAIRMAN COX: Is that all of your 0122 1 items today? You've got one more, don't you? 2 No. That's Item IX -- or Item X. 3 AGENDA ITEM NO. X 4 CHAIRMAN COX: We're going to pass that 5 item. That's the responsibility of Director Sadberry 6 who isn't here today. 7 MS. PYKA: Thank you, Commissioners. 8 COMMISSIONER CLOWE: Mr. Chairman, if I 9 might, in regard to that item being passed, as you 10 correctly and properly pointed out earlier, Executive 11 Director Sadberry is out due to illness. And this 12 item has been diligently pursued by you and the staff. 13 And the passing of it today does not indicate any lack 14 of interest or diligence on the part of the agency in 15 pursuing it, but because he is, in fact, not here and 16 is the person responsible for that item. 17 CHAIRMAN COX: That's exactly correct. 18 The work on that item continues. Ms. Pyka and I spoke 19 about it at least twice in the last week. 20 COMMISSIONER CLOWE: Great! And so as 21 we look forward to his return, hopefully this item 22 will be on the agenda and will see action at some 23 point in the near future. 24 CHAIRMAN COX: Yes, sir. As you have 25 directed, this item will be on the agenda until it is 0123 1 resolved. 2 COMMISSIONER CLOWE: Thank you, sir. 3 AGENDA ITEM NO. XI 4 CHAIRMAN COX: Item XI, report, 5 possible discussion and/or action on the 80th 6 Legislature. 7 Ms. Trevino. 8 MS. TREVINO: Good morning, 9 Commissioners. For the record, I'm Nelda Trevino, the 10 Director of Governmental Affairs. 11 I have no updates to provide today. 12 However, I'll be happy to answer any questions that 13 you might have. 14 COMMISSIONER CLOWE: Who is going to 15 win the nominations? Surely you have that all figured 16 out. 17 MS. TREVINO: I'll have a private 18 discussion with you, Commissioner Clowe, about that 19 matter. 20 (Laughter) 21 CHAIRMAN COX: Did you make any of 22 these bets that they're talking about, about who is 23 going to get elected President? 24 MS. TREVINO: I think next time I'm 25 going to have a report to provide and try to avoid 0124 1 these questions. 2 (Laughter) 3 COMM. CLOWE: That's quick, Nelda. 4 That's good. 5 CHAIRMAN COX: Okay. Commissioner, 6 anything? 7 COMMISSIONER SCHENCK: I have nothing 8 to add. 9 MS. TREVINO: Thank you very much. 10 (Laughter) 11 CHAIRMAN COX: Thank you, Nelda. 12 AGENDA ITEM NO. XIII 13 CHAIRMAN COX: Okay. Item XIII, 14 report, possible discussion and/or action on the 15 agency's contracts. 16 It's not Mr. Jackson. 17 MS. PINA: For the record, my name is 18 Debbie Pina. I'm the Contracts Administrator for the 19 Texas Lottery. Commissioners, in your notebook under 20 Tab XIII is a report on prime contracts. 21 I will be glad to answer any questions 22 you may have. 23 CHAIRMAN COX: Questions? 24 COMMISSIONER CLOWE: No questions. 25 COMMISSIONER SCHENCK: No, I have no 0125 1 questions. I appreciated the HUB report we had the 2 last meeting on minority contracting and 3 subcontracting. And I note that we had a report on 4 Tracy Locke and her efforts to advance those 5 interests, and I hope that we're keeping tabs on that 6 as we go forward. 7 MS. PINA: Yes, sir. 8 CHAIRMAN COX: And I believe, Mike, 9 didn't you tell me something about a HUB report that 10 we would have had today but for -- 11 MR. FERNANDEZ: Yes, sir. For the 12 record, I'm Mike Fernandez, Administration Director. 13 We'll have a full report at our next 14 Commission meeting. We made a systems conversion, and 15 we would ask that that be passed this month. And 16 we'll have a -- Joyce will be back with a complete and 17 full report at the next meeting. 18 COMMISSIONER SCHENCK: Am I remembering 19 right, Mike, that we were the No. 1 agency in the 20 state? 21 MR. FERNANDEZ: We were the No. 1 in 22 agencies, in the largest spending agencies, the 23 largest spending agencies. 24 CHAIRMAN COX: In percent. 25 MR. FERNANDEZ: $33 million, that's 0126 1 outstanding; that's outstanding for an agency this 2 size. 3 COMMISSIONER SCHENCK: Yes. That's 4 good news. 5 CHAIRMAN COX: Thank you, Mike. 6 MS. PINA: Thank you. 7 AGENDA ITEM NO. XV 8 CHAIRMAN COX: Item XV, consideration 9 of and possible discussion and/or action, including 10 proposal, of repeal and/or new rule 16 TAC Paragraph 11 401.312 relating to "Texas Two Step" on-line game. 12 Ms. Woelk and Mr. Tirloni. 13 MS. WOELK: Thank you. I'm Sarah 14 Woelk, Special Counsel, and game expert, Robert 15 Tirloni. 16 MR. TIRLONI: For the record, again, my 17 name is Robert Tirloni, the Products Manager for the 18 Commission. 19 MS. WOELK: This item, the staff is 20 proposing that you propose the repeal of the current 21 Texas Two Step rule and propose a new rule. This is 22 not a proposal to change a game matrix. The game will 23 continue to operate the same. This is a game in which 24 there was an allocation to a prize reserve fund. 25 And for Commissioner Schenck's 0127 1 background, there is a law established in the State 2 Lottery Account and then more as an accounting 3 mechanism, as I understand them. We have identified 4 funds within that account, that they don't have -- 5 they're not separate accounts. And so they exist, as 6 I understand them, more as an accounting mechanism 7 rather than a segregation of funds. 8 But a year or two ago, we proposed and 9 the Commission adopted a new Lotto Texas rule that 10 eliminated the Lotto Texas prize funds, a separate 11 prize reserve fund for that game, and we're proposing 12 to do the same with the Texas Two Step prize reserve 13 fund. 14 A difference here is that the Lotto 15 Texas prize reserve fund was quite large. And 16 although there's no additions, it still exists to be 17 depleted as an accounting mechanism. The prize 18 reserve fund, it doesn't exist at all -- why it's in 19 the negative, Robert -- doesn't exist. But it should 20 not take long for the Texas Two Step prize reserve 21 fund to be depleted. And the rule provides that it 22 will then be abolished while we're proposing a new 23 rule. 24 We redrafted the rule to comport with 25 the recent years? 0128 1 MR. TIRLONI: It's in the positive. 2 MS. WOELK: It's in the positive today. 3 Okay. But it should not take long for the Texas Two 4 Step prize reserve fund to be depleted, and the rule 5 will provide for it. It will then be abolished once 6 it's depleted. While they were proposing the rule, we 7 redrafted the rule to comport with the other rules 8 that have been redrafted in recent years. 9 And one thing I didn't mention in the 10 memo is, when we did the new Lotto Texas rule, at Ms. 11 Nettles' suggestion, you went from your traditional 12 practice of rounding all prizes down to rounding to 13 the nearest dollar, with 50 cents going up. So this 14 also had that change in it. 15 This shouldn't be a very -- this should 16 be a fairly seamless change, because there's not much 17 about this change that's visible to the playing 18 public. And it's really more of a change to satisfy 19 some accounting concerns both Commissioner Cox and 20 Kathy Pyka had about the way we were accounting for 21 things. 22 And if you have no questions, we 23 propose that you propose to publish the proposed 24 repeal in the Texas Register and to publish the 25 proposed new game rule in Texas Register. That would 0129 1 mean it would be -- 2 CHAIRMAN COX: Well, I would like to 3 say that I'm pleased to see this. These reserves have 4 been a thorn in my side because, one, if they go 5 negative, the press gets the idea that we can't pay 6 the prizes. And we don't pay the prizes out of these 7 reserves. As Sarah points out, they're not funds; 8 they're just accounting entries. 9 And, secondly, they're not in 10 conformity with Generally Accepted Accounting 11 Principles, because they're an income-leveling device, 12 an artificial income-leveling device. So I applaud 13 this. 14 COMMISSIONER SCHENCK: So there was 15 never a deposit anywhere. This was just an accounting 16 entry? 17 CHAIRMAN COX: Just an accounting 18 entry, and an incorrect one. 19 COMMISSIONER SCHENCK: I move we adopt 20 the recommendation of the staff. 21 COMMISSIONER CLOWE: Second. 22 CHAIRMAN COX: Motion is made and 23 seconded. All in favor, say "Aye." 24 COMMISSIONER CLOWE: Aye. 25 COMMISSIONER SCHENCK: Aye. 0130 1 CHAIRMAN COX: Aye. 2 Motion carries 3-0. 3 MS. KIPLIN: Ms. Woelk, do you have the 4 memo? 5 MS. WOELK: Okay. 6 AGENDA ITEM NO. XVI 7 CHAIRMAN COX: Item XVI, report, 8 possible discussion and/or action on the Mega Millions 9 game and/or contract. 10 MR. GRIEF: Mr. Chairman, I have 11 nothing to report under this item. 12 CHAIRMAN COX: Thank you, Gary. 13 We've already done Item XVI. Okay. 14 Kim, do you want to do the cases before 15 we go to lunch or after? 16 MS. KIPLIN: It's whatever your 17 preference is. I will say that on one of the cases, 18 Mr. Fenoglio did represent the respondent. 19 CHAIRMAN COX: Then let's go ahead and 20 do that case and see how long it -- where that puts 21 us. 22 MS. KIPLIN: Okay. And there are a 23 couple of cases that are somewhat involved in that 24 same vein, if it's the pleasure of the Commission. 25 0131 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN COX: Okay. So why don't we 3 call, then -- I believe that case is Docket No. 4 362-06-0004.B, Lisa Garland. Is that correct? 5 MS. KIPLIN: Yes, sir. And then once 6 that is complete, or if it spills over, Ms. Guthrie is 7 also here. She's the Staff Attorney-Enforcement, the 8 staff attorney on Items F and G. 9 CHAIRMAN COX: Okay. So we may do 10 those three and then take a break. Let's go ahead and 11 do this one. 12 MS. KIPLIN: If that's the pleasure. 13 CHAIRMAN COX: And who are we going to 14 call on this one? 15 MS. KIPLIN: If I could, I would like 16 to defer to Kristen Guthrie. She's the Assistant 17 General Counsel in the Legal Services Division and was 18 the staff attorney on the Lisa Garland matter, so that 19 she can lay out this matter for y'all's consideration. 20 MS. GUTHRIE: Good morning, 21 Commissioners. For the record, my name is Kristen 22 Guthrie, Assistant General Counsel. 23 The Lisa Garland case involved a 24 proceeding to remove respondent, Lisa Garland, from 25 the Registry of Approved Bingo Workers. The case was 0132 1 tried at the State Office of Administrative Hearings. 2 A PFD was issued in the matter, which recommended 3 respondent remain on the Registry of Approved Bingo 4 Workers. 5 Staff filed exceptions in the case and 6 conclusions of law in the PFD. And subsequent to the 7 issuance of the PFD, respondent and staff reached an 8 agreement in this case which allows respondent to 9 remain on the registry. 10 Specifically one of the conclusions of 11 law in the PFD omitted -- we omitted, because it 12 stated that placement on the registry is not a license 13 for purposes of 2001.554. This conclusion of law was 14 in direct conflict with two other PFDs which are on 15 today's agenda, the matter of Jackie Simpson and 16 Veronica Williams. 17 In those cases, it was stated that 18 placement on the registry is a license for purposes of 19 2001.554. The conclusion of law which was omitted in 20 this agreement is not necessary to reach the ultimate 21 determination that Lisa Garland remain on the 22 registry. 23 The staff recommends that the 24 Commission adopt the memorandum of agreement in Lisa 25 Garland and the PFDs in Jackie Simpson and Veronica 0133 1 Williams. 2 And I'm available for any questions. 3 COMMISSIONER CLOWE: I don't have any 4 questions. Is there a person who wishes to speak 5 about this? 6 MS. KIPLIN: No. I mean, Mr. Fenoglio 7 is available. I do, as the General Counsel, want to 8 tee up the issue for you-all so that you can consider 9 this. 10 CHAIRMAN COX: Well, please. 11 COMMISSIONER SCHENCK: Yes. I was 12 going to ask a question. I'm a little confused. 13 You're saying that we're leaving Ms. Garland in place 14 on the registry and then leaving unresolved the legal 15 question of whether being on the registry is in itself 16 sufficient to constitute licensing as moot in this 17 case and not necessarily inconsistent with where we 18 need to go in the other two cases? 19 MS. GUTHRIE: What we're presenting 20 today leaves the Commission in a consistent position. 21 In the two other PFDs, Veronica Williams and Jackie 22 Simpson, the judges in those cases specifically state 23 it is a license for purposes of 2001.554, which means 24 that if a bingo worker violates an act or rule 25 provision, then we can remove them for that or deny 0134 1 their application. 2 With Lisa Garland, we didn't have to 3 get there in that case. And we did not put on there 4 that it was a license; we did not agree that it wasn't 5 a license. But these decisions in conjunction have 6 the Commission making the ultimate policy decision 7 that bingo worker registration is a license for 8 purposes of 2001.554, which helps the Commission to 9 regulate bingo workers if there's a violation of the 10 Act or rules in one of these cases of -- were you 11 going to ask something? 12 COMMISSIONER SCHENCK: Well, no. I 13 was -- since you acknowledged me, yes. Do any of 14 these three people have, or are any of these three 15 people on the registry but not currently shown by us 16 to also have a license? 17 MS. GUTHRIE: Excuse me. What was your 18 question? 19 COMMISSIONER SCHENCK: Well, if the 20 question is whether being on the registry in itself is 21 sufficient to constitute being licensed, I'm okay with 22 passing on these cases if all three of these people 23 also have licenses, so that we don't have to decide 24 these matters. 25 MS. GUTHRIE: For these individuals, 0135 1 they're only -- well, I can speak for the PFDs. Their 2 only association is with being placed on the bingo 3 worker registry. 4 Is that correct, Phil? 5 MR. SANDERSON: The two individuals, 6 Jackie Simpson and Veronica Williams, are both on the 7 registry. And the action is to remove them from the 8 registry. Is that correct? 9 MS. GUTHRIE: Veronica Williams was an 10 applicant. 11 MR. SANDERSON: Okay. So one is to be 12 removed from the registry and one is to be denied 13 placement on the registry? 14 CHAIRMAN COX: Phil, maybe one thing 15 that you might clear up for all of us is, is there a 16 license involved here or are we calling entry on the 17 registry a license? 18 MR. SANDERSON: There is no license 19 involved. We do not issue any licenses to the 20 individuals that are on the worker registry. What my 21 understanding is, that we've got conflicting rulings 22 from SOAH judges as to whether or not being on the 23 registry is a license or not a license. And if it's a 24 license, then we have broader authority over the 25 individuals as it relates to violations of the Act and 0136 1 the rules in totality, other than just the violations 2 of the five enumerated items in Section 2001.313. 3 And I believe the decision today is for 4 the Commission to, if they adopt the two PFDs and they 5 adopt the settlement agreement, will be taking the 6 position that being on the registry is a license for 7 that purpose. 8 Kim? 9 MS. KIPLIN: That's correct. And what 10 it really boils down to is, under the registry of 11 bingo workers statute, which is 2001.313 of the 12 Occupations Code, there are specific I guess elements 13 or conduct that would cause either refusal to add or 14 removal. 15 And the question -- and one is not 16 violation of the Bingo Act or a provision or failure 17 to disclose. And there is an overarching statute, 18 which is 2001.554, that goes to the heart of that. 19 But to trigger that, to fall within that in terms of 20 if you're a licensee, you have to be a licensee. 21 I don't think that's really what it -- 22 and Kristen can step on me, and Mr. Fenoglio is 23 certainly here and he can step on me. What the SOAH 24 judge in particular, that sua sponte, raised this 25 question in another case. And it really has to do 0137 1 with: Okay. Now, let me get this straight. You get 2 notice and you get an opportunity for a hearing before 3 you can be removed from the registry. You have to 4 apply to be on the registry. It sounds like a 5 license. Why isn't that a license? 6 And under administrative law, under the 7 Administrative Procedures Act, that triggers, and 8 there is language in terms of registration, 9 registration for the license. And so that does 10 trigger the issue of: Is being on the registry the 11 same as being issued a license by this agency for 12 purposes of regulation by this agency, and in 13 particular the statute that I've mentioned, 2001.554. 14 So it comes down to, do we apply a very 15 narrow interpretation on what is the conduct that can 16 trigger removal from the registry or refusal to add? 17 And that would be only those items that are enumerated 18 under the registry of worker statute. Or is the 19 interpretation broader, such that a violation -- if 20 you are on the registry, a violation of an act by you 21 could subject you to being removed. And to get there, 22 it's the operative language under a license issued 23 under .554. 24 COMMISSIONER SCHENCK: But to be clear, 25 there's two statutes that we're working with here. 0138 1 One is the registry and one is licensing? 2 MS. KIPLIN: Yes. To be clear, that is 3 correct. 4 COMMISSIONER SCHENCK: And there are 5 things that you could do to get yourself knocked off 6 of licensing that wouldn't necessarily affect your 7 ability to be on the registry? 8 MS. KIPLIN: Yes, I think that's 9 correct. 10 COMMISSIONER SCHENCK: So if we treat 11 being on the registry as a license, how do we tell 12 somebody that has violated only the things that would 13 get them unlicensed, that they can't participate? 14 Haven't we complated the two statutes into one and 15 denied the Legislature the ability to tell these 16 people that they can't have a license if they do these 17 things? 18 MS. KIPLIN: Well, it's the agency that 19 issues the license. So both of these are our 20 statutes. I may be misunderstanding your question. 21 But we are the agency that issues the license; we are 22 the agency that approves being placed on the registry. 23 And so it would be the same vetting in terms of that 24 and in terms of what do we tell the person we would 25 notify to -- 0139 1 COMMISSIONER SCHENCK: Well, either 2 we're going to pull up the standards for getting on 3 the registry to include all the things that would be 4 required to get a license, or we're going to dumb down 5 the things that require getting a license to make 6 being on the registry be the equivalent of a license. 7 But we're going to have to have the same standards. I 8 get that there is an overlap, but it's not a perfect 9 overlap, from what I'm understanding. 10 MS. KIPLIN: I actually think that the 11 elements that are under .313 are a sub-universe. 12 COMMISSIONER SCHENCK: A lessor 13 included? 14 MS. KIPLIN: Yes, of 2001.554. And the 15 reason I say that is because what can subject your 16 license to revocation under 2001.554, the end 17 provision is violating the chapter or term of a 18 license issued under this chapter. 19 COMMISSIONER SCHENCK: And that is not 20 present in the registry? 21 MS. KIPLIN: No. The registry is 22 limited. That is not present. What will get you 23 removed from the registry -- pardon me while I get 24 over there. 25 COMMISSIONER SCHENCK: It's largely the 0140 1 same things but not that last item? 2 MS. KIPLIN: Not largely the same 3 things. 4 COMMISSIONER SCHENCK: Oh, it's 5 different things, then? 6 MS. KIPLIN: Specific (inaudible) 7 narrow: Convicted of an offense. Well, it's the same 8 thing with a license, you know, a disqualifying 9 offense, so that's the same universe. "Converted 10 bingo equipment in a premises to an improper use." 11 Converted -- and my position would be, that would be a 12 violation of the Act; so, therefore, it would be under 13 .554. 14 "Converted funds that are in, or that 15 should have been in, the bingo account of any licensed 16 authorized organization." Same comment to that. 17 "Taken any action, individually or in 18 concert with another person, that affects the 19 integrity of any bingo game to which this chapter 20 applies." Same thing. 21 And then the last one, "acted as an 22 operator, manager, cashier, usher, caller, or 23 salesperson for a licensed authorized organization 24 without being listed..." And that's it. 25 So if a worker violates the Act in any 0141 1 other manner other than those that are enumerated in 2 .313, without .554, the agency would not have the 3 authority, subject to -- obviously, the way y'all want 4 to interpret this -- would not have the authority to 5 remove them. 6 COMMISSIONER SCHENCK: What about if 7 they're convicted of a felony? Where does that -- 8 MS. KIPLIN: Well, that would fall 9 under (e)(1). But failure to disclose or to disclose 10 something from the application on its face would not 11 be. 12 COMMISSIONER SCHENCK: But these are 13 both statutes. Right? These aren't our 14 administrative rules? 15 MS. KIPLIN: These are both statutes 16 that we are required to administer. 17 COMMISSIONER SCHENCK: But I don't see 18 how we could treat one as being effectively satisfied 19 by the other, unless we're saying there was no purpose 20 for the licensing requirements, we would just throw 21 out and make redundant the statute, then we can't 22 assume that's what the Legislature intended. 23 MS. KIPLIN: Well, and that's -- the 24 split decisions are coming up from SOAH. And so it 25 really does come down to how the agency -- how the 0142 1 Commission, as a matter of interpreting its statutes, 2 wants to land on this. You've gotten SOAH judges 3 that have formed proposed conclusions of law that have 4 gone the opposite. 5 COMMISSIONER SCHENCK: It's a difficult 6 problem. 7 COMMISSIONER CLOWE: Yes. I'm not 8 clear on the staff recommendation. Would you restate 9 that. 10 MS. GUTHRIE: It's our recommendation 11 that the Commission vote to adopt the memorandum of 12 agreement and consent order in Lisa Garland and also 13 the proposal for a decisions in Jackie Simpson and 14 Veronica Williams. 15 COMMISSIONER CLOWE: But the way she's 16 laid it out, she wants a motion to approve all three 17 of them at the same time. We may not want to look at 18 that. We may want to divide them into three different 19 issues and look at them in that manner. 20 MS. KIPLIN: And these are docketed 21 three separately, so I want to correct that. 22 COMMISSIONER CLOWE: We're entitled to 23 do that. 24 MS. KIPLIN: Absolutely. 25 COMMISSIONER SCHENCK: But is the 0143 1 conclusion that we draw from -- let's take 2 Ms. Garland -- that we're willing to put her on the 3 registry but we're not taking a position on whether or 4 not she's licensed or are you taking the next step by 5 putting her on the registry, she is there for a 6 license? 7 MS. GUTHRIE: The reason we brought 8 these all, we got these proposal for decisions around 9 the same time, and we wanted to bring them all to your 10 attention at the same time, because we knew we were 11 getting one proposal for a decision saying it wasn't a 12 license and two that said it was. That's the reason 13 they're all here today. I'm not sure if that answered 14 your question. 15 COMMISSIONER SCHENCK: I'm not either. 16 Well, if I'm entering the staff 17 recommendation, are we taking a position on whether or 18 not being on the registry is a license? 19 MS. GUTHRIE: Yes -- 20 MS. KIPLIN: On the Lisa Garland, you 21 are not, because there is no conclusion of law that 22 you would be adopting as an agreed conclusion of law 23 that speaks either way, so it's silent as to that. 24 COMMISSIONER SCHENCK: Okay. 25 MS. GUTHRIE: That's right. 0144 1 MS. KIPLIN: It just simply leaves her 2 on the registry. The other two, you are taking a 3 position. Your position in both of those cases, 4 because you would be adopting the Administrative Law 5 Judge's proposed conclusion of law, is that being on 6 the registry is the same as having a license issued by 7 this agency for purposes of this particular statute 8 that I have mentioned and discussed, 2001.554. 9 COMMISSIONER CLOWE: And may I, 10 Commissioner, follow along your line of questioning? 11 COMMISSIONER SCHENCK: Of course. 12 COMMISSIONER CLOWE: If we affirm that 13 being on the registry is holding a license, then that 14 person is authorized to operate or be an employee of a 15 licensee. Does that follow? 16 MS. KIPLIN: Yes. But I'm -- let me 17 respond like this -- 18 COMMISSIONER CLOWE: Let me rephrase 19 it. 20 MS. KIPLIN: Okay. Thank you. 21 COMMISSIONER CLOWE: Being on the 22 registry allows a person to do what? 23 MS. KIPLIN: You have to be on the 24 registry to be a bingo worker in particular enumerated 25 categories, period. 0145 1 COMMISSIONER CLOWE: Okay. Stop right 2 there. 3 MS. KIPLIN: All right. 4 COMMISSIONER CLOWE: So in that sense, 5 it's somewhat similar to having a driver's license. 6 You are licensed to drive and you can drive any 7 automobile out there that's road-worthy and properly 8 licensed. So a member of the registry, the person who 9 had been admitted to the workers registry, can go to 10 work at any hall? 11 MS. KIPLIN: So long as they are 12 identified on that conductor's application, that's -- 13 COMMISSIONER CLOWE: And assuming that 14 they are, they come being registered, so they're 15 qualified? 16 MR. SANDERSON: That is correct. The 17 reason for the registry was to help eliminate the 18 duplicate background checks on individuals. If 19 someone has been placed on the registry, then that 20 indicates that the Commission has done the background 21 investigations and the individual does not have any 22 ineligible or disqualifying convictions. 23 COMMISSIONER SCHENCK: Why would anyone 24 ever apply for a license? 25 MR. SANDERSON: As an individual? 0146 1 COMMISSIONER SCHENCK: Yes. 2 MR. SANDERSON: Because they -- well, 3 they apply to be on the registry. 4 COMMISSIONER SCHENCK: If they've 5 applied to be on the registry, why would they ever 6 apply to get a license? 7 MR. SANDERSON: We're not asking that 8 they apply to get a license. 9 COMMISSIONER SCHENCK: Okay. 10 MR. SANDERSON: I think what this -- 11 COMMISSIONER SCHENCK: Well, there is a 12 statute out there that has provisions for them to have 13 a license. 14 CHAIRMAN COX: For individuals to have 15 a license? 16 MS. KIPLIN: No, for -- 17 MR. SANDERSON: There is not. 18 COMMISSIONER SCHENCK: For the 19 operators. 20 MR. SANDERSON: There is not a 21 provision for individuals to have licenses. The only 22 people that we can license are organizations that are 23 authorized to conduct bingo. 24 COMMISSIONER CLOWE: But you can have a 25 license and not be on the registry? 0147 1 COMMISSIONER SCHENCK: A company can 2 have a license. 3 MR. SANDERSON: A company can have a 4 license, yes. 5 COMMISSIONER CLOWE: But they're not on 6 the registry. 7 MR. SANDERSON: But they're not on the 8 registry. That is correct. 9 COMMISSIONER CLOWE: But they must 10 employ workers who are on the registry -- by us. 11 CHAIRMAN COX: Okay. So it's a 12 corporate thing; the registry is an individual thing. 13 COMMISSIONER SCHENCK: Or maybe a 14 license can be both. An individual or a corporation 15 could have a license. The humans that are actually 16 interacting with the bingo players have to be on the 17 registry but don't have to have a license under the 18 statute? 19 MR. SANDERSON: That is correct, and 20 they're not required to have a license. 21 CHAIRMAN COX: So what kind of 22 individual might have a license? 23 MR. SANDERSON: An individual that 24 might have a license as a natural person would be 25 someone that would be a commercial lessor or a 0148 1 distributor or a manufacturer. 2 CHAIRMAN COX: Okay. But -- 3 MR. SANDERSON: As it relates to the 4 conduct of the game in bingo, we only license the 5 organization, the non-profits. 6 CHAIRMAN COX: Okay. 7 MR. SANDERSON: And they in turn have 8 individuals that work at those bingo occasions that 9 have to pass a background investigation before they 10 can work. And the registry, which Mr. Fenoglio was 11 one of the leaders in developing the language, was to 12 eliminate duplications and allow for John Doe to be on 13 the registry and he can go to work at Bingo Hall A, 14 and Bingo Hall B has an opening and needs someone, he 15 can go over there and work without having to go 16 through another background check or notification 17 process. 18 COMMISSIONER CLOWE: Well, what's the 19 downside in calling being on the registry a license so 20 that a person who is on the registry can do just what 21 you described? 22 MS. KIPLIN: I'm not sure I understand. 23 I'm sensing the registry -- let me answer it this way. 24 And if I don't get your, you know, question answered, 25 I'll try again. 0149 1 But what we're saying is, for purposes 2 of this particular enforcement statute subjecting to 3 disciplinary action, being on the registry is 4 tantamount to being issued and holding a license. And 5 a lot of it has to do with the fact that under general 6 administrative procedure law, a license is construed 7 by elements. You get notice and you get opportunity 8 for a hearing, things of that nature. 9 We're not saying that -- within the 10 Bingo Enabling Act, there is a statute that says a 11 bingo worker, you know, besides the registry, is a 12 license. It's for purposes of this particular 13 enforcement statute. And that -- 14 COMMISSIONER CLOWE: I'm getting your 15 answer. So if it is construed to be a license, then a 16 person is entitled to certain rights and privileges, I 17 guess you would say, before that license is revoked? 18 MS. KIPLIN: Well, actually, it's the 19 opposite. It's what triggered the query from the ALJs 20 who handle all agencies' matters regarding notice and 21 opportunity property rights. And it's the fact that 22 it smells like a license, walks like a license, all 23 those kinds of issues that are elements of a license. 24 And what the staff is saying is that 25 given the inquiry that's come up, without being able 0150 1 to link to 2001.554, the agency will be constrained in 2 its enforcement over the bingo workers so that if they 3 engage in conduct that doesn't fit within those 4 elements of the registry, the .313, the agency will 5 have no means by which to remove them from the 6 registry, or refuse to add their names. 7 COMMISSIONER SCHENCK: I think if I 8 understand, there is a license in the administrative 9 law term of art sense -- 10 MS. KIPLIN: Yes. 11 COMMISSIONER CLOWE: Yes. 12 COMMISSIONER SCHENCK: -- in terms of 13 what people are entitled to by way of notice and 14 opportunity to respond. And then there's a license 15 under our statute to conduct bingo operations. And I 16 can see one potential problem that I think triggers 17 into supporting the staff's recommendation, is that if 18 you have an individual, a natural person, as bingo- 19 licensed, who is also on the registry -- and I assume 20 you could have both -- no, you can't be a worker -- 21 MS. KIPLIN: Just a worker. 22 COMMISSIONER SCHENCK: I'm sorry? 23 MS. KIPLIN: Well, there are different 24 licenses that are set out within a different vetting 25 eligibilities. 0151 1 COMMISSIONER SCHENCK: No. But it's 2 got to be -- it can't be that you -- I would want to 3 get a job at one of Steve's client's place -- 4 MS. KIPLIN: Okay. 5 COMMISSIONER SCHENCK: -- as a worker, 6 and I'm also an entrepreneur. So I would say, "I'm 7 good at this. I watch what they do. I'm going to set 8 up a competing" -- 9 MS. KIPLIN: Okay. I see. 10 COMMISSIONER SCHENCK: -- "business, so 11 I can get licensed and be a worker on the registry," I 12 assume. But if I do a bad act that would prevent me 13 from holding a license to conduct the operations, you 14 can't kick me off the registry. 15 MS. KIPLIN: I can't kick you off the 16 registry. But -- 17 COMMISSIONER SCHENCK: Unless -- 18 MS. KIPLIN: I understand where you're 19 coming from. For example, you might hold a commercial 20 lessor's licenses and then also be a bingo-registered 21 worker. 22 COMMISSIONER CLOWE: Mr. Chairman, I 23 think I could deal with this a lot better if we had a 24 short break here. 25 CHAIRMAN COX: We're going to take -- 0152 1 Mr. Fenoglio, is there something you would like to say 2 so that you could leave? Or would it mess your life 3 up if we went to lunch and -- 4 COMMISSIONER CLOWE: No, no. Just a 5 short break will satisfy me. 6 CHAIRMAN COX: You want a short break? 7 COMMISSIONER CLOWE: Yes. 8 CHAIRMAN COX: I thought you said 9 lunch. Okay. 10 COMMISSIONER CLOWE: But I don't think 11 that Mr. Fenoglio is going to be brief. 12 (Laughter) 13 I know him too well. 14 CHAIRMAN COX: We're going to have a 15 five-minute break. 16 COMMISSIONER CLOWE: Thank you. 17 (Off the record: 12:17 p.m. to 12:32 18 p.m.) 19 CHAIRMAN COX: Okay. Let's go ahead. 20 Who is up? Commissioner, were you -- 21 COMMISSIONER SCHENCK: I'm going to 22 request Kristen gave us a quick overview of the other 23 two pending matters, then that we take up the question 24 of whether we want to decide this today or maybe ask 25 the staff to put a memo together and make it clear 0153 1 exactly what we're being asked to decide. 2 COMMISSIONER CLOWE: I think that's 3 really -- this is a complex matter. And, you know, 4 the idea of these being decided improperly is 5 abhorrent to me. And I'm not sure that you want to 6 vote on all three of them at the same time or 7 individually. I've looked at them, but I didn't 8 understand the depth of it. 9 CHAIRMAN COX: And I was briefed on it, 10 and I didn't understand the depth. 11 COMMISSIONER CLOWE: I think we've got 12 to have another cut at it. Let's give Mr. Fenoglio, 13 because he's been here, what is a reasonable 14 opportunity to tell us what he wants us to know, 15 Mr. Chairman, if that's okay with you. 16 CHAIRMAN COX: That's fine. Sure. 17 MR. FENOGLIO: For the record, my name 18 is Stephen Fenoglio. I have an appearance slip, and 19 I'll provide it to Ms. Kiplin momentarily. 20 CHAIRMAN COX: Thank you. 21 MR. FENOGLIO: I'm an attorney in 22 Austin, and I represent Lisa Garland. And I want you 23 to approve the settlement agreement in Lisa Garland, 24 which punts the issue, does not address the issue of 25 registry versus license, because we convinced the ALJ 0154 1 we were right on the law and the facts, and the ALJ 2 did not agree with the staff's interpretation. Now, 3 there is a lengthy PFD. 4 There are exceptions and replies, 5 additional exceptions and replies. And ultimately the 6 ALJ said, "I don't find from all the evidence" -- it 7 was a five-day hearing. I think that's the longest -- 8 I know it's the longest license -- registry hearing 9 that the staff has ever had. I believe the other two 10 are default judgment type cases, I don't know if there 11 was a lot of evidence submitted or legal argument on 12 behalf of the individual. There were several 13 depositions. This went on for an extended period of 14 time. 15 And so my response is, the worker 16 registry issue is, from my perspective, a phantom 17 issue, because after the PFD and exceptions and 18 replies, there were a number of settlement 19 negotiations that ultimately led to an agreed 20 settlement. So that's what I want in Lisa Garland so 21 my people can go home. 22 And the issue on registry versus 23 license is not touched. Had the result been that the 24 ALJ found against my client, then it seems to me the 25 issue of, well, she can't be on the registry, how does 0155 1 that affect is this a license? Well, because she 2 found in my client's favor, we don't address that 3 issue. 4 Now, turning to the other issue. As 5 Mr. Sanderson said, I was the primary author of 2519, 6 which led to the House legislation that became law in 7 '03 that created, among other things, the worker 8 registry provisions. So I do have quite a bit of 9 knowledge about that. 10 There were discussions during that 11 negotiations about if we're going to have this 12 registry -- and in answer to your questions earlier, 13 an individual can hold a commercial lessor license as 14 an individual, or that individual can have a 15 corporation that holds the license or an LLC or a 16 limited liability company, a limited partnership. And 17 that individual, if he or she holds the license of a 18 commercial lessor as an individual, can also be on the 19 worker registry. The individual is not required to. 20 The simple purpose of putting the 21 worker on the registry is exactly what Mr. Sanderson 22 said. Before, if Joe Smith wanted to be -- work for 23 Charity A in Hall 1, they had to be listed on the 24 license application as a worker. And then if Joe 25 Smith wanted to go to work for Charity 2, maybe at the 0156 1 same hall or a different hall, that person had to be 2 placed on their list of workers and the Commission 3 would do another criminal history background check. 4 The worker registry said -- and that 5 was a trap for the charities, because they would need 6 someone to work, Joe Smith appeared to be competent, 7 they put Joe Smith to work. When the Commission came 8 and looked at the records, well, Joe Smith is listed 9 to work for Charity 1, not for Charity 2. That's a 10 violation. And the Commission staff didn't really 11 care about it, because they knew Joe Smith had the 12 proper -- had done the proper background checks, that 13 Joe Smith appeared to be, well -- 14 COMMISSIONER CLOWE: He's not on the 15 registry. 16 MR. FENOGLIO: Well, that was before 17 the registry. That's why we created the registry. 18 COMMISSIONER CLOWE: Oh, okay. Okay. 19 MR. FENOGLIO: And so that Joe Smith 20 could then go work anywhere that Joe Smith could get 21 employed, and that wouldn't be any sort of a sanction 22 for the charity not disclosing that before or after 23 the fact, because the charity would call 24 Mr. Sanderson's division, say, "I got Joe Smith. I've 25 got some identifying information. Is he on the worker 0157 1 registry?" Answer: "Yes." 2 "Okay. We're going to put him to work 3 tomorrow." 4 That's the purpose. That's why we 5 created that worker registry. There was some 6 discussion about whether that would be tantamount to a 7 license. There was some back and forth negotiation 8 between us on the industry side and the staff. 9 My sense is, it's not a license. The 10 staff has a different view. Obviously, the 11 Administrative Law Judges have a different view. One 12 says yes, two say -- two say yes, it is, being on the 13 registry is a license. One says no, it's not. It 14 seems to me that's a policy decision for you guys. It 15 doesn't affect my client, Lisa Garland. 16 So with that said, I'll be happy to 17 answer any questions. And I think you're doing the 18 right thing in getting it teed up a little more, 19 because it's an important policy issue for the 20 Commission to address. Again, for Lisa Garland, it 21 doesn't matter. 22 COMMISSIONER CLOWE: Okay. Now, there 23 is my question. Are you asking us, then, to deal with 24 your case separately and apart? 25 MR. FENOGLIO: I've always wanted my 0158 1 case to go separate and apart. The staff, to their 2 credit, I believe, wanted to get this whole issue teed 3 up as far as being on the registry, is that a license 4 or it's not? But from my perspective, I don't need 5 the other two cases, and I don't think the 6 Commissioners do either, because of the settlement. 7 COMMISSIONER SCHENCK: Can we ask 8 counsel whether -- Kim, do you see any potential issue 9 preclusion by passing on the merits of the Lisa 10 Garland matter that would -- 11 MS. KIPLIN: The only thing that I 12 would say is that if, for whatever reason, you decide 13 you want to explore that settlement agreement between 14 the parties and you decide, you know, it really is a 15 license and we're not going to accept the settlement 16 agreement, we want you to go back and take further 17 evidence regarding her conduct, then once you entered 18 the settlement agreement, I think you would be 19 precluded from doing that. 20 COMMISSIONER SCHENCK: Is there a sense 21 of the staff that there's any potential fact issues 22 that would change the recommendation if it were a 23 license? 24 MS. GUTHRIE: There is a small 25 possibility of that, and that's the only reason I 0159 1 would -- but it's the Commission's decision if they 2 want to go ahead and approve this matter. It doesn't 3 deal with the license issue. 4 CHAIRMAN COX: I'm going to suggest 5 that we get staff to clarify some of these issues for 6 us and bring us a very short, very clear brief on all 7 three of these matters, on the relevant issues in all 8 three of these matters, for the next meeting, because 9 I am just -- as a layman, I'm not comfortable taking 10 the risk that we decide E, and it turns out that F and 11 G had something to do with it. 12 MS. KIPLIN: Commissioners, we would be 13 glad to do that. There may be other cases. I'm 14 not -- 15 CHAIRMAN COX: Does that suit you? 16 COMMISSIONER SCHENCK: I would very 17 much appreciate it. 18 MS. KIPLIN: We would be glad to do 19 that. There may be some other cases that will come up 20 on the February docket that might have this very same 21 issue. And if that's the case, we'll identify those. 22 I'm not aware of any as I sit here right now. 23 CHAIRMAN COX: Okay. 24 MS. KIPLIN: But we get PFDs that come 25 in, you know, weekly. 0160 1 CHAIRMAN COX: Okay. Well, as far as 2 we've come, we might as well go the rest of the way. 3 Are there any of these other cases that 4 are going to take very long, Kim? 5 MS. KIPLIN: No, sir, I don't believe 6 so. 7 CHAIRMAN COX: Okay. Why don't we say 8 that we would finish the cases and we would have the 9 report of the Executive Director, we would have public 10 comment and then go into executive session. 11 Is that okay with you, Commissioner? 12 COMMISSIONER SCHENCK: Okay. 13 CHAIRMAN COX: Mr. Chairman? 14 COMMISSIONER CLOWE: Sure. 15 CHAIRMAN COX: All right. Kim. 16 MS. KIPLIN: Commissioners, if I could 17 take up Letter A -- that's Ola's Grocery -- 18 separately. These are on the contested cases. This 19 is an Administrative Law Judge's recommendation to 20 revoke the license. It's a lottery retailer case, but 21 I'm bringing this to your attention individually 22 because it's not one of the insufficient fund cases. 23 This is a conduct case. The staff obviously does 24 adopt the recommendation and moved for that at the 25 hearing level, for the conduct that is set out in your 0161 1 findings of fact. 2 CHAIRMAN COX: Okay. 3 MS. KIPLIN: I just wanted to make sure 4 that we brought this to your attention. The staff's 5 recommendation is that you do vote to approve the -- 6 COMMISSIONER SCHENCK: What is the 7 conduct? 8 MS. KIPLIN: Well, it's misrepresenting 9 facts to a Commission investigator during an 10 investigation, selling lottery tickets to the customer 11 on credit, charging a lottery winner money to collect 12 the winner's prize. 13 COMMISSIONER SCHENCK: Thanks, Kim. 14 COMMISSIONER CLOWE: Move we adopt the 15 staff recommendation. 16 COMMISSIONER SCHENCK: I second the 17 motion. 18 CHAIRMAN COX: Okay. All in favor, say 19 "Aye." 20 COMMISSIONER CLOWE: Aye. 21 COMMISSIONER SCHENCK: Aye. 22 CHAIRMAN COX: Aye. 23 All right. The motion carries 3-0. 24 MS. KIPLIN: Okay. If I can also 25 present Letters B, C and D. These are all your 0162 1 traditional insufficient fund cases against lottery 2 retailers. And the staff does recommend that you vote 3 to adopt the Administrative Law Judge's recommendation 4 in each of these three cases, which is the surrender 5 of the license. 6 COMMISSIONER CLOWE: Move the adoption 7 of the staff recommendation. 8 COMMISSIONER SCHENCK: Second the 9 motion. 10 CHAIRMAN COX: All in favor, say "Aye." 11 COMMISSIONER CLOWE: Aye. 12 COMMISSIONER SCHENCK: Aye. 13 CHAIRMAN COX: Aye. 14 The motion carries 3-0. 15 MS. KIPLIN: Commissioners, in Letter 16 H, this is a mass docket removal of persons from the 17 registry of approved bingo workers. This does not 18 include the issue that we previously discussed. These 19 all have to do for disqualifying criminal convictions. 20 I do want to bring to your attention 21 that we're presenting you an amended order. I've got 22 it in my hands, and it has to do with removing an 23 individual by the name of Carolyn Torres from 24 Attachment A, which is all the folks that are affected 25 by this order. And the reason for that is because she 0163 1 had already -- she voluntarily requested that her name 2 be removed from the registry. 3 COMMISSIONER SCHENCK: I have a quick 4 question. What is the sanction for a licensed 5 operator or for someone on the registry falsely 6 identifying themselves? If one of these people comes 7 around with a fake ID and presents themselves and gets 8 on the registry under another name, what happens to 9 them and what happens to the operator for hiring them? 10 MS. KIPLIN: Well, if the conductor 11 knows, then we certainly can take action against the 12 organization. And against that person, we would have 13 to develop the facts. But if it is as you say it is, 14 we would look to .313 and determine if there is a 15 basis for removing them. 16 Certainly if there is a filing of some 17 kind of false document with this agency, then we can 18 pursue criminal sanctions. 19 COMMISSIONER SCHENCK: Thanks. 20 MS. KIPLIN: It leaves the open-ended 21 question on whether you can -- can you, because you 22 lied to us on your application, can we remove you from 23 the registry, because all those are triggered as a 24 license issue that we've been talking about. 25 COMMISSIONER SCHENCK: Yes. But I see 0164 1 us not coming up with this immediate issue. So I move 2 to adopt the staff recommendation. 3 COMMISSIONER CLOWE: No questions. 4 CHAIRMAN COX: I'll second. All in 5 favor, say "Aye." 6 COMMISSIONER CLOWE: Aye. 7 COMMISSIONER SCHENCK: Aye. 8 CHAIRMAN COX: Aye. 9 Motion carries 3-0. 10 MS. KIPLIN: Commissioner, we'll add 11 that to the briefing document, the question you posed 12 and the answer to that. 13 COMMISSIONER SCHENCK: Thank you. 14 MS. KIPLIN: The next item is Item I. 15 This was a mass docket on refusing to add names of 16 persons to the registry, and it's for disqualifying 17 criminal convictions. This is also an order that I've 18 got that's amended from the one that's in your book, 19 because there were a couple of people that we have 20 removed from Attachment A, specifically Maria Enriquez 21 and Monica Rivera. They asked that their names be 22 deleted -- well, we were asking that their names be 23 deleted because they asked that their applications be 24 withdraw. And so they're no longer part of -- 25 COMMISSIONER SCHENCK: And all of these 0165 1 people have had an opportunity to object to their 2 exclusion and have not responded? 3 MS. KIPLIN: Yes. All of these persons 4 have had notice and an opportunity to come to the 5 hearing. And we actually do have the hearing, and we 6 put on the evidence of the disqualifying criminal 7 convictions that relates to each individual. 8 COMMISSIONER SCHENCK: I move that we 9 adopt the staff recommendation. 10 COMMISSIONER CLOWE: Second. 11 CHAIRMAN COX: All in favor, say "Aye." 12 COMMISSIONER CLOWE: Aye. 13 COMMISSIONER SCHENCK: Aye. 14 CHAIRMAN COX: Aye. 15 Motion carriers 3-0. 16 MS. KIPLIN: Commissioners, your last 17 item is Item J, and that's Mr. H Food Store. And this 18 is an agreed order between the staff and the retailer. 19 And it's an agreed 10-day suspension against the 20 lottery retailer. He had an employee who was pin- 21 pricking tickets. And by that, he was able to 22 determine whether it was a winning ticket or not. 23 That employee is no longer with the -- in the 24 employment. He was terminated. And the staff does 25 move recommendation, moves your approval of the agreed 0166 1 order. 2 COMMISSIONER SCHENCK: I move that we 3 adopt the staff recommendation. 4 COMMISSIONER CLOWE: Second. 5 CHAIRMAN COX: All in favor, say "Aye." 6 COMMISSIONER CLOWE: Aye. 7 COMMISSIONER SCHENCK: Aye. 8 CHAIRMAN COX: Aye. 9 Motion carries 3-0. 10 AGENDA ITEM NO. XIX 11 CHAIRMAN COX: Okay. Report of the 12 Executive Director. 13 Director Grief. 14 MR. GRIEF: Commissioners, other than 15 what is present in your notebook, I have nothing to 16 report under this item. 17 CHAIRMAN COX: Thank you, Gary. 18 AGENDA ITEM NO. XX 19 CHAIRMAN COX: Okay. I have no witness 20 affirmation forms. Is there any public comment? 21 (No response) 22 AGENDA ITEM NO. XXI 23 CHAIRMAN COX: Okay. At this time I 24 move the Texas Lottery Commission go into executive 25 session: 0167 1 A. To deliberate the duties and 2 evaluation of the Executive Director, the Deputy 3 Executive Director, Internal Audit Director and 4 Charitable Bingo Operations Director and to deliberate 5 the duties of the General Counsel pursuant to Section 6 551.074 of the Texas Government Code. 7 B. To receive legal advice regarding 8 pending or contemplated litigation pursuant to Section 9 551.071(1)(A) and/or to receive legal advice regarding 10 settlement offers pursuant to Section 551.071(1)(B) of 11 the Texas Government Code and/or to receive legal 12 advice pursuant to Section 551.071(2) of the Texas 13 Government Code, including but not limited to: 14 Shelton Charles vs. Texas Lottery 15 Commission and Gary Grief; 16 First State Bank of DeQueen, et al., 17 vs. Texas Lottery Commission; 18 James T. Jongebloed vs. Texas Lottery 19 Commission; 20 The Lotter Ltd; 21 Employment law, personnel law, 22 procurement and contract law, evidentiary and 23 procedural law and general government law; 24 Lottery operations and Services 25 contract; 0168 1 Mega Millions game and/or contract. 2 Is there a second? 3 COMMISSIONER CLOWE: Second. 4 CHAIRMAN COX: All in favor, say "Aye." 5 COMMISSIONER CLOWE: Aye. 6 COMMISSIONER SCHENCK: Aye. 7 CHAIRMAN COX: Aye. 8 The vote is 3-0. 9 The Texas Lottery Commission will go 10 into executive session. The time is 12:49 p.m. Today 11 is January 16, 2008. 12 MS. KIPLIN: Commissioners, before we 13 get off the record, Commissioner Schenck brought a 14 typo to my attention on the first page of the 15 memorandum agreement, agreement and consent order on 16 Mr. H. Food Store. It says M period, not Mr. period. 17 With your permission, I would like to make that 18 change. 19 CHAIRMAN COX: Please do. 20 MS. KIPLIN: Thank you. 21 (Off the record: 12:49 p.m. to 3:03 22 p.m.) 23 AGENDA ITEM NO. XXII 24 CHAIRMAN COX: The Texas Lottery 25 Commission is out of executive session. It's 0169 1 3:03 p.m. 2 Is there any action to be taken as a 3 result of the executive session? 4 AGENDA ITEM NO. XXIII 5 CHAIRMAN COX: If not, the meeting is 6 adjourned. 7 (Meeting adjourned: 3:03 p.m.) 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0170 1 C E R T I F I C A T E 2 STATE OF TEXAS ) 3 COUNTY OF TRAVIS ) 4 I, Aloma J. Kennedy, a Certified 5 Shorthand Reporter in and for the State of Texas, do 6 hereby certify that the above-mentioned matter 7 occurred as hereinbefore set out. 8 I FURTHER CERTIFY THAT the proceedings 9 of such were reported by me or under my supervision, 10 later reduced to typewritten form under my supervision 11 and control and that the foregoing pages are a full, 12 true and correct transcription of the original notes. 13 IN WITNESS WHEREOF, I have hereunto set 14 my hand and seal this 30th day of January 2008. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/08 20 Firm Certification No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25