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 TUESDAY, JANUARY 30, 2007 § 8 9 COMMISSION MEETING 10 TUESDAY, JANUARY 30, 2007 11 12 BE IT REMEMBERED THAT on Tuesday, 13 the 30th day of January 2007, the Texas Lottery 14 Commission meeting was held from 9:00 a.m. to 15 1:59 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 COMMISSIONER C. 18 TOM CLOWE, JR. The following proceedings were 19 reported via machine shorthand by Aloma J. Kennedy, a 20 Certified Shorthand Reporter of the State of Texas, 21 and the following proceedings were had: 22 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONER: Mr. C. Tom Clowe, Jr. 5 GENERAL COUNSEL: 6 Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: Mr. Anthony J. Sadberry 8 CHARITABLE BINGO ASSISTANT EXECUTIVE DIRECTOR: 9 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 NO. 3 AGENDA ITEM NO. I - Meeting Called to Order.. 8 4 AGENDA ITEM NO. II - Consideration of and possible discussion and/or action on 5 external and internal audits and/or reviews relating to the Texas Lottery 6 Commission and/or on the Internal Audit Department's activities, including the FY06 7 financial audit and/or Mega Millions agreed upon procedures ...................... 8 8 AGENDA ITEM NO. III - Report, possible 9 discussion and/or action on the implementation of recommendations contained 10 in the Internal Audit Report on bingo audit services, including development of rules ...... 48 11 AGENDA ITEM NO. IV - Consideration of and 12 possible discussion and/or action, including withdrawal of the currently 13 published proposed amendments in the Texas Register and/or proposal of amendments, on 14 16 TAC §402.300 relating to pull-tab bingo ..... 12 15 PRESENTATION ON BEHALF OF FORT WORTH BOOKKEEPING (IVES) ............ 17 16 PRESENTATION ON BEHALF OF VARIOUS 17 CHARITIES AND BUSINESS ORGANIZATIONS (FENOGLIO) ............................... 18 18 PRESENTATION BY MR. ED BRANOM ............ 20 19 PRESENTATION ON BEHALF OF THE TEXAS 20 CHARITY ADVOCATES (ANAWATY) .............. 23 21 PRESENTATION ON BEHALF OF THE BINGO INTEREST GROUP (BRESNEN) ........... 28 22 PRESENTATION ON BEHALF OF TREND 23 GAMING SYSTEMS (HIERONYMUS) .............. 35 24 PRESENTATION ON BEHALF OF VARIOUS CHARITIES AND BUSINESS ORGANIZATIONS 25 (CONTINUED) (FENOGLIO) ................... 41 0004 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. V - Report, possible discussion and/or action on 3rd quarter 4 Calendar Year 2006 bingo conductor information .................................... 59 5 AGENDA ITEM NO. VI - Report by the Charitable 6 Bingo Operations Director and possible discussion and/or action on the Charitable 7 Bingo Operations Division's activities ......... 62 8 AGENDA ITEM NO. VII - Report, possible discussion and/or action on lottery 9 sales and revenue, game performance, new game opportunities, market research 10 and trends .................................. 64 11 AGENDA ITEM NO. VIII - Report, possible discussion and/or action on transfers to 12 the State and the agency budget ............. 93 13 AGENDA ITEM NO. IX - Report, possible discussion and/or action on Lottery 14 Operations and Services contract Amendment No. 8 credit calculation .................... 96 15 AGENDA ITEM NO. X - Report, possible 16 discussion and/or action on the advertising and dissemination of prize and game 17 information, including information about closing instant games ...................... 107 18 AGENDA ITEM NO. XI - Report, possible 19 discussion and/or action on the agency's contracts ................................... 143 20 AGENDA ITEM NO. XII - Report, possible 21 discussion and/or action on the 80th Legislature ............................ 144 22 AGENDA ITEM NO. XIII - Report, possible 23 discussion and/or action on the Mega Millions game and/or contract ............... 146 24 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XIV - Report, possible discussion and/or action on GTECH 4 Corporation ................................. 147 5 AGENDA ITEM NO. XV - Commission may meet in Executive Session: 6 A. To deliberate the duties and evaluation of the Executive Director 7 and/or Deputy Executive Director pursuant to Section 551.074 of the 8 Texas Government Code. B. To deliberate the duties and 9 evaluation of the Internal Audit Director pursuant to Section 10 551.074 of the Texas Government Code. C. To deliberate the duties, appointment 11 and/or employment of the Charitable Bingo Operations Director pursuant to 12 Section 551.074 of the Texas Government Code. 13 D. To deliberate the duties, appointment and/or employment of an Acting 14 Charitable Bingo Operations Director pursuant to Section 551.074 of the 15 Texas Government Code. E. To deliberate the duties of the 16 General Counsel pursuant to Section 551.074 of the Texas Government Code. 17 F. To receive legal advice regarding pending or contemplated litigation 18 and/or to receive legal advice pursuant to Section 551.071(1)(A) or 19 (B) of the Texas Government Code and/or to receive legal advice 20 pursuant to Section 551.071(2) of the Texas Government Code, including but 21 not limited to: Cynthia Suarez v. Texas Lottery 22 Commission Shelton Charles v. Texas Lottery 23 and Gary Grief Stephen Martin vs. Texas Lottery 24 Commission Patsy Henry v. Texas Lottery 25 Commission 0006 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 First State Bank of DeQueen et al. v. Cletus Irvan 4 Employment law, personnel law, procurement and contract law, 5 evidentiary and procedural law, and general government 6 law Mega Millions game and/or 7 contract ...................... 148 8 AGENDA ITEM NO. XVI - Return to open session for further deliberation and possible action 9 on any matter discussed in Executive Session. 150 10 AGENDA ITEM NO. XVII - Consideration of the status and possible entry of orders in: 11 A. Docket No. 362-07-0555 - The Point Spot 12 B. Docket No. 362-07-0556 - J&J Food Mart 13 C. Docket No. 362-07-0557 - Bob's Beer & Wine #1 14 D. Docket No. 362-07-0558 - Cheswick Liquor 15 E. Docket No. 362-07-0559 - Jessy Discount Beer & Wine 16 F. Docket No. 362-07-0386 - Evant Grocery 17 G. Docket No. 362-07-0300 - Lonestar Liquor & Tobacco 18 H. Docket No. 362-07-0301 - Sunmart #436 19 I. Docket No. 362-07-0303 - Kwik Pick J. Docket No. 362-07-0304B - Fiesta 20 Mini Mart .......................... 150 21 AGENDA ITEM NO. XVIII - Report by the Executive Director and/or possible 22 discussion and/or action on the agency's operational status, activities relating to 23 the Charitable Bingo Operations Division, agency procedures and FTE status ............ 151 24 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE NO. 3 AGENDA ITEM NO. XIX - Public Comment ........ 159 4 AGENDA ITEM NO. XX - Adjournment ............ 160 5 REPORTER'S CERTIFICATE....................... 161 6 7 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 TUESDAY, JANUARY 30, 2007 3 (9:00 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. Today is 6 January 30, 2007. It's 9:00 a m. Commissioner Clowe 7 is here. My name is Jim Cox. 8 I want to read a letter from the Office 9 of the Governor, dated December 29, 2006. 10 "The Honorable Roger Williams. Dear 11 Mr. Secretary: Please be advised that I am 12 designating James A Cox, Jr., as Presiding Officer of 13 the Texas Lottery Commission for a term at the 14 pleasure of the Governor. 15 "Mr. Cox will replace Carlton Thomas 16 Clowe as presiding officer. 17 "Sincerely, Rick Perry, Governor." 18 I would say that I appreciate the 19 Governor's confidence in saying that I could replace 20 Chairman Clowe. I don't think I nor anyone else could 21 replace Chairman Clowe, and I'm very happy to be his 22 successor. 23 AGENDA ITEM NO. II 24 CHAIRMAN COX: Agenda Item No. II, 25 consideration of and possible discussion and/or action 0009 1 on external and internal audits and/or reviews 2 relating to the Texas Lottery Commission and/or on the 3 Internal Audit Department's activities, including 4 Fiscal Year '06 financial audit and/or Mega Millions 5 agreed upon procedures. Ms. Melvin -- 6 MS. MELVIN: Good morning, Chairman. 7 CHAIRMAN COX: -- and Mr. Apperley. 8 MS. MELVIN: Good morning, Commissioner. 9 I have no new items of update for the 10 Internal Audit Division's functions or activities. 11 However, I would like to introduce Mr. Mike Apperley 12 from the State Auditor's Office, here to report the 13 results of their work regarding our annual financial 14 audit and the Mega Millions agreed upon procedures. 15 MR. APPERLEY: Good morning, 16 Mr. Chairman, commission Clowe. It's kind of a 17 difference this time from last year. 18 I'm an Assistant State Auditor with the 19 State Auditor's Office, and I'm here to testify on the 20 results of the recent fiscal year ending August 31st, 21 Annual Financial Report. 22 The objectives of our audit were to 23 express an audit opinion on the Commission's 2006 24 comprehensive annual financial report, to express an 25 opinion on the internal control of our financial 0010 1 reporting and on compliance and, finally, to report on 2 the results of applying agreed upon procedures related 3 to the multi-state Mega Millions game. 4 Our overall conclusion was that the 5 financial statements of the Texas Lottery Commission 6 for the year ended August 31, 2006, are materially 7 correct and presented in accordance with Generally 8 Accepted Accounting Principles. Our audit on internal 9 control over financial reporting and on compliance did 10 not identify any material weaknesses in internal 11 control over financial reporting or instances of 12 non-compliance or other matters that materially 13 affected the financial statements. 14 Finally, applying agreed upon procedures 15 related to the multi-state Mega Millions game did not 16 disclose any exceptions. In short, you got a clean 17 opinion this year. 18 CHAIRMAN COX: Thank you. 19 MR. APPERLEY: Mr. Chairman and 20 Commissioners, this concludes my testimony. I would 21 be happy to answer any questions that you might have. 22 CHAIRMAN COX: Mike, were our folks 23 fully cooperative with your people as you did your 24 audits? 25 MR. APPERLEY: They were. They have 0011 1 been for every engagement we've done in the past year 2 or two. 3 CHAIRMAN COX: Great. Were there any 4 disagreements of any kind between you and our 5 management? 6 MR. APPERLEY: None at all. 7 CHAIRMAN COX: Is there anything else 8 that you think we should know that you ran into as a 9 result of your audits? 10 MR. APPERLEY: No. There will be one 11 change for next year, as I hope that you're aware of. 12 We've delegated authority to do the audit next year 13 back to the Lottery Commission. So the State 14 Auditor's Office will not be conducting the 15 engagement. It will come back to whichever external 16 firm y'all select. 17 CHAIRMAN COX: I saw that, and I think 18 I'm quite pleased with that. That seems to reflect a 19 level of confidence at the State Auditor's Office that 20 I'm very pleased that we have. 21 MR. APPERLEY: I would agree with you. 22 The financial reporting in the Commission is 23 excellent. 24 CHAIRMAN COX: Thank you very much. 25 MR. APPERLEY: Thank you. 0012 1 CHAIRMAN COX: And give our thanks to 2 Auditor Keel. 3 MR. APPERLEY: I will. 4 CHAIRMAN COX: Thank you. 5 AGENDA ITEM NO. IV 6 CHAIRMAN COX: Item No. IV, 7 consideration of and possible discussion and/or 8 action, including withdrawal of the currently 9 published proposed amendments in the Texas Register 10 and/or proposal of amendments on 16 TAC, Paragraph 11 402.300 relating to pull-tab bingo. 12 Ms. Joseph. 13 MS. JOSEPH: Good morning, 14 Commissioners. My name is Sandy Joseph, Assistant 15 General Counsel. 16 In your notebooks is a memo in which I 17 recommend that the Commission withdraw the proposed 18 amendments to 16 TAC §402.300 relating to pull-tab 19 bingo that were published in the Texas Register on 20 December 29, 2006, and to initiate a new rulemaking 21 process by publishing a proposal that omits references 22 and provisions related to video confirmation and 23 digital representation. 24 This recommendation was made after being 25 advised that Sen. Nelson had raised concerns about 0013 1 certain aspects of the rule in regard to a pending 2 Attorney General Opinion and the possibility of 3 related legislation. Very recently the Agency has 4 been contacted by other legislative offices who wish 5 to provide input on the proposed rule. Staff has not 6 had the opportunity to fully communicate with these 7 offices at this time. 8 Additionally, due to the inclement 9 weather experienced in the state at the time of the 10 hearing, when this rule was scheduled, staff has 11 scheduled an additional hearing tomorrow to ensure 12 that everyone who desires to offer comments is able to 13 fully do so. I have been advised that additional 14 comments will be offered tomorrow on this rule. 15 As a result of the additional 16 information that has been received since the time I 17 prepared the memo for your notebook and in 18 anticipation of further comments, I now recommend that 19 the Commission pass this item so that the staff and 20 the Commission may fully consider any issues presented 21 and any additional information offered. 22 I'll be happy to answer any questions. 23 CHAIRMAN COX: Commissioner? 24 COMM. CLOWE: Mr. Chairman, I'm not 25 opposed to the idea of passing this item because, as 0014 1 Counselor has pointed out, the subject may not be ripe 2 for consideration. But it appears to me that there 3 are a number of people that are here this morning that 4 probably came with the intention of addressing this 5 item and have spent time and money to be here. 6 I would ask your guidance, and maybe the 7 General Counsel's comment, on whether it would be wise 8 to ask those folks who have filed appearance forms 9 with you -- and I believe you have a number -- whether 10 or not we should hear what they have to say today, 11 before we make a determination on what the will of the 12 Commission will be. 13 CHAIRMAN COX: Counsel? 14 MS. KIPLIN: Commissioners, this item is 15 on your agenda. You-all in the past have passed 16 matters without taking up public comment. And staff, 17 in making this recommendation, knows that there is a 18 comment hearing that is scheduled for this rulemaking 19 tomorrow and believes that the majority of the folks 20 that are here -- of course, we may be wrong on this -- 21 will be here tomorrow to make a comment that will be 22 part of the comment record. 23 It's certainly within the prerogative of 24 the Commission if you would like to entertain comment. 25 The practice of the agency, when it's called an item 0015 1 and it has not passed it at the beginning, has been to 2 receive the comment from the folks that are in 3 attendance into the Commission meeting record. But 4 you also have passed items on your own volition and 5 not accepted comments. So it certainly is within the 6 prerogative of the Commission. 7 CHAIRMAN COX: Commissioner, I know that 8 at least in the case of one senator that we have not 9 yet been able to communicate, Director Sadberry 10 received a call yesterday from a member of the Senate 11 calling for either me or for Director Sadberry. 12 Director Sadberry has returned that call, but we have 13 not yet been able to connect with the senator. So we 14 have at least that comment that we have not received. 15 There will be the opportunity, as 16 Counsel indicated, for folks to testify tomorrow. 17 However, if you would like for them to testify today, 18 I'm certainly ready to go forward. 19 COMM. CLOWE: Well, I think in the 20 spirit of openness and wanting to hear what people 21 have to say, that when I was a witness, I always 22 appreciated the opportunity to speak to the Commission 23 as opposed to someone else and having a transcript. 24 And there are a number of people I think that are 25 here. I don't know whether they intend to be here 0016 1 tomorrow or not. That's an unknown. 2 CHAIRMAN COX: Yes. 3 COMM. CLOWE: And because they are here 4 today and they do want to have something to say, I 5 would certainly leave it to you to make the decision. 6 But I would be inclined to hear from those who wish to 7 have something to say. I'm very respectful of 8 Sen. Nelson's position, as stated in her letter. I 9 understand that the comment from a senator that you 10 referred to is in support of this issue. So we have 11 some disagreement, if I'm understanding all that 12 correctly. 13 I am inclined to want to hear from all 14 parties and let the comment period close before we 15 deliberate it. But I do hate to disappoint people who 16 have come from out of town and spent their time and 17 money to be here. So I would be inclined to hear 18 whatever people have to say. If they would make 19 remarks that would be brief and to the point, I think 20 it would be beneficial to me. 21 CHAIRMAN COX: Then that's what we'll 22 do. 23 And I'm sorting through those who 24 support the testimony, looking for those who want to 25 testify. 0017 1 Sharon Ives, did you wish to testify? 2 MS. IVES: Good morning. Can y'all hear 3 me okay? 4 CHAIRMAN COX: We can. 5 PRESENTATION ON BEHALF OF FORT WORTH BOOKKEEPING 6 MS. IVES: My name is Sharon Ives, with 7 Fort Worth Bookkeeping. And my office handles the 8 bingo bookkeeping for 19 unit halls, which is over 76 9 charities. 10 As a bookkeeper, I've seen firsthand how 11 event tickets have drastically increased the bottom 12 line for charitable bingo. It is vitally important to 13 continue introducing new avenues that support 14 charitable bingo. I respectfully request that you let 15 the public comment period continue or be extended, if 16 necessary. 17 CHAIRMAN COX: Thank you. 18 MS. IVES: Thank you. 19 CHAIRMAN COX: Mr. Fenoglio, I see that 20 you have a witness affirmation form here. Would you 21 like to testify? 22 MR. FENOGLIO: I would, Mr. Chairman -- 23 thank you -- and Commissioner Clowe. My name is 24 Stephen Fenoglio. I've provided one. And it says, 25 "It depends," because I didn't know where you were 0018 1 going. 2 We came here today to make extensive -- 3 COMM. CLOWE: We didn't know where we 4 were going? 5 PRESENTATION ON BEHALF OF VARIOUS 6 CHARITIES AND BUSINESS ORGANIZATIONS 7 MR. FENOGLIO: Yes, sir. And, in fact, 8 the draft rules outside indicate that you were going 9 to withdraw it. We came here today to make a pretty 10 extensive presentation, "we" being the charitable 11 bingo representatives. And our first recommendation, 12 which is what Ms. Ives just stated, was that you let 13 the process finish before you make any decision. It 14 is fundamentally unfair that the rules of the game are 15 changed in the middle of the game, and we think it's 16 important that you have an exhaustive record. 17 I brought a PowerPoint presentation to 18 demonstrate the event tabs that are being played 19 today, with video confirmation. And I don't intend to 20 show that, because it's about a 10- or 15-minute 21 presentation. We propose to show that tomorrow in the 22 record. I have given to Mr. Sanderson a CD of that, 23 and we would make that in the record tomorrow, as well 24 as a hard copy for the staff. 25 And as the record reflects, there are a 0019 1 number of representatives here. I think many will 2 stay tomorrow; some will not. And I would suggest 3 that if there are people who want to testify today and 4 who may not be -- will be available today, that they 5 be allowed to do so. I'll be here tomorrow. And 6 that's obviously all contingent on we have our day at 7 the Commission which, because of the ice storm, I 8 visited with Ms. Kiplin and Mr. Sanderson. 9 It's interesting how Austin shuts down 10 and the area in Central Texas shut down for two days. 11 But a lot of people who wanted to be here couldn't be 12 here because of travel, of the road conditions. And 13 so we would ask that we be given the opportunity to 14 make our presentation tomorrow in the ordinary course 15 of discussion. 16 And, parenthetically, we're trying to 17 meet with all of the legislators who have an interest 18 in this issue and explain. We think there's been 19 quite a bit of miscommunication or misunderstanding 20 about what the rule intends to do. And it doesn't 21 intend to change the law; y'all can't change the law. 22 You still have to play a pull-tab with a traditional 23 pull-tab. But what the video confirmation will do 24 will give integrity to an existing game, not a new 25 game, but the existing game, other than tickets that 0020 1 have been played successfully in this state 2 And Chairman -- former Chairman Clowe is 3 very aware of that, because he was here when we 4 rewrote the rule to give event tickets in 2001. And 5 they've been fantastically successful. And as is the 6 case in any product, you have to constantly innovate. 7 The lottery does it all the time with scratch-off 8 tickets and different on-line games. And the 9 charitable bingo industry, with more limited 10 resources, is constantly doing the same thing, again 11 playing the same game, only making it better or more 12 interesting and more attractive. 13 I'll be happy to answer any questions. 14 CHAIRMAN COX: No questions, 15 Mr. Fenoglio. Thank you. 16 MR. FENOGLIO: Thank you. 17 CHAIRMAN COX: Mr. Ed. Branom. 18 PRESENTATION BY MR. ED BRANOM 19 MR. BRANOM: Commissioner Cox and 20 Commissioner Clowe and all the folks here, thank you 21 for letting me speak to you for just a second. My 22 name is Ed Branom. Most of you know me. I'm been 23 around in the bingo business for 20 years. I am a 24 lessor from Plano. And I do not get involved -- there 25 is no lessor involvement in my part. 0021 1 But I do support our bingos and our 2 charities whenever I can. And most of the charities 3 that play bingo with us are my friends. I've known 4 them for a long time. And we've tried in the past -- 5 by the way, while I'm at this, it doesn't have 6 anything to do with this necessarily, but it does, 7 too. I just want to thank you guys for getting the 8 unit trust done for us. I know that was a major 9 effort, but it is working so well. The charities are 10 now operating as a real business. And financial and 11 just the structure of the business has totally 12 changed, and I want to tell you how much we appreciate 13 what you guys have done for us in the past in that 14 area, and a lot of other things, too. I just talked 15 with Danny Moore. We hope you two guys stay with us 16 for the next 20 years. 17 Let me tell you a little bit about what 18 our experience is in Plano. First of all, in February 19 of last year, we opened a daytime bingo in Plano, 20 Texas. And if you will talk to the folks around the 21 state, daytime bingos have a hard time making it, and 22 new daytime bingos don't work. We're not great, but 23 we're getting there. And the reason we're getting 24 there is because of the event tabs that we're allowed 25 to use now. They work really, really well. East 0022 1 Plano Bingo, for the last three or four or five years, 2 has had a very, very difficult time surviving. Slowly 3 but surely the event tabs have started to work for us. 4 And in the last two quarters, we have generated 5 $150,000 for our charities. 6 In the previous year at the same time, 7 we were doing good to come up with four or $5,000 a 8 quarter. So you can see our involvement and little or 9 not profit to very profitable has happened to us in a 10 relatively short period of time. I just want to tell 11 you the event tabs work. If you'll get out there and 12 hustle and work like our guys do, it works for the 13 charities, and that's what we're all about. 14 As I understand, it's within your 15 prerogative to decide about these new rules. I've 16 talked with the folks that are involved in it. I've 17 talked with the guys at the bingo, that operate our 18 bingos, and they tell me they really would like to 19 have it because it would be extremely beneficial to 20 the bottom line of the bingo, and the bottom line is 21 for the charities. 22 That's really all I got to say, except I 23 think it will work; I know it will work. It's 24 something we need. And if you can see it in your 25 heart to give it to us, we would like to have it. 0023 1 Thank you. 2 CHAIRMAN COX: Thank you very much, 3 Mr. Branom. 4 Hank Anawaty. 5 PRESENTATION ON BEHALF OF THE 6 TEXAS CHARITY ADVOCATES 7 MR. ANAWATY: Good morning, 8 Commissioners and staff. My name is Hank Anawaty. I 9 am a senior advisor and board member of Texas Charity 10 Advocates. We would like to comment in general about 11 the proposed rule, specifically 402.300. 12 Texas Charity Advocates is an 13 association comprised of charities, lessors, 14 distributors and manufacturers that are allowed by 15 license to either assist in or conduct bingo in Texas. 16 The association's primary mission is to inform and 17 educate our elected officials and the public in 18 general about the charitable programs that result from 19 the conducting of bingo. 20 We also work to stay informed about and 21 support good public policy toward charitable bingo. 22 When attempts are made to improve an existing rule or 23 when legislation is proposed making bingo more 24 efficient and profitable for our charities, it is our 25 goal to speak out. We are guided by our member's 0024 1 interest in improving and moving bingo forward. 2 Of the four rules that are being 3 proposed at this time, we would like to address Rule 4 402.300. In general, Texas Charity Advocates supports 5 the rule in its entirety, though we would like to 6 specifically comment on the portion of the rule that 7 addresses pull-tab video confirmation. 8 Charitable bingo in Texas is suffering. 9 We believe that part of the decline can be attributed 10 to the lack of new products and advancement in the way 11 the game is played. We also believe that technology 12 is a missing component to attracting a younger 13 demographic and larger numbers into the bingo halls. 14 Video confirmation of the outcome of an improved game 15 is one way to use this technology. 16 The Association is grateful for the 17 efforts by regulators in assisting us in keeping 18 charitable bingo across the state on an even playing 19 field. However, our same regulators and lawmakers are 20 hindering our ability to stay on the same playing 21 field with all the products that neighboring states 22 and unregulated venues have to offer to our same 23 patrons. 24 Charitable bingo in Texas will one day 25 cease to exist if our industry and our regulators do 0025 1 not take advantage of some of the products that could 2 be available to us. The bingo patrons will not be 3 staying at home; they will be frequenting other 4 venues. The dollars spent will be taken from 5 charities in Texas and given to other interests that 6 do not work to make our communities better. 7 In 2002, pull-tabs were allowed, by 8 rule, to include event tabs. And, as a result, the 9 decline in gross dollars statewide has reversed. This 10 proposed rule, 402.300, would allow us to use 11 pull-tabs in a way that is even more appealing. 12 The Association believes that licensed 13 manufacturers in the bingo industry will respond to 14 the new rule with products that will appeal to our 15 patrons while still complying with the Bingo Enabling 16 Act. We envision a product that allows a paper 17 pull-tab to be read electronically, while also 18 providing video representation of the tab face, or 19 what is referred to as the flare. The device will not 20 affect the outcome of the game. It would allow 21 players to participate in the pull-tab game in a more 22 appealing and up-to-date format. As an additional 23 benefit, the device would have excellent recordkeeping 24 ability, helping our operators and managers to better 25 summarize sales at the end of the session. 0026 1 With this in mind, it is important to 2 point out that within the Texas Bingo Enabling Act, 3 Bingo Enabling Act, the definition of a pull-tab 4 dispenser does state that the device may include an 5 electronic device. This proposed rule supports the 6 enabling act definition and gives the industry a 7 comfort level that the investment involved in 8 developing such a device would not be a wasted effort. 9 Charitable bingo games in Texas must be 10 more up to date. If they do not become so, the 11 attrition will continue as bingo customers travel to a 12 venue that is more exciting. Our business is no 13 different from any other in today's business climate, 14 changing rapidly, mostly due to technology. We feel 15 as though we have been left behind. 16 Each time something new has come to us 17 through changes to the enabling act or revised rule, 18 our charities have responded well. Some examples are: 19 Charitable bingo has increased in auditing integrity, 20 due to the use of point-of-sale computer summaries. 21 This is what sets on the counter, and the bingo 22 manager uses that when the customer comes to the 23 counter. 24 We know that event tabs have been 25 handled well by charities and have helped gross 0027 1 revenues to stabilize. 2 No. 3, as far back as 1996 when card- 3 minding devices were introduced, the process was 4 handled well by charities, and it brought us more up 5 to date for that time period. 6 There have been other changes as well, 7 some of which have helped the game more than others, 8 but each has been assimilated well by the charities 9 and, for the most part, been an improvement in our 10 operations. The same is true for this proposed rule. 11 It is well within our ability and knowledge to handle 12 this rule change properly. In addition, when we ask 13 for a change, it is well thought out and needed to 14 stay up to date. 15 It may appear to some to be far-reaching 16 for charities to offer a pull-tab with video 17 confirmation. We believe that the time has come. 18 Many charities will not survive much longer in an 19 unfair regulatory environment. Something must be 20 done, and the technology is available and waiting to 21 be put to use. 22 We ask that you help us use our 23 knowledge of the bingo game, along with today's 24 technology, to keep our customers. It is very 25 important to many thousands of Texans that our 0028 1 charitable programs are allowed to continue. 2 Thank you for your consideration of the 3 rule. And then this letter is signed and approved by 4 the Board of Texas Charity Advocates. 5 If you have any questions, I'll be happy 6 to answer them. 7 CHAIRMAN COX: Thank you, Mr. Anawaty. 8 MR. ANAWATY: Thank you. 9 CHAIRMAN COX: Steve Bresnen. 10 PRESENTATION ON BEHALF OF THE 11 BINGO INTEREST GROUP 12 MR. BRESNEN: Thank you, Mr. Chairman. 13 My name is Steve Bresnen. I'm here on behalf of the 14 Bingo Interest Group. And if I could, just a personal 15 comment before we go any further. 16 Commissioner Cox -- Clowe. Excuse me -- 17 you have served this state in an extraordinary way in 18 many different capacities during the time that I've 19 known you. And your service as Chairman on this 20 Commission and as a Commissioner before is exemplary 21 of everything that needs to happen with people who 22 serve in any state agency in this state. And we 23 appreciate very greatly everything you've done to help 24 bingo and to run this state in a professional and a 25 manner of integrity. Thank you. 0029 1 COMM. CLOWE: Thank you. 2 (Applause) 3 MR. BRESNEN: We have a lot of people 4 here from bingo today that have come from as far away 5 as Texarkana and the Dallas-Fort Worth area and South 6 Texas and all over the place, because they're 7 interested in what you're doing. I've told all of 8 y'all, and before when Anthony was a Commissioner, I 9 told y'all at that time that bingo always felt like it 10 was a second-class -- group of second-class citizens 11 and that we were being regulated by our competitor. 12 And because of you two gentlemen and the 13 extra interest you showed, starting two or three years 14 ago, things have begun to turn around. We have 15 demonstrated that if we're allowed to participate and 16 communicate and work with you, that we could turn 17 around something that really shouldn't be able to be 18 turned around in the face of the economics and the 19 competition from out-of-state gaming and from the 20 lottery itself. We demonstrated that that would work. 21 We came to you with the unit trust idea. That is 22 working. We demonstrated that these ideas can work. 23 The proposed rule that's under 24 discussion today was worked on for a very long time. 25 It was a very public process. There was a workgroup 0030 1 that met repeatedly. We worked closely with your 2 staff. We incorporated their ideas. We improved the 3 accountability associated with these games, to reduce 4 the slippage to the charities and to improve your 5 ability to regulate. 6 Then we met repeatedly with the Bingo 7 Advisory Committee. And all those meetings are 8 published in the Texas Register. Everybody is given 9 ample notice to come and participate. We came before 10 you as Commissioners and talked about these issues. 11 These issues have been fully vetted in a 12 public forum on many occasions. And still there are 13 people who have gone to the Capitol and asked 14 Sen. Nelson to oppose the adoption of this bill. I 15 may be the first person that Sen. Nelson met when she 16 came to Austin as a senator, when I was working for 17 Governor (sic) Bullock. We immediately established a 18 fantastic rapport. I've got the greatest respect for 19 her. She is a great senator and represents her 20 district incredibly well. 21 But, unfortunately, her letter is an 22 error in many respects. In one respect, it raises the 23 issue of the pending Attorney General's Opinion. That 24 opinion request has to do with an amendment that I got 25 passed twice in the Texas Senate during special 0031 1 sessions, with 25 votes out of 31. That was fully 2 electronic pull-tab bingo. There would not have been 3 a pull-tab, the games would have been created, 4 generated by a computer, disseminated electronically, 5 there would have never been a break-open pull-tab 6 paper ticket. That did not pass the House, to say the 7 least, and so it's not the law today. 8 So we began to look at the existing 9 statute to try to determine what could be done within 10 the existing law. Her Attorney General Opinion 11 request has to do specifically with the E pull-tab 12 amendment and not with this rule. So we looked at the 13 existing law; we worked with your staff. I feel 14 certain that your staff believes that this proposed 15 rule is within your statutory authority or they would 16 not have brought it to you and recommended it to you 17 to begin with. 18 I believe that's been fully vetted by a 19 whole lost of lawyers. Nobody ever showed up at a BAC 20 meeting, a workgroup meeting or any of your meetings 21 and said anything other than that. Nobody ever 22 opposed the adoption of this rule; and, yet, some 23 unidentified stakeholder has gone up to the Capitol 24 building and told Sen. Nelson some things that are 25 reflected in her letter that are just factually 0032 1 incorrect. 2 For example, the letter says we're 3 replacing the terms "face" and "reverse" with the 4 terms "video confirmation" and "digital 5 representation." That's not what this rule does. The 6 rule on the face and reverse part, it just says all 7 this information that's used to track these tickets 8 has to be somewhere on it and not dictated to be on 9 the face or the reverse. The object is to let 10 manufacturers determine the best place to put it so 11 they can sell tickets in many states without having to 12 do individual tickets for Texas, driving up the cost 13 or causing those tickets to not even be available in 14 Texas. 15 Video confirmation and digital 16 representation have nothing to do with any of that. 17 The letter implies that you don't have to have a paper 18 pull-tab anymore, but the statute requires that you 19 have a pull-tab made of paper and paper products. And 20 the games that would be played with the video 21 confirmation and the digital representation are games 22 that are being played now. 23 In fact, digital representation -- video 24 confirmation is being used today in the marketplace. 25 It's out there now. The whole purpose of putting this 0033 1 in the rule was to assure other manufacturers who have 2 not come into the marketplace that if they came in, 3 there would be a standard to be met and the agency 4 would have a way to evaluate those things and more 5 products like those would be available in the 6 marketplace. 7 All of that has been discussed ad 8 infinitum in all these meetings, but some unidentified 9 stakeholders have gone up to the Capitol building and 10 told Sen. Nelson various things about this rule that 11 are factually incorrect. I don't know who they are. 12 They wouldn't identify them to me. And I think it's 13 reprehensible that all these good people from these 14 charities come down here and participate in this 15 process and then some unnamed people can go out and 16 stir the pot. 17 So what we did was, we went and asked 18 some other members of the Legislature to contact you 19 and let you know that they're aware of this, that they 20 support it if it's within your statutory authority and 21 it will help bingo, then they would like for you to 22 adopt it. That's all we're asking. If you find that 23 it's within your statutory authority and it will help 24 bingo, we ask you to adopt it. I don't know why you 25 wouldn't. 0034 1 If there's some safeguards or 2 clarifications that need to be put in place, I think 3 we've shown ourselves amply willing to sit here day-in 4 and day-out for almost a year and work on those 5 things, and we'll continue to do that if need be. But 6 we need your help. And we've shown, I think with a 7 fair amount of integrity and a lot the stick-to-it- 8 iveness that we can make a difference out there for 9 these charities and generate more money for them if we 10 can get a little help from somebody. 11 You know, there's a bumper sticker that 12 I'm not going to mention directly because I don't want 13 to inject religion into this discussion. But I would 14 ask you this: What would the lottery do? Well, you 15 know what you would do. When your games are sagging, 16 when something is not working or it's not fresh 17 anymore, you publish a proposed rule like the one 18 that's in the Register right now that is intended to 19 come up with something with a little more pizazz to 20 improve your sales. 21 And then the members of the Senate 22 Finance Committee and the Appropriations Committee get 23 to go spend that money, and that's good. We like 24 that. And the things that they do, we fully support. 25 Some of my clients are probably beneficiaries of some 0035 1 of that spending. 2 What we're asking is to do for 3 charitable bingo exactly what you would do for the 4 lottery: Act within your statutory authority and do 5 it if it will hip the charities. I realize if the 6 charities get helped, they pay more prizes, the state 7 gets a little more money, but it's a drop in the 8 bucket compared to the lottery. It's what these 9 people do in the everyday lives of individuals out 10 there with these charities that makes the difference, 11 that doesn't get fully articulated to the Legislature 12 and happens under the radar. 13 That concludes my remarks. I appreciate 14 all the work y'all have done, because I think every 15 time I"ve been here, you've been here, too. Thank you 16 very much. I appreciate it. 17 CHAIRMAN COX: Thank you. 18 MR. BRESNEN: I would be happy to answer 19 any questions if you like. 20 Thank you. 21 CHAIRMAN COX: Steven Hieronymus. 22 PRESENTATION ON BEHALF OF 23 TREND GAMING SYSTEMS 24 MR. HIERONYMUS: Good morning. I'm 25 Steven Hieronymus, distributor, Trend Gaming Systems. 0036 1 I am very much for technology, event 2 tickets, et cetera. My only concern is that the 3 draft -- would be some of the language in the rule 4 itself. So I have some concerns with the way it's 5 drafted as it currently exists. And I've communicated 6 that to Sandra and will continue to do so. 7 But I do want to reemphasize that I'm 8 very -- you know, for the progressive look at our game 9 and how we can continue to enhance it. I've always 10 been an advocate for that. And just so Steve knows, 11 I'm not in any way involved in being an unidentified 12 person, stakeholder, but I do have some concerns with 13 the way it's drafted as it exists right now. And it 14 would help that possibly some additional 15 clarifications could go in there. And I'll fully 16 communicate those to Sandra. 17 That's all I have 18 CHAIRMAN COX: Thank you very much. 19 I have a number of other witness 20 affirmation forms. I don't believe any of them wish 21 to testify, but I'll read these. And if you do wish 22 to testify, please let me know. 23 Mark McCafferty supports charitable 24 bingo and pull-tabs. 25 Bruce Weatherford supports charitable 0037 1 bingo. 2 Earl O. Silver III, "Please help 3 charitable bingo." 4 William T. Smith, "I suppose bingo." 5 Kelly Marsh, "Supporting charitable 6 bingo." 7 Frank Henderson, Jr., "I support 8 charitable bingo." 9 Ronnie Baker, "We strongly support Item 10 IV for the betterment of charitable bingo." 11 Kevin Fontenot, for. 12 James Irby, for. 13 Karl "Fon-tast"? 14 MR. FONTENOT: "Fon-e-no." 15 CHAIRMAN COX: Thank you, Mr. Fontenot. 16 MR. FONTENOT: Yes, sir. 17 CHAIRMAN COX: For. 18 Louis D. Kosanovich -- close? -- for, "I 19 support Charitable bingo." 20 Barbara Manning, "Support charitable 21 bingo." 22 And William Manning, for, "Support 23 charitable bingo." 24 MR. BRESNEN: Mr. Chairman, if I might, 25 Steve Bresnen again on behalf of the Bingo Interest 0038 1 Group. Rather than have everybody testify and take 2 all of your time today, we asked them to fill out the 3 affirmation forms in that manner, to show that they 4 support having the comment period finished or 5 extended, in support of the rule. 6 CHAIRMAN COX: Okay. 7 MR. BRESNEN: I just wanted the record 8 to reflect that. 9 CHAIRMAN COX: So we read those into the 10 record, and that's the purpose? 11 MR. BRESNEN: Yes. 12 CHAIRMAN COX: Thank you for that 13 clarification, Mr. Bresnen. 14 Mr. Fenoglio, how long is your 15 PowerPoint? 16 MR. FENOGLIO: Ten minutes, assuming I 17 can get it up and running. I've turned off the 18 computer. It may come up, if you want to see it. 19 CHAIRMAN COX: We would like to see it. 20 MS. JOSEPH: Commissioners, excuse me. 21 While he's doing that, I would like to offer, if you 22 would so desire, to read Sen. Nelson's letter into 23 this record. Since you have received comments from 24 others, I just want to offer you that option. If you 25 would like for me to do that, I would be happy to. 0039 1 CHAIRMAN COX: Please. 2 MS. JOSEPH: All right. This letter 3 from Sen. Jane Nelson was dated December 22, 2006, and 4 addressed to Mr. C. Thomas Clowe, Chair of the Texas 5 Lottery Commission. 6 "Dear Mr. Clowe, I am writing today to 7 express my profound concerns regarding recent actions 8 of the Texas Lottery Commission. On December 13, 9 2006, the Commission approved proposed rule amendments 10 for charitable bingo, which would, in the opinion of 11 many, have the effect of altering Texas Administrative 12 Code definitions of pull-tab bingo from those 13 reflecting an actual ticket to provisions more 14 appropriate for an altered or electronic version of 15 the game. 16 "Rule amendments proposed by the 17 Commission would delete standard language for pull-tab 18 bingo such as face and reverse, instead substituting 19 terms such as video confirmation and digital 20 representation. These changes could lead to radically 21 different types of paper bingo or electronic 22 involvement. Your 2007 - 2011 Strategic Plan refers 23 to progressive bingo, restructured pull-tabs, and 24 electronic bingo as possible 'opportunities' for 25 future adoption. In addition to 'opportunities' in 0040 1 the area of bingo, the 2007 - 2011 Strategic Plan also 2 references internet-based games, handheld devices, and 3 compact disk products. 4 "Please let me make it clear that I will 5 oppose any expansion of gambling beyond current 6 statutory and historical parameters. I find it 7 particularly troubling that the Commission would take 8 any steps toward electronic bingo as the Texas 9 Attorney General ponders a request for his opinion 10 regarding the constitutionality of bingo expansion. 11 Previous attempts to implement electronic versions of 12 lottery, for instance, have been rebuffed by the 13 Attorney General as needing voter approval. I would 14 strongly encourage you to pull down any current 15 proposed rule changes that alter the nature of a 16 particular game or add any new type of wager until the 17 Legislature has the opportunity to meet on these 18 topics in 2007. Thank you for your attention to this 19 request. Please do not hesitate to contact me if you 20 have any questions or need further information. 21 "Very truly yours, Senator Jane Nelson," 22 with copies to Commissioner Cox and Anthony Sadberry. 23 CHAIRMAN COX: Thank you, Ms. Joseph. 24 Do you want to just stay there. 25 MS. JOSEPH: All right. 0041 1 CHAIRMAN COX: Are you ready, 2 Mr. Fenoglio? 3 MR. FENOGLIO: I am. 4 CHAIRMAN COX: Excellent. 5 PRESENTATION ON BEHALF OF VARIOUS CHARITIES 6 AND BUSINESS ORGANIZATIONS (continued) 7 MR. FENOGLIO: And with any luck, 8 technology will not fail us. 9 I have handed out two color charts. The 10 first is the horse race, which is just pictures of 11 three of the screens on a horse race game that I'm 12 calling up now. This horse race is played throughout 13 the State of Texas. It's an event ticket. And there 14 are, under the Commission's existing rule that hasn't 15 been changed since '01, there are certain 16 predetermined winners, a lot of pre-determined losers 17 and then some tickets called hold tickets where the 18 player holds them for a subsequent event, be it the 19 dropping -- calling of a ball, spinning of a reel or 20 some subsequent event. That's defined in the 21 Commission rule. 22 The second page, a two-page document, is 23 a list of pull-tabs available by location. This 24 happens' to be from Good Time Bingo, a licensed 25 distributor, and it's giving you the 30 something 0042 1 event tickets that they have in their inventory today. 2 Other distributors, Thompson Allstate, Danny Moore and 3 others have other event tickets that are available for 4 sale to charities and, thus, play. 5 This one I'm going to show you, with any 6 luck, is the horse race game in which again -- and I 7 brought with me the actual deal of the box of tickets, 8 and I'll be happy to open it. It's a sample. And I 9 would like to say that I'm not a distributor. I'm not 10 offering this for sale or otherwise making it 11 available for sale to the State of Texas, but merely 12 in demonstration mode. 13 I brought the flare that shows that in 14 this particular game, there are 400 tickets at a 15 dollar. There is one $100 ticket on bingo winner and 16 one horse ticket -- and I'm not quite sure why we're 17 not playing. We've tried it twice today. But there 18 is one instant winner of $25, an instant winner of 19 $20, five instant winners at $2.00, 26 instant winners 20 at $1.00, a payout percentage of 70.25 percent, gross 21 profit to the charity of $119. 22 And, basically, people purchase the 23 instant tickets. If they have a hold ticket, that's 24 one. They continue to play the game. As it turns 25 out, if they end up with the winning hold ticket when 0043 1 a bingo event is called, they win $100. 2 Can you help me on this? 3 (Brief pause) 4 You can now see why I am not a computer 5 technician. And we may be in Mr. Gates' La-La Land or 6 Mr. Dell's La-La Land. 7 And as you can imagine, if you were in a 8 bingo hall, the excitement and tension are mounting: 9 "Start the game." These games will last between two 10 minutes and 10 minutes as an event ticket. And it 11 looks like we've got some activity that's going to 12 begin -- maybe. 13 Okay. I hear the squirrel spinning in 14 the computer, but I don't see any action. 15 CHAIRMAN COX: Commissioner, with your 16 permission, why don't we take a short break while 17 they're getting things together. 18 (Off the record: 9:48 a.m. to 9:55 19 a.m.) 20 CHAIRMAN COX: Mr. Fenoglio, are you 21 ready? 22 MR. FENOGLIO: Yes, sir. 23 CHAIRMAN COX: The meeting will come 24 back to order. 25 MR. FENOGLIO: I have brought with me 0044 1 and opened up some of the instant tickets on the horse 2 race game. And you'll notice that some of them are 3 hold tickets that I have given you. 4 And now our screen has gone blank, 5 although my computer shows it's loading. 6 And here we go. And you can hear the 7 audio. And it's showing that the balls that have been 8 called, and the horses advance graphically. This is 9 shown on the TV screens in the bingo hall. As the 10 different bingo balls are drawn, if you have those as 11 your hold tickets -- and again, now a 2 has been 12 drawn. 13 (Horses running on screen) 14 Now a 6 has been drawn. 15 (Horses running on screen) 16 And then a 13. 17 The goal is to have the winning hold 18 ticket on the last vertical B line when someone blacks 19 out and wins bingo. And as you can tell, in a video 20 way, this is mimicking a horse race, as horses come to 21 the front. 22 And in about 20 seconds, this will be 23 thankfully over. 24 (Horses running on screen) 25 Now, a 12 has been drawn. 0045 1 And, again, the goal is to blackout the 2 vertical B line that has 15 numbers. And when that 3 happens, someone will yell "Bingo!" The game will be 4 won. And whoever blacks out with the last hold ticket 5 corresponding to the number that's called in the hall 6 wins the game of $100. 7 In the hall, you can have the sound 8 continuing like it is in a horse race, with the 9 trumpets. It may be that customers continue to 10 purchase these tickets throughout the game. The hall 11 decides if they have to sell all the tickets before 12 the game begins or customers can continue to buy them 13 as the game progresses. 14 And now we have a winner. It was 10. 15 Whoever held 10 hold ticket went, and that person 16 bingoed, blacked out the entire line. That's how they 17 won. 18 This type of video confirmation is shown 19 in the hall today. And the important thing is, in 20 interviews and surveys with customers, slightly over 21 50 percent of the players historically refuse to play 22 an event ticket. And the reason is, Commissioner 23 Cox -- or Chairman Cox -- unlike a regular bingo game 24 where all of the stuff is flashed on the TV screens 25 throughout the hall, and if you're playing bingo on 0046 1 your card-minder, it's flashed up on the card-minder 2 so customers can verify themselves that, in fact, John 3 Smith bingoed. He had the last ball in the B10, and 4 he won it. And so everyone in the hall can confirm 5 independently they won it. 6 Parenthetically, they will also post 7 that winning card on a bulletin board somewhere in the 8 hall. So it's transparent. Everyone can see it as it 9 happens and know that, in fact, it wasn't someone 10 shuffling a ball to Mr. Smith, it actually was called 11 up on the caller stand, they saw it on the video 12 throughout the hall and independently verified they 13 won. 14 The video confirmation in the ticket -- 15 or in the proposed rule will do the same thing with 16 event tickets. So now those slightly over 50 percent 17 who refused to play an event ticket, because they're 18 convinced -- most bingo players are superstitious, as 19 you might know -- they are convinced there is an 20 inside job working. 21 With video confirmation, they no longer 22 have that fear because they instantaneously see the 10 23 was called, John Smith had the hold ticket B10. You 24 can take that B10 ticket up and put it on the camera 25 and flash it all over the video screen and, thereby, 0047 1 have video confirmation. And everyone in the hall can 2 independently verify that, in fact, John Smith had 3 that winning ticket. 4 We think it will increase sales because 5 that 50 percent of the customer base that doesn't play 6 an event ticket will now have comfort and know that 7 the game is not fixed in any way, shape, form or 8 fashion. 9 Parenthetically, there's some other 10 language in the rule that talks about some accounting 11 systems, and we anticipate the same type of accounting 12 systems that are in card-minders today, instantaneous 13 on-line will be available for event tickets which will 14 make Ms. Shankle's job easier in calculating the taxes 15 that are due on winners' prize fees, Mr. Sanderson's 16 job easier in addressing trends in the industry, why 17 some halls do better than others and not, because of 18 that is instantaneously on-line in the computer 19 system. 20 Thank you for your patience. 21 CHAIRMAN COX: Okay. Thank you very 22 much, Mr. Fenoglio. 23 Okay. Ms. Joseph, your recommendation 24 is that we pass this item, hear the comment that we 25 will hear in the public comment period tomorrow, be 0048 1 able to make contact with at least one member of the 2 Senate who has tried to contact us but we have not 3 reached, and go from there? 4 MS. JOSEPH: Yes, sir. 5 CHAIRMAN COX: Is that your pleasure, 6 Commissioner? 7 COMM. CLOWE: Yes, sir. 8 CHAIRMAN COX: That will be done. 9 MS. JOSEPH: Thank you. 10 AGENDA ITEM NO. III 11 CHAIRMAN COX: Counsel has pointed out 12 to me that I've already made my first mistake. Having 13 handled Item IV, we'll now go to Item III, which is 14 report, possible discussion and/or action on the 15 implementation of recommendations contained in the 16 Internal Audit Report on bingo audit services, 17 including development of rules. 18 Phil Sanderson. 19 MR. SANDERSON: Thank you, Chairman. 20 Good morning Commissioners. I would like to bring you 21 up to date on the progress of implementing the 22 recommendations of the internal audit, which was 23 performed on the audit activities of the Charitable 24 Bingo Operations Division. 25 The workgroups continue to meet to 0049 1 develop language for rules that will be necessary to 2 implement these recommendations. The first rule that 3 was developed deals with the cost standards and is 4 titled "Allowability of expenses." An internal 5 committee comprised of both bingo and other agency 6 staff from Internal Audit, the Office of the 7 Controller, Governmental Affairs and Legal have been 8 reviewing and commenting on drafts of this rule over 9 the past month and a half. The draft has been 10 circulated to representatives from the BAC and the 11 bingo industry for informal comment, and we posted it 12 on the website yesterday to also receive informal 13 comment. 14 The internal controls rule or the 15 minimum internal control standards draft has been 16 completed and is being reviewed by members of the 17 Internal Audit staff. A meeting was held last week 18 with staff from the Internal Audit and the Bingo 19 Division to discuss these standards, and a final 20 version is being compiled at this time. 21 Back on January the 8th and 9th, I met 22 with the audit manager, the regional coordinators and 23 other members of the audit staff to finalize draft 24 language for rules that will address the following: 25 House rules, fair conduct of the game, general audit 0050 1 rule and a books and records rule. 2 The draft rules for the house rules and 3 fair conduct of bingo and the general audit rule have 4 been forwarded to Internal Audit for their review. 5 The books and records rule may have to 6 have some minor modifications, based on how the final 7 version of the internal control standards gets 8 adopted. 9 Additionally during this meeting, 10 factors that will be utilized in developing the risk 11 analysis were discussed, as well as revision to the 12 written audit program and new procedures for desk 13 audits or desk reviews. 14 The compliance audit procedure and the 15 written audit plan are being circulated for comment 16 internally, and a meeting is scheduled next week to 17 review these documents. 18 Currently a rule that will set out 19 guidelines for dispute resolution process is being 20 drafted. And another workgroup has met with staff 21 from the Texas Department of Insurance, Texas 22 Workforce Commission and the Texas Commission on 23 Environmental Quality, to gather information on 24 workpaper documentation and/or audit procedures. 25 We're currently reviewing the 0051 1 possibility of utilizing the TeamMate software that 2 would help standardize workpapers. 3 The audit completion letter that will be 4 sent to the taxpayer after an audit is finalized has 5 been completed and is being reviewed by management. 6 The final audit report template has been drafted, but 7 there may be some changes required once the Yellow 8 Book 2006 is released. It was scheduled for release 9 today. But I just checked, and it still has not been 10 released yet. 11 Finally, there was a request for quotes 12 for auditor training that was issued on December 8th, 13 with bids due back by December 18th. We received two 14 bids. The successful bidder was Leita Hart, CPA. And 15 the training dates for the auditors will be the week 16 of March 5th through the 9th. 17 That concludes my report, and I will be 18 glad to answer any questions. 19 CHAIRMAN COX: Phil, one of the things 20 that we've talked about from the beginning of this 21 project is whether we have the resources that we need 22 to do the job. Now, as I understand the report you 23 just made, the bingo auditors are drafting these 24 documents. They get them as far along as they can get 25 them, then they go to a committee of people that are 0052 1 not bingo auditors, for review? 2 MR. SANDERSON: Yes, sir. 3 CHAIRMAN COX: Okay. And that would 4 include, I guess, Ms. Melvin? 5 MR. SANDERSON: Yes, sir. 6 CHAIRMAN COX: Ms. Pyka? 7 MR. SANDERSON: Yes, sir. 8 CHAIRMAN COX: And what others? 9 MR. SANDERSON: A representative from 10 Governmental Affairs, either Nelda or Colin. 11 CHAIRMAN COX: Okay. 12 MR. SANDERSON: And then we have -- of 13 course, Legal is involved. And I believe Ed Rogers 14 also sits in on some of those committees. 15 CHAIRMAN COX: Okay. Now, do the 16 auditors, the bingo auditors as they write those 17 rules, start with a blank sheet of paper and write 18 what they think should be written and then just pass 19 it along? Or is there a meeting at the beginning of 20 the process to be sure that everybody is more or less 21 on the same page and that the reviewers, those who 22 will ultimately review, agree at least conceptually 23 with the way the document is going to be drafted? 24 MR. SANDERSON: Currently that process 25 is not followed in that manner. The auditors 0053 1 initially do research to look at other states' 2 legislation and rules. They'll look at their other 3 processes and procedures, and then they start drafting 4 what they feel like would be beneficial for the task 5 we've been charged to conduct the audit activities. 6 Once they get that draft, then I'll review it and I 7 send a copy to Internal Audit, and they hold their 8 review of that product. And after that point, then 9 the committee of external bingo staff get together to 10 discuss the rule. 11 Right now we've only had one that has 12 gone through the whole process. We've got two or 13 three that are in the middle of the process. The 14 other rules that have been drafted by the staff are in 15 their final stages. And for the most part, based on 16 the first rule that went through, I think there was 17 pretty, you know, much agreement of what was in there 18 and what the final target was going to be. 19 CHAIRMAN COX: Okay. 20 MR. SANDERSON: In my mind, I think 21 we're moving in the right direction. And I've talked 22 with the internal auditor, Ms. Melvin, and she 23 feels -- you know, I can't speak for her. But, you 24 know, in our discussions, she feels that we're moving 25 in the right direction. 0054 1 CHAIRMAN COX: Do you believe that 2 you'll be able to meet or exceed the schedule that has 3 been set out for getting those rules in place? 4 MR. SANDERSON: I believe so, yes, sir. 5 Like I said, the majority of them are in their final 6 stages. There may be -- probably the March or April 7 meeting may have several rules for your consideration 8 on those two, which is well before the December 2007, 9 I believe, timeline on the majority of them. 10 CHAIRMAN COX: Okay. And so you believe 11 that we have sufficient resources in-house between 12 your auditors and the people that Director Sadberry is 13 make available to you, to get the job done? 14 MR. SANDERSON: I believe so, yes, sir. 15 CHAIRMAN COX: Okay. Ms. Melvin and 16 Ms. Pyka, would y'all come up. And I'll ask both of 17 you. And, Catherine, you can start -- and, Kathy, you 18 can follow up -- do you agree generally with Phil, 19 that we have the resources in place and that we're 20 proceeding ahead of schedule and that we're going to 21 have a good product when we're finished? 22 MS. MELVIN: For the record, Catherine 23 Melvin. 24 Yes, Chairman, I do. I generally agree 25 with Phil's comments. I do think that we should 0055 1 continue to consider the need for outside resources, 2 whatever that might look like, whether that might be 3 informal assistance from other state agencies or 4 perhaps even contracted assistance and expertise to 5 come in. You know, I would certainly encourage those 6 options also 7 CHAIRMAN COX: Ms. Pyka? 8 MS. PYKA: Thank you. For the record, 9 Kathy Pyka, Controller of the Lottery Commission. 10 I agree with Catherine's comments with 11 regard to, you know, continuing to review whether or 12 not we could look at otherwise resource or other 13 expertise that other state agencies might have in the 14 audit area that we're working on. I certainly feel 15 like, you know, in the areas that our office has been 16 sought out for expertise, we certainly have provided 17 that and will continue to do so, as needed by the 18 Bingo Division. 19 CHAIRMAN COX: Okay. You say will 20 continue to look at those, I think were the words that 21 both of you used. When will we stop looking? When 22 will we have a conclusion as to whether we need 23 additional resources or not? 24 MS. PYKA: Chairman, I believe that 25 that, you know, certainly is something that Phil will 0056 1 need to look at, as he's looking at these areas. In 2 the process that's being used, we're receiving the 3 output. So that needs to be a judgment of Phil, I 4 believe, and whether or not there's some expertise 5 skills out there that could be utilized to further 6 enhance what we're doing. 7 CHAIRMAN COX: Well, I certainly agree 8 with you that it's ultimately his responsibility; and, 9 yet, you are the subject matter experts, the two of 10 you. I look to you as understanding the kinds of 11 things that need to come out of this process as 12 resources for Phil. So I hope that you will work 13 closely with him and recommend to him, if you see any 14 need for outside resources, that he get them and help 15 him find them and put them in place. 16 MS. PYKA: Very well. Will do. 17 CHAIRMAN COX: Okay. Now, Catherine, 18 were you involved in the hiring of the trainer? 19 MS. MELVIN: Chairman, I was involved in 20 looking at the request for proposal that went out. 21 Phil shared with me proposed language regarding the 22 types of services that they were looking for, and I 23 provided some assistance in that. 24 And then once the proposals came in from 25 two vendors, Phil shared with me what those proposals 0057 1 looked like. We discussed those. I shared with him 2 my thoughts on what I believe that his auditors would 3 benefit -- the type of training that they would 4 benefit from. 5 Specifically we talked about the types 6 of qualities to look for in a trainer. I wanted to 7 advise him that he was looking for a trainer that 8 would tailor their training to the specific type of 9 auditing conducted by the Bingo Division and 10 specifically the type of auditing that they're looking 11 to doing in the future. 12 CHAIRMAN COX: Okay. So you're 13 satisfied that this is a qualified trainer and that 14 we'll benefit from this training? 15 MS. MELVIN: Yes, sir. 16 CHAIRMAN COX: Okay. 17 Now, Phil, just one more question. Have 18 you reached out to other agencies that do auditing of 19 the type that your auditors do and talked to them 20 about how they approach things and availed yourself of 21 knowledge that's within other state agencies on what 22 you're doing? 23 MR. SANDERSON: We have, yes, sir. And, 24 as I mentioned earlier, we had a workgroup of three or 25 fours auditors that went and met with the Texas 0058 1 Workforce Commission, the Texas Commission on 2 Environmental Quality, the Texas Department of 3 Insurance, and looked at, one, how their working paper 4 documentation is maintained and also at some of their 5 audit practices and audit procedures. 6 CHAIRMAN COX: Okay. One that I think 7 of -- and perhaps it's not relevant -- is the State 8 Controller. Have you talked to the State Controller? 9 The sales tax folks over there are pretty doggone 10 good. 11 MR. SANDERSON: I know they have talked 12 with someone at the Controller's office, I believe up 13 in Dallas. I don't know if anybody in the Austin area 14 has been over to the -- they have been -- I'm being 15 affirmed by Marshall, the Audit Manager, that they 16 have discussed some practices with the Office of the 17 Comptroller. 18 CHAIRMAN COX: Okay. Good. 19 Anything y'all want to add? 20 MS. PYKA: I have nothing further. 21 CHAIRMAN COX: Okay. Commissioner? 22 Thank you, Phil. 23 MR. SANDERSON: Thank you. 24 25 0059 1 AGENDA ITEM NO. V 2 CHAIRMAN COX: Item V, report, possible 3 discussion and/or action on third quarter Calendar 4 Year 2006 bingo conductor information. 5 Mr. Sanderson. 6 MR. SANDERSON: Once again, good 7 morning, Commissioner. Terry Shankle, the Accounting 8 Services Manager, will be operating the slide show as 9 I go through my notes. 10 I'm here today to present to you the 11 third quarter 2006 information as reported by the 12 licensed authorized organizations. Prize payout for 13 bingo in the third quarter were 77.4 percent, while 14 the prize payout percentages for instant bingo were 15 72.5 percent 16 Disbursements, other than prizes, as a 17 percentage of net receipts, the highest percentage 18 continues to be rent payments at 24.3 percent, 19 followed by salary for the callers, cashiers and 20 ushers at 23.5 percent, charitable distributions at 21 20.2 percent and lease payments to distributors, 12.2. 22 Janitorial services are 8.4 percent, and the cost of 23 goods sold is 7.2 percent, with the remainder of other 24 expenses all below 7 percent. 25 This pie chart is a graphical indication 0060 1 of what the percent each expense is as it relates to 2 total expenses, once again not including prize payouts 3 and not including charitable distributions. As a 4 percentages of expense, salaries for the janitorial, 5 callers, cashiers, ushers, security, legal and 6 accounting account for 43 percent of the total 7 expenses. Rent payments are 28 percent of the total 8 expenses, and the cost of goods sold is 22.5 percent. 9 If you recall, the first two quarters of 10 2006 saw instant bingo as the highest percentage of 11 sales in the product mix. In the third quarter, 12 regular bingo sales regained the lead, with 39 percent 13 of the sales. Instant bingo represented 37 percent, 14 and electronic card-minders represent 24 percent. 15 The average attendance per occasion for 16 the third quarter of 2004, 2005 and 2006 continues to 17 decline. This slide indicates that the average 18 attendance declined sharply from the third quarter of 19 2004 to the third quarter of 2005, with a slight 20 decrease in 2006. 21 While the net receipts for regular bingo 22 has decreased 9 point -- excuse me. I'm sorry. This 23 chart shows the net receipts for the third quarter of 24 each year from 2002 through 2006, and the net receipts 25 as being gross receipts minus prizes. As you can see, 0061 1 the net receipts for instant bingo have increased each 2 successive year $10.5 million between 2002 and 2006, 3 while the net receipts for regular bingo has decreased 4 9.3 million during the same time period. Overall, 5 that means that net receipts have only increased by 6 1.3 million, while gross receipts for the same time 7 period increased 24 million. 8 This last chart shows the prize payout 9 percentage for regular and instant bingo for the same 10 time period of the third -- each of the third quarters 11 for 2002 through 2006. As you can see, the payout 12 percentage for regular bingo has increased from 72 13 point -- to 77.6 percent, while instant prize payout 14 percentages increased from 70.4 percent to 73.4 15 percent in 2005, and then it decreased to 72.6 percent 16 for 2006. This is consistent with the information 17 that was reported in the first and second quarters of 18 this year. 19 Additionally in your notebook is 20 information that was provided as an analysis that was 21 performed by Susan Beasley, Program Specialist for the 22 Office of the Controller and includes additional 23 spreadsheets. I would like to bring to your attention 24 the spread sheet that's titled "Third Quarter Data 25 Comparison for Calendar Years 2001 through 2006." 0062 1 You will note that in comparing the 2 third quarter of each year from 2001 to 2006, gross 3 receipts, prizes and net receipts have all continued 4 to each increase each year beginning in 2002. 5 Remember that the third quarter of 2002 is when the 6 event tabs were introduced into the bingo market. 7 It is also interesting to note that 8 while the required distributions has declined over the 9 past several years, the actual distributions have 10 increased over the past three years. Additionally, 11 the number of organizations who conduct bingo 12 continues to decrease, as well as the attendance. 13 However, when you're comparing 2005 to 2006, the 14 decrease is not as drastic. 15 That concludes my report for this agenda 16 item, and I'll be glad to answer any questions. 17 CHAIRMAN COX: Thank you, Phil. 18 AGENDA ITEM NO. VI 19 CHAIRMAN COX: Item VI, report by the 20 Charitable Bingo Operations Director and possible 21 discussion and/or action on the Charitable Bingo 22 Operation Division's activities. 23 Mr. Sanderson. 24 MR. SANDERSON: Commissioners, in your 25 notebook is the report on the activities of the Bingo 0063 1 Division. I would like to point out that a BAC 2 meeting is scheduled for next Wednesday, February the 3 7th, and the agenda for that meeting is scheduled to 4 be submitted to the Secretary of State this afternoon. 5 We are currently working on a procedure 6 to identify the process for BAC nominations and will 7 have a full report for your consideration at the next 8 Commission meeting. 9 As I mentioned earlier, we're 10 circulating a draft of a rule that will help define 11 the terms "reasonable" and "necessary" as well as the 12 new bond rule. Both of these rules will be on the 13 agenda for the next Commission meeting for your 14 consideration. 15 There is also a bingo seminar for the 16 American Legion this Friday at the Omni South that we 17 have representatives go and present about an hour and 18 a half presentation of the status of bingo in Texas 19 and how it affects the American Legions. 20 Additionally, there is a bingo 21 legislative workgroup that has been formed at the 22 request of Chairman Flores that have met several times 23 over the past two months. As a result of these work 24 sessions, staff have had several assignments and work 25 is being compiled to respond to that information. 0064 1 That concludes my report, sir. 2 CHAIRMAN COX: Thank you, Phil. 3 AGENDA ITEM NO. VII 4 CHAIRMAN COX: Item VII, report, 5 possible discussion and/or action on lottery sales and 6 revenue, game performance, new game opportunities, 7 market research and trends. 8 Ms. Pyka, Mr. Tirloni. 9 MS. PYKA: Good morning, Commissioners. 10 My name is Kathy Pyka, Controller of the Lottery 11 Commission. And with me to my right is Robert 12 Tirloni, our Products Manager. 13 Our first chart this morning reflects 14 revenue from sales or net revenue to the state through 15 the week ending January 20, 2007. Total sales through 16 this 21-week period amounted to $1.4 billion, while 17 estimated net revenue to the state for this period was 18 $349.6 million. 19 Our Fiscal Year 2007 sales to date 20 reflect a $49.9 million decline from Fiscal Year 2006 21 sales. And the sales decline includes a one percent 22 or $11.8 million decline in instant ticket sales and a 23 10 and a half percent, or $38.1 million decline, in 24 on-line game sales. 25 Focusing on our on-line game sales 0065 1 first, of the $38.1 million decline, 36 percent -- 2 $36.6 million, or basically 96 percent of that total, 3 is attributed to the Mega Millions game. 4 This decline in Mega sales is not just 5 limited to our state, as many of our Mega directors 6 have experienced concern about our reduced sales and 7 our Mega Million jackpot estimation calls. And Robert 8 is going to provide you a little bit more information 9 about that decline in Mega sales. 10 MR. TIRLONI: Good morning, 11 Commissioners. For the record, my name is Robert 12 Tirloni. I'm the Products Manager for the Commission. 13 As Kathy just stated, Mega is down 14 $36 million in Texas, and that is attributable to lack 15 of large triple-digit jackpots. 16 CHAIRMAN COX: Robert, about what 17 percent is that down? 18 MS. PYKA: Overall percentage is about 19 35 percent from Fiscal Year 2006. 20 CHAIRMAN COX: The $38 million is a 35 21 percent decline? 22 MR. TIRLONI: The $36 million decline on 23 Mega is the 35 percent. 24 CHAIRMAN COX: Thirty-five. Okay. 25 Thanks. 0066 1 MR. TIRLONI: The last time the game has 2 been over $200 million was in April of 2006. About 3 four or five months later, the game climbed up to 4 about $163 million advertised jackpot. That was in 5 September, and there was a jackpot ticket sold. And 6 then just this month, we climbed up into the triple 7 digits again, got to about $122 million, and then we 8 had jackpot tickets sold here in Texas. 9 So every time the game seems to get up 10 to that attractive level for players, where we start 11 to see a positive blip or a positive increase in 12 sales, there seems to be a jackpot win. 13 As Kathy mentioned, Texas is not the 14 only state experiencing these types of declines on the 15 Mega Millions game. Most recently there has been 16 press about Massachusetts, which is seeing an almost 17 47 percent decline in their Mega sales. So the 18 directives are concerned about this; they're talking 19 about it. There is going to be a meeting that will 20 take place next week, and Director Sadberry is going 21 to provide you-all more information about that meeting 22 under Item XIII in today's agenda. 23 MS. PYKA: Continuing on, our net 24 revenue to the state is reflecting a 5.9 percent 25 decrease as compared to out $371.6 million figure in 0067 1 the same period as Fiscal Year 2006. 2 And going back to maybe the previous 3 slide -- I'm sorry, Robert -- our prize expenses 4 you're notice is at 63.2 percent, which is certainly a 5 slight increase over where we were in Fiscal Year 6 2006. 7 Now moving on our next slide, this 8 includes our Fiscal Year 2007 sales to date by game. 9 76.9 percent, or slightly over one billion, is from 10 our instant ticket game; eight and a half percent of 11 sales, or $120.3 million, from Pick 3, followed by 5.6 12 percent of sales and $80.3 million from Lotto, and 13 then 4 percent and $56.3 million from Mega. 14 And then our next slides provides the 15 graphical presentation of sales by game, reflecting 16 each game, amounting to the $1.4 billion in total 17 sales. 18 And now Robert will cover some 19 information on our instant sales. 20 MR. TIRLONI: Commissioners, this is a 21 graphical representation of the $1.1 billion in 22 instant ticket sales realized through the week ending 23 January 20th. There is not much change in the prize 24 points. The $5.00 is our leading prize point, 25 followed by the two and then followed by the ten. And 0068 1 again, we've not seen any change in this for quite 2 sometime. 3 Commissioners, I do have an update for 4 you on Mega Millions. As I mentioned just moments 5 ago, we did have a jackpot ticket sold in Texas for 6 the drawing on Tuesday, January 9. The jackpot was 7 advertised at $122 million. When all was said and 8 done and all the sales were totaled, the jackpot 9 really support -- the sales really supported an 10 annuitized jackpot of $125 million. The ticket that 11 was sold in Texas was a cash value option ticket sold 12 by Taylor Petroleum Companies Store No. 80 in 13 Amarillo. 14 The cash value option is approximately 15 $73.5 million. It is the fourth jackpot ticket we've 16 sold; it also happens to be the largest jackpot ticket 17 we've sold. My staff is working with a potential 18 claimant, so we have been in contact with someone 19 regarding this prize. And the retailer that sold the 20 ticket will be receiving a one million dollar retailer 21 bonus. 22 CHAIRMAN COX: Robert -- 23 MR. TIRLONI: Yes, sir. 24 CHAIRMAN COX: -- you mentioned, I 25 think, that sales supported a jackpot of $125 million. 0069 1 MR. TIRLONI: That's correct. 2 CHAIRMAN COX: Well, how is the 3 advertised amount determined and how do we participate 4 in that? 5 MR. TIRLONI: Every Tuesday and every 6 Friday, there is a conference call where all the Mega 7 Millions states participate. It's usually the 8 financial people, such as Kathy's staff, in Texas. 9 They all participate and they all provide their sales 10 estimate for sales for that current drawing or that 11 night's drawing. And then they also project forward 12 what sales will be, not unlike what we do in-house for 13 our Lotto Texas estimation. 14 So they're looking at sales for the 15 current drawing, sales for the upcoming drawings; and, 16 obviously, they look at the interest rate factor or 17 the interest factor, as we do. And after they all 18 agree on a sales estimate, the directors then join the 19 call and agree on setting a jackpot amount for the 20 next drawing. 21 I don't know if Kathy wants to add 22 anything. 23 MS. PYKA: I think the only other thing 24 I would add is, Commissioners, in the last page of 25 your weekly sales packet, we do analyze each state's 0070 1 estimate and how close they are to actual sales. So, 2 for example in this chart, we always flag ourselves 3 with blue, and you can see those states in which their 4 sales estimate came in short and then those states in 5 which their actual sales came in a bit higher than 6 their estimate. So here we are tracking each 7 individual state. And, I mean, it's important 8 information for us to look at as we're working through 9 each of those weekly projections. 10 CHAIRMAN COX: Okay. Director Sadberry, 11 you participate in that process? 12 MR. SADBERRY: Chairman, for the record, 13 Anthony Sadberry, Executive Director. 14 Yes, sir, I am the Texas director who 15 participates. I have a standing order signed in 16 February of last year appointing Kathy Pyka, Agency 17 Controller, as my designee whenever I do not 18 participate. 19 I would say on an average, I have 20 participated about one-half to slightly more than 21 one-half, generally speaking. And when the jackpot is 22 at a lower tier, such as the $12 million starting 23 point and working from that point forward, my 24 participation might be less. As the jackpot grows, I 25 participate more regularly. I participate by 0071 1 observing the Finance Committee discussion on sales 2 projections, the interest factor and other pertinent 3 considerations. And then I participate in the actual 4 director meeting concerning the jackpot estimation. 5 In addition, I request that Legal 6 Services provide at least one representative, an 7 attorney and staff who are with that attorney, to 8 observe the proceedings. We then will have minutes of 9 each jackpot estimation proceeding prepared and 10 distributed to various persons within the agency, 11 concerning both the Finance Committee discussions and 12 the directors' meeting, the results of the estimation 13 call, and any additional business -- sometimes 14 additional business is conducted at the end of those 15 calls by the directors -- any additional business that 16 is conducted, to ensure compliance with the Mega 17 Millions procedures and other considerations are met 18 and to perpetuate the positions taken by the various 19 directors. 20 For example, there are instances in 21 which there may be projected shortfalls, and we 22 capture that data and record each state's position by 23 roll call that we requested in many instances, so that 24 we have a permanent record, certainly within our 25 agency of these proceedings. Attached to those 0072 1 minutes will be the jackpot estimation and materials 2 from the entire process that is again contained in the 3 permanent record. 4 CHAIRMAN COX: What would happen -- what 5 would have happened had we advertised $122 million in 6 sales that only supported, say, $115 million, and here 7 we are in Texas? And so we've got a winner in Texas, 8 so we're responsible for paying, I guess? 9 MS. PYKA: We're responsible for paying 10 the difference between the jackpot that is published. 11 And the actual sales is shared equally amongst the 12 12 states. So we share that difference. 13 CHAIRMAN COX: Do we pay on advertised 14 or on actual? 15 MS. PYKA: Pay on advertised. 16 MR. TIRLONI: Advertised. 17 CHAIRMAN COX: So if we advertise 122, 18 we pay the cash value equivalent of 122. Based on the 19 computation in this case of the Texas State 20 Controller's office, would Texas buy the securities 21 with the Texas -- 22 MS. PYKA: No. The State of Virginia 23 does. 24 CHAIRMAN COX: The State of Virginia 25 buys those. So they are always -- 0073 1 MS. PYKA: Actually, we buy them. But, 2 I mean, they're doing all the transfer, the collecting 3 of all the funds from the different states. And then 4 they actually transfer the funds to us, and then we do 5 buy through the State of Texas. 6 CHAIRMAN COX: So if there were to be an 7 annuity, they would send us the money and we would buy 8 it through the State Controller's office? 9 MS. PYKA: Right. 10 CHAIRMAN COX: Just cash value, the 11 State Controller's Office doesn't get involved. 12 Virginia sends us the money, and Texas Lottery pays 13 the winner? 14 MS. PYKA: Correct. 15 CHAIRMAN COX: Okay. But the winner is 16 going to get what's advertised, regardless, and the 17 states are going to make up, pro rata, the difference? 18 MS. PYKA: Correct. 19 CHAIRMAN COX: Even though it might be 20 one state that had an inflated -- 21 MS. PYKA: Estimate. 22 CHAIRMAN COX: -- estimate that caused 23 the problem, they don't get singled out to bear the 24 responsibility? 25 MS. PYKA: No, they do not. 0074 1 CHAIRMAN COX: How comfortable are you, 2 Kathy, with the integrity and the competence of the 3 other states in their estimations? 4 MS. PYKA: I think in general most 5 states do a reasonably good job. 6 CHAIRMAN COX: That's a well-hedged 7 statement. 8 MS. PYKA: The states with the larger 9 shares -- California, New Jersey, New York -- I think 10 do a fantastic job on their estimation. We follow 11 them closely. And there's also the opportunity, as 12 finance members, when we have a question about an 13 estimate, we can ask the other members of the state 14 about their estimate. For example, if it seems 15 unreasonably high as they're projecting that day, you 16 know, there is no harm in asking, "What is the basis 17 for that increased estimate? It does look high for 18 us." 19 And, as Anthony noted, we do record all 20 of the estimates as well as what all states believe 21 the growth will be for the next jackpot. In our 22 state, we develop what we believe that estimate will 23 be for the growth to the next roll, and we record 24 that. And then we record what the conclusion is of 25 all states. 0075 1 CHAIRMAN COX: Thank you. 2 Robert, I think I interrupted you before 3 you concluded. 4 MR. TIRLONI: No, sir, you did not. 5 That is the conclusion, but we would be happy to 6 answer any other questions either of you have. 7 COMM. CLOWE: Kathy, along the lines 8 Chairman Cox was asking, to your knowledge, how many 9 instances have there been where there was a shortfall 10 under the advertised jackpot in Mega Millions? 11 MS. PYKA: I'm not aware of many 12 instances, Commissioner Clowe. But one of the 13 concerns that we have had is where the directors will 14 elect to advertise a jackpot that has a shortfall. 15 For example, they'll elect to roll to $30 million 16 while the jackpot support that is identified may 17 support $29.8 million. And so, as Director Sadberry 18 noted, we request a roll call in those instances. And 19 Texas has played the conservative route and only 20 supported rolling to jackpots that could be supported. 21 And so there will be evidence of a vote by Texas that 22 stay with $29 million and the other state roll into 23 30. 24 COMM. CLOWE: I wanted to make that 25 clear on the record, that that was my understanding, 0076 1 that Director Sadberry has always taken the 2 conservative position and has asked for a roll call 3 vote so that we are perhaps outvoted but on the record 4 as favoring the more conservative position in that 5 group. 6 MS. PYKA: That is correct, Commissioner 7 Clowe, and there's been several instances of that 8 occurring. 9 COMM. CLOWE: And we knew when we went 10 into this game that we would not control it like we do 11 our own on-line games, but we want our position 12 recorded clearly for the record. 13 And then, Mr. Chairman, with your 14 permission, I have another question. 15 CHAIRMAN COX: Please. 16 COMM. CLOWE: Back to your revenue 17 reporting part of your report, Ms. Pyka, we are 18 falling behind. 19 MS. PYKA: Yes. 20 COMM. CLOWE: And there is a question in 21 my mind, based on my reading of the current 22 Legislative Budget Board Report, where the adoption of 23 a controller estimate for our revenue is well over a 24 billion dollars, how that figure is going to be 25 reconciled with our figure. It concerns me. Could 0077 1 you elaborate on that? 2 MS. PYKA: Certainly. And, Commissioner 3 Clowe, in the next item that we'll be covering, I 4 actually have a PowerPoint in which I will provide an 5 overview of the biennial revenue estimate by fiscal 6 year, as well as what we had projected, but I'll cover 7 that now if you wish. 8 You are correct in their revenue 9 estimate and the fact that they are slightly between a 10 billion 43 for Fiscal Year 2007 -- Robert, maybe let's 11 pull that up. Looks like you already have. 12 COMM. CLOWE: If you want to cover that 13 when you have it cued up, that's fine. 14 MS. PYKA: No. We'll do it right now. 15 COMM. CLOWE: Good. 16 MS. PYKA: So here we have the 17 PowerPoint of their actual BRE. We'll start first 18 with our actual collections. This is transfers to the 19 state, to the Foundation School Fund. So actual 20 collections for Fiscal Year 2005 were a billion 16; 21 Fiscal Year 2006, a billion 29. 22 So then moving on to the BRE that's been 23 published by the Comptroller, Fiscal Year 2007 is at a 24 billion 43, increasing to a billion 57, all the way up 25 to a billion 72 in Fiscal Year 2009. We reflected a 0078 1 flat transfer to the State Foundation School Fund 2 transfer in our LAR, at a billion 31. And this was 3 based on our projection of the sales estimate of $3.82 4 billion. 5 And the basis for our projection was, we 6 don't believe that sales growth is likely to be 7 sustainable in the future in the fashion that we have 8 had in the past; whereas, the Comptroller's BRE does 9 reflect the continued sales growth pattern in their 10 BRE. 11 I will note, while we see those 12 differences between our estimate and their BRE, the 13 LBB's budget recommendation as published today is 14 utilizing our sales and transfer figure in their LBB 15 budget recommendation that will begin before the 16 Senate Finance Committee on Monday. So at this point 17 in time, the LBB has used our figures, which are 18 definitely the most conservative or the more 19 conservative between the two. 20 You know, I think it's important when we 21 look at that BRE for 2009, that represents almost a 22 $4 billion sales figure for lottery games, at a 23 billion 72. 24 COMM. CLOWE: Mr. Chairman, I think this 25 needs to be pointed out and we need to be aware of the 0079 1 fact that there is a difference in these estimates. 2 My sense is that we're running out of steam on the 3 growth of our instant ticket development. And our 4 on-line games are static, in some cases losing ground. 5 I don't see the Controller's estimate as 6 being realistic. And I think we need to acknowledge, 7 in perhaps appearances that you and Director Sadberry 8 make before legislative committees, that under the 9 current rules, we are beginning to reach that level of 10 contribution that will be difficult to sustain and 11 maintain, if you feel that way and Director Sadberry 12 feels that way. 13 I think it's a thing that we need to 14 sound an early warning on. And we want to avoid a 15 surprise to anybody that is looking at our 16 contribution generation to the Foundation School Fund, 17 so that everybody is aware of this maturity issue. 18 And I think that the staff and the 19 instant ticket providers, who have been very 20 innovative in their creativity and their ability to 21 generate revenue but at a reduced income or net return 22 to the state -- and this current period that is 23 included in Ms. Pyka's report shows the slippage most 24 tangibly that I've seen it in the last few years. And 25 so I want to bring that to the attention of the record 0080 1 so that it won't come as a surprise to anybody. 2 CHAIRMAN COX: That's an excellent 3 point, Commissioner, and leads me to several 4 questions. 5 Kathy, do you have a contact in the 6 Controller's office that you have a dialogue with? 7 And do they know where we're coming from and do we 8 know where they're coming from? 9 MS. PYKA: Yes, sir, we do. We have a 10 contact there that's within the revenue estimation 11 area. He is an economist that has been worked on the 12 lottery projections for many years. He certainly 13 appreciates and respects the fact that we believe that 14 the lottery growth in sales is likely to be 15 unsustainable. 16 They're using the regression model. He 17 shared the regression model with me. And it includes 18 everything from population growth to many of those 19 other economic factors we would expect to see in a 20 regression model. And in looking at the growth from 21 Fiscal Year 2005 to Fiscal Year 2006, which we saw 22 that three percent growth, they utilized that growth 23 as well as our historical sales growth in their model. 24 CHAIRMAN COX: And I think that our 25 estimation that it will be flat is a good position to 0081 1 be taking; and, yet, the approach the Controller is 2 taking is certainly more scientific. I wonder whether 3 the information that Prof. Huff and Dr. Jarrett have 4 developed with regression is similar to that that the 5 Controller is using. Have we made any comparisons of 6 those? 7 MS. PYKA: I have not to date, but I 8 will be happy to look at that and -- 9 CHAIRMAN COX: I think it's real 10 important that you've done what you've done, which is 11 understand their numbers and help us -- or help them 12 understand ours. Now, you said the numbers that the 13 LBB is using are our numbers? 14 MS. PYKA: Yes, sir. 15 CHAIRMAN COX: And, yet, at the end of 16 the day, after the budget is adopted, it has to be 17 certified by the Controller. Is that correct? 18 MS. PYKA: That is correct. 19 CHAIRMAN COX: So how will that all wash 20 out? 21 MS. PYKA: The Comptroller does not have 22 to go back and certify with this exact number. I 23 mean, they are open to make adjustments as they work 24 through the budget process, so there's room to give 25 there. And this is not uncommon from years past in 0082 1 which the LBB's budget recommendation was developed on 2 one number and the Comptroller's number was developed 3 on another. So we've got historical evidence there. 4 CHAIRMAN COX: And one of the things 5 that I think would be very important for the hearings, 6 as we prepare for those, is that we be prepared to 7 respond to questions as to why we didn't use 8 regression analysis but, rather, flat-lined it. 9 MS. PYKA: Okay. Very well. Will do. 10 CHAIRMAN COX: Excellent point. 11 COMM. CLOWE: And I think, to add to 12 what Chairman Cox has said, you know, we're not 13 providing a state service, and it's not going to be 14 connected in this analysis to growth of population in 15 the state or any of the other standard revenue- 16 producing items that most state agencies come away 17 with. The fact is, our market is now made up of fewer 18 people putting more dollars into our product. That is 19 not a positive position to be in from the standpoint 20 of a business person, as I see if. 21 MS. PYKA: I agree. 22 COMM. CLOWE: And I certainly think that 23 needs to be called to your attention in your 24 estimates. I think maintaining a flat contribution, 25 if in anything, is a positive outlook, and I'm 0083 1 concerned about that. I'm not sure that we're not 2 going to see it begin to dip. And I just think that's 3 an early warning that ought to be sounded, based on 4 the knowledge that we have, and I think that's our 5 responsibility. 6 MS. PYKA: Will do. 7 CHAIRMAN COX: Excellent point, 8 Commissioner. 9 And, Kathy, I would suggest that, if you 10 haven't already done so -- Commissioner Clowe, of 11 course, is referring to our demographic study -- that 12 you share that with the Controller's office and be 13 sure that they have all the information we have, 14 because it's easy to look at the population of the 15 State of Texas and perhaps the demographic 16 characteristics of that growth and say, "Hey, lottery 17 sales will go up as long as population goes up." But 18 we have indications that it may be to the contrary. 19 MS. PYKA: Certainly. I'll definitely 20 share that with him if he doesn't have it already. I 21 believe he does, but I'll follow up with him. 22 CHAIRMAN COX: Excellent. Now, one last 23 question on the Mega Millions estimation process. 24 Kathy, you indicated that sometimes these folks 25 outvote Director Sadberry and round up, if you will. 0084 1 MS. PYKA: Yes. 2 CHAIRMAN COX: Tell me about how much 3 rounding up and is it getting bigger or is it just 4 kind of consistent? Is there a trend there that you 5 don't like or is it just a little bit of rounding up? 6 MS. PYKA: I wouldn't -- as we look at 7 the early jackpots, the rolls of 15, 18, 21, you know, 8 it's generally something under $100,000. But -- 9 COMM. CLOWE: $100 million. 10 MS. PYKA: The deficit -- 11 COMM. CLOWE: Oh, the deficit. Okay. 12 MS. PYKA: -- when they round up. So 13 when we're looking at that deficit, it's $99,000, 14 $105,000, somewhere in that nature. But as we get to 15 the larger jackpots and the higher millions, closer to 16 $100 million, it's not uncommon that as we reach like 17 a $200,000 deficit, for there to be a desire to maybe 18 roll from, instead of 89 but 90, has been my 19 experience that I have witnessed in the last year. 20 And certainly Director Sadberry might want to add to 21 that in what his experience has been. 22 MR. SADBERRY: Well, Commissioners, one 23 of the concerns we have is that very thing, that the 24 trend or the inertia, if you will, is not established 25 where deficit projections are acceptable as the norm. 0085 1 And that then is allowed to begin a progression where 2 it increases as the jackpot grows. 3 And so sometimes when we are vying as 4 what would be perhaps acceptable, if it's ever 5 acceptable from a standpoint of a definite, which is 6 not usually for us, from our standpoint, but even if 7 that be the case, where you can explain it from a 8 business standpoint, that it not be allowed to go 9 unchallenged on the matter of the principle of it so 10 that it does not become larger as the jackpots grow. 11 Sometimes there is the sense that we 12 should project by a $10 million increment or sometimes 13 as a preferred number that is considered to have a 14 certain appeal to it. And those become the driving 15 forces of consideration as opposed to considering what 16 that is doing to the deficit when we're doing that. 17 And we have made a very conscious 18 position on two points. One is that we continually 19 exercise stewardship over these funds and consider the 20 deficit, if any, and to make our voice heard. And 21 often that is recognized, that Texas will probably 22 oppose this, but we'll do it anyway. 23 Well, to that extent, then that's to us 24 a good barometer of what purpose we serve in this 25 process -- not to do it arbitrarily, not to do it to 0086 1 state a static position, but to recognize that we have 2 a stewardship duty, but also that we are very 3 conscious of requiring that the procedure be followed; 4 that is, the requisite numbers of directors 5 participate. Like myself, there are others who have 6 designees. And the agreements speak to directors 7 participating and having the responsibility for the 8 outcome. And when those procedures are not met, it's 9 not unheard of that Texas will call for a recount, if 10 you will, a reconvening of the process. 11 So to answer the question you've raised, 12 I have not reached the point where I feel we are at 13 risk or in jeopardy. And I assure you I will notify 14 you if that point is ever reached. But I do have a 15 concern that the acceptable level of deficit may be 16 increasing, certainly as the jackpots grow. And that 17 is not generally acceptable to Texas, even though we 18 recognize the reason for that is to offset the sales 19 decrease. 20 And as Robert mentioned earlier, and I 21 will address it, there are other initiatives that Mega 22 Millions is looking at, including joining forces with 23 Powerball, that collectively will address these types 24 of concerns. But I'll point out, for example, Mega 25 Millions does guarantee payment on the annuitized 0087 1 jackpots at the advertised amount; whereas -- and I 2 don't want to speak out of turn, since we haven't 3 specifically studied this -- but just in general 4 discussion, my understanding is that may not be the 5 case with Powerball. 6 So those are the kinds of 7 reconciliations we'll have to make as we go forward 8 with this notion of potential joint enterprise. My 9 bottom line point is, we are very conscious of this 10 consideration, and we're very mindful of it. It is a 11 matter of concern to us, and we go on record stating 12 the -- when you say "conservative approach," we like 13 to think of it in terms of the responsible approach, 14 that ultimately we're protecting the assets of the 15 state. 16 CHAIRMAN COX: Thank you very much. 17 So I guess I can summarize by saying, I 18 don't have to be concerned about sales supporting 95 19 million and they're saying, "Let's just round it up to 20 a hundred." That kind of thing isn't happening? 21 MS. PYKA: No, sir. 22 CHAIRMAN COX: And just out of 23 curiosity, Director Sadberry, you have designated your 24 Chief Financial Officer as your designee. Is that 25 typically what the other directors have done? 0088 1 MR. SADBERRY: Well, interestingly, that 2 is I think the trend that I'm seeing of recent, such 3 as in the State of Washington did that very recently. 4 In that particular meeting, which is within the month, 5 there was some attention directed to whether that may 6 constitute a conflict. And some directors indicated 7 they wanted to search the issue and look into it and 8 see if that is a matter of concern. 9 And, by the way, whenever I don't 10 participate directly in the estimation process, I do 11 read the minutes very carefully. And in any of the 12 meetings I've been in since then and any of the 13 minutes I've read since then, it does not appear there 14 has been a follow-up on that issue. I will tell you, 15 first of all, many times -- most of the times Kathy 16 and I are both there, even when I'm there. 17 And whenever Kathy is acting in my 18 stead, she removes herself from the finance portion of 19 that process so there is no potential for a conflict 20 of interest. I think it's a reasonable and 21 responsible position to take. I looked at my order. 22 In fact, we were recently asked by the Mega Millions 23 group to reconfirm our designees, and I was very -- 24 without hesitation reconfirmed Kathy. I looked at my 25 order and didn't see any need for revision to that. 0089 1 And that's the position I would take, and I don't have 2 any intention to change that position. 3 Now, I'm obviously open to any 4 discussion by the directors on that at any point it 5 should come up, either in one of these calls or in any 6 of our planned meetings. But that's the position I'm 7 taking at this time. 8 CHAIRMAN COX: Have they put forth any 9 compelling arguments why the financial officer should 10 not be the designee? 11 MS. PYKA: They have not. We understand 12 that there's two states that intend to share that by 13 e-mail. But that was about two weeks ago that that 14 was discussed on the phone call. But I expect we'll 15 see something in the near future. 16 CHAIRMAN COX: So does this mean they 17 just don't like you? 18 MS. PYKA: No. 19 CHAIRMAN COX: Of course not. 20 MS. PYKA: This came up with the 21 Washington designee, not with me. 22 CHAIRMAN COX: Okay. 23 (Laughter) 24 MR. SADBERRY: They had my order. We 25 shared that order with them a year ago, and they have 0090 1 said nothing. 2 CHAIRMAN COX: Well, that's a very 3 informative report, and I'm pleased that both of y'all 4 are right on top of all of that. These folks are good 5 folks. Maybe they're not quite as careful as we are. 6 And hopefully some of our care which rub off on them. 7 I know it won't work the other way. 8 MS. PYKA: Correct. 9 COMM. CLOWE: Mr. Chairman, I might 10 point out that I think we've had this discussion 11 before relative to our jackpot estimation on Lotto 12 Texas. And I think Controller Keel pointed out to us 13 in his audit that we cannot justify some of the 14 jackpots that we declared, and I think the situation 15 here is exactly the same. 16 And we told the Controller and we told 17 the Legislature that we were being prudent, but there 18 was occasion when we wanted to advertise a jackpot 19 that we knew was in excess of what anticipated sales 20 were. That's a practice we've adopted by rule in this 21 Commission. And we believe we are prudent in that, 22 and we are very careful stewards of that process. 23 And I'm hearing in this report this 24 morning that the same care is being exercised with 25 oversight from our staff in Mega Millions. And again, 0091 1 I want to always point out, we don't control that 2 game. We're one of 11, and that's 1/11th of the vote. 3 But I felt like I was hearing the same thing again in 4 the approach that we have in our process that's being 5 adopted here. And thanks to your efforts, I think the 6 other 10 are listening to us now, maybe better than 7 they did at the beginning of this process. 8 MS. PYKA: I would agree. 9 CHAIRMAN COX: And I will say that in 10 the period of time that I've been looking at the 11 jackpots that we advertise -- and I look at them every 12 Wednesday and every Friday with Ms. Melvin -- we do 13 not round up; we round down. So there is only that 14 subtle difference, but it's an important one, I think. 15 COMM. CLOWE: And just for my freshening 16 of my memory, we're still moving by rule up a million 17 from 4 million, starting on the next three rolls, to 18 7 million. Is that right? 19 CHAIRMAN COX: No, sir. I believe that 20 we're rolling by one million at each 4, 5, 6, 7, 21 et cetera, until sales support the number. And then 22 we're switching over to the number that's supported by 23 sales. 24 Now, when I first started doing this -- 25 and, Kathy, correct me if I'm wrong -- but I'm 0092 1 thinking that we broke even at nine or 10 million. At 2 that point, sales supported the advertised jackpot. 3 We're now in the 11 to 12 kind of range. 4 MS. PYKA: Right. 5 COMM. CLOWE: And so by policy, we have 6 extended what was initially, after the 4 million first 7 jackpot, I think -- was it three or four rolls? 8 MR. TIRLONI: It was four. 9 COMM. CLOWE: It was four. And we went 10 to 8 million? 11 MR. TIRLONI: It was the first four, 12 yes. 13 COMM. CLOWE: And then we changed that 14 by rule, and we are advancing it, as Chairman Cox 15 says, by a million, until it equals sales, as a matter 16 of policy? 17 MR. TIRLONI: That's correct, 18 Commissioner. 19 COMM. CLOWE: And then, Chairman Cox, 20 beyond that point, if sales don't support that, we are 21 rounding down, as a matter of policy? 22 CHAIRMAN COX: That's correct. I have 23 seen no instance where we did not round down. 24 COMM. CLOWE: That's very prudent and 25 very conservative, in my opinion. 0093 1 CHAIRMAN COX: Anything else on this 2 item? 3 COMM. CLOWE: Thank you. No. 4 CHAIRMAN COX: Thank you very much. 5 MR. TIRLONI: Thank you. 6 AGENDA ITEM NO. VIII 7 CHAIRMAN COX: Item No. VIII, report, 8 possible discussion and/or action on transfers to the 9 State and the agency budget. 10 Ms. Pyka. 11 MS. PYKA: Yes. For the record again, 12 Kathy Pyka, Controller for the Lottery Commission. 13 Tab VIII includes information on the 14 agency's financial status. The first report in your 15 notebook reflects transfers and allocations to the 16 Foundation School Fund as of November of 2006. Total 17 transfers to the state amounted to $250.6 million 18 through the first quarter of Fiscal Year 2007. And 19 this does represent a minimal increase over the total 20 amount transferred in November of 2005. And the 21 reason that that was a minimal increase at the end of 22 the first quarter is because that was our data through 23 the first quarter, and now we're at the point of 24 January data. 25 The second page of your notebook 0094 1 includes the detailed information for the monthly 2 transfers. Of the $250.6 million transfer to the 3 state, $232.9 million was the amount transferred to 4 the Foundation School Fund, with a balance of 5 $17.7 million transferred from unclaimed lottery 6 prizes. 7 And the last document in your 8 notebook -- 9 CHAIRMAN COX: Kathy, let me stop you 10 there. $17.7 million in unclaimed prizes so far this 11 year? 12 MS. PYKA: Yes. 13 CHAIRMAN COX: What's the biggest 14 unclaimed prize that we have had this year, if you 15 recall? 16 MS. PYKA: I do not. I'll have to go 17 look at the detail when I'm getting that summed up. 18 CHAIRMAN COX: Are there some pretty big 19 ones in there or is it mainly the $2.00 stuff? 20 MS. PYKA: There has to be a big one in 21 that one. I'll go look at the detail, and I can 22 provide that as a supplemental to you. 23 So then moving to the last document in 24 your notebook, which includes a report of the sales, 25 expenditures, transfers from Fiscal Year 1992 to date, 0095 1 our total cash basis transfers to the Foundation 2 School Fund, again through November, were 3 $250.6 million, with a cumulative transfer of 4 $8.9 billion through that period. So we'll reach the 5 $9 billion mark on our next transfer. 6 And then the last item behind the pink 7 divider in your notebook is our Fiscal Year 2007 8 method of finance summary for the Fiscal Year 2007 9 operating budget. This is the first quarter through 10 November 30th. And our lottery account budget is 11 $181.4 million. And of that amount, we've expended 12 22.2 percent of the total on-line for expenditures 13 through the first quarter. 14 And then our bingo operations budget, 15 funded by general revenue, is $13.5 million. And as 16 of November 30th, they're expended $26.2 million. 17 That's not unreasonable because we had the first 18 quarter of allocations included. And so if you take 19 out those allocations, we get back to where lottery 20 is, at 22.2 percent. 21 So everything is on track for our first 22 quarter expenditure pattern that we would expect. 23 CHAIRMAN COX: So that 22.2 versus 25 -- 24 26.2 versus 25? 25 MS. PYKA: Right. 0096 1 CHAIRMAN COX: So right in the ballpark? 2 MS. PYKA: Right in the ballpark for 3 where we need to be. 4 This concludes my presentation on the 5 financial stuff. I would be happy to answer any 6 questions. 7 CHAIRMAN COX: And your presentation on 8 the budget, you have covered that completely in 9 response to Commissioner Clowe's question? 10 MS. PYKA: Right. I went ahead and 11 moved forward with the presentation on the biennial 12 revenue estimate in the previous tab and did not 13 include it again in this one. 14 CHAIRMAN COX: Okay. So we have 15 concluded, then, Item VIII? 16 MS. PYKA: Yes. 17 AGENDA ITEM NO. IX 18 CHAIRMAN COX: Item IX, report, possible 19 discussion and/or action on Lottery Operations and 20 Services contract Amendment No. 8 credit calculations. 21 Ms. Pyka. 22 MS. PYKA: Thank you, Mr. Chairman. For 23 the record again, Kathy Pyka. 24 This morning I wanted to update you on 25 Amendment No. 8 of the GTECH or the Lottery Operations 0097 1 and Services contract for the amount due to the 2 Commission for the first quarter of Fiscal Year 2007. 3 We'll first focus on Section 10.3.3 of 4 the amendment which provided an annual credit to the 5 Commission equal to 12 percent of GTECH's annual 6 incremental revenue from sales. And that was over the 7 previous fiscal year for every .1 percent increase in 8 overall prize payout percentage. While we experienced 9 an overall increase in prize payout for the first 10 quarter of 2007, we did not receive a credit under 11 that section of the contract because there was a 12 slight decline in sales for Fiscal Year 2007. 13 So now I'll point you to the next 14 section which I have a display, which was the section 15 10.3.4 annual credit. And that portion of the 16 amendment requires GTECH provide an annual credit to 17 the Commission equal to 4.5 percent of the year-over- 18 year decline in dollar returns to the state if sales 19 remain flat and the weighted prize payout ratio 20 increases by .1 percent. 21 And so you'll see here we were looking 22 at sales of 896.7 for the first quarter of Fiscal Year 23 2006, moving down to 876.1 of Fiscal Year 2007. The 24 dollar returns to the state, you see the decline of 25 $224.8 million as compared to $217.6 million, the 0098 1 increase in prize payout. With that, we received a 2 credit under this provision of the contract of 3 $323,459. So we have actually taken that credit on an 4 invoice for sales ended through the period of 5 December 30, 2006, and it's actually reflected in our 6 books to date. 7 I would be happy to answer any questions 8 that you might have on this. 9 CHAIRMAN COX: Is that number final or 10 is that subject to adjustment every quarter and then 11 on an annual basis is the actual computation? 12 MS. PYKA: We will actually do an 13 adjustment at the end of the fiscal year, based on 14 actual prize payout. And so it definitely is in draft 15 form, but we've gone ahead and taken the credit and 16 applied it to our billing. 17 CHAIRMAN COX: Okay. So this amendment 18 was responsive to the idea that GTECH's interests and 19 the interests of the Texas Lottery should be more 20 closely aligned? 21 MS. PYKA: That is correct. 22 CHAIRMAN COX: Because the contract 23 calls for the lottery operator to receive a percentage 24 of sales; whereas, the school children of Texas 25 receive net revenues? 0099 1 MS. PYKA: Correct. 2 CHAIRMAN COX: So while we didn't get 3 what we wanted, which is basing everything on net 4 revenues, just what the school children get, this is a 5 step in that direction? 6 MS. PYKA: I believe so, Mr. Chairman, 7 when you assume that first credit. 8 Thank you, commissioners. 9 COMM. CLOWE: May we have a short break, 10 Mr. Chairman? 11 CHAIRMAN COX: Yes. We'll take a short 12 break, about 10 minutes. 13 (Off the record: 11:06 a.m. to 11:16 14 a.m.) 15 CHAIRMAN COX: Let's come back to order. 16 I see that he has now left, but I was 17 given a witness affirmation form by David Heinlein who 18 was for Item IV, and I wanted to acknowledge that. 19 CHAIRMAN COX: And, Ms. Kiplin, I think 20 you have a point of clarification on a previous 21 discussion? 22 MS. KIPLIN: Yes, Mr. Chairman. You-all 23 were discussing the jackpot and I believe the 24 estimation of the jackpot and how you rolled. And I 25 wanted to make sure the record was clear, the 0100 1 reference to the one million dollar incremental 2 increases on the jackpot is not in the Lotto Texas 3 rule. That's part of the administrative code. I 4 believe it's in the procedure on the jackpot, Lotto 5 Texas jackpot. 6 COMM. CLOWE: Mr. Chairman, I have a 7 question, if I may. 8 We made a rule, Counselor, in that 9 regard. Refresh my memory on that rule, if you can, 10 please. 11 MS. KIPLIN: I will. And I also have 12 Ms. Woelk, who was the rulemaking attorney on that 13 matter, that may have more specific knowledge. This 14 rule has undergone several revisions, and I believe 15 that it was in an earlier iteration of the rule but it 16 is no longer. 17 COMM. CLOWE: And then what is the 18 current rule? 19 MS. KIPLIN: Ms. Woelk, I'm going to 20 need you to help me. I've got it in front of me, but 21 I don't believe it references the rules. 22 MS. WOELK: I'm Sarah Woelk, Special 23 Counsel. 24 The current rule does not address the 25 issue of starting jackpot or rolls, and I'm unaware 0101 1 that any previous rule addresses it. My understanding 2 is that you might be thinking of the previous rule 3 which guaranteed the jackpot only through the first 4 four or five rolls. 5 Two changes ago, you changed the rule to 6 guarantee the jackpot at any level. But as I 7 remember, from having reviewed the history of the 8 Lotto Texas rules, the starting jackpot or roll amount 9 has never been established by rule. 10 COMM. CLOWE: That's right. That was a 11 matter of policy. 12 MS. WOELK: Yes. 13 COMM. CLOWE: I'm burdened by a 14 recollection of history. And it seems to me at one 15 time we established a rule that we could either -- the 16 Executive Director could determine the jackpot, either 17 the advertised amount or the sales-justified amount, 18 whichever was greater. 19 MS. WOELK: That's a previous version of 20 the rule. That's correct. 21 COMM. CLOWE: Yes, that's my 22 recollection. But then we came back, I want to say in 23 late '05 or early '06, and changed the rule. That's 24 what I need clarification on. Can you help me with 25 that? 0102 1 MS. WOELK: Well, I can get you 2 clarification after the meeting. I would have to pull 3 the rules to get it, because I've been here less than 4 two years, and I think there have been at least three 5 amendments to Lotto Texas. But when I got here, the 6 rule was, we paid -- we guaranteed it through the 7 first four rolls. And then -- 8 COMM. CLOWE: By matter of policy? 9 MS. WOELK: No. The guarantee was in 10 the rule. 11 COMM. CLOWE: It was in the rule? 12 MS. WOELK: The guarantee was in the 13 rule. And the guarantee is -- it remains in the rule. 14 Now the jackpot is -- the advertised jackpot is 15 guaranteed regardless of what sales support. That is 16 in the rule. What is not in the rule and has not been 17 in the rule is any kind of specific direction on what 18 you set a starting jackpot at and the increments in 19 which you roll the jackpot. 20 COMM. CLOWE: Okay. I just couldn't 21 recall that offhand in that discussion. I would like 22 to be brought back up to date on that when you have 23 time, just so it's fresh in my mind. 24 MS. WOELK: Okay. 25 COMM. CLOWE: And perhaps Chairman Cox 0103 1 might like that as well. 2 CHAIRMAN COX: Yes. 3 MS. WOELK: Okay. 4 COMM. CLOWE: It's a matter of being 5 attentive to that at the time and then, over a period 6 of time, I don't recall it exactly, but I would like 7 to have it in writing, perhaps a summary that I could 8 just put in the file and refer to it at moments like 9 this. 10 MS. WOELK: And we can do that. We have 11 a notebook that has each version of the rule. So you 12 want what was guaranteed, how we decided what we paid 13 and whether rolls or increments were set out in the 14 rule over time? Okay. 15 COMM. CLOWE: And brought us to our 16 present situation. 17 MS. WOELK: Right. 18 COMM. CLOWE: That would be very 19 helpful. 20 MS. WOELK: Okay. We'll do that. 21 Thanks. 22 CHAIRMAN COX: Mr. Sadberry, did you 23 have something to add? 24 MR. SADBERRY: Well, if I can be of help 25 on that, actually, we have a very brief mention of 0104 1 that in today's meeting. But we studied carefully, 2 about this time last year, actually, the issue of the 3 one million dollar roll. What we found at that time 4 was in a Commission meeting, in a presentation made by 5 Lottery Operations and others, on the concept of 6 whether to roll forward at a one million dollar 7 minimum increment, regardless of sales support, would 8 occur. And the best we could determine is that that 9 was a direction given by the Commission to staff to do 10 so. 11 And, in addition to that, and with 12 somewhat less attention, was beginning the jackpot 13 after a winning claimant, at $4 million. And what the 14 State Auditor's office did is to recognize that as a 15 practice -- and we as an agency staff provided that 16 data -- the recommendation was to adopt procedures -- 17 there were several, but part of that was to adopt 18 procedures that reflected current practice. We have 19 done that as an agency. We have the procedure that 20 does those two things, and that procedure has been 21 adopted according to the directive on procedures, on 22 how you adopt and the starting dates and what have 23 you. 24 What we had before you in December and 25 what we anticipated having before you in February is 0105 1 bringing what is already an adopted procedure before 2 you for you to approve that and then have it published 3 in the Register, et cetera. 4 I think the point the General Counsel 5 was making is, you may have made reference to that as 6 being in a rule, and I think General Counsel wanted to 7 clarify that it's not in a rule but it is in a 8 procedure, and that procedure is operative. 9 If you receive that in the February 10 meeting and you approve it, it will then have been 11 approved not only on the agency staff level, which has 12 already occurred, but also on the Commission level 13 which is what the State Auditor recommends. Then it 14 will be published. Meanwhile, it is being followed. 15 And it is a procedure that's binding on the staff of 16 the agency, in accordance with our procedures on 17 procedures. 18 And so I think that's the clarification. 19 And, as Sarah pointed out, we did not find that the 20 issue of the incremental roll forward or the beginning 21 jackpot was ever in a rule. It was a question of 22 whether you guaranteed payment, which was in a rule, 23 and now that guarantee is unconditional. 24 The one point I wanted to be clear on 25 is, even those we round down from the standpoint of 0106 1 the jackpots after the break-even point, which I agree 2 is now around $11 million, we're still rolling forward 3 in the one million dollar increments. The question 4 becomes whether a roll forward is in a greater amount 5 than $1 million. And usually it's at that break-even 6 point and beyond where we start to see the potential 7 for a $2 million roll forward. But the $1 million 8 roll forward is still in practice even after the 9 $11 million break-even point, and that's according to 10 procedure. 11 CHAIRMAN COX: Director Sadberry, do you 12 and your staff believe that we've got what's in the 13 rule that should be in the rule and what's in the 14 procedure should be in the procedure? 15 MR. SADBERRY: I think we're there, 16 Commissioner. As you know, to make the record 17 complete, we had the issue that was still we think 18 about to the point of finalizing of whether the 19 Commissioner involvement should continue. You 20 directed us on that, and we're close to that point. 21 But on the safeguards, the process, and 22 conforming in writing what we are doing in practice, 23 from all of those standpoints, I believe we are there. 24 I think we have done all the things that the auditor's 25 office recommended or that we as staff recognized 0107 1 needed to be addressed. 2 The one final thing to do is bring it 3 before you, once we make the clarification on the 4 Commission involvement, bring it before you to have 5 your final approval, which we are looking at in 6 February, and then publishing. That will make it, you 7 know, certified. It will make it open to publication, 8 what we're doing. But we're already there as a matter 9 of practice, as a matter of adoption of procedures and 10 rules. Yes, sir, I think we're there. 11 CHAIRMAN COX: Excellent. 12 AGENDA ITEM NO. X 13 CHAIRMAN COX: Item X, report, possible 14 discussion and/or action on the advertising and 15 dissemination of prize and game information, including 16 information about closing instant games. 17 Mr. Anger. 18 MR. ANGER: Good morning, Mr. Chairman, 19 Commissioner. For the record, my name is Michael 20 Anger, and I am the Lottery Operations Director. 21 Commissioners, at the October 18th 22 Commission meeting, I briefed you on the staff's 23 evaluation and action related to public comment. It 24 was offered at the June 28th Commission meeting by 25 Prof. Gerald Busald -- and I will note that Prof. 0108 1 Busald is in the audience today -- related to the 2 Commission's advertising and dissemination of prize 3 odds and game information. Staff summarized Prof. 4 Busald's testimony and identified eight suggestions 5 which we reviewed. In reviewing the staff's 6 recommendations, we provided input and asked that we 7 take some additional follow-up actions. I wanted to 8 brief you this morning on the staff's follow-up work 9 related to those items. 10 The first suggestion was to change the 11 Texas Lottery billboard language to include the word 12 "annuitized," similar to what is done by the Virginia 13 Lottery. And as you'll see here on the sample that 14 I've provided up here, right now the billboards for 15 Lotto Texas and Mega Millions indicate "Estimated 16 Jackpot." 17 Commissioners, you had asked that staff 18 pursue the implementation of this option. The staff 19 has worked with the advertising agency and arranged 20 for replacement of vinyl stickers on the billboards 21 that will change these boards to read "Estimated 22 Annuitized Jackpot." All of the Lotto Texas and Mega 23 Millions billboards, as well as a small number of dual 24 boards that we have across the state, will be 25 converted to agree with this new language. There are 0109 1 124 boards statewide who will be converted. This 2 project is scheduled for completion by June 1st of 3 this year. 4 Incorrectly noted -- and I wanted to 5 make this correction with you in your notebook -- I 6 had indicated that this project would complete in 7 March, but it's going to take a little longer to 8 complete that, based on timelines we have received 9 from our advertising agency. 10 CHAIRMAN COX: Michael, how much is this 11 going to cost us? 12 MR. ANGER: The total cost for this 13 project is projected at $18,500, based on estimates 14 we've received. 15 CHAIRMAN COX: Thank you. 16 MR. ANGER: Commissioners, the second 17 suggestion was to include the top prize odds for 18 jackpot games on the back of the on-line rollstock. 19 The Texas Lottery currently provides the overall odds 20 for each of the on-line games in the pre-printed 21 language on the back of the ticket, in accordance with 22 statute. 23 At the October meeting, I reported to 24 you that staff had worked to add the overall odds for 25 the top five for the jackpot games to the language on 0110 1 the back of the on-line rollstock. This additional 2 language is depicted on the slide on the screen in 3 front of you. 4 During our discussion of this item in 5 October, you pointed out that the size and amount of 6 text on the back of our tickets was challenging to 7 read and asked that we revisit this. A team was 8 assembled to evaluate how we might improve the size of 9 the text and still provide important information for 10 our players. 11 The team included members of the 12 agency's Products group, Legal Services and staff from 13 our claim centers, and Communication Services that 14 interact directly with our players and have a good 15 understanding of their questions and needs that can be 16 supported with information on the back of the ticket. 17 We have been able to add the top prize 18 language, odds language that appears here on the 19 screen in front of you and, in addition, reducing the 20 overall amount of language on the back of the ticket, 21 consistent with your request, resulting in increased 22 size and readability of the text. 23 On the slide on the screen, you'll see 24 on the left-hand side our existing language and, on 25 the right-hand side, the proposed language. And you 0111 1 can see the difference in the text size. I've also 2 provided you mocked up samples of the on-line 3 rollstock in hard copy form that you have in front of 4 you. 5 CHAIRMAN COX: What did you get rid of 6 to make room for that and to increase the size of the 7 type, Michael? 8 MR. ANGER: I ask Robert Tirloni to join 9 me at the table. He coordinated the group that -- 10 CHAIRMAN COX: Okay. 11 MR. ANGER: -- conducted this activity, 12 and I think Robert can probably most quickly point you 13 to those changes. 14 MR. TIRLONI: For the record, 15 Commissioners, again my name is Robert Tirloni. I'm 16 the Products Manager. 17 We did a lot of streamlining, and there 18 were a lot of extra words that we actually just 19 removed. And that was -- a lot of that enabled us to 20 remove, like I said, extra verbiage. In places there 21 was information that was duplicated that we didn't 22 think we needed. And so as Michael said, the whole 23 team got together, and we were able to shrink that 24 down. We feel that what's left on the back of the 25 rollstock is all pertinent information for all of the 0112 1 different areas of the agency that communicate with 2 players and claimants on a regular basis. 3 CHAIRMAN COX: Okay. Was a member of 4 the legal staff on your team? 5 MR. TIRLONI: Yes. Sarah Woelk was on 6 our team. And after we got together as a group and 7 came up with a draft, Sarah routed it through other 8 members of the Legal Division for their input as well. 9 CHAIRMAN COX: Okay. So what you've 10 done is provide more information. I think I heard you 11 say that you went from a 4.6 point type to a 6 point 12 type, about a third increase? 13 MR. ANGER: That's correct. 14 CHAIRMAN COX: So we've got more 15 information and bigger print, didn't take anything 16 away? 17 MR. ANGER: Yes, sir. 18 CHAIRMAN COX: Excellent. Excellent. 19 MR. ANGER: Commissioners, Suggestion 20 No. 3 was to communicate the estimated cash value 21 option for jackpot games on our website. This was 22 implemented with the introduction of the agency's 23 redesigned website, on December 14th. The slide on 24 the screen depicts a snapshot of the website home 25 page. 0113 1 And you'll see the gold boxes here below 2 each of the games represent the annuitized jackpot 3 value as well as the estimated cash value option. 4 This was information that was available on the website 5 previously, but we've moved this to the forefront and 6 made it a front page information piece on the front 7 screen of the website. 8 CHAIRMAN COX: Okay. I have to ask why 9 the annuitized jackpot is in bigger bolder print than 10 the cash value? 11 MR. ANGER: That's the number that we 12 advertise, and so that's the number that's highlighted 13 here. But it's very easy to change that. 14 CHAIRMAN COX: I think I would. 15 MR. ANGER: Very good. We'll take care 16 of that. 17 Commissioners, the Suggestion No. 4 was 18 very similar, and that was to communicate the 19 estimated cash value option for the Mega Millions game 20 on the Mega Millions website. Provided that you're in 21 agreement with pursuing this suggestion, Executive 22 Director Sadberry intends to take this matter up with 23 the other executive directors of the Mega Millions 24 states for consideration and possible implementation 25 on the Mega Millions website. 0114 1 CHAIRMAN COX: So we're doing it on 2 ours. But, obviously, we're not the webmaster on 3 theirs? 4 MR. ANGER: No, sir. 5 CHAIRMAN COX: And we're just going to 6 ask? 7 MR. ANGER: Yes, sir. 8 CHAIRMAN COX: And Director Sadberry 9 asks fairly forcefully, I know. 10 MR. SADBERRY: We'll do our best. 11 MR. ANGER: Commissioners, Suggestion 12 No. 5 was to print the estimated cash value of the 13 jackpot prize on every ticket. 14 Commissioners, as you requested, staff 15 has determined with the lottery operator that this 16 option is feasible through software development. 17 Staff has already initiated this request for the work 18 to be performed. And the lottery operator has 19 informed us that they will be able to implement the 20 appropriate programming for this feature on our 21 tickets prior to the end of the fiscal year on 22 August 31st. 23 Please note that on the slide -- and I'm 24 sorry. On the screen, it's more faded than it appears 25 on my slide presentation -- but here where it says 0115 1 "Cash Value Option," it either says "Cash Value 2 Option" or "25 Annual Payments." And the programming 3 will be set up so that when the ticket prints, based 4 on the player's selection, that it will also provide 5 the estimated prize amount associated with their 6 player-selected option. So we are going forward with 7 that, and that will be implemented before the end of 8 the fiscal year. 9 CHAIRMAN COX: And, Michael, as to that 10 one and the change in the print, what's the cost to 11 the State of Texas for those changes -- 12 MR. ANGER: There are no costs 13 associated with either of those items. 14 CHAIRMAN COX: So whatever costs there 15 may be is borne by the lottery operator? 16 MR. ANGER: That's correct. The ticket 17 stock is provided under the terms of the agreement 18 with the lottery operator, so they pay for all 19 rollstock. And we would proceed with implementing 20 that. It will take about 10 to 12 weeks to cycle 21 through the current inventory that's out there in 22 place, but we can begin implementing that process 23 immediately to revise and change that rollstock. 24 CHAIRMAN COX: Good. 25 MR. ANGER: Suggestion No. 6 was to 0116 1 print the overall odds of winning the top prize on 2 every instant ticket, along with the overall odds of 3 winning a prize in the game. At the October meeting, 4 I reported to you that staff had worked to add the 5 overall odds for the top prize on the instant ticket 6 games to the back of our instant tickets. 7 As I noted, related to the on-line 8 ticket language, you had requested that staff revisit 9 all the language in an effort to streamline the 10 language on the back of the instant tickets, to 11 improve the readability of the information that we 12 provide to our players. 13 I would like to note that the same team 14 that worked to review the on-line ticket language also 15 coordinated the completion of this review. The team 16 was able to add the new top prize odds language which 17 appears here, brought to the top of the instant ticket 18 sample on the right-hand side, while reducing the 19 overall language on the back of the ticket, consistent 20 with your request. And we were also able to increase 21 the size of the text, in an effort to improve the 22 readability, consistent with what we did on the 23 on-line rollstock. 24 The slide on the screen is the side-by- 25 side comparison of the current and proposed changes 0117 1 that reflect these improvements. I've also provided 2 you with a hard copy that you have there in front of 3 you. With your approval, we'll proceed in 4 implementing this new language going forward as we 5 introduce new instant ticket games. 6 CHAIRMAN COX: Good. 7 MR. ANGER: One thing I would like to 8 note with regard to that, there is also some lead time 9 associated with this. The Product staff worked 10 several months in advance in developing games for our 11 game plan. And we're way into the calendar year as 12 far as planning and execution of working papers. 13 Additionally, we also have what we call shelf games, 14 and those are games that are generated and held in the 15 warehouse to be fit into the game plan. So it will 16 probably take approximately a year or a little bit 17 more to cycle all inventory over to this new language, 18 but we will begin the process of making those changes 19 immediately. 20 CHAIRMAN COX: Good. 21 MR. ANGER: Commissioners, Suggestion 22 No. 7 was to print the cash value of annuity prizes on 23 instant ticket games that contain annuity prizes. 24 There are no new updates on this items from the 25 presentation at the October meeting. As I indicated 0118 1 at that meeting, the Commission does not currently 2 offer a cash value option on our instant games but 3 offer annuity prizes. However, if we do pursue this 4 in the future, we would further evaluate the 5 suggestion at that time. 6 CHAIRMAN COX: Okay. This is one that I 7 could argue either side of. On the one hand, I think 8 that these tickets tend to sell very well. People 9 must have a pretty firm perception of what they're 10 getting, even if they don't have a concrete number in 11 mind. 12 The other side, I think is, if we put a 13 cash value number on there, would we not only be 14 providing consumer information? Would we also enhance 15 the value of the ticket, because maybe the value of it 16 is even more than they thought? Have you looked at 17 all of those aspects, Michael? 18 MR. ANGER: We would be happy to take a 19 further look at that. There's a couple of thoughts. 20 The call-out for the annuity games and the apparent 21 appeal, most of those games have become core games for 22 the agency, and so they continue to be run because of 23 player interest and enthusiasm for them. And so they 24 use the call-out of a set number of payments over a 25 period of time. I'll use Weekly Grand as an example, 0119 1 and that's $1,000 a week for 20 years. 2 So that call-out to players, while they 3 may not know that the future value of that payment 4 stream is $1,040,000, they know in the course of their 5 daily lives and relative to their paychecks, which 6 they may receive weekly, you know, bi-monthly or 7 monthly, they know what the impact of those dollars 8 would have in their life. And so that's part of the 9 appeal of the top prize in that game. 10 That said, we could post the future 11 value stream of that payment on the back of the ticket 12 or, as you are talking about, potentially the net 13 present cash value number. One thought that I have 14 is, is there may be an opportunity for disappointment 15 on the part of a player who won that prize from the 16 perspective that we're advertising a cash value of 17 that item, but we're not going to offer them the cash 18 value of that item, we're going to offer them the 19 opportunity to collect that cash value from us -- 20 CHAIRMAN COX: "Here is this 21 information, but you can't have it"? 22 MR. ANGER: Right. And I think that 23 that could be a source of, you know, frustration for 24 those players who win. But we would be happy to take 25 a deeper look at that. 0120 1 CHAIRMAN COX: Well, I think we should 2 at least know what other states are doing. And 3 perhaps we can find a win/win deal where the customer 4 gets more information and buys more tickets because 5 they have a better idea of what they're going to win. 6 So if you would look a little further into that, I 7 would appreciate it, Michael. 8 MR. ANGER: We would be happy to do 9 that. 10 Commissioners, the final suggestions was 11 to remove instant ticket games as soon as all the top 12 prizes in the games have been claimed. As we 13 discussed in the October meetings, staff have a 14 comprehensive procedure that evaluates a number of 15 factors in determining when to close a game. Included 16 in these factors are the cost of printing the game, 17 the amount of prizes paid, the sales for the game, the 18 number of weeks that the game has been in the market 19 and the average games sales for a game with the same 20 prize point and print quantity 21 All this information allows staff to 22 make a sound business decision about when a game 23 should be closed. While the top prizes' remaining 24 information appears on the game closure evaluation 25 worksheet that we use for performing this analysis, it 0121 1 is there for informational purposes, along with other 2 game data, and is not a factor that is considered by 3 staff is making game closure determinations. 4 During our discussion of this topic in 5 October, you indicated your familiarity with the 6 procedure on the presentation that was conducted by 7 staff in February of last year. However, at that time 8 you asked that Director Sadberry review our game- 9 closing procedures and again ensure that he was 10 comfortable with the process that the agency currently 11 employs. Staff met with Director Sadberry, and he has 12 indicated his approval of that procedure, utilized by 13 staff in making the end closure decisions. 14 CHAIRMAN COX: Michael, I think one of 15 the compelling things for me in this decision was that 16 we cannot know the most important thing that a 17 customer would want to know, and that is whether all 18 the winning tickets have been sold. We can only know 19 which ones have been redeemed? 20 MR. ANGER: That's correct. 21 CHAIRMAN COX: So someone could be 22 holding one; one could be lost or stolen. We don't 23 know the status of what's in that deck; we just know 24 who has come forward. 25 And, as you mentioned, I have reviewed 0122 1 the procedures. I believe they're sound. What they 2 say to me is that if the game has appeal after players 3 know that -- after we've told them that all the major 4 tickets have been sold, that they'll buy the game. If 5 it doesn't, our procedures will call us to pull it 6 down. 7 And I would urge you -- and I think 8 you've told me that you are continuing to expedite the 9 transmission of information so that the players will 10 know as soon as possible what ticket, how many of 11 those prizes have been paid. Is that correct? 12 MR. ANGER: That is correct. And we're 13 doing a number of things in that regard to further 14 enhance what the agency has done over the years as far 15 as communicating that information to the public. We 16 have a flier that we put out in the stores that 17 highlights the top prize levels for 36 games that we 18 post in the stores that is distributed by the sales 19 staff. 20 And one of the complex issues that the 21 agency has had to face in that regard is that those 22 are distributed to over 16,000 retailers across the 23 state by GTECH sales personnel, and they're delivered 24 by hand. So keeping that information current is a 25 challenge. 0123 1 In addition to that, we've had that 2 information available on the website in the past. 3 We've made significant enhancements in that regard in 4 the last year. In fact, now the information is 5 updated for each of our instant ticket games that's 6 available in the market on a nightly basis, for not 7 just the top prize levels but for all prize levels as 8 far as the number of prizes claimed, and so we've 9 greatly expanded that information. 10 We're also working with the lottery 11 operator on the development of a report that can be 12 provided at the retail location by the retailer, just 13 as they provide a winning result slip to a player, if 14 they request one, for a particular drawing. And the 15 report is a summary report of some of the games that 16 are out. 17 We have some limitations because of 18 printability and size of the rollstock that we 19 generate from the terminal, but we're working toward 20 the optimum solution in that regard, to get good 21 information in the hands of the players about prizes 22 claimed. 23 So that would be something that would be 24 available right there at the retail location beyond 25 the website. So we're trying to do a number of things 0124 1 in that regard to get the very best information 2 available to the players as quickly as we possibly 3 can. 4 CHAIRMAN COX: Excellent. 5 MR. ANGER: Commissioners, I had one 6 additional item I would like to update you on related 7 to this agenda item. There was a news story that ran 8 in the Houston Chronicle just prior to the October 9 Commission meeting, related to this agenda item when 10 it posted for that meeting. 11 In that news story, the reporter quoted 12 Prof. Busald for the story, and it also reached out to 13 Dr. Jim Leigh, a professor at Texas A&M University's 14 Mays School of Business. I reached out to Dr. Leigh 15 and shared with him our efforts to ensure that all of 16 our advertising and communications with the public 17 regarding our games were clear and transparent. 18 Dr. Leigh indicated that he is an advocate for truth 19 in advertising and that it appeared that our efforts 20 were headed in exactly the right direction to inform 21 consumers. I would also like to note for the record 22 that Dr. Leigh was very helpful and offered to me that 23 we could reach out to him in the future, as needed, 24 related to our efforts. 25 And that concludes my report, 0125 1 Commissioners. I would be happy to answer any 2 questions that you have. 3 CHAIRMAN COX: Michael, the article that 4 you referred to in the Houston Chronicle used the term 5 "bait and switch." And if I recall correctly, it used 6 that term in reference to the fact that we advertise 7 the number -- the odds of winning any prize as opposed 8 to the odds of winning the top prize. And that would 9 cause one to believe, if you followed that argument, 10 that someone might believe that there is one chance in 11 71 of winning $50 million, which personally I think 12 our players are smarter than that. 13 But now that we've gone through this 14 exercise, we know that the reason we disclose the 15 number -- the odds of winning any prize is because 16 Texas state law requires that disclosure. We have 17 also learned that it is industry practice that 18 virtually every state, if not every state, does that. 19 We have now begun advertising the chances -- or 20 putting on the back of the sheet, along with the 21 information of the odds of winning any prize, the odds 22 of winning the top prize. 23 Now, having down all of that, do you 24 believe that there is any reason for us to notify the 25 Legislature that the public is concerned about one of 0126 1 our required disclosures being deceptive and suggest 2 that they reconsider that provision of the law? 3 MR. ANGER: Mr. Chairman, I would 4 probably defer to Ms. Trevino with regard to outreach 5 to the Legislature. But what I would offer with 6 regard to this topic is, as you note, it is industry 7 practice that the overall odds of the game be provided 8 to the public. And so that has a somewhat long 9 established history. And as it does and as it was 10 built into our enabling statute, we are in exactly the 11 same situation where we have a history of providing 12 this information to players. 13 I think it's information -- as with 14 everything we've talked about here, information in the 15 hands of players is good. And so in that vein, I 16 don't think there is any harm in the information that 17 we were providing. I think the criticism, as you 18 alluded to, that occurred in the article was that 19 there could be an opportunity for some to have a 20 perception that maybe there's a disconnect between 21 here you're advertising the top prize but you're not 22 saying anything about the odds of the top prize, 23 you're giving overall odds, and so that those things 24 are disjointed from one another. 25 I think that the efforts that we've made 0127 1 to take it a step further and add that information in 2 addition to put us in a good place. I think that, as 3 I said, that's additional information in the hands of 4 the players. I think it addresses the concern that 5 some folks may have had in that regard. 6 I think we've synced up the two pieces 7 as far as what we're advertising and the information 8 we're providing. And then we have this additional 9 information as well with regard to our overall odds. 10 So I wouldn't be an advocate to remove anything. I 11 would just be an advocate for in addition to. 12 CHAIRMAN COX: So now we're answering 13 perhaps whatever question they might want to ask. If 14 they like to win frequently, we're telling them what 15 are your chances of winning without regard to how 16 much? If they're just going for the top prize, we're 17 telling them what are their odds of that? 18 MR. ANGER: Yes. 19 CHAIRMAN COX: And I suspect -- I will 20 speculate that if we took away the 1 in 71 21 information, there would be people who criticized us 22 for taking it away? 23 MR. ANGER: I think that's a fair 24 assessment. I think there would be some who would be 25 disappointed to see that information go away. 0128 1 CHAIRMAN COX: Okay. Director Sadberry, 2 do you have any thoughts on that? 3 MR. SADBERRY: Chairman, going to your 4 question about the legislative mandate and any 5 communication with the Legislature, we remain open at 6 all times. We are in the process of the legislative 7 session is ongoing. We make ourselves available as 8 resources and would be happy to respond to any 9 questions along those lines. 10 I think some questions are being 11 asked -- I'm not sure of the questions that 12 specifically would address that -- has been 13 specifically asked. But we're always available and 14 will continue to provide any resource information 15 about why we do certain things that may be of benefit 16 to the Legislature upon request. 17 I also agree that Nelda and her staff 18 are very effective in outreach, and we continue to 19 carry out those efforts -- they're very helpful to 20 me -- in making ourselves present and indicating to 21 the Legislature we want them to know what we are doing 22 and why we're doing it at any point. And every time 23 that opportunity comes up in our briefings and 24 otherwise, we will take advantage of that to impart 25 that kind of information through legislative briefings 0129 1 and other means, to fully disclose what we do and why 2 we're doing it in this regard. 3 CHAIRMAN COX: Thank you. 4 Michael, I want to commend you and the 5 Lottery staff for the work you've done here. I think 6 we've taken some very positive steps forward in not 7 only the things we're doing but the attitude that we 8 have toward new ideas. 9 And I want to thank you, Prof. Busald 10 for bringing these things to our attention. They were 11 very good points. We appreciate them very much. And 12 we hope that if you have additional observations, that 13 you'll bring them to our attention, too. 14 And, Michael, I would challenge you to 15 stay a step ahead of Prof. Busald, and let's be sure 16 that we're going out there and finding out what other 17 states are doing and doing anything we can to improve 18 in this area and creating new opportunities that are 19 unique to us. I want Texas to be a leader and 20 responsible disclosure to the players. 21 MR. ANGER: We are focused on that 22 effort, and we will continue to be, sir. 23 CHAIRMAN COX: Excellent. Thank you. 24 MR. ANGER: Thank you. 25 CHAIRMAN COX: And public comment, I 0130 1 think, Prof. Busald, you wanted to -- 2 PROF. BUSALD: Yes. 3 CHAIRMAN COX: Please. 4 PROF. BUSALD: For the record, my name 5 is Gerald Busald. I'm a professor of mathematics at 6 San Antonio College. And I'm glad that the cost to 7 the state of all these efforts is approximately 8 $18,000. I think it's really a set of positive 9 things, and I certainly commend staff. And I commend 10 the Commissioners for the attitude that's displayed. 11 I certainly think everything is really a positive 12 attitude. 13 I do have a couple of points to make. 14 And I do have a handout, if I could have someone 15 distribute these. I've already given a copy to the 16 reporter, but I have a copy for Michael, if you would 17 like a copy. And then I have a copy for the Executive 18 Director and the Commissioners. 19 MS. KIPLIN: Have you already given one 20 to the reporter? 21 PROF. BUSALD: I've already given one to 22 the court reporter, yes. 23 Just a couple of additional things that 24 I would like to say. I have even noticed the word 25 "annuitized" in radio adds. And I have heard that 0131 1 there have been some complaints that annuitized is not 2 really a word. I did not research that -- blame 3 Virginia -- but I think it does convey a thought that 4 I think needs to be out there. And if we can get the 5 media to go along with that, we're really doing 6 something. I'm talking about specifically about TV 7 and so on. 8 The other items -- this little handout I 9 have I pulled off the website. And I think Michael 10 will tell you that the day that the website came up, I 11 called to commend him on the changes to the website 12 being very positive, and everything that is being done 13 along that line is extremely positive. I'm very 14 pleased. 15 The two items that I have to deal with 16 are No. 7 on the list about the value of some instant 17 games that are of an annuitized type. And I know that 18 it's not a cash value option, but there is a value to 19 those games. And the reason I think it's important to 20 disclose that amount is that a significant percentage 21 of people who win $10,000 a month for 20 years end up 22 selling those products to discounters. They do not 23 wait 20 years for their money. It may sound good when 24 they bought the ticket. But, in reality, they end up 25 selling that at a significant discount to firms that 0132 1 specialize in that. And, of course, it's happened 2 with lottery winners -- before we had cash value 3 option -- a great deal, so there is some good in 4 knowing that. 5 What I wanted to point out -- I just 6 happened to notice on a -- I was looking for a couple 7 of these games. And I don't know how to print off on 8 the website to get the part that I want to print 9 printed, but this particular sheet has enough 10 information. 11 The first sheet is Game No. 604, which 12 is Monthly Bonus. And it just says the top prize is 13 $10,000 per month for 20 years, which is basically 14 $2.4 million. What I noticed -- and I don't know if 15 this is a change. It seems like a change -- Game 16 No. 765, which is Monthly Bonus, the same game, now 17 shows $1,640,000, which may be the cost of the 18 annuity. I can't answer that. Maybe Michael can come 19 back and answer that. 20 But that's there instead of the 21 $2.4 million. So I suspect that's the cost of the 22 state of the annuity. And it's on the website, and so 23 I don't know if that change occurred because of my 24 discussion and so on. I would like that information 25 if possible, if Michael can answer that. 0133 1 And then I just put a couple of other 2 examples of sheets that are annuity type games: Set 3 for Life, Weekly Grand and so on. The last sheet, 4 however, I think is more significant. And what it is, 5 it's a printout that takes information I took from the 6 website. It's my own setup of that particular 7 information that I have on the student website at 8 San Antonio College. 9 This is about a particular game. And 10 one of the things we talked about is procedures in 11 place to ensure when a game should be withdrawn. And 12 I would like to point to this game as a specific 13 example to say maybe those procedures aren't enough. 14 This specific game, Game 654, Texas Gold 15 Rush, is a $10 game, might well have been named, as 16 similar games are, $250,000 Pot of Gold. That could 17 have been the name. And the prize levels on this game 18 were $250,000, $10,000, $1,000, $300, $100 and so on, 19 down to zero. And at the time of -- as of 11/25/06, 20 the game was pulled and ended in December. But at the 21 time it was pulled, there were no $250,000 prizes 22 left; there were no $10,000 prizes left; there were no 23 $1,000 prizes. And there was one out of 75 $300 24 prizes left. 25 I think, you know, we have a legal 0134 1 disclosure that is often at the ticket sites or the 2 same -- the legal disclosure says basically -- or 3 disclaimer -- says that tickets may continue to be 4 sold after all the top prizes are claimed. 5 I don't know if you really want to 6 expand the language to say tickets may be sold after 7 all top level, second level, third level and 95 8 percent of fourth level prizes are claimed. I think 9 this game -- and, you know, hopefully we don't see a 10 repeat of this -- but I think this game points to a 11 real gap in what you're talking about, about the 12 procedures. 13 But, you know, I really feel, since I 14 pointed this out, it may well be addressed, because I 15 really sense the sense of the Commission to fix things 16 like this. And you may not have been aware of this 17 particular issue. But, you know, on 10/21, there were 18 still three of the $300 prizes left. 19 But in a sense, what this game had was 20 people spending $10 to win a maximum prize of $100. 21 And if the name on the ticket had been $100 Gold Rush 22 or Pot of Gold, I don't think you would sell many $10 23 tickets; but, yet, the ticket was continuing to be 24 sold. 25 And so I think this particular game was 0135 1 especially unfair to players. And so whatever 2 procedures are in place to look at that I think needs 3 to look not only at top level but these other level 4 prizes so that, I mean, we're not down to fifth level 5 prizes are all that's left before we pull the game. 6 Just because a player will continue to 7 buy the game doesn't make it morally right to sell it 8 to them if we have a name out there, $250,000 Pot of 9 Gold. I know this one didn't say that, but it well 10 might have, because that's a theme that names are 11 used. 12 And so I don't know what happened on 13 this game or why that happened or why it continued to 14 be sold, but I think it was inherently unfair that 15 this particular game continued to be sold. And this 16 is something I just happened to discover since our 17 last meeting, and so I wanted to point it out and see 18 if somehow the procedures could be tightened up to 19 include these other levels. 20 That's all I have. I've very grateful 21 to the Commissioners. I'm very grateful to staff, to 22 Michael who has contacted me, been very open. And I'm 23 just glad that my comments were received. You 24 remember when I first made these comments, my point 25 was for Texas to have the best practices of any state, 0136 1 and I feel we're very, very close to that. 2 And I think when those tickets come out 3 that have the cash value on the front and those are 4 seen in other states, it may well force them to make 5 some changes. And I'm very proud if I have any part 6 in making lotteries across the country more honest. 7 And you know that's always been my goal, is to be as 8 open and honest as possible, because lottery is 9 government, so that's my only interest. 10 And once again, I thank everybody -- 11 Mr. Sadberry, Commissioners and staff -- for all their 12 input on this and what has been done and what will be 13 done. And I certainly look forward to seeing those 14 changes implemented a long time. 15 CHAIRMAN COX: Thank you very much, 16 Prof. Busald. 17 Ms. Nettles, would you like to comment? 18 MS. NETTLES: Good morning, 19 Commissioners. For the record, my name is Dawn 20 Nettles. I'm with The Lotto Report out of Dallas. 21 And, first of all, congratulations, Chairman Cox, for 22 your new role. I think that's -- well, I'm going to 23 miss Commissioner Clowe, not that he's going anywhere. 24 But congratulations. 25 I wanted to commend you, too. With what 0137 1 I've seen and heard today, I see some major, major 2 improvements for truth in advertising, and I'm quite 3 impressed; I really am. There's still some issues 4 that need, but y'all really are going in the right 5 direction on this. 6 Now, Michael said something, though, 7 that jogged my memory, and I feel compelled. He made 8 mention a while ago that the winning tickets remaining 9 was on your website, and that's not exactly correct 10 any longer. Or, if it is, I don't know where it is. 11 They changed that to show how many 12 tickets were claimed, and that I think is a problem. 13 I know it is for me because I publish the information, 14 and I don't want to tell how many tickets have been 15 claimed as a player. And my people, my readers, the 16 people of Texas, they want to know how many are 17 unclaimed. 18 And they changed their verbiage -- I 19 guess they actually changed it with that cvs file, 20 which y'all may not know what that is, but they 21 changed it to show how many tickets had been claimed. 22 The people want to know how many tickets are 23 available, not, you know, to be claimed -- not that 24 that really means that they're there because somebody 25 may have bought one and never claimed it. But, still, 0138 1 it's showing as an unclaimed ticket. And I wish that 2 there was something that we could do to get that back. 3 It used to be that way, but it is no longer. At least 4 it -- 5 CHAIRMAN COX: Ms. Nettles, could I 6 address that for you? 7 MS. NETTLES: You bet. 8 CHAIRMAN COX: I think -- and I'm going 9 to ask Michael, to be sure that I'm correct on this -- 10 there was a time when we were saying that we were 11 disclosing the number of tickets that had not been 12 sold, but we were wrong, or at least the words that we 13 were using could cause someone to believe that that's 14 what we were disclosing, but we don't know that. 15 MS. NETTLES: Okay. I'm not talking 16 about sold tickets, sir. 17 CHAIRMAN COX: Okay. Help me, then. 18 MS. NETTLES: There may be three top 19 prizes in a game. Okay? 20 CHAIRMAN COX: Yes. 21 MS. NETTLES: And now they say three 22 prizes, one has been claimed, or none has been 23 claimed. 24 CHAIRMAN COX: Okay. 25 MS. NETTLES: Okay. Used to, it would 0139 1 show three top prizes and three remaining unclaimed. 2 That has nothing to do with what's sold. 3 MR. ANGER: The change that we made -- 4 and I think that what you're talking about, Dawn, is 5 we did have a flier. It's similar data to the data 6 that we put out now that was called "Winning Tickets 7 Remaining." 8 And so we were essentially doing a 9 calculation. We knew the base level number of prizes 10 in the game, for instance, in the example that Dawn 11 cited. The top prize level, if that game had three 12 top prizes in it and one had come forward and been 13 claimed, we had a sheet out there that showed that top 14 prize level and indicated that there were two of the 15 top prizes remaining. 16 And, Chairman, to your point, in looking 17 at this among other things, we've gone a different 18 direction, because of the point that you make. And 19 the fact is, is that now we cite the number of prizes 20 that the game started with and the number of prizes 21 that have been claimed; in other words, the ones that 22 we've been able to identify. And we can only identify 23 them when a player comes forward to claim those 24 prizes, because we don't know where they exist in the 25 game. 0140 1 And so we felt that it was more accurate 2 in providing the information this way, because we 3 can't make claims as to how many are out there. When 4 we say "remaining," that's some sort of indication 5 potentially that we know that those are out there 6 available in the marketplace for sale, when they may 7 not be. They may be in the hand of someone who has 8 purchased that ticket. 9 As you alluded to, they could have been 10 destroyed in a fire. They could be in the available 11 inventory in our warehouse. And so we felt it was 12 more accurate to put the two pieces of separate 13 information out there and provide that in the interest 14 of full disclosure. And so we've changed the title of 15 that to the prizes claimed information sheet. 16 MS. NETTLES: To add to his remarks, 14 17 years ago when I started The Lotto Report, it was the 18 Texas Lottery Commission who asked, requested that I 19 use the name in my Lotto Report "remaining tickets." 20 okay? And I understood the philosophy back then. But 21 for -- I don't know when these cvs files on the 22 website started, but they've been discontinued now. 23 But whenever they started, prior to that, I received, 24 through open records, a report called The Value 25 Report, and it's produced by GTECH. The Texas Lottery 0141 1 receives it every day, I believe, or it's just in your 2 computer system or whatever. The Value Report shows 3 you all the same things, except but it also showed -- 4 it actually did the subtraction for total prizes, how 5 many were claimed, leaving this many unclaimed. 6 CHAIRMAN COX: Unclaimed. 7 MS. NETTLES: Unclaimed. That's the 8 proper word to use for it, because he's right. They 9 could have sold and nobody knew it, threw it away. 10 You know, I understand that. But the people want to 11 know how many are out there remaining. And what the 12 Texas Lottery has got on their new website -- which, 13 incidentally, has a nice appearance, but I'm not too 14 fond of it. I just discussed that with Bobby a few 15 minutes ago, because there's some problems, but it's 16 not from the standpoint of appearance; it's other 17 issues. But, anyway, I have a -- I would just 18 recommend that you make it easier to see than what it 19 is. 20 And on this particular subject, I do 21 have another very serious frustrating issue. Anybody 22 can call this Commission at any time and ask how many 23 tickets are remaining or claimed, however you want to 24 word it. Okay? I prefer -- I want to know what's 25 unclaimed, because that's what I publish. 0142 1 And used to, the Commission would always 2 see to it, when it was my press weekend, that I would 3 be completely current and up to date; I mean, I would 4 have the most current information. Well, two or three 5 weeks ago, I finally, because it was such a problem to 6 me, that I'm getting information that's a week or two 7 old that I'm being forced to publish, that I don't 8 want to publish, but I'm forced to because it's all I 9 can get out of them. 10 Well, two or three weeks ago, I changed 11 my open records request, at the suggestion of actually 12 the Attorney General's office that said request the 13 most recent information at the time that my open 14 records request is filled. Well, I did that, but I 15 still -- I published this weekend information that's 16 as of the 20th. Yet, the TLC website was as of the 17 28th. 18 And I just received that Friday 19 afternoon at 4:30 p.m. And when I received on Friday 20 afternoon went back a week, and I really don't want to 21 be that far behind. This Commission used to overnight 22 express that Value Report to me just so I would have 23 it for my press weekend. So I'm going to be forced 24 down to call the Commission every other Friday and 25 say, "Okay. Let's go through all my tickets here that 0143 1 I'm going to publish so I can figure out how many 2 tickets are remaining," just so I can be current, 3 because I can't seem to get it, and it's not on your 4 website. What you have on there is claimed, not 5 unclaimed. 6 But putting that all aside, that was not 7 my purpose in speaking here. I do want to commend 8 you-all. You really have made -- on these items that 9 you have just discussed, y'all have really bent over 10 backwards to try to make some changes, and I'm really 11 pleased with that. So I thank you. 12 CHAIRMAN COX: Thank you, Ms. Nettles. 13 Thank you, Mike. 14 AGENDA ITEM NO. XI 15 CHAIRMAN COX: Item XI, report, possible 16 discussion and/or action on the agency's contracts. 17 Mr. Jackson. 18 MR. JACKSON: Good afternoon, 19 Commissioners. For the record, my name is Tom 20 Jackson. I'm the Purchasing and Contracts Manager for 21 the Commission. 22 Commissioners, in your notebooks under 23 Tab No. XI is a spreadsheet on prime contracts that 24 has been updated for your review. I'll be happy to 25 answer any questions you may have. 0144 1 CHAIRMAN COX: No questions, Tom. 2 AGENDA ITEM NO. XII 3 CHAIRMAN COX: Item XII, report, 4 possible discussion and/or action on the 80th 5 Legislature. 6 Ms. Trevino. 7 MS. TREVINO: Good morning, 8 Commissioners. For the record, I'm Nelda Trevino, the 9 Director of Governmental Affairs. And I have a brief 10 report for you this morning. 11 The 80th regular legislative session 12 convened on January the 9th, and the Speaker and the 13 Lt. Governor have announced their committee 14 appointments, and we have provided you the composition 15 of the House and Senate committees. 16 The agency's oversight committees 17 include the House Appropriation Committee, the House 18 Licensing and Administrative Procedures Committee, the 19 Senate Finance Committee and the Senate State Affairs 20 Committee. 21 As Chairman -- excuse me -- as 22 Commissioner Cox -- let me get that right -- 23 Commissioner Clowe mentioned earlier, the Legislative 24 Budget Board issued their budget recommendations for 25 the 2008 and 2009 biennium on January the 23rd. The 0145 1 Senate Finance Committee started its agency budget 2 hearings this morning, and the Lottery Commission is 3 scheduled to appear before the Senate Finance 4 Committee on Monday, February the 5th. 5 Additionally, we have provided you an 6 updated legislative tracking report listing bills 7 filed to date, with potential impact to the agency. 8 We are currently tracking 28 bills. And I reported 9 last month that five bills, with specific impact to 10 either charitable bingo, the state lottery or the 11 agency had been filed. And since that time, there 12 have been no additional bills filed with direct impact 13 to this agency. 14 Lastly is, Phil also mentioned I 15 informed you in December that a bingo legislative 16 workgroup was formed at the request of Chairman Kino 17 Flores, and the workgroup is comprised of staff 18 members from Rep. Flores' office, representatives from 19 the bingo industry and staff members from this agency. 20 Three work sessions have taken place, 21 with the goal of producing a draft bill that will 22 streamline the licensing process. And, as Phil 23 reported to you earlier, staff has been working on 24 compiling information responsive to the workgroup's 25 efforts. 0146 1 And this concludes my report, and I'll 2 be happy to answer any questions. 3 COMM. CLOWE: No questions. 4 CHAIRMAN COX: No questions. Thank you. 5 AGENDA ITEM NO. XIII 6 CHAIRMAN COX: Item No. XIII, report, 7 possible discussion and/or action on the Mega Millions 8 game and/or contract. 9 Director Sadberry. 10 MR. SADBERRY: Commissioners, Anthony 11 Sadberry, Executive Director, for the record. 12 As Robert Tirloni mentioned, as we've 13 discussed to some extent earlier in the meeting today, 14 I have information for you regarding the Mega Millions 15 game in an important upcoming meeting in Atlanta. 16 Robert and I will be attending a joint meeting with 17 representatives from Mega Millions states and 18 representatives from the MUSL Group. If you recall, 19 MUSL is the group that runs the Powerball game. 20 The purpose of this meeting will be to 21 discuss potential cooperative ventures or games that 22 both groups can participate in to address the 23 declining sales issues states are facing as a result 24 of jackpot wins. This meeting will take place on 25 February 8th, and I will provide you with any 0147 1 information as a result of that meeting, in the 2 February Commission meeting. 3 One additional item that's materials in 4 your notebooks concerning the resignation of the 5 Massachusetts Mega Millions director. The purpose of 6 that is to inform you that he was the director that's 7 in charge of the Mega Millions group, which will now 8 leave open the situation or finding a replacement, 9 according to the Mega Millions procedures, and I just 10 wanted to keep you advised of that. 11 I will be happy to answer or address any 12 questions you may have. 13 COMM. CLOWE: Where did he go, Anthony? 14 Do you know? 15 MR. SADBERRY: I do not know. My 16 uninformal, unofficial information is that he may have 17 an interest in government service in his county in 18 Massachusetts, of another nature, a different nature. 19 He is no longer with the Massachusetts Lottery, to my 20 knowledge. 21 COMM. CLOWE: Thank you. 22 CHAIRMAN COX: Thank you. 23 AGENDA ITEM NO. XIV 24 CHAIRMAN COX: Item XIV, report, 25 possible discussion and/or action on GTECH 0148 1 Corporation. 2 MR. SADBERRY: Commissioners, Anthony 3 Sadberry, Executive Director. 4 Enclosed in your notebooks, among other 5 written materials, is a GTECH Corporation press 6 release regarding resolution of litigation between 7 Scientific Games and GTECH. The release indicates 8 that Scientific Games and GTECH have signed a 9 settlement agreement resolving all outstanding 10 litigation between the two companies. Generally the 11 litigation included disputes between the parties 12 regarding each company's intellectual property. 13 And I would refer you to the additional 14 written materials in your notebook under this item and 15 would be happy to answer any questions. 16 CHAIRMAN COX: No questions. 17 Commissioner, if it's okay, we'll go 18 into executive session? 19 COMM. CLOWE: Yes, sir. 20 AGENDA ITEM NO. XV 21 CHAIRMAN COX: At this time I move the 22 Texas Lottery Commission go into executive session: 23 A. To deliberate the duties and 24 evaluation of the Executive Director, Deputy Executive 25 Director; and 0149 1 B. Internal Audit Director; 2 C. To deliberate the duties, 3 appointment and/or employment of the Charitable Bingo 4 Operations Director; 5 D. To deliberate the duties, 6 appointment and/or employment of an Acting Charitable 7 Bingo Operations Director; and. 8 E. To deliberate the duties of the 9 General Counsel pursuant to Section 551.074 of the 10 Texas Government Code; 11 F. To receive legal advice regarding 12 pending or contemplated litigation and/or to receive 13 legal advice pursuant to Section 551.071(1)(A) or (B) 14 of the Texas Government Code and/or to receive legal 15 advice pursuant to Section 551.071(2) of the Texas 16 Government Code, including but not limited to: 17 Cynthia Suarez v. Texas Lottery 18 Commission 19 Shelton Charles v. Texas Lottery 20 Commission and Gary Grief 21 Stephen Martin vs. Texas Lottery 22 Commission 23 Patsy Henry v. Texas Lottery Commission 24 Employment law, personnel law, 25 procurement and contract law, evidentiary and 0150 1 procedural law, and general government law, Mega 2 Millions game and/or contract. 3 Is there a second? 4 COMM. CLOWE: Second. 5 CHAIRMAN COX: All in favor, say "Aye." 6 COMM. CLOWE: Aye. 7 CHAIRMAN COX: Aye. 8 The vote is 2-0. 9 The Texas Lottery will go into executive 10 session. The time is 12:17 p.m. Today is January 30, 11 2007. 12 (Off the record: 12:17 p.m. to 1:48 13 p.m. 14 AGENDA ITEM NO. XVI 15 CHAIRMAN COX: The Texas Lottery 16 Commission is out of executive session. The time is 17 1:48 p.m. 18 Is there any action to be taken as a 19 result of executive session? 20 If not, let's move to Item XVII on the 21 agenda. 22 AGENDA ITEM NO. XVII 23 CHAIRMAN COX: Item XVII, consideration 24 of the status and possible entry of orders in Items A 25 through J. Do I need to read all of those, Kim? 0151 1 MS. KIPLIN: No, sir, you do not. 2 Commissioners, in each one of these 3 cases, there is a proposal for a decision issued by 4 State Office of Administrative Hearings Administrative 5 Law Judge. They're all lottery matters. They're all 6 recommendations to revoke licenses against the 7 respective licensees for failure to have funds 8 available at the time of the lottery sweep of the 9 account for the monies owed to the state. 10 The staff recommends that you sign each 11 one of these orders. 12 COMM. CLOWE: Move the adoption of the 13 staff recommendation. 14 CHAIRMAN COX: Second. 15 Motion made and seconded. All in favor, 16 say "Aye. 17 COMM. CLOWE: Aye. 18 CHAIRMAN COX: Aye. 19 Opposed, "No." 20 It carries, 2-0. 21 AGENDA ITEM NO. XVIII 22 CHAIRMAN COX: All right. Item No. 23 XVIII, report by the Executive Director and/or 24 possible discussion and/or action on the agency's 25 operational status, activities relating to the 0152 1 Charitable Bingo Operations Division, agency 2 procedures and FTE status. 3 Director Sadberry. 4 MR. SADBERRY: Commissioners, Anthony 5 Sadberry, Executive Director. 6 Continuing with our practice of 7 providing as much advance information to you as 8 possible, the written materials in your notebook 9 include the ombudsman posting, equity adjustments, 10 Charitable Bingo Operations Division activities and, 11 in connection with those, potential assistance of the 12 State Auditor's Officer, CBO, the management 13 leadership participation on TLC committees, CBOD Audit 14 section restructure, CBOD director posting, CBOD 15 director search committee and FTE status report. 16 As to those, the only thing I would add 17 as an update is that letters have gone out to the four 18 additional members of the search committee who serve 19 with me, who have all accepted the invitation to 20 participate. And we are looking to schedule hopefully 21 a meeting of that committee to begin the interview 22 process in the mid- to late February time frame. 23 Additional comments I would have on 24 other items are as follows: 25 I wanted to provide you an update on the 0153 1 presentation of opinion data gathered by the agency's 2 market research firm. If you will recall, the last 3 data presented was at the October Commission meeting. 4 At that time it was determined that future opinion 5 data would be presented quarterly. 6 At the Chairman's request, staff are 7 currently preparing a briefing addressing information 8 being provided by Ipsos Reid and its use by Lottery 9 staff; therefore, I am recommending that we defer the 10 quarterly report until after the briefing is 11 conducted, to allow for a broader discussion, if so 12 desired by the Commission. 13 On another matter that we mentioned 14 earlier today, the Lotto Texas jackpot estimation 15 procedure, at the Commission meeting in December, 16 staff presented the Lotto Texas procedures for your 17 review and approval, in compliance with the 18 recommendation from the State Auditor's Report on 19 Lotto Texas Activities. Their report included a 20 recommendation that procedures affecting Lotto Texas 21 players should be presented at a public Commission 22 meeting and that the Commission should publicly 23 approve the procedures. 24 Upon approval of the procedures, the 25 Audit Report recommended the agency make the 0154 1 procedures available to the public by publishing them 2 in the Texas Register and on its website. 3 You asked staff to reconsider the need 4 for a Commissioner's signature on the Lotto Texas 5 jackpot estimation documents and return with this item 6 in January. We are currently working toward revising 7 the procedures and plan to bring this item back in 8 February. 9 Another item on the performance 10 evaluations and personnel status changes: In 11 July 2006, the State Auditor's Office issued Report 12 No. 06-047 entitled "An Audit Report on Workforce 13 Management at the Texas Lottery Commission." 14 Contained within this report was the following 15 recommendation: 16 The agency's system for evaluating 17 employee performance does not ensure that managers and 18 supervisors measure all agency employees against 19 similar agency-wide performance standards and the 20 essential job functions of each respective position. 21 Agency management agreed with this recommendation, and 22 the information below details the progress made thus 23 far in revising agency procedures related to employee 24 performance evaluations and changes in personnel 25 status, such as merit raises, promotions or demotions. 0155 1 An employee workgroup formed in response 2 to the results of the 2005 Survey of Organizational 3 Excellence and chaired by the Lottery Operations 4 Drawing and Validations Manager developed a new 5 employee performance evaluation template and related 6 procedures. The new template and procedures have been 7 reviewed by an agency Conference Committee appointed 8 by the Executive Director. The Conference Committee 9 includes the Lottery Operations Drawings and 10 Validations Manager, Internal Audit Director, Human 11 Resources Director, Controller and General Counsel, 12 with the Executive Director and Commission Chairman 13 serving as ex officio members. 14 The Conference Committee is chaired by 15 the Deputy Executive Director. The Conference 16 Committee made changes to the documents and forwarded 17 those changes back to the employee workgroup on 18 January 11, 2007. The employee workgroup's responses 19 to the changes made by the Conference Committee were 20 provided to the Conference Committee on January 24, 21 2007. A meeting of the Conference Committee has been 22 scheduled for February 2, 2007, to discuss these 23 responses. 24 Revisions have also been made to the 25 agency procedure regarding requests for changes in 0156 1 personnel status, merit raises, promotions or 2 demotions, and these changes have received preliminary 3 approval from the Executive Director. Final approval 4 will be sought once the new employee evaluation 5 template and procedures are in place. 6 Pertaining to the retry or incomplete 7 transactions: A committee of staff are working on the 8 development of a procedural recommendation for the 9 handling of incomplete or retry transactions. The 10 committee is currently working with Legal Services and 11 will soon finalize a staff recommendation which will 12 be submitted to me for my consideration. The agency 13 is diligently working toward implementation of 14 procedures related to the SAO findings hotline in the 15 SAO Lotto Texas audit. 16 Commissioners, that concludes my report. 17 I would be happy to answers any questions. 18 COMM. CLOWE: Mr. Chairman, I would like 19 to comment that we didn't receive a report in this 20 meeting of our HUB or minority business activity. And 21 I would like to express interest in keeping current on 22 that. I know Chairman Cox is interested in that, and 23 I am as well. I am somewhat concerned about the level 24 of dedication in this area currently. You and I have 25 spoken about that in the past. 0157 1 MR. SADBERRY: We have. 2 COMM. CLOWE: And this is not meant as 3 criticism but just as an awareness comment, the 4 minority effort, the mentor protege program. You 5 know, it was very active for a number of years, and we 6 were really doing extremely well. And on behalf of 7 Chairman Cox and myself, I want to express our 8 continued interest in that and urge you to see that 9 that's an active program. 10 MR. SADBERRY: Commissioner, I 11 appreciate those comments, and I share your views in 12 that regard. And we will certainly note the need that 13 that be an agenda item and that we, by doing so, keep 14 you informed but also keep the emphasis on that 15 program going forward. 16 I have shared with you and continue to 17 share with staff certain interests and concerns that I 18 have, quite frankly, in that area. 19 If I may, if it's permitted under this 20 agenda item under my report to you, one particular 21 matter, for example, that's currently under 22 consideration is the advertising strategy. 23 And I have had for several weeks now 24 under my review some proposals that have been made. 25 And balancing fiscal responsibility for the 0158 1 utilization of funds in advertising, with the interest 2 in the HUB area that there be a reasonable and fair 3 and equitable sharing of the opportunity to 4 participate in that by HUB and minority vendors is the 5 kind of attention that I have focused on this 6 particular matter. 7 And we are currently scheduling a 8 meeting to hopefully finalize my review of that. And 9 I've met with staff on several occasions, including 10 the HUB director. I have recently completed a review 11 of the draft of the purchasing manual, for example, 12 which had certain HUB components included in that. 13 We need to keep this very important and 14 critical matter on the table, and it's equal to any 15 other matter or concern or issue that would be brought 16 on to this Commission. And I assure you -- and I 17 appreciate and I accept and understand the manner in 18 which you bring that, and I appreciate that emphasis. 19 And you can be assured that I will continue to 20 prioritize it as a vital component of what we do here 21 at this agency. 22 COMM. CLOWE: Thank you, Mr. Chairman. 23 CHAIRMAN COX: Thank you, Commissioner 24 Clowe. I certainly share your view. 25 And thank you, Director Sadberry, for 0159 1 your commitment to that. 2 Do you have anything further, 3 Commissioner? 4 COMM. CLOWE: No, sir. 5 AGENDA ITEM NO. XIX 6 CHAIRMAN COX: I don't see anyone around 7 that wants to do public comment. Am I missing anyone? 8 I don't have any forms. 9 COMM. CLOWE: I would ask about the next 10 BAC meeting? 11 CHAIRMAN COX: The next BAC meeting, I 12 think Phil hold us in his report, it's -- 13 MR. SANDERSON: Next Wednesday. It's a 14 week from tomorrow, February the 7th at 10:00 a.m. 15 And I just got notification that the agenda has been 16 posted on the Texas Register. 17 CHAIRMAN COX: Would you like to 18 continue your practice of attending the first part of 19 that meeting and I'll -- 20 COMM. CLOWE: If that's all right with 21 you. 22 CHAIRMAN COX: Yes, sir, that's fine 23 with me. 24 COMM. CLOWE: Great. Will do it. 25 CHAIRMAN COX: Okay. Now tell me again 0160 1 what date that is, Phil. 2 MR. SANDERSON: Wednesday, February the 3 7th. 4 CHAIRMAN COX: Okay. 10 o'clock? 5 MR. SANDERSON: Yes, sir. I'm just 6 verifying it one more time, just to make sure that's 7 what's posted out there. 8 10:00 a.m., yes, sir. 9 COMM. CLOWE: Okay. Do you want me to 10 leave about 10:15? 11 CHAIRMAN COX: I'll leave that totally 12 to your judgment. I'll be around. They'll let me 13 know when you've left, and then I'll go down there. 14 COMM. CLOWE: Phil, why don't you let me 15 know when he shows up and I'll leave. 16 MR. SANDERSON: Okay. 17 AGENDA ITEM NO. XX 18 CHAIRMAN COX: Okay. If there's no 19 further business, we'll adjourn. Thank you. 20 (Meeting adjourned: 1:59 p.m.) 21 22 23 24 25 0161 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 13th day of February 2007. 15 16 ________________________________ 17 Aloma J. Kennedy Certified Shorthand Reporter 18 CSR No. 494 - Expires 12/31/08 19 Firm Certification No. 276 Kennedy Reporting Service, Inc. 20 Cambridge Tower 1801 Lavaca Street, Suite 115 21 Austin, Texas 78701 512.474.2233 22 23 24 25