0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 WEDNESDAY, FEBRUARY 20, 2008 § 8 9 COMMISSION MEETING 10 WEDNESDAY, FEBRUARY 20, 2008 11 12 BE IT REMEMBERED THAT on Wednesday, 13 the 20th day of February 2008, the Texas Lottery 14 Commission meeting was held from 9:00 a.m. to 15 2:00 p.m., at the Offices of the Texas Lottery 16 Commission, 611 East 6th Street, Austin, Texas 78701, 17 before CHAIRMAN JAMES A. COX, JR., and COMMISSIONERS 18 C. TOM CLOWE, JR., and DAVID SCHENCK. The following 19 proceedings were reported via machine shorthand by 20 Aloma J. Kennedy, a Certified Shorthand Reporter of 21 the State of Texas, and the following proceedings were 22 had: 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONERS Mr. C. Tom Clowe, Jr. 5 Mr. David Schenck 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 DEPUTY EXECUTIVE DIRECTOR: 8 Mr. Gary Grief 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting Called to Order..... 8 4 AGENDA ITEM NO. II - Report by the Bingo Advisory Committee Chair, possible 5 discussion and/or action regarding the Bingo Advisory Committee’s activities, 6 including the February 6, 2008 Committee meeting.............................. 31 7 AGENDA ITEM NO. III - Consideration of and 8 possible discussion and/or action, including withdrawal, on proposed new rule 9 16 TAC §402.211 relating to Fair Conduct........ 102 10 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action, 11 including withdrawal and/or proposal, on new rule 16 TAC §402.210 relating 12 to House Rules.................................. 107 13 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, including 14 adoption, on new rule 16 TAC §402.709 relating to Corrective Action................. 109/187 15 AGENDA ITEM NO. VI - Report by the Charitable 16 Bingo Operations Director and possible discussion and/or action on the Charitable 17 Bingo Operations Division’s activities.......... 114 18 AGENDA ITEM NO. VII - Report, possible discussion and/or action on lottery sales 19 and revenue, game performance, new game opportunities, advertising, market 20 Research, and trends............................ 118 21 AGENDA ITEM NO. VIII - Report, possible discussion and/or action on transfers to 22 the State....................................... 146 23 AGENDA ITEM NO. IX - Report, possible discussion and/or action on Bingo 24 indirect and administrative expenses............ 147 25 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on the agency’s 4 procurement of directors’ and officers’ liability insurance................... 8 5 AGENDA ITEM NO. XI - Report, possible 6 discussion and/or action on the Attorney General Opinion GA-0579 relating to 7 Americans with Disabilities Act and the Texas Lottery Commission........................ 38 8 AGENDA ITEM NO. XII - Report, possible 9 discussion and/or action on the Attorney General Opinion GA-0592 relating to whether 10 the Texas Lottery Commission may operate a raffle-style game............................... 148 11 AGENDA ITEM NO. XIII - Report, possible 12 discussion and/or action on the Attorney General Opinion GA-0591 relating to whether 13 the Texas Lottery Commission may adopt a rule authorizing video or digital display 14 of the outcome of instant bingo games........... 152 15 AGENDA ITEM NO. XIV - Report, possible discussion and/or action on the 80th 16 Legislature..................................... 154 17 AGENDA ITEM NO. XV - Report, possible discussion and/or action on the 18 agency’s contracts.............................. 156 19 AGENDA ITEM NO. XVI - Report, possible discussion and/or action, including 20 extension, on the agency's audit services contract............................... 157 21 AGENDA ITEM NO. XVII - Report and possible 22 discussion and/or action on the agency's HUB program and/or minority business 23 participation, including the agency's Mentor Protégé Program and/or the agency’s 24 FY 2007 Minority Business Participation Report.......................................... 158 25 0005 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XVIII - Consideration of and 4 possible discussion and/or action on external and internal audits and/or reviews relating 5 to the Texas Lottery Commission and/or on the Internal Audit Department’s activities, 6 including a report on annuity payments to prize winners................................... 161 7 AGENDA ITEM NO. XIX - Report, possible 8 discussion and/or action on the Mega Millions game and/or contract................... 182 9 AGENDA ITEM NO. XX - Report, possible 10 discussion and/or action on GTECH Corporation............................... 183 11 AGENDA ITEM NO. XXI - Consideration of the 12 status and possible entry of orders in: A. Docket No. 362-06-0004.B – Lisa 13 Garland B. Docket No. 362-08-0867 – Stars 14 Supermarket C. Docket No. 362-08-0843 – Payless 15 Supermarket, Inc. D. Case No. 2008-133 – Town & 16 Country #93............................ 99/183 17 AGENDA ITEM NO. XXII - Report by the Executive Director and/or possible discussion 18 and/or action on the agency’s operational status, activities relating to the Charitable 19 Bingo Operations Division, agency procedures, and FTE status.................................. 184 20 AGENDA ITEM NO. XXIII - Public comment.......... 188 21 22 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. XXIV - Commission may meet in Executive Session: 4 A. To deliberate the duties and evaluation of the Executive Director 5 pursuant to Section 551.074 of the Texas Government Code 6 B. To deliberate the duties and evaluation of the Deputy Executive 7 Director pursuant to Section 551.074 of the Texas Government Code 8 C. To deliberate the duties and evaluation of the Internal Audit 9 Director pursuant to Section 551.074 of the Texas Government Code 10 D. To deliberate the duties and evaluation of the Charitable Bingo 11 Operations Director pursuant to Section 551.074 of the Texas 12 Government Code E. To deliberate the duties of the 13 General Counsel pursuant to Section 551.074 of the Texas Government 14 Code F. To receive legal advice regarding 15 pending or contemplated litigation pursuant to Section 551.071(1)(A) 16 and/or to receive legal advice regarding settlement offers 17 pursuant to Section 551.071(1)(B) of the Texas Government Code and/or 18 to receive legal advice pursuant to Section 551.071(2) of the Texas 19 Government Code, including but not limited to: 20 Shelton Charles v. Texas Lottery and Gary Grief 21 First State Bank of DeQueen, et al. v. Texas Lottery Commission 22 James T. Jongebloed v. Texas Lottery Commission 23 The Lotter Ltd 24 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 Employment law, personnel law, procurement and contract law, 4 evidentiary and procedural law, and general government law 5 Lottery Operations and Services contract 6 Mega Millions game and/or contract Directors’ and officers’ liability 7 insurance Attorney General Opinions GA-0579, 8 GA-0592, and GA-0591............... 185 9 AGENDA ITEM NO. XXV - Return to open session for further deliberation and possible action 10 on any matter discussed in Executive Session.... 187 11 AGENDA ITEM NO. XXVI - Adjournment.............. 188 12 REPORTER'S CERTIFICATE.......................... 189 13 14 15 16 17 18 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 WEDNESDAY, FEBRUARY 20, 2008 3 (9:00 a.m.) 4 AGENDA ITEM NO I 5 CHAIRMAN COX: Good morning. It's 6 9 o'clock. Today is February 20, 2008. Chairman 7 Clowe is here. Commissioner Schenck is here. I'm Jim 8 Cox. Let's call this meeting of the Texas Lottery 9 Commission to order. 10 I would like to take a couple of items 11 out of order. 12 AGENDA ITEM NO. X 13 CHAIRMAN COX: Item No. X, report, 14 possible discussion and/or action on the agency's 15 procurement of directors' and officers' liability 16 insurance. 17 Ms. Pyka and guests. 18 MS. PYKA: Good morning, Commissioners. 19 For the record, my name is Kathy Pyka, Controller for 20 the agency. With me this morning to my left is 21 Ms. Sally Becker with the State Office of Risk 22 Management, and Mr. Jerry Michalak with Arthur 23 Gallagher Risk Management Services. 24 This morning I would like to inform you 25 of a recent purchase of directors' and officers' 0009 1 liability insurance through the State Office of Risk 2 Management. The State Office of Risk Management 3 manages a statewide program for directors' and 4 officers' liability or public official liability 5 insurance coverage with employment practices liability 6 for all state agencies and institutions of higher 7 education. 8 The Commission's policy includes 9 coverage from February 1, 2008 to February 1, 2009, 10 and provides coverage for commissioners, executive 11 management and agency employees, with an aggregate 12 liability limit of a million dollars. The D&O 13 insurance will provide monetary protection for 14 Commission employees found liable in lawsuits where 15 monetary awards exceed $100,000, including monetary 16 awards for punitive damages. 17 Commissioners, with that, I would like 18 to turn it over to Ms. Becker and Mr. Michalak, who 19 will provide you an overview of the D&O liability 20 insurance. 21 MS. BECKER: Good morning. Thank you 22 for inviting us to be here. I just wanted to tell you 23 that the State Office of Risk Management was given the 24 authority to act as an insurance manager for state 25 agencies under its purview in House Bill 1207 from the 0010 1 77th Legislature. And part of that included looking 2 at every line of insurance, one at a time, and 3 determining if insurance should be purchased by state 4 agencies. If we found that that is a coverage that 5 agencies should purchase, we would be authorized to go 6 ahead and do a procurement for that coverage, and that 7 state agencies could participate in it once we 8 established it. The directors' and officers' 9 liability was one such coverage that we determined 10 that state agencies did have some exposures that could 11 be covered by the insurance policy. 12 One of the things that we did when we 13 went out for the procurement was that we looked at the 14 state's liabilities, its immunities, where we might 15 have some caps on those liabilities that we could be 16 responsible for and where we needed coverage and where 17 we didn't need coverage. And the one particular thing 18 I would like to point out on our directors' and 19 officers' program is the fact that we looked at the 20 fact that in most directors' and officers' liability 21 policies, defense cost is included. And that drives 22 up the premium considerably, because that's usually 23 the most expensive part of any type of lawsuit that 24 you would be involved in. 25 But because the state agencies and the 0011 1 commissioners, directors, board members are all 2 provided defense by the Attorney General's office kind 3 of like for free, we determined that we didn't need 4 that defense cost included in our policy. So when we 5 did our procurement, we asked all the responders to 6 eliminate that coverage from the policy and give us a 7 premium savings in return for that. 8 And also that they would have to 9 understand that the Attorney General would be the 10 attorney who would be representing the state agency or 11 the employee, board member, commissioner, and that 12 they have all the authority to make any settlements 13 and that the insurance company would have to work with 14 them. And we included the Attorney General in our 15 selection committee. They weren't a voting member, 16 but we did include them so they would review the 17 proposals, get the meet the insurers and the people 18 who would be handling it, to be sure that there was 19 that communication between those two entities. And it 20 has worked out very well since the program has been in 21 place. 22 So that was one of the things that we 23 looked at and we made sure that our program eliminated 24 or would give us savings as well. We also asked that 25 the insurer be very -- what do I want to say? -- very 0012 1 cooperative, in that if we found some kind of strange 2 things, because we knew every state agency was a 3 little bit different -- just like the Lottery 4 Commission is a little different from other agencies 5 that we have in the program -- would be maybe some 6 special coverages. So we wanted them to be very 7 flexible in being able to add or eliminate things that 8 were necessary or not necessary. 9 I'm going to let Jerry talk a little 10 bit about the coverages themselves 11 MR. MICHALAK: Thank you. Good 12 morning. 13 The coverage currently is written by 14 Illinois National Insurance Company, which is part of 15 American International Group, one of the largest 16 carriers, largest insurance companies in the world 17 right now. This D&O program has been, as Sally says, 18 in existence for about six years, and it's been very 19 successful for various state agencies. 20 Basically, the coverage provided is 21 coverage provided for directors, officers, all 22 employees, all volunteers for any wrongful acts that 23 may be brought against them for a lawsuit in the 24 delegation of your duties or the responsibility of 25 your duties. In addition to that, the employment 0013 1 practices liability is probably the broadest 2 employment practices liability written to provide you 3 for protection against employees bringing suits or 4 discrimination, humiliation, sexual advance and so 5 forth and so on. Again, the policy is written with a 6 one million dollar limit of liability, $100,000 7 deductible per occurrence, and defense is included by 8 the Attorney General's office. 9 I would like to answer any questions 10 that you may have in regards to this. I didn't want 11 to take up your time going line-by-line through the 12 program and through the policy, bore everybody to 13 death. But if you have any questions, I would be more 14 than happy to answer them at this time. 15 COMMISSIONER CLOWE: Would you like to 16 go first? 17 CHAIRMAN COX: No. Go ahead, please, 18 sir. 19 COMMISSIONER CLOWE: Kathy, has this 20 coverage been in place in the past? 21 MS. PYKA: It has not been in place in 22 the past here at the Texas Lottery Commission. 23 COMMISSIONER CLOWE: And what was the 24 need recognized to acquire this coverage at this time? 25 MS. PYKA: Commissioner Clowe, we 0014 1 looked at whether or not it would be cost-beneficial 2 to include coverage above and beyond the current state 3 indemnity cap and believe that it would be cost- 4 beneficial to have this coverage in place. 5 COMMISSIONER CLOWE: And what is the 6 cap? 7 MS. PYKA: $100,000. 8 COMMISSIONER CLOWE: And what is the 9 cost of the policy for a year? 10 MS. PYKA: The cost of the policy is 11 $26,000 -- or $25,887. 12 MS. BECKER: Can I also answer that 13 question? When we looked at this type of coverage to 14 determine whether or not state agencies should even 15 consider it, our concern at State Office of Risk 16 Management was not necessarily from the directors' and 17 officers' liability standpoint, because of the 18 immunities that are applicable in some cases. But the 19 employment practices liability, you find that 20 employment practices liability, we all have employees, 21 just like IBM or Dell, and they may consider 22 themselves to be discriminated or wrongfully 23 terminated. 24 And a lot of those cases, especially in 25 the discrimination area, end up in federal court 0015 1 rather than state court where any immunities or caps 2 we may have would be applicable -- would not be 3 applicable in federal court. And, therefore, the sky 4 is the limit to what somebody may be able to get as 5 far as a settlement or a judgment. And that's where 6 our concern was, that all state agencies with 7 employees should look at this coverage basically for 8 that protection. Okay? 9 COMMISSIONER CLOWE: And this coverage 10 is applicable to the group that's covered when they 11 act within the scope of their job responsibilities and 12 in a legal manner? Any illegal activity is not 13 covered? 14 MR. MICHALAK: Any criminal activity is 15 not covered. But, at the same time, somebody may be 16 acting in the course and scope but not acting under 17 the guidelines of the lottery commissions. And 18 because of that, you could be drawn into a lawsuit by 19 a dissatisfied employee or a dissatisfied ex-employee. 20 COMMISSIONER CLOWE: So this is 21 applicable in most cases in wrongful discharge 22 matters? 23 MR. MICHALAK: That's correct. Or 24 sexual harassment matters, sexual -- 25 MS. BECKER: Retaliation. 0016 1 MR. MICHALAK: -- retaliation. 2 COMMISSIONER CLOWE: What is the 3 history of this agency in regard to suits of that type 4 and kind? 5 MS. PYKA: May I defer to our General 6 Counsel and see if she would like to -- 7 MS. KIPLIN: I'll be glad to answer 8 that. We've had -- 9 COMMISSIONER CLOWE: I'm not asking you 10 to opine on suits that have been filed, just the 11 history in regard to the number of suits which would 12 be applicable under this coverage in the past. 13 MS. KIPLIN: And I'm going to ballpark 14 the number and say about a handful. 15 COMMISSIONER CLOWE: Is a handful five 16 or less? 17 MS. KIPLIN: Probably about -- probably 18 five. 19 COMMISSIONER CLOWE: And have there 20 been awards in excess of a $100,000 in any of those 21 cases? 22 MS. KIPLIN: No. 23 COMMISSIONER CLOWE: And in the risk 24 management function, how did you come to a decision 25 that this was good coverage for us at 25, $26,000 0017 1 annual cost? How did you matrix that out, if that's 2 what you did? 3 MS. BECKER: Well, we just look at 4 the -- you know, it's a business decision for the 5 Commission itself. Okay? But the fact that you had 6 some type of lawsuits, that is always a possibility 7 that that could happen to you, that just because 8 they're not over the $100,000, that doesn't mean that 9 it couldn't happen. You know, insurance, you have to 10 buy-it-before-it-happens kind of situation; otherwise, 11 it wouldn't apply. 12 So you always have to take into 13 consideration that if you have some activity, that 14 sooner or later there may be that type of a settlement 15 or judgment that is not in your favor. 16 COMMISSIONER CLOWE: And this is -- 17 MS. BECKER: $25,000, you know, that is 18 the business decision that the director needs to take. 19 We can only give someone advice. 20 COMMISSIONER CLOWE: And this coverage 21 is applicable where an individual is named as an 22 individual in the suit, outside of the entity, the 23 agency being sued. Is that correct? 24 MR. MICHALAK: That is correct. But 25 most cases all -- most lawsuits will come in naming 0018 1 the individual, plus it will name the entity at the 2 same time, realizing the fact that you've got the 3 deeper pockets on the entity side. 4 Going back to your question about the 5 matrix and everything else like that, this is 6 underwritten by the underwriters out of New York. It 7 is based upon, No. 1, your budget expenditures, the 8 essence of the Lottery Commission, and then the number 9 of employees that you have. That's the determination 10 for the amount that's there. We have provided three 11 quotes, one for one million, one for $5 million and 12 one for $10 million, and you have elected to purchase 13 one million dollars at this time. 14 COMMISSIONER CLOWE: I think any person 15 who serves on a board without compensation, and giving 16 of their time as a public servant, would like the idea 17 of this kind of coverage. I'm not sure in each 18 individual case if the individual serving have their 19 own insurance. In many cases, they do. And that 20 is -- certainly someone who is going to accept a board 21 position ought to examine the risk and determine if 22 they want their own insurance, paying for it 23 themselves. 24 I assume that if this agency has a good 25 track record in this field, that cost would be reduced 0019 1 over a period of time. Is that a reasonable 2 assumption? 3 MR. MICHALAK: Basically, on your 4 rating size, your experience was taken into 5 consideration, but it was given very many credits, due 6 to your good experience, because of the fact that you 7 have not had any large claims paid and only have had a 8 handsful of claims. 9 If it goes on further, that we've 10 looked at some of the risks they've had -- a 11 considerable amount of lawsuits, a considerable amount 12 of payments -- their premium was not credited -- or 13 their rates were not credited as much as yours were 14 right now. 15 COMM. CLOWE: So the answer is, we've 16 already gotten our discount? 17 MR. MICHALAK: At the present time 18 you've gotten your discount. But as the insurance 19 market goes up and down, you know, there's no telling 20 that it couldn't go down further in the future. 21 COMMISSIONER CLOWE: It strikes me that 22 it's expensive coverage. I'm involved in some other 23 O&D insurance activities. And 25, $26,000 a year is 24 in my mind on the expensive side, just actual dollars. 25 I think it's important, Mr. Chairman, 0020 1 to point out to everyone that might be interested in 2 this that the best protection against any kind of 3 wrongful discharge activity or sexual or other 4 discrimination activity is good practice. And this is 5 not a protection that should be considered to be a 6 license for misbehavior. And no one should draw 7 comfort from the fact that this kind of coverage is in 8 place. 9 The most important thing is to perform 10 properly in your job responsibility. And then if you 11 have someone who is disgruntled to the point of filing 12 a lawsuit, then you go forward in that venue. But 13 it's most important to me, and I think surely to every 14 other board member, to have good practice and to treat 15 employees properly before you ever get to this kind of 16 an action where insurance of this type and kind might 17 come into play. 18 MR. MICHALAK: Commissioner, I note -- 19 and the fact that you do have a very good employee 20 handbook. And the way your handbook is written as far 21 as the directions of your employees and your 22 supervisor adds a lot to what you're saying right 23 there. And I totally agree. Good practices 24 supervision are the most important things, and 25 training, to keep these lawsuits at a minimum or, you 0021 1 know, just nip them in the bud when it does happen. 2 COMMISSIONER CLOWE: Thank you, 3 Mr. Chairman. 4 CHAIRMAN COX: Thank you. 5 Commissioner? 6 COMMISSIONER SCHENCK: Thank you. I 7 have just a few questions. I want to clarify just who 8 this coverage is for. It's not just for the board, to 9 be clear? 10 MS. PYKA: That is correct. It 11 includes the Commission directors as well as all 12 agency employees. 13 COMMISSIONER SCHENCK: Okay. But not 14 the Commission itself as an entity? 15 MR. MICHALAK: The Commission itself as 16 an entity is also covered. 17 COMMISSIONER SCHENCK: Okay. Secondly, 18 this was competitively bid. I agree this is an 19 expensive premium, or seems to be, but we've gone 20 through a competitive bid process. 21 MS. BECKER: That's correct. The State 22 Office of Risk Management writes the specifications. 23 The State Office of Risk Management is 24 administratively attached to the Attorney General's 25 office. And so, therefore, they provide us with their 0022 1 procurement, purchasing expertise. So they make sure 2 that we follow all the bid laws and everything is done 3 according to them. 4 So they, you know, sit on our selection 5 committee, not as a voting member, but to make sure 6 that everything is done correctly. They do the 7 publication of it. They receive the proposals. They 8 are at every pre-proposal meeting or any meeting with 9 any of the vendors that have given us a proposal. So 10 we do do that. 11 We did this procurement three years ago 12 for the second time. And the first time we did the 13 procurement, we only had one response. The second 14 time we had three. So as the program, you know, grows 15 and gets known and the experience that we have, the 16 more participants we'll have in that process. 17 COMMISSIONER SCHENCK: So this was the 18 best deal that you could work for us after all that 19 process? 20 MS. BECKER: At that point in time, 21 yes. 22 COMMISSIONER SCHENCK: Okay. One more 23 question about the policy itself. Is this a claims- 24 made policy or is this an occurrence policy? 25 MR. MICHALAK: It is a claims-made 0023 1 policy. 2 COMMISSIONER SCHENCK: Okay. 3 MR. MICHALAK: And the reason being is 4 because under employment practices or under any 5 directors' and officers' suits that may be brought, it 6 is very hard to determine exactly the date of 7 occurrence, and the date of occurrence could run over 8 multiple years. So that's why it is probably best to 9 have this type of coverage written on a claims-made 10 basis. 11 COMMISSIONER SCHENCK: Okay. Is there 12 a tail end feature to this or -- 13 MR. MICHALAK: Yes, there is. 14 COMMISSIONER SCHENCK: Okay. So if we, 15 for instance, have an event occur that -- we're 16 unhappy with, let's say, two employees. One of them 17 is discharged and brings a claim against the other and 18 the Commission. We're not happy with the other one; 19 we let him go. Is he still covered despite the fact 20 that he's now separated from the Commission? 21 MR. MICHALAK: Right. That is correct. 22 COMMISSIONER SCHENCK: Even though the 23 claim is made after his departure? 24 MR. MICHALAK: That is correct. 25 COMMISSIONER SCHENCK: Okay. And just 0024 1 to be clear, the one thing I'm most concerned about 2 with this coverage is that it not affect the agency's 3 litigating position or its posture in case -- I think 4 we just heard that our experience with claims has been 5 very good, and I would expect that it would continue 6 that way, and that if we continue to perform well as 7 an agency and as an insurance-buying customer, we can 8 expect that in the future that our premiums will 9 reflect that. 10 So it seems to me that given the 11 immunities that we normally enjoy already, the fact of 12 having this insurance is, frankly, going to make it 13 easier for the Commission to stand when it believes 14 that it's right in its position and not to settle a 15 claim simply because there is insurance there. It's, 16 frankly, as a backstop so that if we face a claim 17 where we don't believe there is a valid basis for 18 liability, we will not be in a position where we are 19 simply settling it to make it go away? 20 MR. MICHALAK: From what we've seen in 21 the past before working with the Attorney General's 22 office or having an insurance company work with the 23 Attorney General's office and the legal counsel with 24 various state agencies, they vehemently do fight most 25 all of these claims as they do come in. None of them 0025 1 are taken on the merit of it right there, but they are 2 totally investigated and defended as need be. 3 COMMISSIONER SCHENCK: All right. And 4 so my understanding would be the existence of this 5 coverage would only further the enthusiasm for 6 defending what we believe would be a valid position? 7 MS. BECKER: And I'll tell you, I have 8 not seen the Attorney General make any distinction 9 between losses that have insurance and don't have 10 insurance. They aren't assigned to special attorneys 11 that, you know, handle only the cases that have 12 insurance from those agencies. They're just 13 distributed as they come in, depending upon the work 14 load of that particular assistant Attorney General. 15 And so I don't think there's any preference from their 16 standpoint as to how they handle a case. 17 COMMISSIONER SCHENCK: That's good to 18 know. And having separated the duty to defend out of 19 the policy, as you point out, the defense costs aren't 20 part of the rationale either, as we look forward. So 21 this is ultimately just a backstop to encourage 22 defense where defense is an appropriate posture. 23 MR. MICHALAK: That's correct. 24 COMMISSIONER SCHENCK: Okay. Thank you 25 very much. I have no further questions. 0026 1 CHAIRMAN COX: I want to talk a little 2 bit about that premium as well. My experience, like 3 Chairman Clowe's, serving on other boards, is that 4 this is a pretty expensive premium. Typically for 5 less than that, we usually get $10 million coverage. 6 What was the basis of the premium? 7 MR. MICHALAK: The basis of the premium 8 is, No. 1, the expenditures of the agency, taking out 9 any prizes paid by the Lottery Commission. Your 10 normal operating expenses, that's Point No. 1. Point 11 No. 2 is the asset base of the state agency. 12 CHAIRMAN COX: Yes. 13 MR. MICHALAK: And thirdly is the 14 number of employees that you have. 15 CHAIRMAN COX: Okay. So what I see 16 there that's out of whack is the amount of 17 expenditures that we pay, because if you look at this 18 like a normal business, I would say that that's 19 relevant. But I think if it's relevant in this case, 20 it's relevant in a very different way, because most of 21 that money that we are spending is to outside agencies 22 to operate the lottery and assume that liability 23 themselves. 24 So, really, all we're doing is working 25 with about 300 employees and about $30 million in 0027 1 payroll and other operating expenses relating to our 2 facilities and the like. And the rest of that is 3 contracted work to independent contractors who carry 4 their own insurance against the activities that it 5 looks like we're getting whacked for, too. 6 MR. MICHALAK: I don't necessarily 7 agree with that, Chairman. From what I have seen in 8 the D&O market, looking at the size of your 9 operation -- and I understand the $30 million in 10 premium -- I mean, $30 million in salary and things 11 like that. If you look at it, the coverage is 12 basically priced at about $90 or $85 per employee -- 13 CHAIRMAN COX: Yes. 14 MR. MICHALAK: -- for a million 15 dollars' worth of coverage, if you want to matrix it 16 that say. If you want to take your total expenditures 17 and divide that back into it at the $25,000 worth of 18 premiums, I think it's -- again, the number goes done 19 even more. Everything that we've seen from our 20 quoting and our operating with the various state 21 agencies, including universities and things like that, 22 this is a very, very competitive-priced program and a 23 very, very competitive premium for your organization. 24 CHAIRMAN COX: Would it be the case 25 that our premium is higher than what I am accustomed 0028 1 to seeing, because we're covering all employees, where 2 typically the coverage is only for directors and 3 officers? 4 MR. MICHALAK: That very well could be. 5 A lot of companies buy -- public companies buy 6 separate D&O limits, directors' and officers' limits, 7 separate employment practices liability coverage, 8 because they don't want to dilute their limits in case 9 of a lawsuit brought against the directors and the 10 officers of the company. So that could be part of it. 11 Also non-profits, per se, if you're 12 operating for a church and things like that, who don't 13 have the opportunity or may not see the type of 14 lawsuits that would come about, because of their 15 number of employees, again, their premium would be 16 lower at that same time. 17 CHAIRMAN COX: Yes. So this wasn't a 18 cookie-cutter deal. You looked at our facts and 19 circumstances in determining what the risks were and 20 what the appropriate premium would be? 21 MR. MICHALAK: Exactly. As a matter of 22 fact, the first premiums that did come in I thought 23 came in a little high to begin with, and we were able 24 to negotiate them down to the level that they are 25 right now. 0029 1 COMMISSIONER CLOWE: I think that's an 2 excellent point, Mr. Chairman. In thinking about the 3 coverage, I guess I would like to ask another question 4 about an explanation in regard to the coverage of all 5 employees. Only certain employees within the agency 6 are empowered to separate an employee from the agency. 7 But I guess any employee can influence a separation in 8 some way or another. And I guess any employee, 9 through misbehavior, could discriminate against 10 another employee. Can you help me with that a little 11 bit? 12 MR. MICHALAK: Absolutely. And one of 13 the first employment practices liability claims I 14 became involved with was a company that manufactured 15 money-counting machines, and they did this worldwide. 16 And inside their plant they had three or four 17 gentlemen that liked to roughhouse around, and they 18 always picked on one individual. 19 Well, there was a layoff involved. 20 That employee left, and he came back and sued the 21 company for sexual harassment of these gentlemen 22 roughhousing in the plant. Now again, anybody can 23 bring a lawsuit for any reason. But that's a prime 24 example. There's no supervision involved. There's 25 nothing probably there against the employee handbook. 0030 1 But, yet, they were able to bring a suit -- he was 2 able to bring a suit after he was laid off and was 3 successful in winning it, because he had notified a 4 supervisor before that. They didn't do anything, 5 because, "Oh, they're just roughhousing." And all of 6 a sudden it came back. And when he was terminated, he 7 said, "I told you, and that's the reason I'm 8 terminated and brought the lawsuit." 9 COMMISSIONER CLOWE: Thank you. 10 COMMISSIONER SCHENCK: Well, that's 11 true for almost every sexual harassment claim. Right? 12 And the other thing is that -- Chairman Clowe, is that 13 "wrongful act" is the definition of the coverage. So 14 it boggles the imagination to think of the number of 15 things that a plaintiff's lawyer will think up as a 16 basis for liability. 17 But I have one more question for you, 18 Kim. 19 MS. KIPLIN: Yes, sir. 20 COMMISSIONER SCHENCK: We have 21 already -- we have a pretty narrow window we're 22 dealing with here. We have immunities for most of 23 these things, unless the federal government largely 24 has taken it away. Are you aware of a case outside of 25 this agency where a state employee ever confronted 0031 1 damage recovery in excess of the $100,000 where it was 2 not immune? 3 MS. KIPLIN: Yes, sir, I am. And it's 4 anecdotal. It goes back years. It was, frankly, 5 before the state authorized agencies to purchase D&O, 6 and it was a first amendment retaliation case, went to 7 trial and the verdict was returned, and liability 8 against the employee was in excess of $100,000. Not 9 this agency, but I am aware of it. 10 COMMISSIONER SCHENCK: No further 11 questions. Thank you. 12 CHAIRMAN COX: Thank you very much. 13 MS. BECKER: Thank you. 14 MR. MICHALAK: Thank you. 15 CHAIRMAN COX: We appreciate your 16 coming and your explanations. 17 MS. BECKER: Appreciate it. 18 AGENDA ITEM NO. II 19 CHAIRMAN COX: Agenda Item No. II, 20 report by the Bingo Advisory Committee Chair, possible 21 discussion and/or action regarding the Bingo Advisory 22 Committee's activities, including the February 6, 2008 23 Committee meeting. 24 Ms. Taylor. 25 MS. TAYLOR: Good morning, 0032 1 Commissioners. I believe that this report was 2 included in your notebook, so I'm just going to speed 3 read through it real quickly, if you have any 4 questions. 5 MS. KIPLIN: Can I ask you not to speed 6 read through it and kind of go slow, because it's 7 really challenging for the Court Reporter. 8 MS. TAYLOR: I've already talked to the 9 Court Report. 10 MS. KIPLIN: Okay. 11 MS. TAYLOR: I'm giving her my copy 12 when I'm finished. 13 MS. KIPLIN: Thank you, because I've 14 seen her . . . 15 MS. TAYLOR: The Bingo Advisory 16 Committee of the Texas Lottery Commission met on 17 February 6, 2008, in Austin at 10:00 a.m. All members 18 were in attendance. BAC members were advised Chairman 19 Cox was unable to attend. 20 It was moved, seconded and unanimously 21 passed to approve the November 7, 2005 Bingo Advisory 22 Committee meeting minutes as posted on-line, with no 23 changes. 24 Nelda Trevino, TLC Director of 25 Governmental Affairs Division, reviewed action on the 0033 1 80th Legislature. She noted there have been no 2 committee meetings as of this date regarding bingo. 3 Public comment was received from Steve Bresnen stating 4 that although progressive bingo had passed through the 5 House and Senate, the bill had been vetoed by the 6 Governor because of the work of the Littlefield 7 Corporation who had hired lobbyists to kill the bill. 8 The reform bill which had been worked 9 on for months and was in good condition never made it 10 out of calendars because of the dog track and out-of- 11 state gaming people who do not want bingo in Texas to 12 thrive. He urged BAC members to talk to their state 13 senators and representatives for help. Steve also 14 mentioned the AG opinion which said video verification 15 of pull-tabs was legal but questioned whether event 16 tabs themselves were legal. 17 Bruce Miner, TLC Manager of Licensing 18 Services, reviewed the third quarter 2007 bingo 19 conductor information with BAC members. He noted net 20 receipts were higher the third quarter 2007 than the 21 third quarter 2006. However, attendance decreased 22 approximately 4.8 percent between the third quarter 23 2007 and the third quarter 2006, and has decreased 24 20.2 percent since the third quarter 2003, with 25 conductors decreasing 11.8 percent for the same time 0034 1 period. Prizes have continued to increase, due to 2 increasing prize percentage payouts. A workgroup to 3 address prize payouts was created, with Knowles as 4 Chair, Rosie, Markey, and public members Darin Peters 5 and Kris Keller. 6 Richard Frysinger, TLC Special Projects 7 Assistant, reviewed the on-line Operator Training 8 Program with committee members. The program met with 9 positive feedback from BAC members. 10 Sandy Joseph, TLC attorney from Legal 11 Services Division, reviewed proposed new rule 16 TAC 12 402.709 relating to corrective action-audit. She told 13 committee members because of House Bill 3430, there 14 are new guidelines for reasoned justification of 15 rules. Therefore, the new rules that have not already 16 been adopted by Commissioners will be republished to 17 comply with 3430. There was no additional comment 18 from BAC members concerning this rule. 19 Sandy Joseph reviewed proposed new rule 20 16 TAC 402.210 relating to house rules. She noted 21 this rule has been modified substantially in 22 accordance with comments received, and it is now a 23 much simpler rule. BAC members support this rule and 24 thank the staff for great work. Public comments was 25 received that the Bingo Interest Group supports this 0035 1 revised rule. 2 Sandy Joseph reviewed proposed new rule 3 16 TAC 402.211 relating to fair conduct. BAC members 4 questioned why work done during the workgroup session 5 was not contained in this rule and why additional 6 items not in the rule worked on by the workgroup was 7 now in the rule. 8 BAC members do not support this rule 9 and have asked that the workgroup, consisting of 10 Markey as Chair, Suzanne, Kim, Rosie and public 11 members, Steve Fenoglio and David Heinlein, meet again 12 with staff members before the rule is published. 13 Public comment was received from Steve Bresnen, 14 stating that he agrees with the comments from the BAC 15 and would like to be added to the workgroup to 16 continue working on this rule. Kris Keller also 17 requested to serve on the workgroup. 18 Markey advised committee members she 19 did not have a report from her workgroup at this time. 20 Knowles and Earl both reported their committees had 21 met two times and they would send written comments to 22 the staff, to be forwarded to the rest of the 23 committee members. Earl also reported that the only 24 rule his committee had not been able to work on yet 25 was the collection of rent. 0036 1 Kris Keller, a commercial lessor from 2 San Antonio, told committee members about pricing on 3 electronics in San Antonio and why he feels there is a 4 need for setting a pricing floor for the sale of 5 card-minding devices in bingo halls. A workgroup to 6 look at market conduct was created, with Markey as 7 Chair, Rosie, Tom, and public members Steve Bresnen 8 and Kris Keller. Markey was directed to add 9 additional committee members, at her discretion. 10 A workgroup consisting of Suzanne, Kim 11 and Rosie was created to work on the 2007 BAC Annual 12 Report. Phil Sanderson said the staff will pick a day 13 for the numbers that will be used on the report. 14 Phil Sanderson gave BAC members a 15 report on the activities of the Charitable Bingo 16 Division. 17 No additional public comment was 18 received. 19 The next meeting is tentatively 20 scheduled for May 7, 2008, at 10 a.m. A workgroup to 21 work on BAC nominations will need to be created at 22 this meeting. 23 And the meeting was adjourned at 24 12:56 p.m. 25 If you have any questions, I'll be glad 0037 1 to try to answer them. 2 CHAIRMAN COX: Questions? 3 COMMISSIONER CLOWE: No questions. 4 COMMISSIONER SCHENCK: No questions. 5 CHAIRMAN COX: Suzanne, Item X, 6 Mr. Keller appeared and said that he believed that 7 there is a need for setting a pricing floor for the 8 sale of card-minding device in bingo halls. That 9 doesn't sound like something that can be done. 10 Counsel, do you -- 11 MS. TAYLOR: Well, actually, I do 12 believe that somewhere contained -- and I know 13 Mr. Sanderson can probably just pop that right up -- 14 somewhere contained in the rule or there is something 15 where the Commission can set pricing for card- -- 16 CHAIRMAN COX: Well, it seemed like 17 we -- and I think Commissioner Schenck was recalling 18 as well -- that that question came up in a recent 19 meeting. 20 MR. SANDERSON: After the Commission 21 meeting, I believe either in January or December, 22 Mr. Keller had made a petition for rulemaking. And we 23 had the discussion, and staff's recommendation was to 24 deny that petition. And at that point he contacted 25 the Chair of the BAC and requested the agenda item be 0038 1 placed on the BAC's agenda for their discussion and 2 possibly look at forming a workgroup on market conduct 3 in general. And one of the issues would be to look at 4 if there is a possibility of setting prices. 5 CHAIRMAN COX: Ms. Joseph, you stay 6 right in the middle of that, will you? 7 MS. JOSEPH: Yes, sir. 8 CHAIRMAN COX: Okay. Thank you. 9 Suzanne, thank you very much. 10 MS. TAYLOR: Thank you so much. 11 AGENDA ITEM NO. XI 12 CHAIRMAN COX: Okay. Now, we're going 13 to take Item XI, report, possible discussion and/or 14 action on the Attorney General Opinions GA-0579 15 relating to Americans with Disabilities Act and the 16 Texas Lottery Commission. 17 Ms. Kiplin. 18 MS. KIPLIN: Commissioners, you took 19 this matter up in the December meeting and had 20 significant discussion from both the staff and then 21 also from folks outside this agency. You asked the 22 staff to undertake some tasks and then come back to 23 you-all with that information, and that is what the 24 staff is prepared to do today. 25 We thought it would be a good idea if 0039 1 Ms. Woelk would begin the staff part of this item and 2 just briefly going through the state of the law again. 3 I think one issue that you asked was to go back and 4 revisit that and make sure what we believe as the 5 state of the law is, in fact, the state of the law and 6 touch base with those folks that had an interest in 7 that, and I believe we have done that. 8 And then after that, Mr. Anger has the 9 other portion of the assignments that you made and is 10 planning to present that information 11 CHAIRMAN COX: Excellent. 12 MS. WOELK: Thank you. Sarah Woelk, 13 Special Counsel. 14 At the last Commission meeting, I 15 reviewed the Americans with Disabilities Act in 16 Title II and talked about the context in which a claim 17 could arise. And I've talked to both Tina Tran with 18 Sen. Ellis' office, and Wayne Krauze with Texas Civil 19 Rights Project. I don't think we have any 20 disagreements about what the law says or what the case 21 law is, although they're not here to speak for 22 themselves. 23 But I think I would stick with my view 24 that under the current development of the ADA, there 25 is nothing that makes me say, "Oh, my, yes! We must 0040 1 go out and change our rule so that we license only 2 people who don't permit smoking." They have what I 3 think of as an optimistic view of where they could 4 take the ADA in a lawsuit. And the ADA is the kind of 5 law that has a fairly limited amount of actual text to 6 it, and it is developed by case law. So it's not 7 inconceivable that that case law could develop that 8 takes it in a new direction. And as we discussed at 9 the last meeting, certainly it's conceivable that an 10 individual with a specific disability could have a 11 claim where he got -- where the Plaintiff got some 12 fairly narrow relief. I don't think there's any basis 13 for concluding that all retailers must be -- all 14 retailers we use must have no-smoking facilities. 15 I got a couple of real specific 16 assignments from you. And one was, the question came 17 up: Is there a general prohibition against smoking in 18 state facilities? And the answer is "Almost." The 19 agency that used to be the Building -- the General 20 Services Commission -- is now the Texas Facilities 21 Commission. And they have an agency rule that any of 22 their facilities, the facilities under their 23 regulation, must be no-smoking facilities. 24 As it happens, we have a general -- we 25 are excepted from coverage of those Facilities 0041 1 Commission rules, but this agency has adopted a policy 2 consistent with those rules. So basically most state 3 agencies are in facilities that are under the Texas 4 Facilities Commission rule that requires them to be no 5 smoking. That rule doesn't specifically apply to the 6 Lottery Commission. 7 CHAIRMAN COX: Well, Sarah, the Texas 8 Building Commission and the Preservation Board, most 9 all of their buildings are non-smoking? 10 MS. WOELK: Right. Almost all state 11 buildings are subject to this Facilities Commission 12 rule. You may recall that we're generally excepted 13 from a certain group of a certain chapter of their 14 rules. So, as it happens, this building isn't subject 15 to that rule. And I think Mike Anger -- or Mike 16 Fernandez can give you more information. But we have 17 adopted a policy that matches their rule. 18 COMMISSIONER CLOWE: What is the 19 relevancy in that to the question of passing a rule 20 that would require no smoking of licensed sellers of 21 bingo -- of lottery? 22 MS. WOELK: Well, I think how we got 23 there at the last meeting was, some questions came up 24 to which the answer was, "Well, those facilities have 25 to be" -- oh, I know. The issue came up about other 0042 1 state services and would this ADA issue be relevant to 2 them. And I think we responded that most state 3 services are provided in state facilities which are 4 no-smoking anyway. 5 So for most state services in Texas, 6 the issue wouldn't even arise. But because the 7 Lottery Commission, and maybe Parks & Wildlife and a 8 few other agencies provide certain state services 9 through private retail outlets, those state services 10 may be provided in facilities that allow smoking. 11 But that's the conversation at the 12 meeting in which it came up. And one of the 13 Commissioners requested that the staff follow up and 14 confirm that generally in state facilities, generally 15 state facilities are subject to a no-smoking rule. 16 But it's not directly relevant. 17 COMMISSIONER CLOWE: I don't see the 18 relevancy, really. 19 MS. WOELK: Right. 20 CHAIRMAN COX: I think the direct 21 relevance, Chairman Clowe, was to the impact of the 22 ADA on the provision of state services. And since 23 most state services were provided in state buildings, 24 I think it was just a question of interest: Are there 25 prohibitions against smoking in places where most 0043 1 state services are provided? 2 COMMISSIONER CLOWE: I understand that, 3 and I understand that question. I'm just trying to 4 get to the narrow view of where lottery tickets are 5 sold outside of the claim center out here where 6 tickets are sold -- 7 MS. WOELK: Right. And -- 8 COMMISSIONER CLOWE: -- which is state 9 property, a state office. I'm just trying to -- 10 MS. WOELK: Right. And I don't think 11 the question -- 12 COMMISSIONER CLOWE: I didn't get the 13 answer to what the other states do at licensed sellers 14 of lottery product. Did I miss that answer? 15 MS. WOELK: No. I mean, the question 16 that we were specifically asked is, what's the rule 17 that applies to state facilities generally? But the 18 one other agency we're aware of that uses private 19 retailers to provide a state service would be Parks & 20 Wildlife in the issuance of hunting and fishing 21 licenses, and they are in the same position we are. 22 No one has made an ADA claim directly to them, but 23 they've briefed the issue to the Attorney General, 24 because they recognize that their situation is 25 analogous to our situation. 0044 1 COMMISSIONER CLOWE: And did we get 2 into the bingo side of this, with this inquiry about 3 prohibition on behalf of the Lottery Commission for 4 smoking in bingo halls? 5 MS. WOELK: Well, it was mentioned in 6 the last meeting, only in the context that you were 7 aware that some local ordinances that had banned 8 smoking had caused some unhappiness in the bingo 9 community. But we don't provide a service in bingo 10 halls. In regard to bingo, this is a regulatory 11 agency, which is comparable to what most state 12 agencies are doing. In regard to the sale of lottery 13 tickets, we actually are an enterprise. So our 14 position in regards to the sale of lottery tickets is 15 not a typical state agency position to be in. 16 COMMISSIONER CLOWE: Does that mean 17 that you see us licensing bingo operations differently 18 from licensing the sale of lottery tickets? 19 MS. WOELK: I see that our relationship 20 to bingo licensing and our relationship to lottery 21 sales licensing is very different for purposes of the 22 ADA, because what the ADA is looking at is the 23 provision of a state service. And the sale of lottery 24 tickets is probably within what the ADA views as the 25 provision of a state service. 0045 1 It's clear that the ADA does not view 2 traditional trade licensing or activity licensing as a 3 provision of a state service. The provision of bingo 4 games is a privately provided service. We just happen 5 to okay that; whereas, the sale of lottery tickets is 6 a service that the state is actually providing. And I 7 think that's very clear, that the ADA makes that 8 distinction. 9 COMMISSIONER CLOWE: Where would, for 10 example, the requiring of an inspection sticker on an 11 automobile, which is a state requirement performed on 12 private premises, fall in regard to that? 13 MS. WOELK: Well, I didn't look at that 14 question directly. I think it probably depends on 15 what the structure is. My guess is, those people are 16 just licensed to be able to provide a certain service, 17 and they remit a certain amount of the money they're 18 paid -- to the state. I don't think that's a state 19 enterprise in the sense that the state actually is 20 responsible ultimately for the program. 21 COMMISSIONER CLOWE: I think the state 22 is. 23 MS. WOELK: They may be. And I can't 24 answer that for sure. But I don't think it's the 25 same -- 0046 1 COMMISSIONER CLOWE: The state requires 2 that the mechanic perform a visual and a mechanical 3 function and enter it into a computer. And the state 4 provides the license which is affixed on the 5 windshield. I see it as very similar. 6 MS. WOELK: And it might be. And I 7 have not -- I mean, it's very clear under the ADA that 8 traditional licensing, like occupational licensing, is 9 not a state service for purposes of the ADA. And the 10 inspection system may be somewhere in the middle, and 11 that would be another venue for the smoking issue to 12 be raised. But I think that the fact that we actually 13 sell a product makes the lottery different from most 14 state licensing. 15 COMMISSIONER CLOWE: Yes. I think it's 16 almost -- in my mind, Sarah, it almost turns more on 17 it's a voluntary purchase as opposed to a required 18 purchase, in the case of the inspection sticker on a 19 car or the requirement to have a hunting or a fishing 20 license if you're going to partake in that activity. 21 I'm just trying, Mr. Chairman, in my 22 mind to get where we are in this licensing activity. 23 And Sarah has said it is not within the scope of our 24 statute to make a rule, if I've understood what she 25 said. I just, you know, wonder if we started this, 0047 1 how far it would go. 2 MS. WOELK: Let me clarify a few 3 things. One, I think the issue of licensing is a bit 4 of a red herring. The issue is the service of the 5 sale of lottery tickets is something that the Lottery 6 Commission provides. And there's not case law in 7 Texas that says, "Yes, the provision of lottery 8 services is covered by Title II of the ADA." There 9 are a couple of cases in other states that implicitly 10 reach that decision. 11 And I think that, as we discussed at 12 the last meeting, if there were a lawsuit filed 13 against us, we would raise the issue of whether the 14 sale of lottery tickets is a state service for 15 purposes of the ADA at all. I don't think that would 16 be our strongest defense, but I think that it's -- you 17 know, the case law prisons, what they do in prisons is 18 considered the provision of state service. 19 So it's possible that the ADA reaches 20 more state activities than I would have thought or 21 than have been established by case law. But I think 22 the line you're going down is more likely to lead to, 23 "Oh, well, other state activities may be covered as 24 well" than to lead to the conclusion, "Oh, the lottery 25 is not covered." 0048 1 I think the existing case law would 2 suggest fairly strongly that the activity of selling 3 lottery tickets is a state service; and, therefore, in 4 carrying out that state service, the rules of Title II 5 of the ADA apply -- probably. And we're not throwing 6 in the towel on that issue. 7 COMMISSIONER SCHENCK: Sarah, I have a 8 question. Before I start, though, I think I want to 9 make my same disclosure I made before, which is that 10 in the nineties, early nineties, I represented R. J. 11 Reynolds at some point in a couple of matters, and my 12 firm still does. And I don't understand R. J. 13 Reynolds to be directly interested in this matter, and 14 that doesn't require my disqualification. But I 15 wanted to make that disclosure again. 16 But back to your first point that you 17 were making in answer to Chairman Clowe, it seems to 18 me we are a bit different because, as I recall from 19 our last meeting, these sales are all taking place on 20 premises, for the most part, that we don't even. 21 MS. WOELK: Right. 22 COMMISSIONER SCHENCK: There is a 23 property owner there. They've contracted with us to 24 make these sales, and they've certified to us that 25 they're ADA-compliant. So I think the first question 0049 1 is whether we're going to pierce through that and 2 assume that we're talking about a state service at the 3 location where the person has decided he wants to sell 4 lottery tickets. So I'm comfortable assuming for the 5 sake of argument, and for no other purpose at this 6 point, that we're talking about a good or a state 7 program for purposes of the ADA. But I understand 8 you're wanting to reserve that point should we find 9 ourselves in litigation. 10 MS. WOELK: Right. And another point 11 that needs to be made is, there is a statement in our 12 own law that says retailers must certify that they 13 comply with the ADA. Now, we have historically 14 interpreted that to mean that -- means the measurable 15 kind of building inspection things that apply to 16 buildings under the ADA. But if a court suddenly 17 ruled the ADA requires that all state services be 18 provided in no-smoking facilities, then we have the 19 issue not just coming directly from the ADA, but we 20 would have it coming through our own statute as well, 21 which says that retailers must comply with the ADA. 22 But I think another issue -- I guess 23 to -- you may want to continue on that. But the 24 starting point is yes, that's an issue we would raise. 25 If this were a lawsuit, we would raise the issue: Is 0050 1 the sale of lottery tickets in non-government 2 facilities reached by the ADA at all? That would be 3 an opening question. But I think it's probably, from 4 what I've seen under the ADA, not our strongest 5 position on these various issues under the ADA. 6 COMMISSIONER CLOWE: And you haven't 7 found any case law that deals with it? 8 MS. WOELK: Well, there's a very old 9 West Virginia case and a Kansas case that do apply the 10 ADA to lottery retail facilities, and without really 11 discussing the possibility that they're not covered. 12 So, yes, implicitly there are some courts that have 13 assumed that it was covered. And none of those would 14 be controlling in Texas. 15 But another issue I wanted to get to 16 is -- I think this caused some confusion at the last 17 meeting -- is the question of whether the Lottery 18 Commission has authority to -- assuming the ADA 19 doesn't require it, does the Lottery Commission have 20 authority to adopt a rule requiring that lottery 21 tickets be sold only in no-smoking locations? 22 And this is the issue that you asked me 23 to discuss with Tina Tran, with Wayne Krauze, and we 24 did discuss it. And I actually made some copies of 25 the different pieces of our statute that set out your 0051 1 authority in regard to licensing, and it is very 2 broad. You know, we may choose to -- we may adopt 3 rules to license places that best serve the public 4 convenience. So I think Ms. Tran and Mr. Krauze take 5 the view that it would be within the agency's 6 authority to adopt such a rule. 7 I think the analysis is a little more 8 subtle than that, in that all of your rulemaking has 9 to be in the context of running the lottery. So I 10 don't think you have authority to adopt a rule with 11 the stated purpose of curing cancer or of making Texas 12 a state with cleaner air. 13 It seems to be if you considered such a 14 rule, you would need to articulate a reason that had 15 to do with the running of the lottery that would 16 justify such a rule. And I can imagine that, for 17 example, if you had had two million phone calls from 18 potential lottery players saying, "We don't buy 19 lottery tickets because we can't stand to walk through 20 the smoke." You haven't had that. You haven't had 21 the groundswell of players I would think that would 22 lead to the conclusion that smoking in retail 23 locations is having a significant effect either on the 24 sale of tickets or the public image of the lottery. 25 So I don't think you can say 0052 1 categorically you couldn't adopt such a rule. You 2 could adopt such a rule if you had a reason that you 3 could articulate about why such a rule either improved 4 the lottery's standing as a government activity or 5 actually would potentially increase the sale of 6 lottery tickets. 7 So I think what you can do always has 8 to be tied back to: Well, how is that connected to 9 running a lottery? So when someone comes in and says, 10 "We think smoking is bad. It has this incredible 11 relation to cancer," as noble as that mission might 12 be, it is not your mission to make rules with the sole 13 purpose of improving public health. But if you had a 14 reason that you thought no-smoking facilities would be 15 an overall improvement in the conduct of the lottery, 16 then I think you could at least possibly justify such 17 rule. 18 Is that a fair -- 19 COMMISSIONER CLOWE: Since you raised 20 that point, Mr. Anger, have we had players who have 21 called and asked for non-smoking venues for the 22 purchase of lottery tickets? 23 MR. ANGER: We have not received any 24 type of substantial contact from the public regarding 25 either support for smoking or non-smoking with regard 0053 1 to retail locations. I'm not aware of any player 2 contacts that we've received through our Communication 3 Services group weighing in on this issue. We did 4 receive a couple of calls from retailers, from 5 licensees, expressing their views, although those were 6 limited, and that was related to the survey we 7 conducted, which I'll talk about in a moment. 8 The few calls that we did receive were 9 expressing, you know, a concern about the agency 10 taking a position with regard to smoking in their 11 retail establishments. 12 COMMISSIONER CLOWE: Okay. 13 MS. WOELK: So does that at least 14 address your questions? 15 COMMISSIONER CLOWE: It answered mine. 16 MS. WOELK: Okay. And one other task 17 that you asked me to do is, Ms. Tran made a statement 18 that California, Florida and New York were all states 19 with statewide no-smoking policies, and they all had 20 higher per capita ticket sales then we do. And you 21 asked me to contact those states and ask if they had 22 seen any relationship between a no-smoking ban and the 23 sale of tickets. 24 The person I talked to in New York said 25 that they had actually had a drop in keno revenues, 0054 1 because keno is played in bars and restaurants and 2 they had a no-smoking ban apply and that they had not 3 seen that jump back. She said they hadn't done any 4 kind of survey or analysis to define the causal 5 connection but they had seen that drop. 6 In Florida they said they could assure 7 me that they've seen no increase in lottery sales 8 since the statewide no-smoking ban went into effect, 9 but they also had done the studies. 10 And then the person I talked to in 11 California was fairly perplexed by the question. And 12 he said that since there was no part of the state in 13 which lottery tickets could be sold in smoking 14 locations, they had no data for any kind of meaningful 15 comparison. So he seemed rather irritated that I had 16 called at all. 17 (Laughter) 18 COMMISSIONER CLOWE: Maybe just talking 19 to a Texan was perplexing enough. 20 MS. WOELK: Yes, yes. I did follow up, 21 and that's the information I got. 22 COMMISSIONER CLOWE: Is there a 23 statewide smoking ban in Florida in any public place? 24 MS. WOELK: I didn't discuss the 25 breadth of the ban. And when they say "statewide 0055 1 smoking ban," obviously, there are subtleties of where 2 it does and doesn't apply. But all three states 3 seemed to accept the premise on which I called, that 4 their retailers were subject to a statewide no-smoking 5 ban. I'm sure there are subtle differences between 6 exactly where it applies. 7 COMMISSIONER CLOWE: That would be a 8 law that would be passed by the State Legislature? 9 MS. WOELK: Right. And I believe Sen. 10 Ellis did introduce a law of that breadth in the last 11 legislative session. 12 COMMISSIONER CLOWE: So that may be 13 where the solution lies in this matter? 14 MS. WOELK: It would take the matter 15 out of your hands, certainly, if there were a -- 16 COMMISSIONER CLOWE: I'm not sure the 17 matter is in our hands. 18 MS. WOELK: Right. 19 COMMISSIONER CLOWE: I mean, it's 20 becoming more apparent to me that although there may 21 be sympathy on the part of the Commissioners or the 22 Board in regard to this issue -- and that's 23 unexpressed at this time -- but the Commission has 24 certainly been responsive to the raising of this issue 25 and has asked questions and asked research to be done. 0056 1 It may be that, in fact, regardless of what level of 2 sympathy there is to this matter, it's beyond the 3 scope of our authority. 4 CHAIRMAN COX: I'm in the same place 5 you are, Chairman Clowe. The states that you 6 mentioned -- Florida, California and New York -- you 7 said it was done by the legislature. We certainly 8 don't have the authority to legislate. And I think I 9 heard you say that we don't have the authority to make 10 a rule unless there is some good reason for it, other 11 than it makes places healthier. 12 MS. WOELK: I think you have -- your 13 rulemaking authority is all tied to your operation of 14 the lottery. And, you know, I did discuss this with 15 Ed Rogers, and there has been -- you know, certainly 16 Mr. Williams and Ms. Young have definitely raised the 17 issue, that they would prefer that lottery retailers 18 be no-smoking. But there has not been a significant 19 number of contacts raising that issue. 20 So as of yet, I have not heard anyone 21 articulate a reason. And to adopt a rule, you would 22 have to articulate a reasonable justification for 23 adopting the rule and cite your authority for adopting 24 the rule. I have not yet heard someone articulate a 25 factual basis for why this rule would be within your 0057 1 authority to conduct the lottery. 2 Because I reread the transcript. I 3 mean, the speakers were very much speaking about their 4 concerns were public health concerns and that they saw 5 the lottery understandably as one avenue to attempt to 6 achieve those public health concerns. But your 7 authority is limited to operating the lottery. 8 COMMISSIONER SCHENCK: Sarah, I agree 9 with that. But I think in fairness, I think the 10 concern that they had was that if we're operating a 11 state program, that the mandate is put on us not by 12 the Legislature in Texas but by Congress, with the 13 Americans with Disabilities Act, to make 14 accommodation. 15 MS. WOELK: Oh, absolutely. And my 16 premise in this part of the discussion was, assuming 17 there is no ADA requirement. 18 COMMISSIONER SCHENCK: Yes, I'm sorry. 19 MS. WOELK: Yes. 20 COMMISSIONER SCHENCK: And I think 21 we're all in the same position with respect to our 22 authority, absent some affirmative obligation coming 23 to us from the ADA. 24 MS. WOELK: Right. And we will 25 definitely keep -- you know, I -- we will definitely 0058 1 keep up with the ADA. And there's a possibility a 2 lawsuit would be filed. And, you know, we would keep 3 you abreast of any developments. But I think the ADA 4 issue would have to be examined, the factual issue of 5 specific plaintiffs with specific complaints and a 6 possible specific remedy as to them. 7 COMMISSIONER CLOWE: I have no further 8 questions of Sarah. I don't know. Does Michael have 9 something? 10 CHAIRMAN COX: Are you through, Sarah? 11 MS. WOELK: I am. Michael has a 12 survey. 13 CHAIRMAN COX: Okay. Well, let me see 14 if I understand what you're saying. I understand you 15 to say that there are three lines of defense as to 16 whether this product that we sell comes within the 17 ADA. One is, is it the type of state service 18 contemplated by the ADA? The second is, does the ADA 19 provide protection for those who suffer from asthma? 20 And the third is, notwithstanding all of that, is 21 there reasonable access in other locations such that 22 even those people who suffer from asthma have 23 reasonable access to our product or service? 24 MS. WOELK: Yes. There's actually even 25 a few more points in the analysis. The first is, is 0059 1 this service covered by the ADA? The second is, in a 2 lawsuit, do you have a plaintiff who has a disability, 3 for purposes of the ADA? And asthma is a disability 4 sometimes and not in others. I mean, that's a fact 5 issue as to specific plaintiffs. And then if you've 6 identified specific plaintiffs with a disability, the 7 question is: Have they been denied meaningful access? 8 And meaningful access is where you 9 would raise up all the fact issues of how much time 10 you have to spend buying a lottery ticket? What are 11 your options? And then even if they've been denied 12 meaningful access, there is the question of: Would a 13 no-smoking rule be a reasonable modification? So it's 14 a question of whether it's a reasonable modification. 15 And even if you say it is a reasonable modification, 16 there is the question of whether it would -- and I'm 17 forgetting the statutory words, be an -- 18 COMMISSIONER SCHENCK: Undue burden, I 19 think. 20 MS. WOELK: Yes, undue change -- undo 21 hardship, whatever the standard is. So there's a 22 whole bunch of questions, all of which are hurdles 23 that would have to be gotten over. But the important 24 thing to remember, it's a very plaintiff-specific 25 case, so it's very hard to talk about it in terms of a 0060 1 global remedy, because you've got to start with 2 someone who has a disability and who hasn't achieved 3 meaningful access to a specific place. So you're 4 being asked to look at it as kind of the reasonable 5 person with a disability who has been denied 6 meaningful access. And that's not really how the 7 analysis works. It's a -- 8 CHAIRMAN COX: Okay. So if I could 9 summarize, is it your advice that we have no 10 obligation to pass such a rule and may not even have 11 the right to pass such rule? 12 MS. WOELK: Of course, if the ADA said 13 that we had to, then we have the right to do it, 14 because we would have to obey any sort of -- 15 CHAIRMAN COX: Yes. 16 MS. WOELK: -- federal court. But I 17 don't think there is anything out there in the current 18 state of the law that would say we need to take 19 prophylactic action and go out and make sure no one is 20 smoking. But that doesn't mean -- I want to make this 21 clear. There is a theoretical possibility in 22 particular that you could have a single plaintiff at a 23 single location that could prove that that individual 24 was entitled to a remedy. I haven't seen anything -- 25 CHAIRMAN COX: I understand. 0061 1 MS. WOELK: -- to see how you get the 2 global remedy that's sought here. But, you know, 3 people do amazing things with the law. And it could 4 go there sometime, but I don't think it's there now. 5 CHAIRMAN COX: Okay. Thank you. 6 MS. WOELK: Okay. 7 CHAIRMAN COX: Michael, do you have 8 some information about the demographics of this 9 situation? 10 MR. ANGER: I do. Commissioners, for 11 the record, my name is Michael Anger. I'm the Lottery 12 Operations -- 13 CHAIRMAN COX: Are you sure your mike 14 is on, Michael? I can barely hear you. 15 COMMISSIONER CLOWE: Thank you, 16 Mr. Chairman. 17 MR. ANGER: Once again, good morning, 18 Commissioners. For the record, my name is Michael 19 Anger, and I'm the Lottery Operations Director. Can 20 you hear me? 21 CHAIRMAN COX: Not very well. 22 COMMISSIONER CLOWE: Get a little 23 closer. 24 MR. ANGER: How about now? 25 CHAIRMAN COX: Better. 0062 1 MR. ANGER: Very good. 2 Commissioners, one of the tasks that 3 staff took up following the discussion at a prior 4 Commission meeting on this topic was to go out and 5 survey the licensee base to determine the smoking 6 status of the licensees that are currently licensed to 7 sell lottery products, and so I'll walk you through 8 the results of that survey now. 9 GTECH lottery sales representatives 10 were asked to conduct a survey on behalf of the Texas 11 Lottery to determine the number of lottery retailers 12 who allow smoking in their licensed locations. The 13 survey was conducted over three two-week sale cycles, 14 from December 17, 2007, through January 26, 2008. 15 16,199 retailers were surveyed during this time frame. 16 42 retailers were not surveyed during the designated 17 survey period. 18 Surveys were conducted by GTECH lottery 19 sales representatives at each of the retail locations 20 that license with the lottery, and most answers were 21 relayed to GTECH's Research Department through a 22 playslip or a scantron transaction captured at the 23 retailer's ISYS on-line terminal. For those retailers 24 without ISYS on-line terminals, their survey answers 25 were collected manually by the lottery sales 0063 1 representatives for GTECH and compiled by GTECH's 2 Research Department. 3 Retailers were asked to respond to four 4 questions during the survey, three of which were 5 mutually exclusive. The first question was, "Are 6 employees or customers allowed to smoke in your 7 business?" The following three questions are the 8 mutually exclusive questions: "Are you the business 9 sales clerk (or employee)? Are you the business 10 manager? Are you the business owner?" 11 Regarding the response to the mutually 12 exclusive questions, 28 percent of the respondents 13 were business owners, 37 percent of the respondents 14 were business managers, and 33 percent of the 15 respondents were business sales clerks or employees. 16 And those percentages were rounded down to the nearest 17 whole number. 18 With regard to the question of, "Are 19 employees or customers allowed to smoke in your 20 business?" overall, 9.9 percent of all lottery 21 licensed retailers statewide allowed smoking of some 22 type in their business. Among independent business 23 owners, this number was a little bit higher, just over 24 11 percent. And among chain business owners, the 25 number that allowed smoking in their locations was 0064 1 just under 8 percent. 2 COMMISSIONER CLOWE: Michael, what does 3 "smoking of some type" mean? 4 MR. ANGER: That's probably poor 5 wording on my part. I'll take responsibility for 6 that. The answer is, is we tried to format this 7 question in such a way that it was a straight "Yes" or 8 "No" response. Basically if there was any level of 9 smoking allowed around the business, then the answer 10 would be "Yes." And if it was a complete no-smoking 11 facility, the answer would be "No." 12 COMMISSIONER CLOWE: That's really what 13 the question was and that's the answer? 14 MR. ANGER: Yes, sir. 15 Commissioners, this slide shows a map 16 representation of the 254 counties in the State of 17 Texas. 250 of the counties include at least one Texas 18 Lottery retailer. The statewide map colorcodes each 19 county into one of four categories. There is a key up 20 at the top, but it's a bit hard to read on the slide 21 presentation, so I'll walk you through that. 22 There were 140 counties where less than 23 25 percent of the retailers indicated that they 24 allowed smoking in their business. There were a total 25 of 914 retailers in these counties that did allow 0065 1 smoking in their businesses. These counties are 2 depicted in light blue on the map. 3 There were 57 counties where between 25 4 and 50 percent of the retailers indicated that they 5 allowed smoking in their business. In those 57 6 counties, there were 422 retailers that did allow 7 smoking in their businesses. And those counties are 8 depicted with the brownish-green coloration on the 9 map. 10 There were 36 counties where between 50 11 and 75 percent of the retailers indicated that they 12 allowed smoking in their businesses. And there were 13 236 retailers within these 36 counties that allowed 14 smoking in their businesses. Those counties are 15 depicted in yellow in the map. 16 And then finally, there were 17 17 counties in the state where over 75 percent of the 18 retailers responding to the surveys indicated that 19 they allowed smoking in their business, with a total 20 of 47 retailers in those counties that did allow 21 smoking. These counties are depicted in bright green 22 on the map. 23 COMMISSIONER CLOWE: Does that tell us 24 anything? 25 CHAIRMAN COX: Michael, what do you 0066 1 think that tells us? 2 MR. ANGER: It tells us that we have 3 some variation in the level of smoking around the 4 state. As you can see depicted in the map, in the 5 south and primarily in the central areas of the state, 6 there's a lower incidence of smoking, if you will, 7 among lottery licensees. There seems to be more of a 8 prevalence of smoking allowed in retail business 9 establishments in Northeast Texas and in West Texas, 10 particularly toward the northwest. 11 But those are likely attributed to, you 12 know, the city ordinances or, you know, potentially 13 controlling ordinances that may exist in those 14 particular areas of the state. 15 COMMISSIONER SCHENCK: Michael, the 16 highest proportion of smoking-allowed businesses are 17 in the -- I'm going to call it fluorescent yellow- 18 green color? 19 MR. ANGER: Yes. 20 COMMISSIONER SCHENCK: Those are, if 21 I'm not mistaken, some of the least populous counties 22 in the state. Is that right? 23 MR. ANGER: I believe that's accurate, 24 yes. 25 COMMISSIONER SCHENCK: Thank you. 0067 1 MR. ANGER: Commissioners, that 2 concludes my information. I would be happy to answer 3 any additional questions that you might have. 4 CHAIRMAN COX: Commissioner? 5 COMMISSIONER CLOWE: No questions. 6 COMMISSIONER SCHENCK: I have a couple. 7 Michael, are you familiar with Eagle Pass? 8 MR. ANGER: I'm aware that it's down on 9 the South Texas border. 10 COMMISSIONER SCHENCK: I believe there 11 is a casino down there. I believe that's an Indian 12 casino. Does anyone know, maybe you can help us with 13 this. There is a phenomenon in the northeast of these 14 things called smoke shops where you have Indian 15 territorial property, and these places will sell gas, 16 they'll sell cigarettes. And literally they intend 17 this historically as a smoke shop. Do we have any 18 retailers that would be Indians that have said they 19 want to participate in the lottery? 20 MR. ANGER: I'm aware of the type of 21 business that you're speaking of. I'm not aware of 22 whether the Indian tribe in Eagle Pass operates such a 23 business. 24 COMMISSIONER SCHENCK: I'm thinking of 25 that as an example. 0068 1 MR. ANGER: Now, I will say this: We 2 have had and we currently have some businesses that 3 operate in the state that are non-Indian and not on 4 tribal lands, that their primary business is selling 5 smoke products, selling tobacco products of various 6 different types. Typically they're kiosk style 7 businesses that reside in the parking lots of, you 8 know, larger businesses. They sometimes are 9 affiliated with a larger business, similar to what 10 grocery stores are now doing with free-standing gas 11 stations in their parking lots. Over time, there have 12 been businesses like that that have licensed with the 13 Lottery. 14 COMMISSIONER SCHENCK: I think I'm 15 seeing a nodding of heads, though, that we have 16 apparently some Indian retailers. 17 MS. KIPLIN: Can I respond to the 18 extent I'm familiar? Maybe not currently but in the 19 past there were at least one, if not two, convenience 20 stores that were owned -- and we licensed them -- it 21 was the Running Bear Corporation. It was not what I 22 would consider to be a tribal corporation under the 23 meaning of the words, you know, "Indian." It was the 24 Ysleta del Sur Pueblo tribe -- 25 COMMISSIONER SCHENCK: In El Paso? 0069 1 MS. KIPLIN: -- out of El Paso, but 2 these were actually state corporations, Texas 3 domestic. 4 COMMISSIONER SCHENCK: Well, I think 5 Ysleta del Sur are pretty jealous in guarding their 6 tribal heritage and sovereignty, if I'm remembering 7 right. And these were affiliated with the Ysleta del 8 Sur? 9 MS. KIPLIN: Well, they're the Running 10 Bear Corporation. And we know that there was some 11 connection with the Ysleta del Sur tribe. I wouldn't 12 say that they were a tribal corporation. They were a 13 corporation that was incorporated under the State of 14 Texas corporation laws. 15 I'm not aware on the Alabama-Coushatta 16 site in East Texas, I'm not aware of any convenience 17 store that we've licensed. Right now, as I am aware, 18 I'm not aware of any Indian tribe that we've licensed 19 as a lottery retailer. 20 COMMISSIONER SCHENCK: Well, I would 21 be surprised if we were licensing tribes as a 22 retailer. I mean, the tribes themselves are made up 23 of individuals who are business people and do the same 24 thing that the regular population does. 25 MS. KIPLIN: Right. 0070 1 COMMISSIONER SCHENCK: It's just that 2 they have historically business practices and other 3 practices that are unique to themselves. And I just 4 want to make sure that we're cognizant of that 5 possibility as well. 6 CHAIRMAN COX: Thank you, Commissioner. 7 So, Michael, you tell us that about 8 10 percent of our retailers permit smoking on their 9 premises? 10 MR. ANGER: That's correct. 11 CHAIRMAN COX: So with that, I can have 12 a nice warm feeling that we're providing -- what's the 13 term of art? 14 MS. WOELK: Meaningful access? 15 CHAIRMAN COX: -- meaningful access. I 16 see this, and I'm not so sure what I see, because I 17 see that there could be some instances where perhaps 18 in some of those counties like that -- I forget which 19 one that is, but almost out to the tip to El Paso -- 20 it's a big old county and they may just have two or 21 three and they're all smoking. So I don't know what 22 we've done here, other than I conclude that statewide, 23 it sounds like we're providing plenty of meaningful 24 access. 25 Now, Sarah, have you looked at this and 0071 1 formed any kind of opinion about that one aspect of 2 things? 3 MS. WOELK: Not necessarily. But, 4 obviously, if someone had a successful individual 5 lawsuit, they might have a better opportunity to show 6 lack of -- 7 CHAIRMAN COX: Zeroing in on one of 8 those facts and circumstances? 9 MS. WOELK: Yes. Show lack of 10 meaningful access in one of those fluorescent green 11 counties, then -- you know, Austin or Dallas or 12 Houston. 13 CHAIRMAN COX: Yes. 14 Okay. Michael, what services do we 15 provide to people or what are we able to provide to 16 people who call in and say, "You know, I would really 17 like to buy a lottery ticket, but I've got asthma, and 18 I really need a place where they don't smoke"? 19 MR. ANGER: What we would try to do is, 20 we would try to work with that individual, should they 21 call in, and identify locations in their vicinity, now 22 that we're in possession of some information as a 23 baseline that are non-smoking facilities that they 24 might be able to go to, to purchase lottery products. 25 We're restricted from, you know, making lottery 0072 1 products available by mail or Internet, so those 2 aren't really viable options. 3 CHAIRMAN COX: Okay. Now, we have some 4 places, I'm told, where the customer can honk his horn 5 and people will come out and sell him lottery ticket? 6 MR. ANGER: There are some businesses 7 that we've worked with with regard to compliance with 8 the ADA that, due to the structure of the building 9 itself, it's not possible for it to come into 10 compliance with Texas accessibility standards or the 11 federal ADAG standards for the ADA. And so, you know, 12 as a work-around solution for that, we've worked with 13 those businesses in some narrow cases to, you know, 14 place signage of that sort, but it's pretty limited. 15 CHAIRMAN COX: Okay. So now that you 16 have the data of where the smoking and non-smoking 17 places are, you could make that available to someone 18 who calls in? 19 MR. ANGER: Absolutely. 20 CHAIRMAN COX: And could you make it 21 apparent, from some place on out website, that that 22 information is available, if someone were to call in? 23 MR. ANGER: We could. This is 24 something we've -- we gathered this data. And after 25 staff gathered the data, we looked at this issue from 0073 1 the customer service perspective, if you will. 2 One of the things that we do or are in 3 the process of doing at our website is creating a 4 store locator. We have a lot of players who call in 5 that have a favorite game that they want to play, and 6 that game may no longer be available at the business 7 that they typically purchase their lottery tickets at. 8 So they're interested in where they can find it in 9 their local area. So we're working on a store locator 10 that they can go in on the website, enter some 11 information and identify stores that are close to them 12 that have that game available. 13 I believe we could take these survey 14 results and work to develop a similar database and 15 make a search feature available on the website that 16 individuals could use to, you know, search this table 17 and identify retailers that are close to them that are 18 non-spoking facilities, should they want to pursue 19 that. 20 CHAIRMAN COX: Okay. Do you have any 21 questions? 22 COMMISSIONER CLOWE: I just heard 23 something that I had never heard before, and it is 24 something I guess I have to comment on. I'm a little 25 bit concerned -- maybe somewhat concerned about the 0074 1 idea of curb service. You know, how does a person 2 outside the store know that that's a valid lottery 3 ticket that just came out of the terminal and not one 4 that's been pre-printed and brought out? I'm 5 concerned about that, and I'm not sure what our rule 6 is on point of sale. 7 But I have to raise the issue and ask 8 that it be looked into from the standpoint of 9 liability on behalf of the retailer. You know, we've 10 had some issues in the past about tickets that were 11 not valid, that were offered illegally to a person, 12 other issues where tickets were said to be not winners 13 that were winners. And it seems to me that point of 14 sale where visually the transaction is observed by the 15 buyer from the seller is important. 16 And it just -- I had never heard that 17 we would go outside the front door and deliver a 18 ticket, away from the point of sale, the terminal. 19 And I would ask that you look into that to see if 20 we're comfortable with that practice occurring. 21 CHAIRMAN COX: Excellent point. 22 COMMISSIONER CLOWE: I just don't want 23 to get hit over the head with something that we now 24 know occurs, and make sure that it's properly done, if 25 it is done. 0075 1 MR. ANGER: We will. 2 CHAIRMAN COX: Anything else, Chairman 3 Clowe? 4 COMMISSIONER CLOWE: No. 5 CHAIRMAN COX: Commissioner? 6 COMMISSIONER SCHENCK: Just to get back 7 to -- the reason I was asking my question about let's 8 take the Running Bear as an example -- and maybe, 9 Sarah, this is better addressed to you. If we have a 10 retailer -- let's say we have an ADA problem -- and 11 we're speaking now to our retailers -- the remedy 12 that's being sought would be that we would tell 13 retailers they can't participate in the program unless 14 they're going to keep their facilities smoke-free. 15 So at this point -- and correct me if 16 I'm wrong in my understanding -- we have one, I think, 17 gentleman in North Texas who encountered a smoking- 18 allowed facility in an area of the state where, if the 19 map is telling me right, we have on the order of less 20 than 10 percent smoke-allowed facilities, where we 21 would be telling the Indians on the border in Eagle 22 Pass that they can't participate in the lottery or 23 sale of lottery tickets unless they want to turn their 24 smoke shop into something other than a smoke shop. Am 25 I misunderstanding? We would have to turn the whole 0076 1 state into a -- 2 MS. WOELK: Well, that's the sort of 3 desired remedy. And the phrase I was trying to think 4 of earlier and I couldn't was "fundamental 5 alteration." So I think if you had a smoke shop and 6 an ADA case was brought against the smoke shop 7 individually, that smoke shop would have a pretty 8 strong argument that banning smoking would be a 9 fundamental -- 10 COMMISSIONER SCHENCK: Well, let me 11 refer further to my question to you earlier, that all 12 these facilities have certified to us that they are 13 ADA-compliant. 14 MS. WOELK: Right. 15 COMMISSIONER SCHENCK: And at this 16 point no one is addressing a challenge individually to 17 any one of those facilities. So the remedy that we're 18 talking about here is quite sweeping on the theory 19 that we might have somebody get in a car and travel 20 down I-35 about eight hours and take a turnoff, if I'm 21 remembering right at -- gosh! -- at Pearsall and head 22 down to Eagle Pass. 23 COMMISSIONER CLOWE: That's close. 24 MS. WOELK: I mean, the fundamental 25 alteration standard would also apply under Title II. 0077 1 And I just couldn't find anything where they applied 2 the fundamental alteration standard to a state 3 service, although statutorily it would be the 4 standard. So you can see how it would operate in an 5 individual sales location, that clearly a smoke shop, 6 to not be able to sell smoke products be a fundamental 7 alteration. 8 I think this ultimately goes back to -- 9 I think it would be hard to get an ADA, even if you 10 had a partially successful ADA suit, it would be hard 11 to get the global remedy that applies everywhere, that 12 you would have to look at specific plaintiffs and 13 their access. 14 I think the courts might be fairly 15 confused. Mr. Krauze said on the record last time 16 that if they -- if they brought a claim, they would 17 bring them both against a specific store and the 18 lottery as a state program. And I can see a court 19 being quite comfortable knowing how to apply the 20 standards to a specific store. 21 But they don't hold together very well 22 when you try to reply it to a state program. And I 23 think that's just uncharted territory under the ADA. 24 COMMISSIONER SCHENCK: Michael, you did 25 us the favor of putting together these surveys by 0078 1 countywide. But also I don't think you put up the 2 GTECH sales district chart which, if I'm reading it 3 correctly, I think the highest percentage we have in 4 any GTECH sales district is 33 percent. So just on a 5 random sample, you would think the odds are a little 6 less than one in three that you would encounter a 7 smoke-allowed facility, putting aside the question of 8 whether during any particular time of the day anyone 9 inside the facility is actually smoking in any one of 10 these districts. Is that correct? 11 MR. ANGER: That's correct. 12 COMMISSIONER SCHENCK: Okay. I have no 13 further questions. 14 CHAIRMAN COX: We have some public 15 comment. Mr. Billy J. Williams, speaking for Item XI. 16 COMMENTS ON BEHALF OF GASP OF TEXAS 17 MR. WILLIAMS: My name is Billy J. 18 Williams, and I live in Lewisville, Texas. And I want 19 to comment on what I've heard today, and I want to 20 start with the idea of: Is the Lottery Commission, 21 Texas Lottery, covered by the ADA? 22 The United States of America made a 23 settlement agreement with the State of Oregon 24 regarding accessibility to the video games for the 25 disabled in lottery ticket sales outlets, so I think 0079 1 that we have a precedent there. Oregon actually had 2 to modify a state statute in order to comply with the 3 ADA. It was a settlement agreement. If they didn't 4 do it, they were going to be sued by the United 5 States. So I think it's pretty well settled that the 6 lottery is covered. 7 Also, one thing that I think would be 8 beneficial to the Commissioners is an amicus brief 9 that the Department of Justice submitted in the United 10 States District Court for the District of New 11 Hampshire. And I have part of -- I want to quote part 12 of that. It's a brief -- am I going dead here? Oh, 13 it's a brief -- what am I doing wrong here? 14 CHAIRMAN COX: I'm not sure. 15 MR. WILLIAMS: I'm not sure either. 16 Maybe I'm -- 17 CHAIRMAN COX: Ms. Kiplin will see if 18 she can help you. 19 MR. WILLIAMS: Okay. 20 MS. KIPLIN: One of your hands is 21 touching this on and off. 22 MR. WILLIAMS: Oh, is that what's wrong 23 with me? Okay. 24 The brief was submitted in Lakes Region 25 Consumer Advocacy Board (Cornersbridge) vs. the City 0080 1 of Laconia, New Hampshire. And in it the Department 2 of Justice says all governmental activities of public 3 entities are covered, even if they're covered out by 4 contractors. 5 Also, Title II makes no distinctions 6 based on the portion of the public served by a 7 program, service or activity, so that takes cares of 8 part of the things that were there. And as far as now 9 here and doing things in an individual basis, that's a 10 no-no, too. 11 The U.S. District Court for the 12 District of Kansas has held that, "A public entity 13 that simply adopts a policy of responding to 14 individual complaints alleging violations of Title II 15 has not gone far enough to affirmatively identify 16 access problems with its services, practices, and 17 procedures and proceed on its own to correct them as 18 required by the key language of 28 C.F.R § 35.105(a)." 19 That decision is Tyler vs. City of Manhattan, 857 20 F.Supp. 800, 815 (D.Kan. 1994). 21 So on top of that, to do so, to go out 22 here and get individual little rules that affect one 23 group of disabled people comes under district impact 24 discrimination. They are neutral rules that fall more 25 heavily on one group than the other. And to do that 0081 1 on the disabled has been illegal in Texas for 25 2 years, starting with the decision of Pruitt vs. U.S. 3 Postal Service, 662 F.2d 292. Pruitt was a wounded 4 Vietnam veteran, and he could not lift 70 pounds above 5 his shoulder, which was required for a letter carrier 6 sorting mail. In his lawsuit, the Fifth Circuit 7 discussed discrimination against the handicapped. 8 They defined four types: Disparate treatment, 9 disparate impact, surmountable barrier discrimination 10 and insurmountable barrier discrimination. 11 The Postal Service admitted if it cut 12 the bench off, the legs off on the bench, Pruitt could 13 do the job; therefore, it was surmountable barrier 14 discrimination by the post office. So it's pretty 15 well settled that you can't do the neutral policy 16 thing and have it just affect one group. 17 In 1987, the Supreme Court ruled in 18 Alexander vs. Choate, and they held that disparate 19 impact covered the handicapped. And then the Supreme 20 Court ruled that disparate impact is covered under the 21 ADA in Raytheon vs. Hernandez. But one of the better 22 ones is Crowder vs. Kitagawa out of the 9th Circuit. 23 The State of Hawaii has never had a 24 case of rabies, and they don't want one. So they had 25 a quarantine of dogs coming into Hawaii for 90 days. 0082 1 They were sued by Crowder, and the federal government 2 came in on the thing. And, as a result, guide dogs 3 are not quarantined for 90 days in Hawaii. And they 4 made a settlement agreement to that effect, but they 5 held it was disparate impact discrimination. And that 6 is one of those other decisions if you want to do it. 7 I don't happen to have a cite on it, because I didn't 8 expect this today. But that is definitely there. 9 So when you get to that point of it, 10 you are just about down to a regulation, and that 11 regulation is 28 C.F.R. § 35.130(b)(7). And you are 12 required to modify a policy in order to avoid 13 discrimination unless it would be a fundamental 14 alteration. And I don't think you can show it would 15 be a fundamental alteration to conduct a state 16 service, in the absence of a public health hazard. 17 That's basically where I'm at on the thing. 18 Oh, and as far as your sales outlets, 19 you say they're in compliance with the ADA. We have a 20 compliance standard for smoking policies in Texas. It 21 was set and then reverses the Caravan of Dreams. And 22 in Emery, the District Court held, citing 42 U.S.C. 23 § 12182(b)(2)(A)(ii), "The U.S. District Court for the 24 Northern District of Texas held that smoking policies 25 are subject to the fundamental alteration test for 0083 1 policies, practices, and procedures under Title III of 2 the ADA." 3 Now, "Furthermore, the district court 4 held that modification of a smoking policy is not 5 required if it would affect the viability of a 6 business." 7 So unless your outlets are out there, 8 they're in violation of the ADA if they have smoking 9 policies, and it wouldn't affect the viability of that 10 business. And, as I understand it, you people are 11 supposed to have these people claiming as to whether 12 they're not in compliance. They're obviously not, 13 most of them. 14 And it might be the complaint actually 15 is really not with the Commission when I file my 16 complaint, it's with the U.S. Department of Justice, 17 because they put out phony technical advice and they 18 do it deliberately to create situations such as we 19 have here today. 20 And I was waiting to see what you were 21 going to do, because I don't know if most people have 22 heard of Section 1001 of the Patriot Act, but I have. 23 That provides that a person can bring charges against 24 a Department of Justice employee for violation of 25 their civil rights, and I'm going to bring one against 0084 1 John Wodatch, the section chief of the Disability 2 Rights Section of the Justice Department, for not 3 following judicial interpretations when he hands out 4 technical advice. And when he hands it out, he hands 5 it out and says, "Oh, this is not binding on 6 everybody." 7 But anyway, that's what I got to say. 8 If anybody has any questions, I would be glad to try 9 to answer them. 10 COMMISSIONER CLOWE: I don't have any 11 questions. 12 COMMISSIONER SCHENCK: I have a couple 13 of questions, actually. 14 Mr. Williams, I want to thank you again 15 for bringing this issue. I appreciate it. And I'm 16 with you on the consciousness-raising level of the 17 dangers of smoking and I think that's helpful. But I 18 think as a legal question, I think we have a different 19 problem. And I want to walk through it very quickly 20 with you so you can make sure I understand correctly 21 where you're coming from and I understand where you 22 are. 23 MR. WILLIAMS: Okay. 24 COMMISSIONER SCHENCK: As I understand 25 it, right now we have you, one person, you have -- 0085 1 it's asthma, if I'm remembering right? 2 MR. WILLIAMS: Yes. 3 COMMISSIONER SCHENCK: And let's say 4 I'm willing to assume for the sake of argument today 5 that we are running a state program. I think you've 6 given us authority to support that, if I'm remembering 7 right? 8 MR. WILLIAMS: Yes. 9 COMMISSIONER SCHENCK: Subject to the 10 ADA Title II, and that you have a disability, which 11 the Supreme Court has defined for us at a pretty high 12 level recently. But let's say for the sake of 13 argument, I'm willing to accept that your asthma 14 constitutes -- I think it's a severe life -- 15 MR. WILLIAMS: Substantial limitation 16 of a major life activity, when you get technical. 17 COMMISSIONER SCHENCK: Let's assume I'm 18 with you there. What we have right now, sir, is, we 19 have one person who has this problem and we have the 20 question of what to do about it. So the question I 21 have for you is, do you have any reason to believe 22 there's a lot of people suffering in the same measure? 23 Because you've told us one person is enough. If one 24 person is enough, then remember during our last 25 hearing, I talked to the lawyer who was here about the 0086 1 people who had allergies to gasoline fumes, to benzene 2 and things like that. Now, he told me that he 3 wouldn't take on a case like that, but there's got to 4 be at least one person somewhere in Texas that has an 5 allergy to gasoline. And I don't think that we could 6 say that we're not going to allow lottery tickets to 7 be sold where gasoline is sold. 8 MR. WILLIAMS: Well, yes. I think 9 where you get into that, you get back to the 10 fundamental alteration test. I mean, you got to sell 11 gasoline. 12 COMMISSIONER SCHENCK: Why? 13 MR. WILLIAMS: Because you're going to 14 be stuck if you don't. I mean, you get out there and 15 start saying, "What's a fundamental alteration?" I 16 can make a point that it would not be a fundamental 17 alternation to take smoking out of a lot of the sales 18 outlets. I couldn't make that argument about 19 gasoline. 20 COMMISSIONER SCHENCK: Let me ask you 21 one more question. Do you think that there are a lot 22 of people who have asthma like you do, it's not just 23 one person with -- 24 MR. WILLIAMS: Oh, I know there are. 25 COMMISSIONER SCHENCK: Okay. And would 0087 1 you say they're throughout the United States? 2 MR. WILLIAMS: Oh boy! I go to health 3 conferences, and it's quite high, and it's getting 4 worse. 5 COMMISSIONER SCHENCK: Okay. 6 MR. WILLIAMS: It's getting worse. And 7 not only that, but the people with cystic fibrosis 8 which, incidentally, that is what Diane Emery had 9 from -- you know, Diane Emery, Caravan of Dreams. She 10 was actually a friend of mine. 11 COMMISSIONER SCHENCK: So there are a 12 lot of people with these asthma illnesses? 13 MR. WILLIAMS: These illnesses, you'll 14 find them with multiple sclerosis or even some of your 15 cancer people. And a lot of them are told to stay out 16 of second-hand smoke after they've had their -- 17 COMMISSIONER SCHENCK: And that would 18 be true throughout the United States? 19 MR. WILLIAMS: Oh, yeah, yeah. 20 COMMISSIONER SCHENCK: So here is my 21 question: Why is it, since the ADA is a federal law 22 that applies across the United States, that the 23 Legislatures of California, New York, Florida and 24 Illinois thought it necessary to pass laws to declare 25 the states smoke-free if we have these problems all 0088 1 over the United States, there is nothing unique about 2 Texas? 3 MR. WILLIAMS: Well, the unique thing 4 about it is me. I know all the people that are 5 supposed to be the heavy hitters in the no-smokers' 6 rights movement, John Banzhaff, National Smoking and 7 Health, Dick Danard from Northeastern University, Mark 8 Gottleib, all these people, and none of them -- 9 they've always been out there and they just -- to be 10 really truthful, they haven't understood it. I pushed 11 it. 12 COMMISSIONER SCHENCK: I think that -- 13 the concern I have is, I think this is probably best 14 placed in the Legislature, because at this point I 15 don't see or understand -- 16 MR. WILLIAMS: Well, you know, I could 17 read you something out of the 2nd U.S. Court of 18 Appeals on that, too. I brought it with me today. 19 COMMISSIONER SCHENCK: But you see my 20 point -- 21 MR. WILLIAMS: I see your point. But 22 they're saying just because the legislatures haven't 23 addressed it doesn't mean that we should get 24 discriminated against. 25 COMMISSIONER SCHENCK: I understand. 0089 1 Thank you, sir. 2 MR. WILLIAMS: Yes. 3 CHAIRMAN COX: Thank you very much,d 4 Mr. Williams. 5 MR. WILLIAMS: Thank you for allowing 6 me to be here. I've enjoyed it, both trips down. 7 COMMISSIONER SCHENCK: Thank you. 8 Mr. Doug DuBois? 9 I took a 50/50 chance on that 10 pronunciation. 11 MR. DuBOIS: You did a good job, sir. 12 I appreciate it. 13 CHAIRMAN COX: Okay. Representing 14 Texas Petroleum Marketers and C-Store Association. 15 MR. DuBOIS: I have prepared comments. 16 In the interest of time, I can kind of get to our 17 summation and maybe address some of the other 18 questions that you had regarding smoke shops and some 19 of those issues. Or would you like the prepared 20 comments? 21 CHAIRMAN COX: I would like for you to 22 go however you would like. 23 24 25 0090 1 COMMENTS ON BEHALF OF THE TEXAS PETROLEUM 2 MARKETERS AND CONVENIENCE STORE ASSOCIATION 3 MR. DuBOIS: All right. Well, I have 4 these for the stenographer. I'll get to the crux of 5 it. 6 Chairman Cox, Commissioners, my name is 7 Dough DuBois, the Director of Member Services and 8 Governmental Affairs with the Texas Petroleum 9 Marketers and Convenience Store Association. We 10 represent over 200 companies who are engaged in the 11 sale of motor fuels, lubricants and other petroleum 12 products across the state. These companies sell fuel 13 directly to the public through convenience stores, 14 truck stops and other retail facilities. Our 15 membership owns over 3,000 retail establishments 16 across the state, and many of those are licensed 17 lottery retailers. 18 We have comments regarding the Attorney 19 General's Opinion. We were asked to provide feedback 20 to the Opinion Committee prior to the Opinion coming 21 out. Down kind of to our bottom line is, regardless 22 of whether our members' facilities currently permit 23 smoking within their facilities, we're concerned about 24 the administrative rule requiring the lottery 25 retailers to ensure their facilities are free from 0091 1 second-hand smoke. That could be problematic, because 2 unlike traditional barriers to a facility's 3 accessibility -- curb cuts, driveways, sidewalks, 4 doorjambs, things of that nature -- second-hand smoke 5 is an impermanent and subject to a number of factors 6 influencing its behavior within a certain area. 7 If the solution to this issue is to ban 8 all smoking within a sales agent's facility, our 9 association's members are concerned that because the 10 air within a retail facility may contain any number of 11 elements impacting asthma besides tobacco smoke, 12 including dust, perfumes and other allergens, they 13 will be required to undertake additional measures in 14 order to retain their lottery license. 15 Although local ordinances prohibiting 16 smoking in certain areas have become more commonplace 17 in recent years, we're concerned that the 18 administrative rule by the Lottery Commission 19 requiring non-smoking facilities may be difficult to 20 enforce because of the number and geographic diversity 21 of lottery agents' locations. Our members are also 22 concerned that the fiscal impact of additional 23 enforcement activities regarding a prohibition on 24 smoking will mean the agency must limit other 25 enforcement of regulatory goals. 0092 1 I apologize for the briefness of the 2 comments, but I think the issue has been well- 3 addressed in previous testimony. I would like to 4 address the issue of smoke shops in terms of the 5 definition. Our industry refers to smoke shops as 6 those facilities that predominantly sell cigarettes. 7 It's not so much a location where smoking takes place 8 but where the product that is smoked is sold. 9 The native American tribes of the 10 Alabama-Coushatta have a large convenience store in 11 Livingston, one in the Houston area. I'm not familiar 12 with the Tiguas who operate the casino outside of 13 Eagle Pass, if they have convenience stores or not. 14 Running Bear Corporation in El Paso is a member of our 15 association and they primarily operate just your 16 traditional convenience store. Cigarettes are a part 17 of their product mix, but not to the extent that the 18 Alabama-Coushattas sell them. 19 Another issue on accessibility, talking 20 about the honking of the horn, many of our convenience 21 stores are equipped with drive-through windows where a 22 handicapped individual challenged to be remaining in 23 their car could drive through a drive-through window 24 and purchase lottery products and still have 25 visibility of the terminals and ticket dispensers, I 0093 1 believe. 2 COMMISSIONER SCHENCK: I'm sorry to 3 interrupt. I would like to ask a question on -- 4 MR. DuBOIS: Certainly. 5 COMMISSIONER SCHENCK: -- that we were 6 talking about a minute ago, about the smoke shops and 7 about -- how many clients do you represent? 8 MR. DuBOIS: 200 companies, 3,000 9 convenience stores. 10 COMMISSIONER SCHENCK: Probably some of 11 these or most of these are maybe chains. But surely 12 some of them are smaller stores where people want to 13 put up on the wall things maybe someone else wouldn't 14 put up on the wall in terms of a poster or political 15 messages that other people might object to. But 16 surely you have come across or represent individual 17 owners who want to smoke in their own store and would 18 like to participate in the lottery or sell gas or do 19 other things? 20 MR. DuBOIS: We don't keep records of 21 company policies regarding smoking. We have done an 22 informal survey. And some folks have replied that 23 some smoking is allowed in some stores. Overall the 24 predominant response was that there's not much smoking 25 allowed. 0094 1 But, like you say, we represent a broad 2 range of convenience store operators, from the large 3 chains to small independents. And as Mr. Anger's map 4 illustrated, I believe a lot of those smaller we might 5 term mom and pop independent operators would be in 6 rural locations. Those might be the rural locations 7 where you have a seating area for their food service 8 operation that would allow folks to come in and drink 9 coffee, and that's where you might find the local 10 folks smoking, in a rural convenience store like that, 11 and that might be also the town service station with 12 gasoline sales, might have a post office attached to 13 it and some other facilities, kind of a one-stop shop. 14 COMMISSIONER SCHENCK: Yes. And those 15 people seem to have -- I guess what I'm trying to cut 16 to the chase to get to is, those people have the sense 17 that this is their property. I mean, they own these 18 facilities. And some of them have pretty strongly 19 held views about the fact that they own the facilities 20 and they want to do what they would like to do with 21 it. 22 MR. DuBOIS: Property owner rights are 23 very important to Texans, yes, sir. 24 COMMISSIONER SCHENCK: Some of those 25 people may be smokers. 0095 1 MR. DuBOIS: Very possibly. 2 COMMISSIONER SCHENCK: They have equal 3 protection rights to not be denied access to 4 participate in state programs as well, don't they? 5 MR. DuBOIS: I would have to agree with 6 you, yes, sir. 7 COMMISSIONER SCHENCK: Okay. Thank 8 you. And we would have to weigh that in any analysis 9 that we conduct with respect to any rule we might 10 consider. 11 MR. DuBOIS: We could agree to that, 12 yes, sir. 13 COMMISSIONER SCHENCK: Thank you. 14 MR. DuBOIS: Any other questions? If 15 not, I appreciate your time this morning. 16 CHAIRMAN COX: Thank you, Mr. Dubois. 17 MR. DuBOIS: You bet. 18 CHAIRMAN COX: Ms. Kiplin, where are 19 we? 20 MS. KIPLIN: Mr. Chairman, we're at the 21 front of the agenda, if you would like to take it up. 22 I do have a -- 23 CHAIRMAN COX: No. Where are we to 24 conclude this item? 25 MS. KIPLIN: Oh, sorry -- sorry. 0096 1 CHAIRMAN COX: This is your agenda 2 item. 3 MS. KIPLIN: I understand. Sorry. 4 I think that's it in terms of the Staff 5 presentation. I would be happy to take direction -- 6 CHAIRMAN COX: Are you looking to the 7 board for any action? 8 MS. KIPLIN: We are not looking to the 9 board for any action whatsoever. If the Commission 10 would like to give further additional direction to the 11 Staff, we'll certainly take that. 12 COMMISSIONER CLOWE: Mr. Chairman, my 13 view is that this subject has been thoroughly and well 14 examined. And I, for one, would certainly like to 15 express thanks to the knowledgeable members of the 16 public who have come before us and spoken in regard to 17 their interest on this matter. 18 We've had in a prior meeting a 19 presentation from other outside organizations, the 20 American Civil Liberties Union. We appreciated that. 21 We've also heard from a respected senator and member 22 of the House of Representatives in regard to their 23 view. 24 The Staff has done a very good job, in 25 my opinion, of being responsive to the Commissioners' 0097 1 questions about this issue and have given us a lengthy 2 and well-thought-out response to our questions. 3 I think the member of the House 4 probably summed it up best when she said in her 5 comments to us -- she came to the meeting I think this 6 last time thinking we must take action on this. And 7 then after hearing the testimony, she wished that we 8 would, because we may. 9 This information is all in the public 10 and it can be furnished to anyone who would like to 11 take this matter further. But at this point, I would 12 be unable to second or vote for any action, based on 13 what I've heard that would move this matter to a 14 conclusion. I don't think that this board has the 15 authority to entertain a motion to create a rule, 16 regardless of what our personal feelings are about 17 this issue. And certainly we have those. But in our 18 role, we are obligated to act for the public and for 19 the citizens of the State of Texas. So I would not be 20 in favor of any action at this point in time. 21 CHAIRMAN COX: Commissioner? 22 COMMISSIONER SCHENCK: Mr. Chairman, I 23 think I find myself in the same place. I really do 24 appreciate the excellent testimony we had the last 25 time this issue came up and today. And I appreciate 0098 1 everyone coming and I appreciate the hard work of 2 Staff and GTECH in putting together all this data. I 3 know we had 16,000 responses, and that was very 4 helpful information. 5 And I think, like Chairman Clowe, I see 6 this as a public health issue. I think the reduction 7 of smoking and the dangers of second-hand smoke are 8 important -- well, the reduction of smoking is an 9 important societal goal, and I think that second-hand 10 smoke has complicated but dangerous considerations 11 attached to it. 12 But we aren't the Public Health 13 Commission here. And I think unless we can see a 14 basis for an ADA-driven solution here, which has not, 15 to my knowledge, been identified or accepted with 16 respect to operation of the lottery in any state in 17 the United States, and the states that have decided to 18 effect a smoking ban have done so through their 19 elected representatives. 20 And, frankly, I see that as the only 21 solution that we as this Lottery Commission can take. 22 So at this point I would be with Chairman Clowe in 23 suggesting that we simply table this issue. 24 CHAIRMAN COX: And I'm in total 25 agreement with that. And I think y'all have said it 0099 1 well enough that I don't need to repeat what y'all 2 have said. Thank you very much to everyone who helped 3 us with this. 4 COMMISSIONER CLOWE: May we have a 5 short break? 6 CHAIRMAN COX: Would you like to have a 7 short break? 8 COMMISSIONER CLOWE: Yes, sir. 9 CHAIRMAN COX: Let's take about a 10 10-minute break. 11 (Off the record: 10:53 a.m. to 11:05 12 a.m.) 13 CHAIRMAN COX: May we come back to 14 order, please. 15 AGENDA ITEM NO. XXI.A 16 CHAIRMAN COX: Call Agenda Item No. 17 XXI.A, the Lisa Garland case. 18 Ms. Kiplin. 19 MS. KIPLIN: Mr. Chairman, 20 Commissioners, thank you for taking this item out of 21 order. This is a settlement agreement and proposed 22 order in the Lisa Garland matter. Kristen Guthrie is 23 here. She was the staff attorney on this matter. And 24 I know Mr. Fenoglio, representing Lisa Garland, is 25 also in the audience. 0100 1 If you'll recall, this was a case that 2 was presented, along with a couple of other contested 3 cases, at your last Commission meeting. And there was 4 an issue that came up regarding whether being on the 5 bingo registry was the same as holding a license. You 6 asked us to go away and do a bit of work. We did do 7 that. In terms of an analysis -- I'm probably 8 stealing some of Ms. Guthrie's comments, but just to 9 move this along. 10 In doing that analysis, we've 11 identified an issue that we want to do further 12 research on as it relates to that particular issue, 13 the bingo registry equaling the issuance of a license. 14 We did not notice those items up today. This is the 15 agreed settlement between the parties on the Lisa 16 Garland. That issue is silent in that matter. I know 17 there was a couple of issue preclusion that came up on 18 whether taking this up would preclude your ability to 19 decide that issue in the other cases, and it will not 20 preclude your ability to do so. 21 I'm going to turn it over to 22 Ms. Guthrie to handle the facts of this case, but I 23 wanted to make sure you knew why you had only what you 24 had before you today. 25 MS. GUTHRIE: Good morning, 0101 1 Commissioners. My name is Kristen Guthrie, Assistant 2 General Counsel. 3 Staff recommends adoption of the 4 Memorandum of Agreement and Consent Order in Lisa 5 Garland. This case was originally tried at the State 6 Office of Administrative Hearings, and Staff sought to 7 remove Lisa Garland from the registry of approved 8 bingo workers for violations of the Bingo Enabling Act 9 and rules. 10 The ALJ issued a PFD in this case which 11 recommended Garland remain on the registry and did not 12 find that she violated any provisions of the Act or 13 rules. After the PFD was issued, Garland and Staff 14 reached an agreement in this case. The agreement 15 allows Garland to remain on the registry. But one of 16 the conclusions of law is omitted, which deals with 17 the issue of whether placement on the registry is a 18 license. The agreement does not address whether 19 placement on the registry is the same as issuance of a 20 license. There are two other cases, as Ms. Kiplin 21 stated, which deal with a license issue, and they will 22 be presented at the March Commission meeting. 23 In adopting the Garland agreement 24 today, the Commission is not precluded from 25 determining the issue of whether placement on the 0102 1 registry is the same as issuance of a license. 2 Staff recommends that the Commission 3 vote to adopt the Memorandum of Agreement and Consent 4 Order in Lisa Garland. 5 COMMISSIONER CLOWE: Move the adoption 6 of the Staff recommendation. 7 COMMISSIONER SCHENCK: I second the 8 motion. 9 CHAIRMAN COX: Okay. Motion is made 10 and seconded. 11 Mr. Fenoglio would like to -- do you 12 want to speak, Stephen? 13 MR. FENOGLIO: No. 14 COMMISSIONER CLOWE: Better leave it 15 alone. 16 CHAIRMAN COX: All in favor, say "Aye." 17 COMMISSIONER CLOWE: Aye. 18 COMMISSIONER SCHENCK: Aye. 19 CHAIRMAN COX: Aye. 20 Motion carries 3-0. Thank you. 21 MS. KIPLIN: Mr. Chairman and 22 Commissioners, I have an order. 23 AGENDA ITEM NO. III 24 CHAIRMAN COX: Agenda Item No. III, 25 consideration of and possible discussion and/or 0103 1 action, including withdrawal, on proposed new rule 16 2 TAC §402.211 relating to fair conduct. 3 Ms. Joseph. 4 MS. JOSEPH: Good morning, 5 Commissioners. For the record, my name is Sandra 6 Joseph, Assistant General Counsel. 7 Item No. III concerns proposed new 16 8 TAC §402.211 relating to fair conduct. The proposed 9 rule was published in the Texas Register on October 5, 10 2007. Numerous comments were received indicating that 11 the proposed rule is too detailed, is burdensome and 12 would negatively affect the conduct of bingo. 13 At its February 6, 2008 meeting, the 14 Bingo Advisory Committee expressed concern about 15 certain requirements of the proposed rule and offered 16 the assistance of a workgroup composed of several BAC 17 members and members of the public. 18 In consideration of the comments, Staff 19 plans to receive further input from the workgroup to 20 develop a new draft proposed rule that would 21 accomplish the purpose of the rule without being 22 excessively burdensome. The new draft proposed rule 23 would be presented to the Commission at a future 24 meeting. 25 Staff recommends that the Commission 0104 1 approve withdrawal of 16 TAC §402.211 relating to fair 2 conduct that was published in the Texas Register on 3 October 5, 2007. 4 CHAIRMAN COX: Mr. Sanderson, is this a 5 tar baby? 6 MR. SANDERSON: There's some things 7 that were in that draft of the rule that was published 8 that probably could be considered excessively 9 burdensome, and I think it's new to the organizations. 10 CHAIRMAN COX: Okay. 11 MR. SANDERSON: Although I do believe 12 that there are many organizations that follow the 13 items that we have set out in the rule, looking at it 14 as a rule could be a scary thought for some of them, 15 because it's required. And so we're going to work 16 closely with the BAC workgroup and come up with an 17 amenable solution. 18 CHAIRMAN COX: Okay. Well, we're 19 balancing two things here. We're balancing doing it 20 well and doing it rapidly enough to get the advisory 21 information out there in public hands. So I know 22 you're conscious of both of those things. 23 MR. SANDERSON: Yes, sir. 24 COMMISSIONER CLOWE: Move adoption of 25 the Staff recommendation. 0105 1 COMMISSIONER SCHENCK: I have just a 2 couple of quick questions for either one of you, 3 actually, Sandra or Phil. We did, prior to 4 publication of this, run this by the Bingo Advisory 5 Committee? 6 MR. SANDERSON: They had some input. 7 There was a workgroup that was formed. And at the 8 time there was what appeared to be a fast track to try 9 to get some of these rules published and adopted. And 10 since that time we've looked at a different approach 11 to allowing just a little bit more input and to get it 12 right. 13 COMMISSIONER SCHENCK: Okay, because 14 we've burned up a lot of ink and paper publishing this 15 in the Register. It will be good if we come to a 16 decision about what we think is best, with 17 consultation, obviously. But it may come a time when 18 we're not going to be able to please everyone, but we 19 do need a rule. 20 MR. SANDERSON: That is correct, yes. 21 COMMISSIONER SCHENCK: Okay. Thanks. 22 CHAIRMAN COX: Those are good thoughts, 23 Commissioner. I was personally responsible for this, 24 I guess, because I came to one of the Bingo Advisory 25 Committee meetings and sensed that we were moving too 0106 1 fast and that we weren't getting the kind of input 2 that we needed to be sure things were going to work. 3 And so I asked Phil, and he agreed, that we needed to 4 slow down a little bit. And so that's the cause of 5 that. 6 COMMISSIONER SCHENCK: Well, and it may 7 be that we find out that we were right. I don't want 8 to preclude that. I mean, if we need to hold in the 9 position where ultimately there are some who would 10 object, that's why we have public notice and comment. 11 If they object but they're wrong and we need a rule, 12 that's what we're here to do. I mean, that's why we 13 have government. 14 CHAIRMAN COX: Okay. Excellent 15 thought. 16 Did you want to second Chairman Clowe's 17 motion? 18 COMMISSIONER SCHENCK: I'm sorry. Yes, 19 I would like to second the motion. 20 CHAIRMAN COX: Motion made and 21 seconded. All in favor, say "Aye. 22 COMMISSIONER CLOWE: Aye. 23 COMMISSIONER SCHENCK: Aye. 24 CHAIRMAN COX: Aye. 25 Motion carries 3-0. 0107 1 MS. JOSEPH: And I have a T-bar for 2 your initialing, to withdraw that rule. And with your 3 permission, I'll hold that until the conclusion of my 4 presentations. 5 CHAIRMAN COX: Okay. 6 AGENDA ITEM NO. IV 7 CHAIRMAN COX: Item No. IV, 8 consideration of and possible discussion and/or 9 action, including withdrawal and/or proposal, on new 10 rule 16 TAC §420.210 relating to house rules. 11 Ms. Joseph. 12 MS. JOSEPH: Yes, Commissioners. This 13 proposed rule relating to house rules was published in 14 the Texas Register also on October 5, 2007. A public 15 hearing was held and comments were received. In 16 response to those comments, the Staff has drafted a 17 proposed rule that is substantially different from 18 what was published. The new draft proposed rule is 19 before you for your consideration as well as the 20 recommended withdrawal of the previous published rule. 21 Again, comments received in response to 22 the October 5, 2000 publication of the proposed rule 23 indicated the requirements were too detailed, were 24 unduly burdensome and would limit an organization's 25 ability to exercise discretion in varying situations. 0108 1 In consideration of those comments, the Staff did 2 draft the new proposed rule that is less detailed in 3 its requirements. 4 The submission prepared for the 5 Register includes notice of a public hearing to be 6 held on the new proposed rule on March 20th at 7 10:00 a.m. And the Staff recommends that the 8 Commission approve withdrawal of Rule 402.210 that was 9 published in the Register on October 5, 2007, and 10 initiate a new rulemaking process by publishing the 11 new draft, 16 TAC §402.210, in the Texas Register in 12 order to receive public comments for a period of 30 13 days. 14 COMMISSIONER CLOWE: No questions. 15 COMMISSIONER SCHENCK: I have no -- 16 well, one question. The burdensome objection has been 17 resolved by these last detailed requirements? 18 MS. JOSEPH: That's what we want to 19 receive comments on. Staff believes that that would 20 be much more acceptable. 21 COMMISSIONER SCHENCK: Okay. Well, the 22 rule looks quite acceptable to me as it's written 23 here. So I would be curious to see what comments or 24 complaints we might hear about them. 25 But subject to that, I move we adopt 0109 1 the Staff's recommendation. 2 COMMISSIONER CLOWE: Second. 3 CHAIRMAN COX: Motion made and 4 seconded. All in favor, say "Aye." 5 COMMISSIONER CLOWE: Aye. 6 COMMISSIONER SCHENCK: Aye. 7 CHAIRMAN COX: Motion carries 3-0. 8 AGENDA ITEM NO. V 9 CHAIRMAN COX: Okay. Consideration of 10 and possible discussion and/or action, including 11 adoption, on new rule 16 TAC §402.709 relating to 12 corrective action. 13 Ms. Joseph. 14 MS. JOSEPH: Commissioners, before you 15 for your consideration for adoption is proposed rule 16 16 TAC §402.709 related to corrective action. There 17 are changes to the proposed text as it was published. 18 The purpose of this new rule is to set 19 out the requirements for licensed authorized 20 organizations to follow in order to address compliance 21 issued identified in an audit of their organization. 22 The new rule sets forth the definition of "corrective 23 action," lists examples of corrective actions and 24 explains what may occur if an organization does not 25 take corrective action. 0110 1 In response to public comments, some 2 portions of the rule have been modified for 3 clarification, as shown on the draft in your notebook. 4 Specifically, the changes include changing the title 5 of the rule from "Corrective Action-Audit" to simply 6 "Corrective Action." 7 In Subsection (a)(1), the word 8 "undisputed" has been added. In Subsection (b)(1), 9 the language "non-bingo" has been deleted. To 10 Subsection (c)(3) the language, quote, "more frequent 11 inspections and compliance audits and/or," close 12 quotes, has been added. In Subsection (c)(1) through 13 (3), the words "notice of" has been added. In 14 Subsection (c)(2), we have added the words "and/or." 15 And Subsection (c)(4) as published was deleted, and 16 that language was moved to the beginning of the 17 subsection. These were all clarifications made to 18 address comments that were received. 19 Staff recommends the Commission adopt 20 this new rule, 16 TAC §402.709, relating to corrective 21 action. 22 COMMISSIONER CLOWE: No questions. 23 COMMISSIONER SCHENCK: I have a couple 24 of questions. The substantive changes seem to be in 25 (c) here on our last page. There's two concerns I 0111 1 have. One is, it seems we've added more frequent 2 inspections and compliance audits as a potential 3 response to failure to take corrective action. 4 There's nothing in the rule, as I read it here, to 5 assure that this would be a guaranteed first step, is 6 there, in lieu of other action? 7 MS. JOSEPH: No, there is not a 8 guarantee. That would be the first step. 9 COMMISSIONER SCHENCK: There is a 10 potential confusion here for "notice of license 11 revocation." I would think, obviously, that means 12 license revocation will follow. Why didn't we just 13 say "more frequent inspections and compliance audits 14 and/or disciplinary actions," after "notice" such as 15 license revocation, license suspension, administrative 16 penalty? Because "notice of" modifies all three of 17 them. Why don't we just put the notice of -- 18 MS. JOSEPH: Well, that certainly would 19 be a simple alternative. 20 COMMISSIONER SCHENCK: My concern is, 21 it would -- I can see someone making what I would 22 think an absurd argument of "Sure you're entitled to 23 give me notice, but I didn't know that you were going 24 to actually suspend my license or revoke it." Maybe 25 that's too small a point. 0112 1 MS. JOSEPH: The comment that we 2 received previously was that it appeared that the 3 Staff was going to take these actions on its own when, 4 in fact, it would be the Commission. And this 5 subsection addresses primarily what the staff will do. 6 So we were trying to make it clear and eliminate the 7 concern -- 8 COMMISSIONER SCHENCK: So why wouldn't 9 we say, then, "disciplinary action after notice and 10 Commission action, such as revocation, suspension or 11 administrative penalty"? 12 MS. JOSEPH: That sounds -- 13 CHAIRMAN COX: Would you like that 14 change made? 15 COMMISSIONER SCHENCK: I would. 16 CHAIRMAN COX: And, Sandy, would you 17 figure that that is not a substantive change that 18 would require republishing? 19 MS. JOSEPH: No, it would not require 20 republication. 21 CHAIRMAN COX: Okay. 22 MS. JOSEPH: So the language suggested 23 is "disciplinary action" -- 24 COMMISSIONER SCHENCK: After "notice." 25 MS. JOSEPH: -- after "notice." 0113 1 COMMISSIONER SCHENCK: "...and 2 Commission" -- 3 MS. JOSEPH: "...and Commission 4 action" -- 5 COMMISSIONER SCHENCK: -- "such as 6 revocation, suspension." 7 MS. JOSEPH: We could certainly make 8 that change if it's the Commissioners' desire and 9 prepare that order and bring it back to you later in 10 the meeting today. 11 CHAIRMAN COX: Excellent. 12 COMMISSIONER CLOWE: We can go ahead 13 and act on it. 14 CHAIRMAN COX: We can go ahead and 15 approve it, subject to that change being made. 16 COMMISSIONER SCHENCK: I move that we 17 adopt, subject to that change. 18 COMMISSIONER CLOWE: Second. 19 CHAIRMAN COX: All in favor, say "Aye." 20 COMMISSIONER CLOWE: Aye. 21 COMMISSIONER SCHENCK: Aye. 22 CHAIRMAN COX: Motion carries 3-0. 23 MS. KIPLIN: And we'll present an order 24 consistent with that. 25 CHAIRMAN COX: Thank you Ms. Joseph. 0114 1 AGENDA ITEM NO. VI 2 CHAIRMAN COX: Agenda Item No. VI, 3 report of the Charitable Bingo Operations Director. 4 Mr. Sanderson. 5 MR. SANDERSON: Commissioners, in your 6 notebook is the report of the Charitable Bingo 7 activities. I would like to highlight that the next 8 regular BAC meeting is scheduled, or tentatively 9 scheduled, for May the 7th of 2008. 10 The quarterly reports were due on the 11 25th of January. And while it's not in the report 12 here, allocations were released last week, and I'll 13 have a full report on that at the next Commission 14 meeting. 15 Another point is the operator training 16 program. We're currently working on designing an 17 on-line program for individuals to take the Operator 18 Training Program on the Internet. And when we have a 19 prototype ready, we'll bring that back for a 20 demonstration at the Commission meeting. 21 And then also there are two conferences 22 that are coming up, Bingo World in March and the NAGRA 23 conference, North American Gaming Regulators' 24 Association, in June. 25 And that concludes my report. 0115 1 COMMISSIONER CLOWE: I would like to 2 ask how we're doing on the Audit Department's 3 activities, the improvement, the timeline that you 4 gave us for changes and work that was to be done 5 there? 6 MR. SANDERSON: We have -- of course, 7 the rules are constantly being developed and modified 8 as it relates to both the Audit Department and also 9 the Licensing Department. We're working on rules in 10 that area. 11 The implementation of the audit 12 program, we have finalized some audits that have got 13 findings that we're working with the Legal Division 14 and the Enforcement Division on those findings. 15 Hopefully we'll have some reports that we can provide 16 to you at a future meeting as to how those audits are 17 turning out. 18 COMMISSIONER CLOWE: Are the 19 Commissioners to be assured at this point that all the 20 problems that were developed and identified in the 21 Internal Auditor's report have been corrected and 22 steps have been taken to make certain that future 23 problems similar to those discovered and identified 24 will not occur? 25 MR. SANDERSON: We do have processes 0116 1 and procedures in place that I believe will provide 2 those assurances. I continue to meet with Ms. Melvin 3 on several areas and have her look at and review 4 certain documents to maintain that we're moving in the 5 right direction and continue to go in the right 6 direction. 7 COMMISSIONER CLOWE: Thank you. 8 CHAIRMAN COX: And I think to add to 9 that, Catherine, would you come up and tell us -- give 10 the board the discussion we had the other day about 11 the work you've done to review a set of workpapers and 12 the things you've done as a result of that? 13 MS. MELVIN: Absolutely. For the 14 record, my name is Catherine Melvin, Director of the 15 Internal Audit Division. 16 Yes, sir. As you stated, Mr. Sanderson 17 did ask Internal Audit to review a set of working 18 papers that represented a new methodology and new 19 approach that they were utilizing in looking at bingo 20 licensees, and some of that was a result of Internal 21 Audit's recommendations. We asked that they focus 22 more on the bingo proceeds rather than just 23 expenditures in their audit approach. 24 I mean, I believe this set of audits 25 were a result of a complaint. And so it was a very 0117 1 narrowly focused specific group of audits done at a 2 bingo hall. But in any case, we did review a set of 3 working papers from that. We found some 4 recommendations that we made to improve the quality of 5 their working papers. 6 Specifically we -- you know, we did not 7 reaudit their work. But what we did was, was we 8 wanted to look at primarily the adequacy and 9 appropriateness of the audit methodology that they 10 utilized. We wanted to look at the adequacy and 11 appropriateness of the evidence contained in the 12 working papers to support their conclusions. That was 13 very important to us. 14 And also the adequacy and 15 appropriateness of the quality control with the 16 working papers, again, those were recommendations from 17 our earlier audits, and so we had some recommendations 18 there. And Phil assured us that he believed he could 19 meet those. 20 COMMISSIONER CLOWE: Thank you. 21 COMMISSIONER SCHENCK: No questions. 22 Thank you, Catherine. 23 CHAIRMAN COX: Thank you, Catherine. 24 Phil, was that the conclusion of your 25 report? 0118 1 MR. SANDERSON: Yes, sir. 2 CHAIRMAN COX: Okay. Thank you. 3 AGENDA ITEM NO. VII 4 CHAIRMAN COX: All right. Item No. 5 VII, report, possible discussion and/or action on 6 lottery sales and revenues, game performance, new game 7 opportunities, advertising, market research and 8 trends. 9 Ms. Pyka, Mr. Tirloni. 10 MS. PYKA: Good morning, Commissioners. 11 My name is Kathy Pyka, Controller for the agency. And 12 with me to my right this morning is Robert Tirloni, 13 our Products Manager. 14 Our first chart that we have for you 15 this morning reflects revenue from sales and net 16 revenue to the state through the week ending 17 February 9th of 2008. Total sales for this time 18 period amounted to $1.6 billion, while estimated net 19 revenue to the state for this period was 20 $396.7 million. 21 You'll notice that net revenue to the 22 state does reflect a slight increase. It's point 23 three-tenths of a percent as compared to the 24 $406.5 million figure for the same time period in 25 Fiscal Year 2007. 0119 1 Prize expense as a percentage of sales 2 is reflected at 63.7 percent for the current period; 3 again, an increase over where we were in Fiscal Year 4 2007. 5 Our next chart for you this morning 6 summarizes the change in sales by game from Fiscal 7 Year 2007 to 2008. We provided it this month for you 8 in a slightly different format. And what we show this 9 morning is a grouping of the different types of games. 10 So beginning with the instant ticket 11 product, our instant ticket sales are currently 12 $8.1 million down from Fiscal Year 2007, or point 13 six-tenths percent of a decline. As we look at our 14 overall on-line games, beginning with Lotto Texas, 15 down through Cash 5, the on-line games do reflect a 16 $3 million growth, or .8 percent. And we'll focus 17 first on the jackpot games, looking at Lotto Texas 18 Mega, Megaplier, and Texas Two Step. We have a 19 $4.4 million decline, with the Mega Millions and the 20 Megaplier showing a gain on the jackpot games. 21 Our daily games are noted in the green 22 font. And the daily games, while they note a gain of 23 $7.4 million, I wanted to focus on Pick 3's decline of 24 $13.1 million. When you look at the decline and also 25 add to that the new games -- the Pick 3 Sum It Up, 0120 1 Daily 4 and Daily 4 Sum It Up -- we do reflect a 2 $12.2 million gain over the same time period in Fiscal 3 Year 2007. 4 CHAIRMAN COX: Kathy, is that pretty 5 much in line with your estimate still? 6 MS. PYKA: It is. Actually, we're 7 doing a bit better than our fiscal note estimate on 8 the Sum It Up game for Daily 4 and Daily 4. Pick 3 9 Sum It Up is not quite as significant as we've seen in 10 the Daily 4 area. But we're definitely showing a 11 positive gain on the Daily 4. 12 COMMISSIONER SCHENCK: Kathy, can I ask 13 you a question? 14 MS. PYKA: Certainly. 15 COMMISSIONER SCHENCK: Do you think the 16 Sum It Up numbers are reflective of the advertising? 17 I've seen a lot of Sum It Up advertising the last 18 couple of weeks. 19 MS. PYKA: Outstanding point. We 20 actually started the advertising campaign two weeks 21 ago, the formal advertising campaign. And in looking 22 at the actual sales data through this past Saturday, 23 which would be the two weeks of that data, we're 24 showing a bit additional growth with the Sum It Up 25 features than we did in the previous weeks. So we do 0121 1 believe we're seeing some gain from that. 2 COMMISSIONER SCHENCK: And, Robert, 3 refresh my recollection. I think we've put on the 4 website a clarification of the rules and method of 5 play, to address Ms. Nettles' concerns as she 6 expressed to us in October? 7 MR. TIRLONI: Commissioners, for the 8 record, my name is Robert Tirloni. I'm the Products 9 Manager for the Commission. 10 Yes, we clarified how pair play works 11 with Sum It Up -- on the website. We put out a 12 retailer education flier to make sure retailers 13 understood how that worked. And we've also reprinted 14 all of our physical how-to-play brochures to also 15 provide that example 16 COMMISSIONER SCHENCK: Have we heard 17 any more complaints about the method of play or 18 confusion? 19 MR. TIRLONI: No, sir. No, sir, I have 20 not. 21 COMMISSIONER SCHENCK: Okay. Thank 22 you. Thank you. 23 CHAIRMAN COX: Kathy, one more question 24 on the advertising. 25 MS. PYKA: Yes. 0122 1 CHAIRMAN COX: Did we do it such that 2 it was done in certain markets and not done in other 3 markets, and so we could see, if there was an 4 increase, where it was done and not an increase where 5 it wasn't? 6 MS. PYKA: Chairman Cox, I'm going to 7 let Robert address that question, as that's under his 8 purview. 9 CHAIRMAN COX: Okay. 10 MR. TIRLONI: The advertising is 11 statewide. It hasn't been done market-specific. 12 CHAIRMAN COX: Okay. Thank you. 13 MR. TIRLONI: And it also includes, 14 besides the TV and radio ads that you may have heard, 15 there's also POS effort in-store. So there's new 16 point of sale at Play Stations, and hopefully at the 17 counter, that talks about the Sum It Up feature on 18 both Pick 3 and Daily 4. 19 COMMISSIONER SCHENCK: Can I ask a 20 stupid question at this point? 21 CHAIRMAN COX: There are no stupid 22 questions. 23 COMMISSIONER SCHENCK: Still being 24 fairly new to the Commission, from time to time I see 25 something and I think, "I don't understand this, and I 0123 1 want to ask a question." I'm going to ask, but I'm 2 not sure if I've got the right audience for it or not. 3 So feel free to punt. 4 But I see from time to time billboard 5 advertising for out-of-state gaming, and I'm 6 wondering, do we know what the law is on that, casinos 7 in Oklahoma, or -- 8 COMMISSIONER CLOWE: No prohibition 9 that we're aware of. 10 COMMISSIONER SCHENCK: Do we have -- no 11 one has recently looked at that? 12 COMMISSIONER CLOWE: No prohibition 13 that we know of. And, you know, it's not against the 14 law to go across the state line and participate in 15 those games. It is against the law to use the 16 Internet. Level of enforcement. 17 COMMISSIONER SCHENCK: When we buy 18 advertising, for instance, we don't buy Texas Lottery 19 advertising on the most powerful Mexican radio station 20 we can find to broadcast up into Chicago in the night, 21 do we? 22 COMMISSIONER CLOWE: It's against the 23 law to buy a Texas lottery ticket outside of the 24 state. 25 COMMISSIONER SCHENCK: But I 0124 1 remember -- the reason this comes up is, I remember, I 2 think there was a Supreme Court decision on 3 advertising lotteries in non-lottery states. So, in 4 other words, let's say Missouri buying ads and placing 5 them on Arkansas radio stations, trying to encourage 6 Arkansas residents, where there is not a lottery, to 7 drive across the state lines, and I can't remember how 8 that came out. But it occurs to me that that 9 rationale would be somewhat applicable to the 10 advertising we see, to drive people to Bossier and 11 into Oklahoma. So I don't know the answer to my own 12 question. Maybe I ought to think about it some more. 13 CHAIRMAN COX: Why don't we ask 14 Ms. Kiplin to look at it. 15 MS. KIPLIN: I'll be glad to. I'll 16 just offer a few comments. 17 In terms of the broadcasting across the 18 state line, I think that's covered by a different 19 statute. By the way, these are federal statutes. For 20 us in terms of using our authority to make any kind of 21 purchase of advertising dollars, as Commissioner Clowe 22 said, it's identified within the borders of the State 23 of Texas, because that's our market. 24 On the radio broadcasting, it's 25 incidental that it goes into -- because of the way 0125 1 that its, you know, signals are transmitted, it's 2 incidental that it goes across the border. The 3 identified market is within the state. 4 As to the billboards, I'll take a look 5 at that again, but I don't believe there is a 6 prohibition on a billboard in one state advertising 7 for something in another state, but I'll look at it. 8 COMMISSIONER SCHENCK: I know the Texas 9 Supreme Court in the last couple of years has handed 10 down a decision involving a guy who went to the Cayman 11 Islands or some place and charged a whole lot of 12 money, got a cash advance, lost it at the casino in 13 that state, came back home and then decided that he 14 was going to cancel the credit card. 15 And the Supreme Court, "Yes, that's a 16 valid action. If you want to get our citizens' 17 dollars for gaming outside of what we authorize, you 18 had better get cash, because we're not going to allow 19 you to enforce a contract that's against our public 20 policy." So if that's true -- 21 MS. KIPLIN: Yes. 22 COMMISSIONER SCHENCK: -- it seems to 23 me those billboards are just as clearly against our 24 public policy. 25 MS. KIPLIN: I'll be glad to look into 0126 1 it. 2 COMMISSIONER SCHENCK: Thanks. 3 CHAIRMAN COX: Against a credit card. 4 COMMISSIONER SCHENCK: Yes. We have 5 creditworthy citizens. 6 COMMISSIONER CLOWE: Along those lines, 7 Commissioner, it is I think significant and a good 8 sign to see that there is a higher level of law 9 enforcement directed at 8-liners within the last few 10 months. The local law enforcement agencies are really 11 pursuing that stronger. 12 And, you know, we've identified for 13 years that a tremendous percentage of the gaming 14 dollar within this state is going in that direction. 15 CHAIRMAN COX: Yes. 16 COMMISSIONER CLOWE: And I've been 17 heartened to see the local district attorneys and 18 sheriffs and others enforcing the fuzzy prize rule. 19 And the media is covering that, which I think is 20 beneficial insofar as law enforcement, the Texas 21 Lottery and people being channeled to play legal games 22 instead of illegal games. We're getting some 23 attention in that area. It's very gratifying. 24 COMMISSIONER SCHENCK: Yes. I saw a 25 story in the Dallas News the other day about Fort 0127 1 Worth, Tarrant County. They were running some raids 2 and finding enormous amounts of illegal activity going 3 on. 4 CHAIRMAN COX: That's right. 5 COMMISSIONER SCHENCK: So I think it's 6 something to be encouraged, to make sure our laws are 7 respected and adhered to. 8 CHAIRMAN COX: We had a study done by 9 The University of Texas, looking at this. I think you 10 have probably seen that. And one of their data points 11 was that -- I think it was the county sheriff in 12 Harris County said that there may be 65,000 of those 13 machines in Harris County. This was several years 14 ago. So the magnitude is just really hard to estimate 15 and, yet, certainly significant. 16 COMMISSIONER SCHENCK: Well, those 17 numbers aren't suggestive of fuzzy animals. 18 MS. KIPLIN: Commissioners, I'm taking 19 your deliberation to be that activity as it impacts 20 lottery sales and revenues? 21 CHAIRMAN COX: Absolutely. 22 COMMISSIONER CLOWE: That was 23 exactly -- 24 COMMISSIONER SCHENCK: That's exactly 25 what I was bringing it up for. 0128 1 MS. KIPLIN: That's what I thought. I 2 just -- 3 COMMISSIONER SCHENCK: We're right. 4 COMMISSIONER CLOWE: You know, we would 5 hope that at some point in time, there would be 6 justification and reasonable action on the part of the 7 Department of Public Safety to view this situation and 8 enter into enforcement. That would be a very positive 9 thing from our standpoint. 10 CHAIRMAN COX: Yes, it would. 11 Okay. Who is up right now? 12 MR. TIRLONI: Commissioners, before we 13 move on, I did want to let y'all know that the Mega 14 Millions game did roll last night. So we're currently 15 advertising a $270 million jackpot for this Friday's 16 drawing. We did sell four second-tier winning tickets 17 in Texas last night. Those are $250,000 prizes. One 18 of those four was megaplied and is worth a million 19 dollars. 20 COMMISSIONER CLOWE: That was in 21 Houston, wasn't it? 22 MR. TIRLONI: The million dollar one 23 was in Garland. 24 COMMISSIONER CLOWE: In Garland? 25 MR. TIRLONI: Yes; yes. 0129 1 CHAIRMAN COX: $270 million. What's 2 our record? 3 MR. TIRLONI: I believe it's 390. 4 MS. PYKA: 390. And we've -- 5 CHAIRMAN COX: How many more times 6 would it have to roll to get to 390? 7 MS. PYKA: We've got a couple. We're 8 planning to do an extra jackpot estimation call 9 tomorrow -- 10 CHAIRMAN COX: Okay. 11 MS. PYKA: -- to see if we might want 12 to bump up the advertised jackpot from 270 to another 13 number. And based on actual sales that came in, 14 compared to estimated sales yesterday, I do foresee 15 that if sales continue at that pace, that we will need 16 to increase that advertised jackpot. 17 COMMISSIONER CLOWE: Gary, I would just 18 like to keep that hand grenade ticking. Don't let the 19 Mega Millions people forget about combining with Power 20 Ball. 21 (Laughter) 22 And, you know, keep agitating along 23 those lines. The bigger the jackpot, as Chairman Cox 24 has just pointed out, the more attractive. And at 25 some point in time, I think reason and logic is going 0130 1 to prevail and pride will fail and those two entities 2 will come together. And that will be a national 3 lottery, which will have the largest jackpots ever 4 MR. GRIEF: Commissioner Clowe, I think 5 comments made in our Commission meetings have a way of 6 quickly getting to the Mega Millions and Power Ball 7 groupies. And we've agitated it just by having this 8 conversation. So we'll continue to do that. 9 COMMISSIONER CLOWE: The thought 10 crossed my mind. Thank you. 11 CHAIRMAN COX: Kathy, I have great 12 comfort in the procedures that you have in your 13 department for estimating jackpots to advertise. 14 MS. PYKA: Correct. 15 CHAIRMAN COX: With all due respect to 16 the skill with which your staff does that, that is a 17 tiny subset of what the Mega Millions folks are having 18 to do. 19 MS. PYKA: That is correct. 20 CHAIRMAN COX: Are you personally 21 satisfied, either by results, by examination of 22 process or participation in process, that their 23 estimation process is going to keep us from 24 advertising a jackpot that's way more than sales 25 support? I understand that in Mega Millions, we pay 0131 1 advertised whether sales support it or not. 2 MS. PYKA: That is correct. We're one 3 of 12 members, and so we have one voice at the table 4 when we set the advertised jackpot. And I believe 5 that there is a very conservative effort in setting 6 that jackpot yesterday at $270 million. It was funded 7 at $271 million that the Finance Committee 8 recommended. Once we get to these higher levels, you 9 know, it is difficult to estimate sales. So there was 10 a conservative effort by the finance directors to 11 recommend a $270 million jackpot, with the concept of 12 having an extra call on Thursday. 13 So I do feel comfortable with that. 14 And, of course, after every estimation process, we do 15 analyze the actual sales as compared to estimated 16 sales and monitor that as part of our sales report 17 that we publish. And, of course, you know, we come 18 back and monitor it for the purposes of evaluating our 19 staff's performance. 20 CHAIRMAN COX: Does some central group 21 do it for all the states or does each state send in 22 its own estimate and somebody adds those 12 together? 23 MS. PYKA: What we do is, we have an 24 actual conference call that begins at 10:18, and each 25 state calls in and provides their estimated sales 0132 1 forecast for that day. And then the second part of 2 the call includes each state providing what they 3 believe the growth will be for all states' estimation 4 process in the event of a rolled jackpot. There is 5 some negotiation that occurs on that growth factor in 6 trying to come up with a consensus on what the growth 7 factor should be for all states. 8 Following that part of the call that's 9 handled by the Finance Directors, then one member of 10 each state, on a rotating basis, presents the Finance 11 Committee's report to the directors, who generally 12 come on the call at 10:30 each Tuesday and each 13 Friday. And at that point, following the Finance 14 Committee report, the directors then make a decision 15 on what the advertised jackpot will roll to in the 16 event that we're not hit that night. 17 In some cases, there's great consensus 18 on what that advertised jackpot should be. In some 19 cases, they actually do take a vote when there's a 20 different advertised jackpot that's being suggested by 21 different states. 22 CHAIRMAN COX: And would there be a 23 posture Texas typically takes on a vote like that? 24 MS. PYKA: In general we take a 25 conservative approach on the vote. But I know that 0133 1 there's times that we may not have taken that 2 conservative approach and we've gone with the other 3 states for other factors. 4 CHAIRMAN COX: Okay. 5 COMMISSIONER CLOWE: I'm curious -- 6 COMMISSIONER SCHENCK: I'm sorry. 7 COMMISSIONER CLOWE: If I could just 8 make a comment. I think it follows the Chairman's 9 comment. I think we have directed the Executive 10 Director to take a conservative position, haven't we? 11 CHAIRMAN COX: I believe we have, yes. 12 COMMISSIONER CLOWE: And I think in 13 this last setting, the Executive Director voted for a 14 jackpot level that was above the projected sales, 15 which I think is the first time he's done that. 16 Am I correct in that? 17 MS. PYKA: Commissioner Clowe, I 18 believe there's been maybe one or two other times in 19 which that's happened, a smaller sales deficit in 20 those other two instances and this one. 21 COMMISSIONER CLOWE: So I think that 22 was the most recent, and I think he stipulated his 23 reasons for that. I don't know what they were, and 24 he's not here today. So, you know, if we wanted to go 25 into that, we would have to wait until he's present. 0134 1 But I think it's good to mention it on 2 the record, that it is a fact and that it did occur. 3 And although it hasn't been our directed policy, I 4 think he justified the reason for doing it. And maybe 5 you might want to talk with him about that later on at 6 a subsequent event. But, in fact, the sales did go to 7 271. Is that what you told us? 8 MS. PYKA: The actual sales estimate 9 for yesterday's jackpot funded at $271 million 10 advertised roll. The directors and the Finance 11 Committee recommended staying with the $270 million 12 advertised jackpot, because at that high sales level, 13 it is difficult. We're in kind of uncharted territory 14 and don't have a lot of sales history when we get to 15 these higher jackpots, with the election that we will 16 have another call tomorrow to then review sales data 17 in a current manner and decide if we want to increase 18 the $270 million advertised jackpot to some higher 19 figure. 20 And again, based on actual sales that 21 materialized yesterday, I do believe that it will 22 probably increase, if the interest factor holds 23 steady. 24 COMMISSIONER SCHENCK: I have a couple 25 of questions. First I'm curious whether we bother, 0135 1 given the number of states that we're talking about, 2 to look at our colleagues and see if one of them is 3 operating contrary to our policy and regularly being 4 optimistic in what they see as their sales. Do we 5 look for that -- and I'm not asking for the outcome, 6 if you have somebody. I'm just asking if we go 7 through that process. 8 MS. PYKA: We do go through the 9 process. And I think I'll handle the response at a 10 high level. When we see that there is a split vote 11 where maybe there is a shortfall of, say, $50,000 and 12 rolling to the next million, Texas will elect to go 13 with what is funded in that vote. And then you'll see 14 a split vote where other states have not elected to go 15 with that conservative vote. And so they've elected 16 to roll to the jackpot that might have a shortfall. 17 And in addition to a spreadsheet that 18 we maintain in the Office of the Controller of those 19 recorded votes, Ms. Kiplin's division also provides an 20 attorney and a legal assistant in every jackpot call, 21 and they record minutes of the calls 22 COMMISSIONER SCHENCK: What I'm trying 23 to figure out is, if there is a state that is overly 24 optimistic, would we be identifying who they are, so 25 when we have one of these close votes, we would know 0136 1 if, "Oh, goodness, you know!" -- I'll make up a 2 state -- "Saskatchewan is floating big sales. We 3 can't trust them. Let's pull ourselves back a little 4 bit"? 5 MS. PYKA: While we record and review 6 the actual sales compared to the estimated sales for 7 our other 11 member states, if we have a question -- 8 and there have been instances on the call where we 9 thought maybe their sales estimate was low or high -- 10 we have the opportunity to ask. 11 COMMISSIONER SCHENCK: What I'm asking 12 is, would you know if there is a pattern with a 13 particular state? 14 MS. PYKA: I'm not aware of a pattern 15 with a particular state. 16 MR. GRIEF: I think in response to your 17 question if there was one, yes, we would know about 18 it. 19 COMMISSIONER SCHENCK: You would know 20 about it? 21 MR. GRIEF: Definitely. 22 COMMISSIONER CLOWE: Well, I might try 23 to give you a little folklore that's passed around the 24 campfire late at night; you know, it's not written 25 down anywhere. 0137 1 I think my historical interpretation is 2 that there are some states that see themselves as sort 3 of the leaders in this group. And the leadership 4 within those states has changed since we joined Mega 5 Millions -- in some cases. And I think our influence 6 from the outset has been towards a more conservative 7 posture. And where we were viewed when we went into 8 Mega Millions I think as sort of troublemakers -- 9 because we wanted more precise estimation and 10 justification of jackpots, we wanted the majority vote 11 to rule and we wanted votes recorded, and we wanted a 12 more business-like procedure, because we wanted 13 comfort in that organization -- we have now become 14 looked upon more as a respected member of the group 15 instead of an outsider that's trying to make things 16 happen the Texas way. 17 We still I think get outvoted 18 frequently, but I think people wait in some cases now 19 to see how we vote and want to know why we vote the 20 way we do. So I think we are gaining some stature 21 over a period of time, and a lot of that is due to the 22 work our Executive Director has put into being part of 23 that group and talking to the people from other states 24 about our conservative posture. 25 But, as we said when we went into this, 0138 1 we're one of a number. It used to be initially 10, 2 wasn't it, Robert? 3 MR. TIRLONI: I believe when we joined, 4 we became 11. And then California joined. 5 COMMISSIONER CLOWE: Yes, we were 11. 6 MR. TIRLONI: Yes; yes. 7 COMMISSIONER CLOWE: And now we're one 8 of 12. So, you know, we don't run it like we do Lotto 9 Texas. But the experience I think is getting better. 10 And we're more comfortable today than we were 11 initially, aren't we, Gary? 12 MR. GRIEF: That's a fair statement, 13 yes, sir. 14 COMMISSIONER CLOWE: And it's taken, I 15 think, a character of leadership in some of the other 16 states and the emergence of our leadership in the 17 organization. I think our Executive Director has done 18 a very good job in that area in bringing people around 19 to our viewpoint and respecting some of the concerns 20 that we have. And I trust that effort continues. 21 COMMISSIONER SCHENCK: We do this one 22 state, one vote. We don't do a weighted vote by 23 sales. Right? 24 MS. PYKA: That is correct. In 25 general, New York, New Jersey and California represent 0139 1 about 49 -- anywhere between 48 and 49 percent of the 2 sales for any one given jackpot call. 3 CHAIRMAN COX: Okay. Let me ask a 4 couple of questions about this estimation. Now, in 5 the estimation you do for Lotto Texas, you get an 6 annuity factor from the State Controller's office? 7 MS. PYKA: Yes, we do. 8 CHAIRMAN COX: And that's based, as I 9 understand it, on United States treasury securities? 10 MS. PYKA: That's correct. 11 CHAIRMAN COX: Okay. How does that 12 work in Mega Millions? 13 MS. PYKA: Very similar. And the only 14 difference is that Virginia, the State of Virginia, is 15 responsible for doing the interest factor calculation 16 and obtaining the cost of securities. 17 CHAIRMAN COX: Okay. And what have the 18 recent fed cuts done to your annuity factor? 19 MS. PYKA: We have seen a huge 20 fluctuation in the interest factor for both games. 21 When we're looking at Lotto Texas, for example, 22 there's been a substantial dip in that interest 23 factor, which is definitely creating the inability to 24 roll in the same manner that we have on those 25 jackpots. 0140 1 CHAIRMAN COX: So that factor we can 2 take into account on a case-by-case basis, because 3 we've got a live estimate of what we could buy those 4 securities for, should someone choose an annuity? 5 MS. PYKA: Right. 6 CHAIRMAN COX: Now, the other thing 7 that we've got going on is, we've got what a lot of 8 people call a recession going on. And I think those 9 are times when you tend to be more conservative in 10 your estimates of sales than you might when things are 11 really booming. 12 MS. PYKA: Right. 13 CHAIRMAN COX: Are you seeing any of 14 that? I notice our sales are pretty flat. 15 MS. PYKA: Our sales are fairly flat. 16 When you look at the jackpot estimation games, you can 17 see they're definitely being driven by jackpots. 18 While Texas Two Step is down, last year at this point 19 in time, we had two million plus jackpots that we had 20 already experienced at this point in the fiscal year. 21 And as we look at Lotto Texas sales 22 today and compare it to jackpots from, you know, six 23 months ago, I mean, we're actually seeing a little 24 higher sales volume than we did six months ago. So 25 we're monitoring it. In each day's estimation 0141 1 process, we analyze our current activity to determine 2 what we believe actual sales might be. 3 CHAIRMAN COX: Thank you. 4 MS. PYKA: Yes. And then our next 5 slide for you this morning includes the Fiscal Year 6 2008 sales, year-to-date sales by game. As noted on 7 this slide, the green area of the pie chart includes 8 the instant ticket sales, representing 76.6 percent of 9 total sales, or $1.249 billion; 7.7 percent of sales, 10 or $126.1 million from Pick 3, followed by 5.8 percent 11 of sales and $94.5 million from Lotto Texas, followed 12 by 4.1 percent of sales and $67.2 million for Mega 13 Millions. 14 Again, sales to date for Daily 4 are 15 $18.3 million, and $4.5 million for Daily 4 Sum It Up. 16 And included are our first 13 weeks of Pick 3 Sum It 17 Up sales, amounting to $2.4 million. 18 Now Robert will be discussing with you 19 sales by price point. 20 MR. TIRLONI: Commissioners, this next 21 slide illustrates the $1.2 billion we've realized in 22 instant ticket sales through the week ending February 23 9th. This slide does contain some new information 24 this month. Chairman, you requested that we show the 25 percentage that each price point represented for the 0142 1 same time period last fiscal year, and we're noted 2 that below the current fiscal year information. And 3 I'll go over that in a moment. 4 But for the current fiscal year, the $5 5 price point continues to be the leading price point, 6 followed by the two, the ten, and then the one. And 7 we've not seen any change in that sequence for quite 8 sometime now. 9 If we look at the new information on 10 the slide, we see that the $5 price point is 11 representing approximately the same percentage as it 12 did last fiscal year. So, for example, this current 13 fiscal year, the five is representing 27 and a half 14 percent, through the same number of weeks. Last 15 fiscal year it was 27.8 percent. 16 The $20 and the $25 are dead even. The 17 one, the two, and the $30, their shares of the total 18 have deceased from last fiscal year. 19 CHAIRMAN COX: $30 looks like supply. 20 MR. TIRLONI: We actually have the same 21 number of $30 games active. 22 CHAIRMAN COX: So it's just really 23 taken a dive? 24 MR. TIRLONI: I think what's happened 25 is, the $30 player has moved up to the $50. 0143 1 CHAIRMAN COX: $30 is a non-traditional 2 betting amount. 3 MR. TIRLONI: Yes, sir. The three and 4 the seven have both seen an increase in their share in 5 this current fiscal year. Now, of course, the $50 was 6 not in existence until May of '07, so we can't give 7 you a comparison on that. 8 So I think it's worth noting, if we 9 look at, in terms of sales, the one through the $10 10 and we group those as a whole, in sales that group is 11 down $32 million compared to the previous fiscal year. 12 And so that's the one, two, three, five, seven and 13 $10. And the $2 is really the price point that is 14 hurting that group, so to speak. We're struggling at 15 the $2 price point. 16 If you look at the 20 plus, which would 17 be the $20, the $25, the $30 and the $50 as a whole 18 and you group those, those are up $24 million. So 19 that gives us the net of an $8 million decrease this 20 fiscal year compared to last fiscal year. And Kathy 21 had that noted on an earlier slide. 22 So we do have some strong product 23 launches that are coming out in the next few months, 24 and we hope those strong product launches will 25 continue to prevent further decline throughout the 0144 1 remainder of the fiscal year. 2 Chairman, is that what you were looking 3 for from us? 4 CHAIRMAN COX: Yes. Thank you, Robert. 5 Very helpful. 6 MR. TIRLONI: Commissioners, I did have 7 a little update for you. Last month when we were 8 talking about upcoming games, we talked about our new 9 licensed property game, I Love Lucy. We did have a 10 big promotional weekend in San Antonio the weekend of 11 February 1st. That was at a Valero location. And we 12 had the Lucille Ball impersonator here in Texas. 13 I figured I would show you some 14 pictures of that event. We did have a radio remote on 15 site. This was the Oldies station in San Antonio, 16 pretty highly rated radio station. They were there 17 during the evening drive time. There were live 18 call-ins where our Lucille Ball impersonator was on 19 air talking about the lottery being at this location. 20 We were selling tickets. We had our trailer there. 21 This next photo is of the Lucille Ball 22 impersonator with the Valero staff. This was a very 23 large-sized Valero location right around the corner 24 from the AT&T Center where the Spurs play. It's also 25 where the San Antonio rodeo took place. And the 0145 1 impersonator also made appearances at the rodeo two 2 times on Saturday and two times on Sunday. So it was 3 a good opportunity for us to get out in front of 4 people and get some radio stations interested and 5 involved in what we were doing and get some good 6 promotions, for not only the Lucy game but our other 7 games as well. We also had a pretty high Mega 8 Millions jackpot that Friday night that we were at the 9 Valero location. So it drew a pretty good sized 10 crowd, and we were pretty happy with the results. So 11 since we had talked about that last month, I just 12 thought I would share that with you. 13 CHAIRMAN COX: Thank you. 14 COMMISSIONER SCHENCK: Robert, did you 15 pick pictures where she looked especially like -- 16 MR. TIRLONI: These are the best 17 pictures that came out. She does look very much like 18 Lucille Ball. 19 And that's all we have for you this 20 month. We would be happy to answer any questions that 21 you may have. 22 CHAIRMAN COX: Good report. Thank you. 23 MS. PYKA: Thank you. 24 25 0146 1 AGENDA ITEM NO. VIII 2 CHAIRMAN COX: Item VIII, report, 3 possible discussion and/or action on transfers to the 4 state. 5 Ms. Pyka. 6 MS. PYKA: For the record again, my 7 name is Kathy Pyka, Controller for the agency. 8 Tab VIII in your notebook includes 9 information on the agency's financial status. The 10 first report includes the transfers and allocations to 11 the Foundation School Fund and the allocation of 12 unclaimed prizes for the period ending December 31, 13 2007. 14 Total cash transfers to the state 15 amounted to $339.7 million for the first four months 16 of the fiscal year. This represents a minimal 17 increase from the total amount transferred through 18 December of '06. And the second page in your notebook 19 includes the detailed information on the transfer. Of 20 the $339.7 million transfer to the state, 21 $317.9 million was the amount transferred to the 22 Foundation School Fund, with a balance of 23 $21.8 million transferred from unclaimed prizes. 24 And then the final document in your 25 notebook includes a summary of lottery sales, 0147 1 expenditures and transfers from Fiscal Year 1992 to 2 date. And cumulative transfers to the Foundation 3 School Fund now amount to $10 billion, which is what 4 we had reported as a supplemental report to you last 5 month. 6 Be happy to answer any questions. 7 COMMISSIONER SCHENCK: I have no 8 questions. 9 COMMISSIONER CLOWE: I have no 10 questions. 11 AGENDA ITEM NO. IX 12 CHAIRMAN COX: Okay. Item X (sic), 13 report, possible discussion and/or action on bingo 14 indirect and administrative expenses. Commissioners, 15 with your permission, I'm going to pass this item. 16 COMMISSIONER CLOWE: Thank you. 17 COMMISSIONER SCHENCK: That's fine. 18 COMMISSIONER CLOWE: That was IX, I 19 think, wasn't it? 20 MR. TIRLONI: Yes. 21 COMMISSIONER SCHENCK: That was IX. 22 CHAIRMAN COX: Yes, it was. Thank you 23 very much. I'm getting into areas where I've already 24 covered. Let's see. We've already done XI. 25 0148 1 AGENDA ITEM NO. XII 2 CHAIRMAN COX: I think we're now coming 3 to XII, report, possible discussion and/or action on 4 the Attorney General's Opinion GA-0592 relating to 5 whether the Texas Lottery Commission may operate a 6 raffle-style game. 7 Executive Director Sadberry had a 8 medical appointment today, and Gary Grief will be 9 making this report. 10 Gary. Thank you, Mr. Chairman. 11 Commissioners, I would like to inform 12 you about a recent opinion that we received from the 13 Office of the Attorney General regarding the Texas 14 Lottery Commission's authority to operate a raffle- 15 style game. 16 As background, of the 43 U.S. 17 jurisdictions that currently operate lotteries, 33 of 18 those jurisdictions have introduced these raffle-style 19 games. The game structure for lottery raffle games is 20 unique in each jurisdiction, but generally they all 21 have certain common attributes. Each raffle ticket in 22 a particular game typically costs the same price, 23 usually $5 to $20 in U.S. operated games that have 24 been launched thus far. Only a finite number of 25 tickets are sold for each game; for example, 500,000. 0149 1 Sales for the particular game end 2 either when all of the tickets are sold for that game 3 or at a pre-determined date set by the jurisdiction. 4 The Quick Pick feature that's common for other on-line 5 games is not available in a raffle game. The gaming 6 system generates a unique ticket number for each 7 ticket sold, usually in sequential number order as the 8 tickets are sold. And there are typically no 9 omissions or duplicate tickets issued. And raffle 10 tickets typically cannot be canceled. 11 COMMISSIONER CLOWE: How many digits, 12 Gary? 13 MR. GRIEF: It depends on the number of 14 tickets sold. For example, 500,000, you would have 15 Tickets No. 1 through 500,000 for that particular 16 game. And to bring some excitement to the game, the 17 players usually know how many tickets are going to be 18 printed and they're able to see that they have Ticket 19 No. 450,000, for example, and there's only 50,000 20 left, et cetera. 21 Raffle games typically offer some of 22 the best odds to the players for winning top prizes 23 that usually range from around $250,000 to sometimes 24 several million dollars in some jurisdictions. 25 There's typically one drawing that's held at the 0150 1 conclusion of the raffle game, in which a number of 2 top winning tickets are selected, along with multiple 3 numbers of lesser prize-winning tickets. Computerized 4 drawings are usually used for these raffle type games, 5 due to the sheer volume of winning tickets that must 6 be selected. 7 For example, in Illinois recently, the 8 Illinois Lottery conducted a raffle game in which they 9 had four winners of one millions dollars each, five 10 winners of $100,000 each, and 500 winners of $1,000 11 each. 12 In July of 2007, Chairman Cox, on 13 behalf of the agency, sought an Attorney General 14 Opinion on the authority of the Texas Lottery 15 Commission to operate a lottery raffle-style game. On 16 January 17th of 2008, the Office of the Attorney 17 General issued an Opinion in response to this request, 18 and a copy of the Opinion was provided to each 19 Commissioner. 20 In short, the OAG ruled that the Texas 21 Lottery Commission authorizing -- I'm sorry -- the 22 Texas Constitution authorizing a state-operated 23 lottery did not authorize the Texas Lottery Commission 24 to operate a raffle-style game nor enter into a 25 contract with a private entity to operate a game on 0151 1 behalf of the state. 2 I would defer to a member of our legal 3 team to provide you with the detailed analysis of that 4 Opinion. My focus today is to bring this Opinion to 5 your attention and inform you that we are removing the 6 introduction of a raffle-style game from our game 7 plan. 8 In June of 2007, the agency analyzed 9 potential costs and revenue related to the 10 introduction of raffle games in Texas. And our 11 projections showed a five-year net revenue gain of 12 approximately $51 million to the Foundation School 13 Fund, based on our assumptions of game launch 14 frequency, number of tickets sold, price per ticket 15 and other variables. 16 And that concludes my report this 17 morning, and I would be happy to answer any questions 18 that you might have. 19 COMMISSIONER CLOWE: And there were no 20 expenses incurred or equipment or machinery purchased 21 in anticipation of having a raffle game, I assume? 22 MR. GRIEF: That is correct, 23 Commissioner Clowe. 24 COMMISSIONER CLOWE: Thank you. 25 COMMISSIONER SCHENCK: That was 0152 1 prescient of you. That was good. Thank you. 2 CHAIRMAN COX: Was anything included 3 for a raffle in our long-range numbers that we sent 4 over to the Hill? 5 MR. GRIEF: I don't believe, no, sir. 6 CHAIRMAN COX: Thank you, Gary. 7 COMMISSIONER CLOWE: Thank you for 8 asking, Mr. Chairman. 9 AGENDA ITEM NO. XIII 10 CHAIRMAN COX: Okay. Item No. XIII, 11 report, possible discussion and/or action on the 12 Attorney General Opinion GA-0591 relating to whether 13 the Texas Lottery Commission may adopt a rule 14 authorizing video or digital display of the outcome of 15 instant bingo games. 16 Mr. Sanderson. 17 MR. SANDERSON: Good afternoon, 18 Commissioners. I would like to inform you of a 19 recently issued Attorney General Opinion, GA-0591, 20 relating to whether the Texas Lottery Commission may 21 adopt a rule authorizing video or digital display of 22 the outcome of instant bingo games. 23 As you may recall, the Commission 24 adopted amendments to the pull-tab rule, 402.300, at 25 the June 25, 2007 Commission meeting. One of the 0153 1 amendments allowed for the use of video confirmation 2 devices. And by definition, video confirmation means 3 a graphic and dynamic representation of the outcome of 4 a bingo event ticket that will have no effect on the 5 result of the winning or losing event ticket. 6 On June 27, 2007, Sen. Jane Nelson 7 submitted a request for an Attorney General Opinion. 8 Sen. Nelson asked for an Opinion on whether the Texas 9 Lottery Commission has the authority to introduce new 10 and/or change existing bingo games that provide the 11 player with graphic and dynamic representations that 12 corresponds to or represents the outcome of any 13 instant bingo game, including but not limited to 14 pull-tab bingo games, as adopted by the Commission on 15 June 25, 2007. 16 On January 17, 2008, Greg Abbott, the 17 Attorney General of Texas, issued AG Opinion GA-0591 18 which has been included in your notebook. The summary 19 of the opinion is as follows: A Texas Lottery 20 Commission rule authorizing the graphic and dynamic 21 video confirmation device solely to inform players of 22 the winning numbers in a bingo game would not by 23 itself convert the game into electronic bingo. 24 The opinion also indicates that the 25 inquiry raises the validity of the event ticket game 0154 1 itself but as to this issue concludes that the 2 question wasn't asked, and so the opinion doesn't 3 address this issue. We have currently received one 4 submission from a manufacturer which is still going 5 through the approval process, and we have an 6 indication that another manufacturer plans on making a 7 submission. 8 That concludes my report. And I'll be 9 glad to answer any questions. 10 COMMISSIONER CLOWE: No questions. 11 COMMISSIONER SCHENCK: No questions. 12 CHAIRMAN COX: Thank you, Phil. 13 AGENDA ITEM NO. XIV 14 CHAIRMAN COX: Item XIV, report, 15 possible discussion and/or action on the 80th 16 Legislature. 17 Ms. Trevino. 18 MS. TREVINO: Good afternoon, 19 Commissioners. For the record, I'm Nelda Trevino, the 20 Director of Governmental Affairs. 21 I've mentioned at several past 22 Commission meetings during the legislative interim, 23 the Speaker of the House and the Lt. Governor assigned 24 charges to each committee to study particular issues 25 and possibly conduct committee hearings for the 0155 1 purpose of making recommendations to the next 2 Legislature. 3 I reported at the December 2007 4 Commission meeting some of the interim charges issued 5 by Speaker Craddick to several committee, including 6 the House Licensing and Administrative Procedures 7 Committee. Included in your meeting notebook is an 8 excerpt of the Senate Interim Committee charges issued 9 on January the 29th of 2008 by Lt. Governor Dewhurst. 10 There are some interim charges for the Committees on 11 Finance and State Affairs which directly impact the 12 agency or may impact the agency that I would like to 13 briefly highlight. 14 A joint interim charge issued to the 15 Senate Finance Committee and Senate State Affairs 16 Committee noted on Page 7, Paragraph 4, relates to the 17 State Lottery. An additional interim charge issued to 18 the Finance Committee noted in the first paragraph on 19 Page 7 includes the state lottery. And, lastly, an 20 interim charge related to illegal gambling was issued 21 to the State Affairs Committee and is noted on Page 21 22 in the second paragraph. 23 We will keep you advised on 24 developments related to the House and Senate Committee 25 interim charges, specifically as it relates to any 0156 1 committee request that might be made of the agency. 2 And, finally, we are beginning our preparations for 3 our next agency legislative briefing, which we plan to 4 hold on March the 26th. 5 This concludes my report, and I'll be 6 glad to answer any questions that you might have. 7 COMMISSIONER SCHENCK: No questions. 8 COMMISSIONER CLOWE: No questions. 9 CHAIRMAN COX: So far we don't have any 10 request for assistance with any of these interim 11 charges? 12 MS. TREVINO: That's correct. 13 CHAIRMAN COX: Thank you. Thank you, 14 Nelda. 15 AGENDA ITEM NO. XV 16 CHAIRMAN COX: Item XV, report, 17 possible discussion and/or action on the agency's 18 contracts. 19 Mr. Jackson. 20 MR. JACKSON: Good afternoon, 21 Commissioners. For the record, my name is Tom 22 Jackson, Purchasing and Contracts Manager for the 23 agency. 24 Commissioners, in your notebooks under 25 Tab No. XV is a report on prime contracts that has 0157 1 been updated for your review. I would be happy to 2 respond to any questions. 3 COMMISSIONER CLOWE: No questions. 4 COMMISSIONER SCHENCK: No questions. 5 CHAIRMAN COX: Thank you, Tom. 6 AGENDA ITEM NO. XVI 7 CHAIRMAN COX: Item XVI, report, 8 possible discussion and/or action, including 9 extension, on the agency's audit services contract. 10 Mr. Fernandez. 11 MR. FERNANDEZ: Good afternoon, 12 Commissioners, Mr. Chairman. My name is Mike 13 Fernandez. I'm the Director of Administration. 14 This is an information briefing item. 15 It's to inform you that the current contract with 16 Maxwell Locke & Ritter for the annual financial audit 17 and Mega Millions agreed upon procedures expires 18 March 31st of this year. There are two one-year 19 renewal options remaining under the terms of this 20 contract. And this item is to advise you that it is 21 Staff's intent to renew this contract for one year. 22 If you have any questions, I will be 23 happy to answer those questions. 24 COMMISSIONER CLOWE: No questions. 25 COMMISSIONER SCHENCK: No questions. 0158 1 Thank you. 2 CHAIRMAN COX: Catherine, help me 3 remember. Is this the one that the extension -- the 4 contract that we're extending is the one that the 5 State Auditor authorized you to negotiate, to acquire 6 and negotiate? 7 MS. MELVIN: Yes, sir, they did. 8 However, they did stipulate that we come back to them 9 each year and request their permission, and we have 10 done that. 11 CHAIRMAN COX: And I have seen that you 12 have done that. 13 MS. MELVIN: Yes. 14 CHAIRMAN COX: Okay. Thank you. 15 AGENDA ITEM NO. XVII 16 CHAIRMAN COX: Item XVII, report and 17 possible discussion and/or action on the agency's HUB 18 program. 19 Ms. Bertolacini. 20 MS. BERTOLACINI: Good afternoon, 21 Commissioners. For the record, my name is Joyce 22 Bertolacini, Coordinator of the TLC's Historically 23 Underutilized Business Program. 24 A copy of the agency's finalized Fiscal 25 Year 2007 Minority Business Participation Report has 0159 1 been included in your notebooks today. This report, 2 which is required by Section 466.107 of the State 3 Lottery Act, must be made available annually to the 4 Governor, Lt. Governor, Speaker of the House and 5 members of the Legislature. The report requires your 6 formal approval prior to being printed and published 7 on our website. 8 The current Minority Business 9 Participation Report documents the level of minority 10 and HUB participation in the agency's contracting 11 activity during Fiscal Year 2007. It also provides 12 information on the number of licensed minority lottery 13 retailers. During Fiscal Year 2007, the agency 14 achieved an overall participation rate of 15 27.07 percent in its minority HUB contracting 16 activity. In addition, during this report period, the 17 agency had 6,636 minority retailers, which represented 18 40.94 percent of the total lottery retailer base. 19 I would be happy to answer any 20 questions or entertain any suggested revisions to the 21 report at this time. 22 COMMISSIONER CLOWE: No questions. 23 COMMISSIONER SCHENCK: No questions. 24 We're talked about this recently, and I congratulate 25 you again on this fine work. 0160 1 MS. BERTOLACINI: Thank you. 2 Then if there aren't any other 3 questions, the staff recommends your approval of the 4 FY 2007 Minority Business Participation Report. And, 5 Chairman Cox, you should have a cover letter ready for 6 your signature. 7 CHAIRMAN COX: And I do. 8 MS. BERTOLACINI: Fine. 9 COMMISSIONER CLOWE: So move. 10 COMMISSIONER SCHENCK: Second. 11 CHAIRMAN COX: All in favor, say "Aye." 12 COMMISSIONER SCHENCK: Aye. 13 COMMISSIONER CLOWE: Aye. 14 CHAIRMAN COX: Aye. 15 Motion carries 3-0. So that's my 16 authority to sign this transmittal letter. 17 MS. BERTOLACINI: And I have just a few 18 more updates for you this afternoon. I wanted to let 19 you know that the next statewide HUB report will be 20 released by the Comptroller of Public Accounts on 21 April the 15th. This report will measure the agency's 22 HUB performance for the first six months of Fiscal 23 Year 2008. I'll plan to present a set of summary 24 reports to you regarding the agency's HUB performance 25 during the May Commission meeting. 0161 1 And finally, I would also like to 2 provide you a brief update on the agency's Mentor 3 Protege Program. I have been in touch with all three 4 of the mentor companies who have either met with or 5 are scheduling meetings with their proteges during the 6 coming weeks. I have requested that the new mentor 7 protege pairs submit their annual goals to me by the 8 end of this month. I will follow up with each pair 9 and should have more detailed information to present 10 at the next Commission meeting. 11 I would be happy to answer any 12 questions that you have at this time. 13 CHAIRMAN COX: Okay. Thank you very 14 much for that report. The written report is an 15 excellent job. And you and Mr. Fernandez and everyone 16 who participated in that are to be commended. 17 MS. BERTOLACINI: Thank you. 18 AGENDA ITEM NO. XVIII 19 CHAIRMAN COX: Item XVIII, 20 consideration of and possible discussion and/or action 21 on the external and internal audits. 22 Ms. Melvin. And Ms. Hernandez. 23 MS. MELVIN: Again, Commissioners, for 24 the record, Catherine Melvin, Director of the Internal 25 Audit Division. 0162 1 Today we have two items for you. First 2 I would like to provide a very brief update on the 3 State Auditor's office efforts. And then I also have 4 Dale Hernandez who is here with me who will present 5 the results of a recently completed Internal Audit. 6 The state auditors have completed their 7 work, as I've previously reported. They provided a 8 draft report to agency management, and they are 9 awaiting final management responses. Those are due at 10 the end of this week. And we anticipate that their 11 final report will be published before the month is 12 out. 13 And then now I'll turn it over to Dale 14 who will lay out a report from Internal Audit. 15 CHAIRMAN COX: Let me ask one question 16 at this point, Catherine. 17 MS. MELVIN: Sure. 18 CHAIRMAN COX: Gary, do you anticipate 19 that we will have management's response completed and 20 have that report filed on time? 21 MR. GRIEF: Absolutely. Yes, sir. 22 CHAIRMAN COX: Thank you. And did we 23 have any disagreement with the auditors on any of the 24 matters? 25 MR. GRIEF: No, sir, we did not. 0163 1 MS. HERNANDEZ: Good afternoon, 2 Commissioners. For the record, my name is Dale 3 Hernandez, and I am with the Internal Audit Division. 4 Before you is a copy of the annuity 5 payments to prize winners audit report, and I will 6 start by laying out the objectives of the audit and 7 give you the overall results and then discuss 8 opportunities to strengthen controls. 9 The objective of the audit was to 10 determine if controls over the payment of annuities 11 are adequate to ensure that the correct winners are 12 paid the correct amount for the proper length of time. 13 To accomplish our objective, we reviewed winner files 14 to determine if the proper procedures had been 15 followed and the correct documentation had been 16 obtained for each winner. In addition, we compared 17 the internal winner payment schedules to a listing of 18 payments made by the Comptroller of Public Accounts, 19 to verify the accuracy and completeness of payments. 20 And based on the results of our review 21 and testing, we found the controls provide reasonable; 22 assurance that the correct winners are paid the 23 correct amount for the proper length of time. Our 24 testing of actual payments disclosed no exceptions in 25 the accuracy and frequency of payments to winners. 0164 1 However, we identified several areas 2 where improvements to controls could be implemented. 3 First, the death verification performed on win-for- 4 life prize winners could be improved. There are 5 currently seven winners receiving payments for their 6 lifetime. We currently verify vital status by either 7 telephoning the winner or sending a letter with return 8 signature requested. We recommend that a more 9 reliable and proactive method be utilized. And the 10 Office of the Controller agreed with our 11 recommendation and responded that they will implement 12 a new method beginning in April 2008. 13 COMMISSIONER SCHENCK: I'm sorry. 14 Could I ask a quick question? 15 MS. HERNANDEZ: Certainly. 16 COMMISSIONER SCHENCK: When were we 17 doing this win-for-life? 18 MS. HERNANDEZ: That is a fairly old 19 game that occurred in late '93, beginning of '94. 20 COMMISSIONER SCHENCK: We haven't done 21 anything like that in a long time. Right? 22 MS. HERNANDEZ: No. That's -- 23 COMMISSIONER SCHENCK: I think for 24 obvious reasons, we don't want to be doing a lot of 25 this. Eh? 0165 1 MS. HERNANDEZ: Well, I'll let Robert 2 speak to the games. 3 MR. TIRLONI: I was short, and this 4 chair just made me shorter. 5 All of our annuity style games that we 6 have been introducing here for at least the past I 7 want to say seven to eight years all have a cap. As 8 Dale said, the win-for-life game was a game that was 9 introduced way early on that did not have a cap. But 10 all of our current annuity games cap at a certain -- 11 in dollar amounts. 12 COMMISSIONER SCHENCK: So other than 13 calling him up and asking him if he's still alive, I 14 mean, what proactive approach are you suggesting we 15 could consider? 16 MS. HERNANDEZ: Well, there's a variety 17 of options in that regard. We could subscribe to a 18 service where we could check the social security 19 numbers and see if a death has been reported. There 20 are tools we have within the agency that sort of do 21 the same thing, just tightening up, making sure that 22 we get either something in writing or, you know, 23 something a little more formal than just calling and 24 seeing if they're alive. 25 COMMISSIONER SCHENCK: Well, the Social 0166 1 Security Administration has this problem as well. 2 MS. HERNANDEZ: Yes, I'm aware of that. 3 Right. 4 COMMISSIONER SCHENCK: Because you hear 5 stories of -- 6 MS. HERNANDEZ: Sure. 7 COMMISSIONER SCHENCK: -- deaths that 8 go unreported. 9 MS. HERNANDEZ: Of course. 10 COMMISSIONER SCHENCK: And we seem to 11 have incentivized some of those potentially here. So 12 I think your suggestion that there is something needs 13 to be improved here is a good one. But I would think 14 that one method alone is probably not going to be -- 15 MS. HERNANDEZ: Well, it can be a 16 combination of perhaps a letter or maybe using one of 17 the tools to verify the social security number. I 18 know that one -- in my opinion, one method would 19 probably not be, you know, the cure-all for this. But 20 the Office of the Controller is going to look into 21 this and come up with maybe a tighter -- 22 CHAIRMAN COX: Kathy, I think you 23 already have looked into it, haven't you? Do you want 24 to just tell us what you found? 25 MS. PYKA: Again, for the record, Kathy 0167 1 Pyka, Controller for the agency. 2 I have looked into it. And I believe 3 that we'll need look at a combination of methods to 4 verify vital status. As they mentioned, we currently 5 utilize either the telephone or written letter 6 approach. And I think we need to continue with some 7 form of written documentation -- 8 COMMISSIONER SCHENCK: I'm sorry, 9 Kathy. I need to interrupt you. A written letter? 10 MS. PYKA: Yes. 11 COMMISSIONER SCHENCK: Like we send 12 them a letter? And is it return receipt requested, I 13 assume? 14 MS. PYKA: Yes, it's a certified letter 15 that -- 16 COMMISSIONER SCHENCK: So if anyone at 17 the house signs for the letter, we get the green card 18 back? 19 MS. PYKA: It's not -- their 20 recommendation is an outstanding recommendation. We 21 need to add to the current process. But as I've 22 looked at these subscription services and looked at 23 the in-house system, a lot of these systems are 24 relying on the Social Security Administration, and so 25 their data is only as good as it's been reported. 0168 1 So I believe we need to look at a 2 combination of systems. And I've looked at the Berwyn 3 Group, as recommended as part of the recommendation. 4 And those tools seem to be pretty robust, and they're 5 very reasonable in cost. And so we're looking at 6 getting some data reports back from them as we speak. 7 And we want to analyze those reports and also exactly 8 who they are reaching out to. They have a multiple 9 group of places that they're actually getting their 10 data, in addition to the Social Security 11 Administration. I want to analyze what those sources 12 are, to make certain that we end up with the right 13 result. 14 COMMISSIONER SCHENCK: Do we know these 15 people's ages at this point, I assume? 16 MS. PYKA: Yes. 17 COMMISSIONER SCHENCK: Are we 18 tracking -- I mean, an insurance agent could tell you 19 what someone's life expectancy would be, and I would 20 think we would get more rigorous as someone 21 approaches -- 22 CHAIRMAN COX: 150. 23 COMMISSIONER SCHENCK: -- 115. 24 (Laughter) 25 I would hope we would never offer one 0169 1 of these games again. 2 CHAIRMAN COX: I would hope so as well. 3 COMMISSIONER CLOWE: How many are there 4 of these people? 5 MS. HERNANDEZ: There are seven right 6 now. We had eight, but one passed away. 7 COMMISSIONER CLOWE: None of you-all 8 are old enough to have dealt with this. But when you 9 have a family member who dies who is on social 10 security, you get a letter from the Social Security 11 Department addressed to the person. And they are 12 required to present themselves at the social security 13 office. You know, you ought to just do that. 14 I wouldn't make this a big deal. You 15 don't have to hire a service. Just have somebody go 16 and identify them in person. You're only talking 17 about seven people. We have people all over the 18 state. Ask them to come by the claim center that's 19 closest to them, identify themselves and verify that 20 they're alive. And that's what the federal government 21 does. And I had to write back, say, "This person will 22 not be presenting themselves because they are 23 deceased." And it's a very nice letter. It's a 24 simple thing. Don't make a complex deal out of it. 25 CHAIRMAN COX: Well, I think that it 0170 1 sounds more complex than it is. I think Kathy is 2 talking about about $1,000 a year -- 3 COMMISSIONER CLOWE: Yes. 4 CHAIRMAN COX: -- for the outside 5 service. 6 COMMISSIONER CLOWE: Is that right? 7 CHAIRMAN COX: Yes. 8 MS. PYKA: It's very reasonable. The 9 most expensive was $5,000. The other was a $1,000. 10 And I just wish to look further into their data 11 sources. 12 COMMISSIONER CLOWE: How did you find 13 out the one person was deceased, if you know? 14 MS. HERNANDEZ: Actually, I did review 15 their file. And their spouse telephoned Kathy's 16 people and notified them of the death. 17 COMMISSIONER CLOWE: See, people are 18 basically honest. 19 COMMISSIONER SCHENCK: Yes. 20 MS. HERNANDEZ: Yes. And it does -- I 21 did verify independently, through using the tool we 22 have in enforcement, and I did want to look up that 23 winner and see what Accurint reported. And it did 24 show her death. I don't know how quick that would 25 appear, you know, immediately after the death, but we 0171 1 did also do that. So . . . 2 CHAIRMAN COX: Are these big enough 3 that you use actuarial tables to account for them 4 or -- 5 MS. PYKA: No, they're not. It's seven 6 files. And there's annuity schedules that we're 7 paying off of. And it's just very routine. We just 8 need to go this extra step and close the loop. 9 MS. HERNANDEZ: And these winners 10 receive $1,000 a week for life, so that's the amount 11 of their prize. 12 COMMISSIONER CLOWE: How do they know 13 that a social security number represents a person who 14 is deceased? Probating the will? 15 MS. HERNANDEZ: I'm not sure how the 16 service does that. Does anyone -- 17 MS. MELVIN: No, I don't know, either, 18 Commissioner. But I know that early on in the audit, 19 what we looked at was what the Teacher Retirement 20 System and the Texas Employees Retirement System -- 21 COMMISSIONER CLOWE: Pardon me. I 22 couldn't hear you. 23 MS. MELVIN: Earlier on in the audit, 24 what we looked at was what the Teacher Retirement 25 System and then the Texas Employees Requirement System 0172 1 utilized to do this very thing. It's, you know, 2 obviously on a much larger scale than what we're 3 talking about here, but those were the services that 4 they were using. 5 COMMISSIONER CLOWE: I'm sure glad 6 there are not 70 or 700 of these people out there. I 7 don't wish ill health to any of them. 8 When were those games, Robert? When 9 did those games exist? 10 MR. TIRLONI: Prior to my tenure. And 11 being responsible for product marketing activities at 12 the Commission, I believe it was in the early -- 13 MS. KIPLIN: It was in 1993. 14 MR. TIRLONI: '92 is when the scratch- 15 off game started. I want to say like around '93 to 16 '95, somewhere in that time period. 17 MS. KIPLIN: I can answer that 18 question. It was the fall of 1993. 19 MS. HERNANDEZ: Right. 20 MS. KIPLIN: And it was at a time when 21 the Lottery Division was leaving the Comptroller and 22 coming into its own existence as the agency. And at 23 that time, game procedures had been passed through me 24 for review. 25 Actuarial -- I did ask the question 0173 1 about actuarial, and it was about 20 years on each 2 one. In this particular regard, the issue was -- 3 there was not a definition of "person" in the State 4 Lottery Act. And so under code -- this is the issue I 5 raise -- and under code construction, you would go to 6 the definition of "person" in the Government Code, 7 which is the form of any legal entity. In each of 8 these cases, I'll tell you that they were individuals 9 that claimed the prize. So you're really looking at. 10 It wasn't -- 11 COMMISSIONER SCHENCK: You were 12 concerned that we would have someone incorporate and 13 claim the prize as a corporation? 14 COMMISSIONER CLOWE: How many young 15 children did they have to think -- 16 COMMISSIONER SCHENCK: Like the British 17 East India Company or whatever? 18 MS. KIPLIN: But the bottom line is, in 19 each of these cases, it was an individual. As I 20 recall -- 21 CHAIRMAN COX: Pretty young one, too, I 22 bet. 23 MS. KIPLIN: Beg your pardon? 24 COMMISSIONER SCHENCK: The youngest 25 person in the house. 0174 1 MS. KIPLIN: At that point I was just 2 more concerned that it be an individual, not a legal 3 entity that claimed it, because likely I think it 4 would have been -- 5 COMMISSIONER CLOWE: They would have 6 had to have been 18 -- 7 CHAIRMAN COX: Right. 8 COMMISSIONER CLOWE: -- to be a legal 9 buyer. 10 MS. KIPLIN: No. 11 COMMISSIONER CLOWE: We're talking 12 about a scratch-off, aren't we? 13 MS. KIPLIN: No. You can claim a prize 14 if you're a minor; you just can't purchase the ticket. 15 COMMISSIONER CLOWE: A one-year-old 16 child. 17 MS. KIPLIN: Yes. That was another 18 issue. But that's -- let me just set all that aside. 19 COMMISSIONER CLOWE: Is this Glenn Hunt 20 or who is responsible for this? 21 MS. KIPLIN: I don't know. All I know 22 is -- 23 CHAIRMAN COX: Let's assume he's not 24 sitting at the table over there. 25 COMMISSIONER SCHENCK: No, he's not. 0175 1 MS. KIPLIN: Right, just reviewing it. 2 And I believe this is the only game, this win-for- 3 life, this is the only game at that time. And then 4 there were other types of play styles that were 5 similar but not exactly on point. 6 COMMISSIONER CLOWE: Then we went to 7 the 25-year annuity. 8 MS. KIPLIN: We went to the weekly 9 grand where, as Mr. Tirloni indicated, there is a cap; 10 there is a cap. It's a payment. You know, you can 11 get it -- you can make an option, whether it's weekly, 12 I think monthly, quarterly or annually. But it's not 13 tied to the life of the claimant. That's the history 14 as I recall from 1993. 15 COMMISSIONER CLOWE: And we are 16 learning. 17 MR. TIRLONI: And we do currently have 18 a Set For Life game. It's a similar name, but it does 19 have a cap. It's very clear to the front of the 20 ticket. It's not paid out based on the -- 21 MS. KIPLIN: Life. 22 MR. TIRLONI: -- life of the claimant. 23 CHAIRMAN COX: Well, why do we call it 24 that exactly? 25 MR. TIRLONI: It has appeal to the 0176 1 playing public to think that they're going to get a 2 payment over a period of time. 3 CHAIRMAN COX: That wasn't the answer I 4 wanted to hear. 5 COMMISSIONER SCHENCK: It's set for 6 life. It's not pay for your life. 7 MR. TIRLONI: No, it's not being paid 8 for your life. You know, the $10 Set For Life game 9 pays up to $5 million. 10 CHAIRMAN COX: That would be pretty 11 set. 12 MR. TIRLONI: That's what I mean, yes. 13 So it's not based on your lifespan. 14 COMMISSIONER SCHENCK: I think you 15 should carve on the desk. 16 COMMISSIONER CLOWE: Truth in 17 advertising. 18 COMMISSIONER SCHENCK: Never a win-for- 19 life game, in case some of us forget. 20 MS. KIPLIN: So the bottom line is, 21 this is the only game, and it's from 1993 where you 22 have this exposure. 23 COMMISSIONER CLOWE: The sense of it I 24 think is try to find a verification process that is 25 not offensive and intrusive on the individual's 0177 1 personal life but one that the state can verify that 2 the person is continuing properly to receive the 3 money. 4 MS. PYKA: Your comments are noted, 5 Commissioner. Thank you. 6 MS. HERNANDEZ: All right. Moving to 7 the next issue, the Office of the Controller currently 8 relies on a manual tracking system. They make 9 payments weekly, quarterly, monthly or annually, 10 depending on the game and the payment frequency chosen 11 by the winner. And I'm going to show a couple of 12 slides that will give you a better idea of just how 13 many payments they deal with throughout the year. 14 At the time of the audit, there were 15 365 Lotto Texas and Mega Millions winners receiving 16 annual payments. This chart shows how those payments 17 are distributed through each's month of the year. 18 The next slide shows instant game, the 19 options that some of those winners have chosen. At 20 the time of the audit, there were also 147 instant 21 game winners receiving payments at various intervals. 22 And they can receive -- except for the Win-For-Life 23 people that we just discussed, instant winners can 24 receive their payments, depending on the game rules as 25 well -- weekly, monthly, quarterly or annually. And 0178 1 this chart shows how they've opted to do that. 2 We recommend with this large volume of 3 number of payments that the Office of the Controller 4 begin automating this process to ensure that reminders 5 of payments due are available automatically to the 6 staff involved in the payment process. And the Office 7 of the Controller agreed with our recommendation and 8 will implement an automated payment tracking system. 9 Okay. Third, winner files are 10 maintained in hard copy format in the Office of the 11 Controller. These files contain all information 12 needed to process the payments. The files are kept in 13 a locked fireproof cabinet that are removed frequently 14 to process payments or for auditor review or any other 15 reason. 16 While the files could be substantially 17 reconstructed if the files were damaged or destroyed, 18 valuable notes or other unavailable data might be 19 lost. We recommend that critical information in the 20 files be scanned into an electronic file if feasible. 21 The Office of the Controller agreed with the 22 recommendation and will create electronic versions of 23 active master payment files and back up copies of 24 inactive files 25 COMMISSIONER SCHENCK: I have a 0179 1 question about that. Do we have a paper backup as 2 well? 3 MS. HERNANDEZ: Well, the Office of the 4 Controller has the master file. There are other 5 documents -- for example, legal documents -- that 6 Legal might have. Or the initial claim when it's 7 processed, the claim center would have some of those 8 documents. But there is no backup paper file. 9 COMMISSIONER SCHENCK: Is there a 10 single paper file that we could go to now? 11 MS. HERNANDEZ: Yes. 12 COMMISSIONER SCHENCK: I'm concerned 13 that the electronic storage media also have 14 limitations on their lifespan. I mean, if we could 15 EMP pulse somewhere, it would all actually disappear. 16 Are there paper files? 17 MS. HERNANDEZ: There is a paper file 18 currently being used, yes. 19 Lastly, I would also like to note that 20 the Office of the Controller has approved the 21 documentation contained in their files and also 22 currently utilizes a check list to ensure that proper 23 information is obtained during initial winner 24 processing and throughout the life of the file. The 25 Office of the Controller will continue their efforts 0180 1 in this regard. And I would like to commend them on 2 the improvements made there. I would also like to 3 thank the Office of the Controller for their 4 cooperation during this audit. 5 This concludes my presentation, and I 6 would be happy to answer any questions. 7 COMMISSIONER SCHENCK: I'm sorry. I 8 don't mean to come back to this. I know we've beaten 9 this issue, I shouldn't say to death, but the winners 10 for life, Kim, is there a possibility that we could 11 approach these people and do a reduced to net present 12 value exchange with them instead of having someone 13 from the state constantly checking to see if they're 14 alive? 15 MS. KIPLIN: Let me look into that. In 16 my mind are the issues regarding the fact that we 17 don't cash out except by policy, by rule, by agency 18 rule. We don't cash out, if you will, prizes except 19 for, ironically enough, in the event of the death of 20 an individual prize winner in very limited 21 circumstances. And the reason is because of the 22 application of the constructive receipt rule. This is 23 a narrow group, though. So I would like to go back 24 and take a look at that and give you some information. 25 COMMISSIONER SCHENCK: I think if there 0181 1 is a way, it would be preferable. I mean, we're 2 spending money we don't need to spend in ways that we 3 don't want to spend it. We don't want to look like 4 we're at odds with the hope that these people will 5 live long and happy and very long lives, and just be 6 better for everyone. 7 MS. KIPLIN: I guess one issue that 8 we'll need some help with is actuarially -- I mean, 9 how do you cash that out? 10 CHAIRMAN COX: The structured 11 settlement techniques are pretty clear and pretty 12 simple to apply. The legal questions I think are the 13 hurdles. 14 MS. KIPLIN: Yes. And whether your 15 decision or your -- if you were to make that decision 16 to try to cash these out, whether it would then 17 trigger the doctrine of the constructive receipt -- 18 CHAIRMAN COX: Even if they didn't 19 accept? 20 MS. KIPLIN: Yes, exactly, for the 21 others. 22 CHAIRMAN COX: Because now it's 23 available to be received. 24 MS. KIPLIN: For the ones -- 25 CHAIRMAN COX: I think that's your big 0182 1 hurdle right there. 2 MS. KIPLIN: For the ones that do 3 accept -- 4 COMMISSIONER SCHENCK: For tax 5 consequences? 6 MS. KIPLIN: Yes, for tax consequences. 7 COMMISSIONER SCHENCK: Well, let's just 8 look at it. 9 MS. KIPLIN: Sure. 10 COMMISSIONER SCHENCK: Thank you. 11 CHAIRMAN COX: Thank you very much. 12 MS. HERNANDEZ: Thank you. 13 CHAIRMAN COX: Oh, Catherine, one 14 question. Do you anticipate that the State Auditor 15 will make a report to this board? 16 MS. MELVIN: I have asked that they do 17 that, and they indicated they would be happy to. 18 CHAIRMAN COX: Excellent. Thank you. 19 AGENDA ITEM NO. XIX 20 CHAIRMAN COX: Item No. XIX, report, 21 possible discussion, et cetera, on Mega Millions game 22 and/or contract. 23 Mr. Grief. 24 MR. GRIEF: I have nothing to report 25 under this item, Mr. Chairman. 0183 1 CHAIRMAN COX: Okay. 2 AGENDA ITEM NO. XX 3 CHAIRMAN COX: Item XX, report, 4 possible discussion and/or action on GTECH 5 Corporation. 6 Mr. Grief. 7 MR. GRIEF: I believe that Executive 8 Director Sadberry has placed some items in your 9 notebooks for your review. I have nothing to report 10 under this item. 11 CHAIRMAN COX: Okay. 12 AGENDA ITEM NO. XXI.B, C AND D 13 CHAIRMAN COX: Kim, I'm looking at Item 14 XXI.B, C and D. Are these all NSF's? 15 MS. KIPLIN: The two, B and C, are 16 NSFs. The other one is an agreed order between the 17 Staff and the licensee, and it had to do with the use 18 of a credit card and purchasing a ticket. That 19 employee is no longer with that respondent. And the 20 respondent agreed to a 10-day suspension. Staff does 21 recommend that you vote to approve that agreed order. 22 COMMISSIONER CLOWE: Move the adoption 23 of the Staff recommendation. 24 COMMISSIONER SCHENCK: I second the 25 motion. 0184 1 CHAIRMAN COX: All in favor, say "Aye." 2 COMMISSIONER CLOWE: Aye. 3 COMMISSIONER SCHENCK: Aye. 4 CHAIRMAN COX: Aye. 5 Motion carries 3-0 -- 6 Okay. Items B, C and D are all NSFs? 7 MS. KIPLIN: B -- 8 CHAIRMAN COX: Pardon me. C and D? 9 MS. KIPLIN: B and C are NSFs. D is 10 the agreed order. 11 CHAIRMAN COX: Okay. We just did D. 12 COMMISSIONER CLOWE: Move the adoption 13 of the staff recommendation. 14 CHAIRMAN COX: On B and C. 15 COMMISSIONER SCHENCK: I second the 16 motion as to B and C. 17 CHAIRMAN COX: All in favor, say "Aye." 18 COMMISSIONER CLOWE: Aye. 19 COMMISSIONER SCHENCK: Aye. 20 CHAIRMAN COX: Aye. 21 Motion carries 3-0. 22 AGENDA ITEM NO. XXII 23 CHAIRMAN COX: Report of the Executive 24 Director. Mr. Grief. 25 MR. GRIEF: Mr. Chairman, I believe 0185 1 Executive Director Sadberry has the standard 2 information available for you under this tab in your 3 notebook, and I have nothing to report under this 4 item. 5 CHAIRMAN COX: Thank you. 6 COMMISSIONER CLOWE: No questions. 7 AGENDA ITEM NO. XXIV 8 CHAIRMAN COX: Commissioners, with your 9 permission, we'll go into executive session. 10 COMMISSIONER CLOWE: Yes, sir. 11 CHAIRMAN COX: At this time I move the 12 Texas Lottery Commission go into executive session: 13 A. To deliberate the duties and 14 evaluation of the Executive Director, the Deputy 15 Executive Director, Internal Audit Director and the 16 Charitable Bingo Operations Director and to deliberate 17 the duties of the General Counsel pursuant to Section 18 551.074 of the Texas Government Code, to receive legal 19 advice regarding pending or contemplated litigation 20 pursuant to Section 551.071(1)(A) and/or to receive 21 legal advice regarding settlement offers pursuant to 22 Section 551.071(1)(B) of the Texas Government Code 23 and/or to receive legal advice pursuant to Section 24 551.071(2) of the Texas Government Code, including but 25 not limited to: 0186 1 Shelton Charles vs. Texas Lottery and 2 Gary Grief; 3 First State Bank of DeQueen, et al., 4 vs. Texas Lottery Commission; 5 James T. Jongebloed vs. Texas Lottery 6 Commission; 7 The Lotter Ltd; 8 Employment law, personnel law, 9 procurement law, contract law, evidentiary and 10 procedural law and general government law; 11 Lottery Operations and Services 12 contracts; 13 Mega Millions game and/or contract; 14 Directors' and officers' liability 15 insurance; 16 Attorney General Opinions GA-0579, 17 GA-0592 and GA-0591. 18 Is there a second? 19 COMMISSIONER CLOWE: Second. 20 CHAIRMAN COX: All in favor, say "Aye." 21 COMMISSIONER CLOWE: Aye. 22 COMMISSIONER SCHENCK: Aye. 23 CHAIRMAN COX: Aye. 24 The vote is 3-0. 25 The Texas Lottery Commission will go 0187 1 into executive session. The time it 12:44 p.m. Today 2 is February 20, 2008. 3 (Off the record: 12:44 p.m. to 1:59 4 p.m.) 5 AGENDA ITEM NO. XXV 6 CHAIRMAN COX: The Texas Lottery 7 Commission is out of executive session. The time is 8 1:59 p.m. 9 Is there any action to be taken as a 10 result of executive session? 11 AGENDA ITEM NO. V (continued) 12 CHAIRMAN COX: If not, let's go back to 13 Agenda Item No. V. Earlier this was passed, subject 14 to some editing that Commissioner Schenck requested. 15 Commissioner, would you review that and 16 see if that -- 17 COMMISSIONER SCHENCK: Surely. 18 CHAIRMAN COX: -- page is written as 19 you wanted it. 20 COMMISSIONER SCHENCK: Indeed it is. 21 And I would move adoption of the Staff recommendation. 22 COMMISSIONER CLOWE: Second. 23 CHAIRMAN COX: All in favor, say "Aye." 24 COMMISSIONER SCHENCK: Aye. 25 COMMISSIONER CLOWE: Aye. 0188 1 CHAIRMAN COX: Aye. 2 Motion carries 3-0. 3 Now, do we sign this or do we sign a 4 T-bar? 5 MS. KIPLIN: No. That's an order 6 adopting that rule. 7 CHAIRMAN COX: Oh, okay. That's right. 8 We're adopting this -- 9 MS. KIPLIN: Adopting the rule. So 10 you're -- 11 CHAIRMAN COX: We haven't adopted 12 anything in a while. 13 MS. KIPLIN: And you have to adopt 14 rules by order. 15 AGENDA ITEM NO. XXIII 16 CHAIRMAN COX: Okay. It looks like I 17 don't have a check by public comment. 18 Is there any public comment? 19 AGENDA ITEM NO. XXVI 20 CHAIRMAN COX: If not, the meeting is 21 adjourned. 22 (Meeting adjourned: 2:00 p.m.) 23 24 25 0189 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 5th day of March 2008. 15 16 17 ________________________________ 18 Aloma J. Kennedy Certified Shorthand Reporter 19 CSR No. 494 - Expires 12/31/08 20 Firm Certification No. 276 Kennedy Reporting Service, Inc. 21 Cambridge Tower 1801 Lavaca Street, Suite 115 22 Austin, Texas 78701 512.474.2233 23 24 25