0001 1 TRANSCRIPT OF PROCEEDINGS 2 BEFORE THE 3 TEXAS LOTTERY COMMISSION 4 AUSTIN, TEXAS 5 6 REGULAR MEETING OF THE § TEXAS LOTTERY COMMISSION § 7 TUESDAY, MARCH 25, 2008 § 8 9 COMMISSION MEETING 10 TUESDAY, MARCH 25, 2008 11 12 BE IT REMEMBERED THAT on Tuesday, 13 the 25th day of March 2008, the Texas Lottery 14 Commission meeting was held from 9:15 a.m. to 15 2:02 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 DAVID SCHENCK and FERNANDO C. REYES, JR. The 19 following proceedings were reported via machine 20 shorthand by Aloma J. Kennedy, a Certified Shorthand 21 Reporter of the State of Texas, and the following 22 proceedings were had: 23 24 25 0002 1 APPEARANCES 2 CHAIRMAN: 3 Mr. James A. Cox, Jr. 4 COMMISSIONERS Mr. David Schenck 5 Mr. Fernando C. Reyes, Jr. 6 GENERAL COUNSEL: Ms. Kimberly L. Kiplin 7 EXECUTIVE DIRECTOR: 8 Mr. Anthony J. Sadberry 9 DIRECTOR, CHARITABLE BINGO OPERATIONS: Mr. Phil Sanderson 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0003 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. I - Meeting Called to Order..... 8 4 AGENDA ITEM NO. II - Report, possible discussion and/or action on ethics, 5 administrative procedure, and open government laws pertaining to the 6 Texas Lottery Commission........................ 51 7 AGENDA ITEM NO. III - Consideration of and possible discussion and/or action, 8 including adoption, on new rule 16 TAC §402.500 relating to General Records 9 Requirements.................................... 62 10 AGENDA ITEM NO. IV - Consideration of and possible discussion and/or action, 11 including adoption, on new rule 16 TAC §402.506 relating to Disbursement 12 Records Requirements............................ 65 13 AGENDA ITEM NO. V - Consideration of and possible discussion and/or action, 14 including adoption, on new rule 16 TAC §402.511 relating to Required Inventory 15 Records......................................... 67 16 AGENDA ITEM NO. VI - Report by the Charitable Bingo Operations Director 17 and possible discussion and/or action on the Charitable Bingo Operations 18 Division’s activities........................... 74 19 AGENDA ITEM NO. VII - Report, possible discussion and/or action on lottery sales 20 and revenue, game performance, new game opportunities, advertising, market 21 research, and trends............................ 77 22 AGENDA ITEM NO. VIII - Report, possible discussion and/or action on transfers 23 to the State.................................... 94 24 AGENDA ITEM NO. IX - Report, possible discussion and/or action on Bingo 25 indirect and administrative expenses............ 97 0004 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA ITEM NO. X - Report, possible discussion and/or action on the 4 agency's Strategic Plan for 2009-2013........... 97 5 AGENDA ITEM NO. XI - Consideration of and possible discussion and/or action, 6 including adoption, of repeal of 16 TAC §401.312 relating to "Texas Two Step" 7 On-Line Game.................................... 103 8 AGENDA ITEM NO. XII - Consideration of and possible discussion and/or action, 9 including adoption, on new rule 16 TAC §401.312 relating to "Texas Two Step" 10 On-Line Game.................................... 103 11 AGENDA ITEM NO. XIII - Report, possible discussion and/or action on the 80th 12 Legislature..................................... 108 13 AGENDA ITEM NO. XIV - Report, possible discussion and/or action on the 14 agency’s contracts.............................. 121 15 AGENDA ITEM NO. XV - Report and possible discussion and/or action on the agency's 16 HUB program and/or minority business participation, including the agency's 17 Mentor Protégé Program.......................... 122 18 AGENDA ITEM NO. XVI - Consideration of and possible discussion and/or action on 19 external and internal audits and/or reviews relating to the Texas Lottery Commission 20 and/or on the Internal Audit Department’s activities, including State Auditor’s Office 21 Follow-up Audit Report on Workforce Management, Procurement, and Lotto Texas 22 Activities at the Texas Lottery Commission...... 9 23 AGENDA ITEM NO. XVII - Report, possible discussion and/or action on the Mega 24 Millions game and/or contract................... 122 25 0005 1 TABLE OF CONTENTS 2 PAGE 3 AGENDA ITEM NO. XVIII - Report, possible discussion and/or action on GTECH 4 Corporation..................................... 123 5 AGENDA ITEM NO. XIX - Consideration of the status and possible entry of orders in: 6 A. Docket No. 362-06-1019 – La Porte Shell 7 B. Docket No. 362-07-3965 – La Porte Shell and La Porte Chevron 8 C. Docket No. 362-08-1309 – Quik Pik Stop 9 D. Docket No. 362-08-1310 – Good Luck Chevron 10 E. Docket No. 362-08-1246 – Southwest Café and Market 11 F. Docket No. 362-08-1382 – El Ranchito Convenience Store 12 G. Docket No. 362-08-1499 – EZ Stop H. Docket No. 362-08-1501 – Foster Food 13 Mart I. Docket No. 362-08-1384 – J&J Main Stop 14 J. Docket No. 362-08-1383 – Medfield Food Store 15 K. Docket No. 362-08-1381 – Mikey’s Food Store #1................................ 128 16 AGENDA ITEM NO. XX - Report by the Executive 17 Director and/or possible discussion and/or action on the agency’s operational status, 18 activities relating to the Charitable Bingo Operations Division, agency procedures, and 19 FTE status...................................... 141 20 AGENDA ITEM NO. XXI - Public comment............ 143 21 22 23 24 25 0006 1 TABLE OF CONTENTS (continued) 2 AGENDA ITEM NO. XXII - Commission may meet in Executive Session: 3 A. To deliberate the duties and evaluation of the Executive Director 4 pursuant to Section 551.074 of the Texas Government Code 5 B. To deliberate the duties and evaluation of the Deputy Executive 6 Director pursuant to Section 551.074 of the Texas Government Code 7 C. To deliberate the duties and evaluation of the Internal Audit 8 Director pursuant to Section 551.074 of the Texas Government Code 9 D. To deliberate the duties and evaluation of the Charitable Bingo 10 Operations Director pursuant to Section 551.074 of the Texas 11 Government Code E. To deliberate the duties of the 12 General Counsel pursuant to Section 551.074 of the Texas Government Code 13 F. To receive legal advice regarding pending or contemplated litigation 14 pursuant to Section 551.071(1)(A) and/or to receive legal advice 15 regarding settlement offers pursuant to Section 551.071(1)(B) of the Texas 16 Government Code and/or to receive legal advice pursuant to Section 17 551.071(2) of the Texas Government Code, including but not limited to: 18 Shelton Charles v. Texas Lottery and Gary Grief 19 First State Bank of DeQueen et al. v. Texas Lottery Commission 20 James T. Jongebloed v. Texas Lottery Commission 21 The Lotter Ltd Employment law, personnel law, 22 procurement and contract law, evidentiary and procedural law, 23 and general government law Lottery Operations and Services 24 contract Mega Millions game and/or contract... 143 25 0007 1 TABLE OF CONTENTS (continued) 2 PAGE 3 AGENDA NO. XXIII - Return to open session for further deliberation and possible 4 action on any matter discussed in Executive Session............................... 145 5 AGENDA ITEM NO. XXIV - Adjournment.............. 145 6 REPORTER'S CERTIFICATE.......................... 146 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 0008 1 P R O C E E D I N G S 2 TUESDAY, MARCH 25, 2008 3 (9:15 a.m.) 4 AGENDA ITEM NO. I 5 CHAIRMAN COX: Good morning. It's 6 about 9:15. Today is March 24 (sic), 2008. 7 Commissioner Schenck is here. I'm Jim Cox. 8 I would like to begin by reading an 9 announcement from Gov. Perry. This is dated March 7, 10 2008. 11 "Gov. Perry appoints Reyes to Texas 12 Lottery Commission. 13 "AUSTIN - Gov. Rick Perry appointed 14 Fernando Reyes, Jr., of San Antonio to the Texas 15 Lottery Commission for a term to expire February 1, 16 2011. The Commission oversees the Texas Lottery and 17 ensures that lottery and bingo games are conducted in 18 a legal and fair manner. 19 "Reyes is president of Reyes 20 Industries, Inc. and Reyes Automotive Group. He is... 21 a past appointee to the Texas Workers' Compensation 22 Insurance Fund Board and the Texas Skills Standard 23 Board. Reyes is Chairman of the San Antonio Hispanic 24 Chamber of Commerce, Commissioner of the San Antonio 25 Fiesta Commission and the 2008 San Antonio Rey Feo. 0009 1 Additionally, he is a board member of the Christus 2 Santa Rosa Hospital, San Antonio Parks Foundation and 3 St. Mary's University. 4 Reyes received a bachelor's degree from 5 the University of Texas at Arlington and a master's 6 degree from the University of Southern California." 7 Commissioner, welcome to the Texas 8 Lottery Commission. 9 COMMISSIONER REYES: Thank you so much 10 for having me. 11 (Applause) 12 CHAIRMAN COX: I guess I really can't 13 make it March 24th if it isn't, can I? 14 MS. KIPLIN: No, sir. And I may have 15 misheard, but I just want to be -- 16 CHAIRMAN COX: Today is March 25, 2008. 17 AGENDA ITEM NO. XVI 18 CHAIRMAN COX: Okay. I would like to 19 begin with Agenda Item No. -- Catherine, what's your 20 agenda item number? -- XVI, which is consideration of 21 and possible discussion and/or action on external and 22 internal audit reports and/or reviews relating to the 23 Texas Lottery Commission and/or on the Internal Audit 24 Department's activities, including State Auditor's 25 Office Follow-up Audit Report on Workforce Management, 0010 1 procurement, and Lotto Texas Activities at the Texas 2 Lottery Commission. 3 And we welcome the representatives of 4 the State Auditor's Office. 5 MS. MELVIN: Good morning, 6 Commissioners. Welcome, Commissioner Reyes. 7 For the record, my name is Catherine 8 Melvin, Director of the Internal Audit Division. I 9 have no items of update regarding Internal Audit. 10 However, I would like to turn over the mike to the 11 guests at the table. These individuals are from the 12 State Auditor's Office, and they've appeared before 13 this Commission before. And I'll ask each to 14 introduce themselves. 15 CHAIRMAN COX: And if I could 16 interrupt, just make one announcement. 17 Commissioner, we are pretty informal 18 about questions. 19 COMMISSIONER REYES: Okay. 20 CHAIRMAN COX: If you want to ask a 21 question as things are going along, just ask it. 22 COMMISSIONER REYES: Okay. 23 CHAIRMAN COX: And then there will be 24 an opportunity for questions, comments and 25 deliberation after each item. 0011 1 COMMISSIONER REYES: Okay. Thank you 2 very much. 3 MS. VICE: Good morning, Chairman Cox, 4 Commissioner Schenck, Commissioner Reyes. My name is 5 Sandy Vice. I am an Assistant State Auditor at the 6 State Auditor's Office. And I'll let the others 7 introduce themselves. 8 MS. O'NEIL: Good morning, 9 Commissioners. My name is Audrey O'Neil. I'm the 10 Project Manager with the Texas State Auditor's Office. 11 MR. HICKS: Good morning. My name is 12 Willie Hicks. I was the Assistant Project Manager on 13 this audit. 14 MS. VICE: And if you will, we just 15 have a few comments that we wanted to share with you. 16 First of all, it was back in 2006 that our office 17 conducted and published five audit reports at the 18 Texas Lottery Commission. And it was October of 2007 19 that our office began to follow up on three of these 20 audits. 21 The topics of the three audits that we 22 followed up on were workforce management, procurement 23 and Lotto Texas. The other two audits we did not 24 choose to follow up on, because they are of a 25 recurring nature. And so we figured that those would 0012 1 be followed up at that time. 2 I want to just speak briefly about what 3 we did and did not do. In those three audit reports 4 that we followed up on, there were a number of 5 recommendations -- 64 to be exact. And for each of 6 them, we followed up on about half of them. So for 7 workforce, we followed up on 13 out of 24. For 8 procurement, we followed up on 12 out of 22. And for 9 Lotto Texas, we followed up on 9 out of 18. And I'm 10 going to have Audrey here in a minute give you the 11 results of that work. 12 I wanted to just let you know that on 13 an annual basis, our office requires agencies to 14 submit to us the status of implementation of 15 recommendations. And in an appendix in our report, we 16 did include the self-reported information that your 17 agency provided on the status of those remaining 18 recommendations. So there is information in our audit 19 report on all of the recommendations. 20 I also want to say that I want to thank 21 the Commission, Mr. Sadberry, his staff. Everyone has 22 been extremely cooperative, and we have received 23 everything that we needed to complete our audit. So I 24 do thank everybody for their assistance and to the 25 staff for, once again, helping us complete a survey of 0013 1 the employees. So I thank you. 2 And with that, I'm going to let Audrey 3 present the findings. At any time if y'all have 4 questions, please. You should have a copy of our 5 audit report, plus the highlights that Audrey is going 6 to be presenting from. 7 MS. O'NEIL: Thank you. Before I begin 8 the detailed overview of the results of our audit, I 9 would like to take a minute to just briefly explain 10 the implementation statuses that we use in a follow-up 11 audit report. 12 Page 1 of your audit report actually 13 provides complete definitions for each implementation 14 status. But very briefly, we use these statuses to 15 indicate the agency's progress in implementing each 16 recommendation, and we use four-tiered implementation 17 statuses. 18 The first implementation status is 19 fully implemented, which indicates a successful and 20 consistent process to address a prior recommendation. 21 The second status is substantially implemented, which 22 indicates a successful but inconsistent process to 23 address a prior recommendation. Third is incomplete 24 or ongoing, which indicates the ongoing development of 25 a process to address one of our recommendations. And 0014 1 finally, not implemented, which indicates the lack of 2 a process to address a prior recommendation. 3 Our overall conclusion from this audit 4 was that the Texas Lottery Commission fully or 5 substantially implemented the majority of prior State 6 Auditor's Office recommendations regarding workforce 7 management, procurement and Lotto Texas activities. 8 To summarize the results of our work in 9 regards to the workforce management, the agency fully 10 implemented 11 of the 13 implementations we reviewed 11 as part of our follow-up. However, two key 12 recommendations were not completely implemented. 13 First, the agency did not have a 14 defined process to address informal employee 15 complaints made to the agency's ombudsman, to the 16 internal auditor or to managers or supervisors, and it 17 did not always communicate complaint resolution to all 18 involved parties, including the employee initiating 19 the complaint. 20 Second, the agency did not have formal 21 policies and procedures to clarify the 22 responsibilities of its ombudsman position, and the 23 ombudsman did not have a defined role in the employee 24 complaint process. 25 At the request of the Commission, we 0015 1 also conducted an agency-wide employee survey. The 2 results of that survey suggests that staff believe 3 that the culture of the agency has improved in the 20 4 months between this survey and when the State 5 Auditor's Office originally conducted an employee 6 survey in 2006. Specifically -- well, you have -- the 7 graph on the next page of your handout provides a 8 summary of key survey responses by staff. I would 9 just like to point out a few to you specifically. 10 First, 70 percent of employees now 11 agree that they are treated with respect and dignity, 12 which is compared with 55 percent in 2006. So that's 13 an increase of 15 percentage points in that category. 14 However, 44 percent of employees still believe that 15 they will not be retaliated against if they raise 16 issues or concern, compared with 38 percent in 2006, 17 an increase of 6 percentage points. 18 The most significant increase in the 19 survey results was in the survey statement, "I trust 20 Human Resources." It had the highest increase, of 26 21 percentage points, from 40 percent of employees 22 agreeing with that statement in 2006, to 66 percent of 23 employees agreeing with that statement in 2007. 24 Additionally, your Audit Report contains complete 25 survey results. Those are in Appendix 2 on Page 29, 0016 1 if you would like to look at them more, in more 2 detail. 3 In regards to our follow-up of 4 procurement, the agency fully or substantially 5 implemented 10 of the 12 recommendations that we 6 reviewed. However, two recommendations were not 7 completely implemented. 8 First, the agency had weaknesses in its 9 policies and procedures for negotiating contracts. 10 And, second, the third-party reviewer that the agency 11 relies on to monitor the primary lottery operator may 12 appear to lack independence, because it contracts 13 directly with the primary lottery operator instead of 14 directly with the agency. 15 Finally, for Lotto Texas, the agency 16 fully implemented eight of the nine recommendations 17 that we reviewed. However, the agency did not 18 implement a recommendations that we made to publish 19 proposed policies and procedures that affect Lotto 20 Texas players on its website and in the Texas Register 21 prior to adoption by the Commission. The agency did 22 seek public approval of the policies and procedures by 23 the Commission and posted the final version on its 24 website and in the Texas Register but not the proposed 25 versions for public comment. 0017 1 As a result of our audit, we made 2 several recommendations regarding workforce 3 management. The agency should develop guidelines for 4 informal complaints made to the agency's ombudsman, 5 internal auditors or supervisors, finalize its 6 policies and procedures for the ombudsman position and 7 have executive management and the Commission approve 8 those, and evaluate how the ombudsman position can 9 best address the concerns of employees and, if 10 necessary, revise the duties of the ombudsman to 11 reflect that. 12 Regarding procurement, the agency 13 should continue to strengthen its policies and 14 procedures for contract negotiations, to provide 15 specific guidance to its staff engaging in those 16 negotiations. It should also contract directly with 17 the third-party reviewer to monitor the primary 18 lottery operator's compliance with contract terms and 19 conditions. 20 Regarding Lotto Texas, the Commission 21 should publish proposed Lotto Texas policies and 22 procedures on its website and in the Texas Register 23 for public comment, prior to adoption. I would just 24 like to note that this last recommendations is carried 25 forward directly from our prior audit report on Lotto 0018 1 Texas activities. However, in the initial Audit 2 Report, it was addressed to the agency. At this time 3 we have redirected that recommendation to the 4 Commission, thinking that that might be a more 5 appropriate role for the Commission to play. 6 That concludes my remarks. I'm happy 7 to answer any questions that you might have. 8 CHAIRMAN COX: Commissioner? 9 COMMISSIONER SCHENCK: I have quite a 10 few. 11 First, thank you for your hard work on 12 this, and I think it's an excellent report. I think 13 overall it shows substantial improvement with the 14 agency. Are you in agreement with that conclusion? 15 MS. O'NEIL: Yes, substantial 16 improvement. 17 COMMISSIONER SCHENCK: And you did, as 18 I believe you said, got -- you received full 19 cooperation wherever you were -- you sought it from 20 the agency? 21 MS. O'NEIL: Absolutely. 22 COMMISSIONER SCHENCK: Can you refresh 23 my recollection as to what percentage of the workforce 24 responded to the survey request -- 25 MS. O'NEIL: Sure. 0019 1 COMMISSIONER SCHENCK: -- if you know? 2 MS. O'NEIL: Let me get it exactly 3 right. 4 In the 2007 survey, the most recent 5 survey we conducted, the total response rate for all 6 employees at the agency was 57.3 percent. 7 COMMISSIONER SCHENCK: How does that 8 compare to other agencies that you're conducting 9 audits for? 10 MS. O'NEIL: We do not always survey 11 agency-wide, especially employee -- you know, agency- 12 wide employees. However, we used 50 percent as a 13 guideline for what is an acceptable response rate, so 14 we're comfortable with 57 percent. 15 COMMISSIONER SCHENCK: Do you think 16 that there is something we as a Commission could do to 17 further encourage the employees to participate in 18 surveys like this? I don't know that we'll be 19 repeating this in any short term. But we try to 20 encourage the employees to communicate, because it's 21 important to us. We don't always have direct lines of 22 communication, as a commission, with the individual 23 employees. So these sorts of surveys I think are 24 especially helpful for those of us who sit up here, to 25 understand what it is, as a group, that the employees 0020 1 are sensing or feeling as they come here every day. 2 Is there something more we could be doing? 3 MS. VICE: One of the things that is 4 most helpful is for staff to feel that something 5 happens as a result of the comments that they provide. 6 And one way that they can understand what happens is 7 for the agency to maybe provide either in writing or 8 in briefings, letting them know the actions that are 9 being taken as a result. And if they can see that 10 there are tangible differences as a result of their 11 comments, I think they are more likely to continue to 12 participate. 13 COMMISSIONER SCHENCK: With respect to 14 these particular recommendations you made with respect 15 to the workforce portion of the audit, one concern, 16 obviously, was the lack of clarity of the role of the 17 ombudsman. And I believe there is an open question -- 18 and I'll put this to anyone who wants to answer it -- 19 of to whom exactly the ombudsperson should be 20 reporting -- individually to the Executive Director, 21 perhaps to the Commissioners, or both? And I think 22 there is, as I understand it, a lack of clarity on 23 that question at this time. 24 And Human Resources, obviously, has a 25 role in this as well. But I think if we're going to 0021 1 have an ombudsperson -- and I believe that we 2 should -- the sense that the employees can trust this 3 person to be acting in their best interest is fairly 4 important. And I get the sense from the 5 recommendations that there is some concern for the 6 informal complaint process that is sort of an in box 7 which functions like a black hole, information doesn't 8 come back out. Do you think that changing the 9 schematic to have the ombudsperson reporting 10 differently than is currently occurring would be 11 helpful in that regard? 12 MS. O'NEIL: I think there is a 13 two-tiered answer to that question. I think first, it 14 is important that employees know clearly who the 15 ombudsman is reporting to. And formalizing the 16 policies and procedures for the ombudsman will make 17 that clear to employees or will help make that clear 18 to employees. 19 In terms of who the ombudsman should 20 most appropriately report to, that really is a 21 management decision to be made by the Commission and 22 the agency. However, that being said, in our prior 23 audit report, we recommended that the ombudsman report 24 to the Executive Director with access to members of 25 the Commission. So that's available for your 0022 1 consideration 2 COMMISSIONER SCHENCK: Help me to 3 understand what that means, "with access to the 4 Commissioners." That means they can pick up the phone 5 and call us -- he or she -- if the ombudsperson so 6 chooses? 7 MS. O'NEIL: Yes. I think we intended 8 that to mean that they should have free and open 9 access to you should they have any need to contact 10 you. 11 COMMISSIONER SCHENCK: Okay. But I 12 think it is overall very promising that we've seen 13 substantial increases in satisfaction with the 14 employees as a whole, and I think that's largely 15 attributable to the efforts of our Executive Director. 16 And I think he should be commended for those efforts 17 as they're being reflected in this data. 18 With respect to procurement, third- 19 party oversight of the contract, how quickly do you 20 think we should be in a position to improve that where 21 we're having a direct contract instead of contracting 22 with GTECH? 23 MS. O'NEIL: Commissioner Schenck, it's 24 my understanding -- and perhaps Mike Fernandez could 25 clarify this for you -- that that contract will sort 0023 1 of be up -- we'll have a complete cycle made -- I want 2 to say in October -- but in about another quarter to 3 six months. And I would think at that time, there 4 would be an opportunity for the agency to contract 5 directly. 6 In the meantime, we do offer sort of 7 two alternatives to the agency about how you might fix 8 that problem in the interim. And those two, you know, 9 options for you to consider were either to contract 10 directly with someone else now or to implement some 11 steps to augment monitoring of the third-party 12 operator, until such a time as you have a direct 13 contract with a third-party reviewer. 14 COMMISSIONER SCHENCK: That second 15 option seems most cost-effective, doesn't it? Instead 16 of having two layers of contracts to accomplish the 17 same purpose, which would arguably be waste, to have 18 somebody within the agency performing a watch dog over 19 our watch dog. It seems to me it would be a little 20 more cost effective. Would you disagree with that? 21 MS. VICE: I think that's accurate. 22 COMMISSIONER SCHENCK: Yes. 23 CHAIRMAN COX: This is the Protiviti 24 contract we're talking about, isn't it? 25 MS. VICE: Yes. 0024 1 CHAIRMAN COX: And it's a quarterly 2 review. Is that correct? 3 MR. FERNANDEZ: That's correct. 4 CHAIRMAN COX: So why couldn't we just 5 say, "By golly, right now we're starting to contract 6 for it instead of GTECH contract for it. In the next 7 quarter, they will be working for us"? 8 MR. FERNANDEZ: Well, that's a 9 procurement issue, Mr. Chairman. And what I mean by 10 that is that we simply -- there are other companies 11 out there that offer the same capability. 12 And for the record, my name is Mike 13 Fernandez. I'm the Director of Administration. 14 So what we did when these discussions 15 occurred between the State Auditor's staff and our 16 staff, we began to take a look at that and had a 17 number of conversations with their staff in regards to 18 the quickness, I guess, that we could turn that 19 around. What would be required would be for us to put 20 a competitive bid on the street. So that's the time 21 lag. 22 CHAIRMAN COX: I see. You can't just 23 transfer it over and -- 24 MR. FERNANDEZ: Well, to say that we 25 couldn't just do it, I don't know if that's completely 0025 1 accurate. You know, there always are opportunities to 2 do what we used to call -- and I know you were a 3 commissioner -- they're a 309 bid or go direct service 4 bid to someone. But generally what you have to 5 explain is the reason that you're doing it. And in 6 most cases is that they offer some product that no one 7 else can offer, and that's what enables us to do that. 8 In this case, when we examined it and 9 looked at the marketplace, we understood very quickly 10 that there are other companies out there that do it. 11 CHAIRMAN COX: Okay. 12 MR. FERNANDEZ: Our discussion and my 13 discussion with the State Auditor's staff was that 14 what we would like to do is to implement the second 15 suggestion or recommendation that was made. By that, 16 I mean, is look very closely at the reports that are 17 coming in from Protiviti and look at the tests that 18 Catherine and I have talked about that they're 19 employing when they test certain functions and 20 features, to watch that very closely, work very 21 closely with the other divisions in doing that and 22 then also to develop an RFP and put that on the street 23 and have that -- have another company in place when 24 this contract expires with our service provider. 25 CHAIRMAN COX: Okay. So there would be 0026 1 nothing to preclude Protiviti from bidding on our 2 procurement as well? 3 MR. FERNANDEZ: That's correct. 4 CHAIRMAN COX: Okay. 5 MR. FERNANDEZ: There would be nothing 6 to preclude. The other issue that we got into looking 7 at going sole source was the use of their product, and 8 that just looked very complicated to us over the long 9 run. 10 CHAIRMAN COX: Okay. And the State 11 Auditor is good with this arrangement? 12 MS. VICE: Yes. 13 CHAIRMAN COX: Thank you, Mike. 14 MR. FERNANDEZ: Yes, sir. 15 CHAIRMAN COX: Pardon me, Commissioner. 16 COMMISSIONER SCHENCK: Mike, before you 17 go -- this might be applicable to you -- it seems to 18 me -- I've often heard it said that the GTECH contract 19 is the most important contract the agency has, given 20 its size. I'm not sure that that's right. I think 21 the oversight of GTECH may be the most important 22 contract we have, given the unique nature of the 23 relationship. I don't know of any other vendor to the 24 state that is carrying out the functions that GTECH 25 does. And I think that this contract is extremely 0027 1 important, and I think this recommendations that we're 2 getting from the State Auditor is extraordinarily 3 important. 4 So as we go forward with this 5 procurement process, whenever that unravels, I'm -- 6 because I am fairly new here, Commissioner, as you 7 are. I'm not as familiar with that as I might be, and 8 I was wondering if you could help me to understand, in 9 addition to the lowest bidder, how we might look at 10 and evaluate the abilities of this third-party 11 contract, or whether it's Protiviti or anybody else, 12 and really doing an outstanding job of watching what's 13 going on with this enormous contract. Do we have the 14 ability to take a contract and award it, even if it's 15 not from the lowest bidder? 16 MR. FERNANDEZ: It's best value; it 17 will be best value. So that the cost, the price, if 18 you will, is one component of the bid, which is not in 19 itself the overriding award factor. So we would -- 20 first off, I agree with what you said. We take very 21 seriously, as you know, what the State Auditor says 22 literally. And what we will do is that we well 23 develop the requirements. Certainly we have an 24 advantage in the terms of the things that we're going 25 to review and the frequency, because all of those 0028 1 things in the current review have been risk-ranked. 2 And I will tell you, based on my 33 3 years of experience in state government, you don't see 4 that very often in state agencies. You may see it 5 more, now because these guys are focusing on it. But 6 I think that we've done an excellent job in terms of 7 risk-ranking. So we look at the frequency of things 8 that are going to be evaluated. Where there may be 9 some things that we only want to look at semiannually, 10 there may very well be things that we want to look at 11 every quarter, and we do. 12 So all of those factors that we have 13 been through -- and that has been the entire staff in 14 terms of the divisions being represented in that 15 review, including Legal -- will be brought to bear as 16 we develop the specifications for that bid. And they 17 will be again weighted in terms of their priorities. 18 COMMISSIONER SCHENCK: And in response 19 to a question from the Chairman, I think you mentioned 20 that there are a number of companies out there that 21 would likely be responsive to this? 22 MR. FERNANDEZ: We're hopeful. 23 COMMISSIONER SCHENCK: How many do you 24 think there would be? 25 MR. FERNANDEZ: We're hopeful. Well, 0029 1 when I first got involved in this in discussions with 2 the Chairman, I immediately went out and Googled it. 3 I was familiar with some companies, but there were 4 three or four that jump up, come up on the Google very 5 quickly and that are global firms. 6 I think that there are some issues out 7 there. Most of those companies that I have looked at 8 or the ones that we have looked at provide services in 9 the private sector. And I have not seen a lot of 10 those services, those companies providing services in 11 the public sector. And one of the issues that jumped 12 to the forefront is indemnification, which becomes an 13 issue very quickly, as I'm sure you can appreciate in 14 this issue. 15 So what we do know is that some of 16 those companies also have government practices in the 17 beltway. So I've got to believe that if they're 18 dealing with -- if they're doing some work in the 19 federal sector, that they've dealt with this 20 indemnification issue before. But that's one of the 21 issues that we've got to -- 22 COMMISSIONER SCHENCK: This would be a 23 big contract for whoever got it, I would imagine? 24 MR. FERNANDEZ: Well, I think it's a 25 good contract. And I think any time you come in and 0030 1 do business with the State of Texas, that it's always 2 a benefit to you throughout the country. 3 COMMISSIONER SCHENCK: And I shouldn't 4 imply -- I have no criticisms of -- specifically this 5 is GTECH in this regard. I just think that it's an 6 extremely important function and it helps us from 7 having surprises when we -- to the extent that 8 surprises are capable of being avoided. But I think 9 what we're looking for here is the best -- 10 MR. FERNANDEZ: Absolutely. 11 COMMISSIONER SCHENCK: -- operator. 12 And I understand value. But given the size and the 13 nature of this contract we're looking to oversee, 14 skill I think is going to be at the forefront. So if 15 we can find the best people, I think we should be 16 working -- bending over backwards to try to make that 17 contract work. 18 MR. FERNANDEZ: Yes, sir, I agree. 19 COMMISSIONER SCHENCK: Thanks. And 20 again, I have no further questions. I appreciate your 21 hard work on this audit, and we'll take it to heart. 22 COMMISSIONER REYES: A couple of 23 questions that I have. I'm new to this, so I'm going 24 to ask it the best way I know. But are you telling me 25 that 30 percent of our employees feel that they're not 0031 1 treated with respect and dignity? 2 MS. O'NEIL: The way I would answer 3 that is that 30 percent of your employees either 4 disagreed or were neutral, that they are treated with 5 respect and dignity. So, in other words, they 6 couldn't bring themselves to mark "Agree" or "Strongly 7 Agree." 8 MS. VICE: And again, that's of the 9 ones that responded. 10 COMMISSIONER REYES: So you didn't get 11 100 percent response, or close to that? 12 MS. VICE: No, sir. 13 COMMISSIONER REYES: And then 14 56 percent of our employees feel like they're going to 15 be retaliated against if they raise issues and 16 concerns -- of the ones that responded? 17 MS. O'NEIL: Again, those employees 18 could not bring themselves to agree that they would 19 not be retaliated against. 20 COMMISSIONER REYES: So how would you 21 take that kind of an answer? 22 MS. O'NEIL: I believe the conclusion 23 drawn in the overall Audit Report is that that is 24 still a concern for employees. Fear of retaliation 25 remains a concern for employees. 0032 1 Additionally, the difference between 2 the 2006 response, which was where 38 percent of the 3 employees agreed, versus 44 percent in 2007, was less 4 of an increase than we saw in some other survey 5 questions. 6 COMMISSIONER REYES: Well, I come from 7 a very people-oriented type business in manufacturing, 8 and that if I had this kind of numbers, I would be 9 very concerned that I wouldn't be able to do all the 10 work that we need to do. So I think we need to move a 11 lot stronger in trying to get the employees to feel 12 that this is a great place to work. So I will do 13 anything I can to make sure that that happens. 14 Thank you. 15 MS. O'NEIL: Yes. Thank you. 16 COMMISSIONER REYES: Thank you. 17 CHAIRMAN COX: Thank you very much, 18 Commissioner. 19 The statement that the agency agrees 20 with all of your recommendations I found somewhere. I 21 also found that -- although I haven't had an 22 opportunity to discuss this with Director Sadberry 23 yet -- that many of our implementations had a date of 24 May 1, 2008. Do we have any concern that we're a 25 little ambitious there? Are we going to be able to 0033 1 make that? 2 MR. SADBERRY: Chairman, I discussed 3 that with the management team as we developed those 4 dates. And I personally reviewed in the last quarter 5 report, which went in about two weeks ago, to the 6 leadership. The first series of dates, which actually 7 was earlier than that -- it was a March 1st date -- I 8 required that I receive personally, I think it was, 9 procurement procedures that were indicated or required 10 to have compliance by March 1st. And I personally 11 required that I would be provided with those and 12 review those to personally be assured that that had 13 occurred and that it had occurred sufficiently and 14 satisfactorily. 15 And as to the May 1 date, yesterday in 16 a directors' meeting, I required the same process be 17 provided to me. I'm having meetings constantly on all 18 of these matters, including the ombudsman -- we've had 19 several meetings on that -- and the Auditor's 20 guideline development, Legal Services' involvement in 21 that and other areas, to make sure that we are 22 tracking toward compliance with those dates. 23 I, as of yesterday, required that we go 24 away what now is a quarterly reporting practice, to a 25 monthly reporting practice, which is where we were at 0034 1 the beginning of the first implementation of the 2006 2 audit, so that I will have before me on a monthly 3 basis now the evidence of the implementation of these 4 matters. 5 My understanding, in talking with the 6 Deputy Executive Director Grief, who is not here 7 today, that the Human Resources dates, for example, 8 were, in fact, pushed back from some earlier 9 indications of a more aggressive posture, back to the 10 May 1 date, so that that's more realistic. 11 We are in the process now of my 12 receiving the drafting of the documents and 13 regulations and procedures that would accomplish these 14 dates. As you well know, it's my expectation that 15 dates are real and that they be met and that they're 16 not established with the anticipation or the realistic 17 prospect that there will be a request for extensions 18 or need for extension. 19 My expectation is that they are 20 concrete and that they will be met. And my activities 21 in an oversight, general oversight for the entire 22 agency capacity, is that that occurs. Should that not 23 develop or should there be problems that occur in the 24 process, it is my intent to make you aware of that, 25 and we can make a determination of any matters that we 0035 1 need to address at that time. 2 And it's also my requirement that we 3 communicate directly with the State Auditor's Office 4 in the event that either a management decision, a 5 management action on any action or circumstances that 6 develop a change beyond our control, that changes -- 7 what we initially indicated would be the 8 implementation -- that we notify directly and openly 9 the State Auditor's Office of that and receive 10 confirmation from them of their response as to whether 11 there is an issue or problem. We've done that with 12 respect to at least one item of the 2006 audit. And 13 if that should occur in this audit, follow-up audit, 14 we would do that as well. 15 CHAIRMAN COX: Excellent. Well, I'm 16 glad we're taking an aggressive posture on this, and I 17 fully expect that we'll be able to achieve this. 18 One of the things that I was a bit 19 concerned about were the three bullet points on your 20 overall conclusion here. 11 of 13, 85 percent were 21 implemented. 10 of 12, 83 percent. Eight of 9, 22 89 percent. That's pretty good for a baseball hitter, 23 but it doesn't seem very good for an agency. 24 Were there reasons that satisfied the 25 State Auditor that we had not implemented 100 percent 0036 1 of your recommendations? 2 MS. O'NEIL: There certainly were 3 reasons, you know, a variety of reasons that these 4 recommendations were not fully implemented. In all 5 cases, other than publishing Lotto Texas policies and 6 procedures, there was some progress made by the agency 7 in implementing those recommendations. It just wasn't 8 enough progress for us to say that they were 9 substantially or fully implemented. So this 11 of 13, 10 or 85 percent, shouldn't indicate to you that there is 11 no progress on those remaining two recommendations, 12 just that the progress did not indicate substantially 13 or fully implementing those recommendations. 14 CHAIRMAN COX: Okay. So the only place 15 where we really just flat dropped the ball was on the 16 Lotto Texas publication? 17 MS. O'NEIL: On the Lotto Texas, the 18 agency -- that was really a three-part recommendation: 19 First, to publish the proposed policies and procedures 20 that affect Lotto Texas players, for comment; second, 21 to seek your public approval of those procedures; and 22 third, to publish the final policies and procedures on 23 the agency website and in the Texas Register. 24 Steps 2 and 3 occurred. However, Step 25 1 did not occur at all, which is why that 0037 1 recommendation was considered not implemented. 2 CHAIRMAN COX: Okay. Ms. Kiplin, is 3 that your area? 4 MS. KIPLIN: Legal has a part in it in 5 terms of filing those documents with the Texas 6 Register? 7 CHAIRMAN COX: Are we fixing that? 8 MS. KIPLIN: Yes, we are. And I 9 believe that there have been drafts of the changes in 10 these particular procedures that have been routed and 11 should ultimately come to the Commission timely for 12 y'all's review. And then to the extent that there are 13 changes envisioned or anticipated with the Lotto Texas 14 procedures, those will come to you consistent with the 15 recommendations that the State Auditor's Office has 16 made to publish for public comment prior to the 17 Commission acting to adopt those procedures. 18 CHAIRMAN COX: Thank you. 19 COMMISSIONER SCHENCK: Kim, can we meet 20 the May 1 deadline, going through with publication, 21 et cetera, et cetera? 22 MS. KIPLIN: Well, let me answer it 23 this way: First of all, yes, because there are no, at 24 this point, changes to the procedures that are being 25 made that I'm aware of. But the changes that I'm 0038 1 talking about are to put into, how do you do a 2 procedure? Very clearly, as it relates to Lotto 3 Texas, that it comes to the Commission for 4 consideration to publish for public comment prior to 5 the Commission actually acting to adopt. 6 So one is process and the other one is 7 substantive changes to the procedure. The first one 8 is the process, and that's the Auditor's 9 recommendation that has to do with the process on how 10 the Commission adopts changes -- or to the Lotto Texas 11 procedures. And then the substantive one would be 12 those changes and then following that process. 13 Does that answer your question? 14 COMMISSIONER SCHENCK: It seems to me 15 if we're -- I may not be understanding correctly. But 16 if we're publishing for public notice and for public 17 comment, I mean, the period is -- if we get comments 18 that suggest change is necessary, I don't know that 19 we're going to be able to get the May 1 deadline met, 20 would we? 21 MS. KIPLIN: Well, what is en route 22 right now has to do with how the Commission, both the 23 agency and the three-member commission, will take up 24 changes to the Lotto Texas jackpot procedures. That's 25 the heart, as I understand it, of the recommendation 0039 1 the State Auditor's Office has made. That is 2 occurring. I am not aware of any substantive changes 3 at this -- right now on the Lotto Texas jackpot 4 procedure itself. So one has to do with how you go 5 about making those changes and the other one has to do 6 with the substantive changes. And I may not be 7 doing -- 8 COMMISSIONER SCHENCK: So we're not 9 envisioning a rulemaking necessary as part of this 10 process? 11 MS. KIPLIN: No, sir. 12 COMMISSIONER SCHENCK: Okay. 13 MS. O'NEIL: I might just add that that 14 is the reason that this recommendation is now 15 addressed to the Commission instead of the agency, to 16 give you more flexibility in addressing those issues. 17 COMMISSIONER SCHENCK: Thank you. 18 CHAIRMAN COX: Janine, could you come 19 join us, please. 20 MS. MAYS: Good morning. Janine Mays, 21 HR Director. 22 CHAIRMAN COX: Commissioner, Chairman 23 Clowe and I share your concern, and we are publicly on 24 record as sharing your concern. And I believe 25 Chairman Clowe put it in a way, which I agreed, that 0040 1 we are not satisfied as long as there is one employee 2 in this agency that is not treated with respect and 3 dignity, and we are not satisfied that there is one 4 employee who believes that he would be retaliated 5 against. 6 And, Janine, your department received 7 very good rankings here, and you've obviously made a 8 lot of progress. How hard is the job ahead of you to 9 get to 100 percent? 10 MS. MAYS: Well, realistically, I don't 11 think you always get to 100 percent, but I think -- 12 because different people have different issues. But, 13 like I mentioned in 2006 when we first started talking 14 about this, we're talking about a culture change. 15 We're talking about changing the mindset, changing how 16 people think about problem-solving, and that takes 17 time. 18 And I'm pleased with the fact that we 19 are moving -- we're not stagnant -- we are moving in a 20 direction of change. And one of the things that I 21 personally did to help make that change was to start 22 with our leaders. And this past fall, all of our 23 division directors participated in a training session 24 to first address who we were, how we function, and 25 then how we interact with the employees that we deal 0041 1 with from day-to-day. And I think that was 2 significant, because I believe change starts at the 3 top. 4 And so in making that change with who 5 we are, then we can better lead the people that we are 6 responsible for. And it's going to take time. And I 7 agree with you, everybody needs to know that they have 8 places to go to discuss their issues. They need to 9 have some comfort in knowing that those issues will be 10 addressed, and they need to have some comfort in 11 knowing that when they are addressed, whether they 12 agree or disagree, they're addressed fairly. It 13 doesn't mean that every employee gets what they want, 14 but it should mean that every employee is addressed in 15 a fair manner. 16 And my division had lots of changes to 17 make, along with helping the ombudsman as part of our 18 role. I think we work together. Even though she 19 works independently, we also work together in trying 20 to accomplish these goals. 21 One of the things that I think is very 22 important to address, too, is while our marks were 23 good, those marks would not have been good unless the 24 group that I work with, the managers and supervisions 25 and the division directors, trusted me. So that 0042 1 number was reflective of not just HR but of the 2 changes that are being made throughout all of the 3 agency. I can give suggestions and roll out ideas. 4 But in order for those to happen, it means that the 5 group has to trust some of those ideas, and I believe 6 that that is occurring. And that is one of the things 7 in the first audit, the 2006 audit, that was 8 highlighted, was the issue of trust. And again, that 9 starts at the top. 10 So while my numbers were good, my 11 numbers were reflective of everybody and everybody's 12 attempt to begin to trust some of the things that I'm 13 laying out and trust some of the ideas that are there 14 and stepping out of a comfort zone of, "This is how 15 we've always done it," and moving more towards, "Well, 16 it may not be working, but I'm going to at least try 17 it to see if this option is something that we can work 18 with." 19 So we're getting there. It's going to 20 take time. And just like I said, in 2006, June of 21 2006, is when I started. And as I said then, it's 22 going to take time, and it's going to be some bumpy 23 roads and we're going to have some more things that 24 we're going to have to work on. But for me, as long 25 as we're moving away from where we were, I think that 0043 1 we're making progress. 2 CHAIRMAN COX: Do you have all the 3 resources that you need, that you can use, to move 4 this forward as expeditiously as possible? 5 MS. MAYS: As long as I have the 6 Commissioners' support, Gary Grief's support and 7 Anthony's support, I think that I do. 8 CHAIRMAN COX: Okay. And do you 9 believe that you have all that support? 10 MS. MAYS: I do. 11 CHAIRMAN COX: Okay. So we're not 12 going to get there overnight, but we are obviously 13 making progress. 14 MS. MAYS: That's right. 15 CHAIRMAN COX: And you've got the 16 resources you need to keep us moving down the fairway? 17 MS. MAYS: I do. And the directors, I 18 must say, have been very receptive to some of the 19 changes that we have tried to implement, and extremely 20 receptive to the training that we did in the fall, 21 which was the start, I think, of trying to start from 22 the top and work down. Everyone has been very 23 supportive. 24 And I think if we have dialogue, that 25 starts the process, because that begins the discussion 0044 1 of different perspectives, different ideas, different 2 points of view. And that's happening. Our door is 3 open. I think in the past, HR's door was not open. 4 Our traffic has increased, and I think that's a good 5 thing. I've had managers to come and say, "Janine, 6 I'm not an HR person and I don't know what you do, but 7 I want you to help me." To me, that's progress. 8 It doesn't mean that everybody is going 9 to be walking around throwing up flowers and excited, 10 but we're talking. And talking I think is very, very 11 important for the business that I do, because then we 12 have some ideas of, like you were mentioning before, 13 why people check the box of "Don't Agree" or 14 "Neutral." Then we can get some ideas of what that 15 is. And one of the things that was in the audit was 16 for us to dig a little deeper and to find out what 17 some of those core issues are. 18 And part of my response to them is to 19 not only try to find out what those core issues are 20 but try to be proactive in our approach; in other 21 words, try to think ahead and prevent it from becoming 22 a problem, but really digging down deep and finding 23 out what the issues are so that we can know how to 24 move forward, and I believe that's beginning to 25 happen. 0045 1 CHAIRMAN COX: Well, one of the things 2 I sensed from your remarks is that you have taken to 3 heart the concern I had last time that we not let the 4 pendulum swing too far the other way. 5 MS. MAYS: Yes. 6 CHAIRMAN COX: We're certainly looking 7 for fair processes, but we can't give everyone 8 everything they want. 9 MS. MAYS: That's right. 10 CHAIRMAN COX: But they're certainly 11 entitled to a fair process. 12 MS. MAYS: I agree. 13 CHAIRMAN COX: And that's the way 14 you're approaching this. 15 MS. MAYS: Yes. And fair doesn't 16 always mean that you tell them what they want to hear 17 or tell them what they want, but you tell them in a 18 manner in which they understand, and respectfully. It 19 doesn't always mean that you agree, but it sometimes 20 means that you can agree to disagree and move on. And 21 I think you can give people permission to move on with 22 how you give them the information. And that's new. 23 You know, that's a new concept for some. So my hope 24 is that I'm able to help facilitate that and to allow 25 that to grow and get people moving in the right 0046 1 direction. We're trying. 2 CHAIRMAN COX: Now, Sandra and Audrey, 3 you have some specifics recommendations in your report 4 for how we can improve in this area. In general, do 5 you believe that we're addressing this professionally 6 and expeditiously? 7 MS. VICE: Yes, sir, I do. 8 CHAIRMAN COX: Okay. Thank you very 9 much for that. 10 Anything further, Commissioner? 11 COMMISSIONER REYES: No. I agree. I 12 think it's a very difficult job, especially when 13 you're dealing with people's assumption of what may 14 happen to them. And I think we need to change that. 15 And I think basically what you need to do is a lot of 16 communication back and forth with the employees. They 17 have to feel -- what bothers me is that they don't 18 feel that they're respected. And I think that our 19 agency has to recognize that all the employees are 20 probably our biggest asset to our state and to what we 21 have to do. So I think we got to keep that door open, 22 at least communicate with each other. And I agree. 23 You can't give them everything they want, but at least 24 we can hear what the problems are. 25 CHAIRMAN COX: Sure. 0047 1 COMMISSIONER REYES: Thank you. 2 MS. MAYS: One of the analogies that 3 I've used with some of the managers in the past is 4 that our employees and our managers are much like our 5 body. You know, you have to have a heart and you have 6 to have a brain. But with that heart, you also have 7 to have veins in order to transport the blood and do 8 what needs to be done. Well, the employees are the 9 same. One can't work without the other. One is as 10 important as the other. And one is responsible for 11 implementing the things that the other puts out. 12 So you're exactly right. And your 13 employees can make or break your business goals and 14 objectives. And their value -- it's a term I use in 15 my office all the time when we're talking about 16 customer service-related issues -- value add. Those 17 employees should be perceived as bringing a value to. 18 And that goes back to the 2006 audit and the concept 19 of trust in the agency. And the more that trust is 20 felt, the more value the employees will feel, the more 21 we can move away from some of the things that we see 22 and get closer to where we're trying to get. 23 CHAIRMAN COX: Thank you. 24 Commissioner? 25 COMMISSIONER SCHENCK: Just a few quick 0048 1 things. To the extent I'm not already on the record 2 with Chairman Clowe and Chairman Cox, I'm aspiring to 3 100 percent numbers on these positive questions. Let 4 me join in saying I want that. Also, I would like 5 this number to be zero, where our employees are asked 6 if they feel they're going to be retaliated against if 7 they make a complaint, that's a problem. 8 We've been focusing here on problems. 9 But I think another thing that we need to do is look 10 at the direction that these numbers have been heading 11 in. And I want to commend our Executive Director, 12 that we had a hole that we were in. It looks to me 13 like we've stopped digging and we're starting to -- 14 more than stating -- we're moving in a very positive 15 direction. 16 And, Janine, it's largely attributable 17 to you and your staff, your hard work, and to Anthony 18 and other senior level staff here and directors, and I 19 think it's important that that continue. But I want 20 to recognize that I think we've moved forward, even as 21 we focus on these issues, is where we need to make 22 additional progress. 23 And then lastly, Janine, I want to 24 address this question to you -- I'll call it a 25 question -- but I'm going to say that with respect to 0049 1 the open issue of where the ombudsman fits on our 2 chart, I'm going to be very unhappy with any proposal 3 that doesn't have her having direct access to the 4 Commissioners. And I know that she's working with 5 you, and I think that the progress that you've made 6 makes that role to some extent hopefully less 7 critical, but it is nonetheless critical. 8 And I think it's important that the 9 ombudsperson have access to the Commissioners, just so 10 that the employees know, if the process seems to be 11 breaking down in some way, that the ombudsperson has 12 the ability to jump outside the system and make sure 13 that the system is actually functioning. And I would 14 like to know what your thoughts are on that. 15 MS. MAYS: I totally agree. Her role 16 is to be neutral. But, more importantly, she should 17 also have access to you as the Commission. And I 18 believe that that was discussed previously with her in 19 one of our previous Commission meetings. 20 CHAIRMAN COX: It has been discussed. 21 MS. MAYS: Yes. 22 CHAIRMAN COX: And I've talked to her 23 personally and assured her that she does have access 24 to us as she needs it. 25 MS. MAYS: Right; right. I totally 0050 1 agree. And the reason why, one of the things that 2 Lauren and I have been talking about is why we got to 3 the point of needing an ombudsman and that -- I think 4 we have to continue to keep focus on that, how we got 5 to where we are, to prevent ourselves from making the 6 same mistakes. 7 And so we've been having a lot of 8 discussion about that, she and I, and her role, and 9 her role specifically to this agency and to this 10 culture and to the things that we have to work on. I 11 think that's real important in trying to get -- 12 accomplish the goals that we have set before us. But 13 I agree totally that she should have access to you-all 14 as well when she needs to, in addition to Anthony. 15 COMMISSIONER SCHENCK: Thank you. 16 CHAIRMAN COX: Sandra and Audrey, 17 Willie, thank you so much for your work. You know, I 18 know that your resources are precious and I know you 19 have to allocate them carefully. And I personally 20 appreciate your ceding to my request in doing this 21 survey again. I know that's a lot of work, and you 22 aren't able to do that for every agency. And we 23 really appreciate it. It's very valuable to us. And 24 y'all come back any time. And please give our thanks 25 to Auditor Keel. We really appreciate your work. 0051 1 MS. VICE: Thank you. 2 MS. O'NEIL: Thank you so much. 3 CHAIRMAN COX: Catherine, did you have 4 anything further under your item? 5 MS. MELVIN: I did not. 6 CHAIRMAN COX: Okay. 7 AGENDA ITEM NO. II 8 CHAIRMAN COX: Item No. II, report, 9 possible discussion and/or action on ethics, 10 administrative procedure and open government laws 11 pertaining to the Texas Lottery Commission. 12 Ms. Kiplin, 13 MS. KIPLIN: Thank you, Mr. Chairman. 14 Commissioners, when we welcome a new 15 commissioner, we generally put this item on the 16 record, just to go over the laws that pertain to the 17 Commission and its operations. And so with that -- I 18 must say that Sarah Woelk, who is an Assistant General 19 Counsel, generally does this presentation. She did it 20 for Commissioner Schenck and the Commission in 21 October. 22 She's the lead attorney on ethics, and 23 aptly so. She is the former General Counsel of the 24 Texas Ethics Commission. We were fortunate enough to 25 have her join our staff. So I want to acknowledge the 0052 1 work that she does and the document that she put 2 together. I'll hold this up. It's in a portfolio 3 type layout. 4 This document is actually the guide to 5 ethics laws that the Texas Ethics Commission puts 6 together. And she has gone to great effort to 7 annotate this document -- and you'll see it in a blue; 8 type -- to point out the changes or where there may be 9 a stricter rule or a different rule as it pertains to 10 members of the Texas Lottery Commission. 11 I don't want to belabor this too much, 12 because this is certainly a great document, and it's a 13 good reference to you. But I did want to point out a 14 couple of things, if I could, through this document as 15 it relates to ethics law. 16 Mr. Chairman and Commissioner Schenck, 17 if you'll bear with me as we go through this. 18 And I think the first thing I would 19 like to point out in particular are the standards that 20 are set out under the general ethics law, and that's 21 on Page 3, and these are called the "Should Nots." 22 And this has to do with the standards of conduct for 23 state employees. 24 It essentially stands for not accepting 25 any kind of gift or employment, anything that would 0053 1 tend to influence your independence in your exercise 2 of your performance of your official duties. 3 Now, as it relates to gift laws, I must 4 tell you that the Texas Lottery Commission is subject 5 to stricter standards. For example, under general 6 ethics law, there are dollar threshold amounts. But 7 under the Texas Lottery Commission organic law, there 8 are not. 9 There is an exception as it relates to 10 an independent relationship, because of kinship or 11 prior professional relationship. The general 12 guideline is avoid accepting gifts to the extent you 13 can. Obviously there's the carve-outs. For example, 14 one in particular is somebody who might win a prize of 15 $600 or more. You know, it could be -- for example, 16 this pertains to Lottery Commission employees -- it 17 could be my mom. And I would like to think that I 18 could still receive a gift during the holiday season 19 from my mom. So there is a carve-out for things that 20 are a prior relationship. I'll leave that to your 21 reading. 22 I do want to point out Page 4 when you 23 go to "Private Interest in Measure or Decision," this 24 really has to do with recognizing those fact 25 situations that may give rise to a conflict of 0054 1 interest, and goes through the need to recuse one's 2 self from participating in an act where a conflict of 3 interest may arise. Once again, there are other 4 standards that apply to Texas Lottery Commission on 5 conflicts of interest, and I'll direct your attention 6 to that. 7 And certainly we are available, the 8 Legal staff is available any time one of these fact 9 situations arise, for you to contact us. 10 I'm sorry. The gift prohibitions is 11 actually on Page 5. I think I referenced Page 4. So 12 I do want you to know that there are stricter 13 standards as it relates to acceptance of gifts. 14 Know that as it relates to gifts to a 15 state agency, if somebody would want to offer or 16 provide a gift to you on behalf of the state agency, 17 there has to be specific express statutes, statutory 18 language in that agency's enabling law to accept 19 gifts. This agency does not have that, so this agency 20 is not in a position of accepting gifts as an agency. 21 So know that. 22 On Page 10, I'll direct your attention 23 to the topic that has to do with other employment and 24 concurrent employment. Know that as a member of the 25 Lottery Commission, there are certain employment or 0055 1 remunerations from persons that you may not receive. 2 In particular, somebody that's got a significant 3 financial interest in the lottery, a person, or a 4 bingo lessor or a distributor or bingo manufacturer. 5 A person who has a significant financial interest in 6 the lottery is defined. We can help you with that as 7 a fact situation may arise for you as you go back to 8 your business with the Lottery Commission. 9 And know that there is a revolving door 10 on Commission members that prohibits you from lobbying 11 on a matter that was before the Commission for -- or I 12 believe it's a revolving door of two years. The 13 specific language for that is on Page 12, and you'll 14 see that annotated in blue as it relates to Texas 15 Lottery Commissioners. 16 Also know that a member of the 17 Commission -- this is on Page 14 again -- may not 18 purchase a ticket, a lottery ticket, claim or collect 19 or receive a lottery prize or a share of a lottery 20 prize. Also please know that that same prohibition 21 applies to a spouse, child, brother, sister or parent 22 of a member of the Commission if that particular 23 identified individual resides in your same household. 24 My mom does not. 25 And as to the use of your office for 0056 1 meeting with members of the Legislature, please know 2 that there is a general prohibition on the use of 3 appropriated funds for an agency to try to influence 4 legislation, either the support or the defeat of 5 legislation. You-all are not -- you're unpaid, and so 6 you are in a position where if you would like to go 7 visit with a member of the Legislature, because you 8 receive no appropriated funds -- you're unpaid -- you 9 can do that. But you would be precluded from being 10 assisted by a state employee here, so we couldn't go 11 with you. We certainly are available to serve as a 12 resource when called upon and act in that capacity, to 13 provide information to members of the Legislature. 14 I have gone through this really, really 15 quickly. Commissioner Reyes, I had the opportunity 16 before today to visit with you and touch on this. And 17 most importantly, I would just like you to know that 18 we are available, glad to help you wrestle with any 19 situation that may arise as you serve on this agency. 20 If I could, I would like to go next to 21 the Administrative Procedure Act 22 COMMISSIONER SCHENCK: And before you 23 do that, can I ask you a question? 24 MS. KIPLIN: Yes, sir. 25 COMMISSIONER SCHENCK: Have you given 0057 1 Commissioner Reyes the Attorney General Opinion from 2 former Attorney General, Dan Morales -- 3 MS. KIPLIN: Yes, sir. 4 COMMISSIONER SCHENCK: -- relating to 5 his political activities? 6 MS. KIPLIN: Yes, I have. And we've 7 also provided him with a copy of the recent request 8 for an Attorney General Opinion seeking clarification 9 of the Opinion that was handed down. 10 And I'll just put on the record that 11 the current state of the Opinion that we received from 12 Attorney General Morales is that a commission member, 13 Lottery Commission member, either in his individual or 14 official capacity, cannot command, coerce, advise. 15 And it's been implied by the AG 16 Opinion, the word "solicit" funds from somebody to 17 serve for a political purpose. We are seeking 18 clarification regarding the breadth of that opinion 19 and would like to think that we'll receive it. They 20 do it fairly quickly. But the Opinions Committee does 21 have 180 days from the date that we requested it to 22 hand down an opinion. 23 COMMISSIONER SCHENCK: Thanks, Kim. 24 MS. KIPLIN: You bet. 25 COMMISSIONER REYES: I would just like 0058 1 to add right now that I want to thank Mr. Sadberry and 2 the staff for giving me a briefing last week. They 3 did a fantastic job and tried to brief me as much as 4 possible with everything that I had to learn very 5 quickly, but they did a great job. So thank y'all 6 very much for doing that. Appreciate it. 7 MS. KIPLIN: Sure. 8 CHAIRMAN COX: Thank you. 9 MS. KIPLIN: You and I have talked 10 about the Public Information Act and the Open Meetings 11 Act. And you were provided, Commissioner Reyes -- 12 along with each commissioner, you were provided out of 13 the Legal Services Division these resources. 14 So I'm just going to leave you with two 15 general rules, one as it relates to public 16 information. Please take the general rule and presume 17 that anything that you create, you write, even so much 18 as a voice mail, is subject to being considered to be 19 an open document under the Public Information Act. 20 There are exceptions, and those arise as it relates to 21 that particular document and that particular request. 22 The open records coordinator and function is within 23 the Legal Services Division. And I think it's safe to 24 say that we do receive open records requests every 25 day. 0059 1 We are able, as any agency is, to 2 request rulings from the Open Records Division as it 3 relates to particular exemptions within the Open 4 Records Act, or Public Information Act, as it's now 5 called. But you should act under the general rule 6 that whatever you create in your capacity, obviously, 7 as a Lottery commissioner, is subject to being 8 considered to be a public document under the Open 9 Records Act. 10 And then the general rule that I would 11 like to offer for the Open Meetings Act is that a 12 quorum of a governmental body -- and in this case, 13 because it's a three-member commission, that quorum 14 would be two -- may not meet outside of an open 15 notice, notice of an open meeting, to discuss or 16 deliberate -- to discuss, to talk about matters 17 relating to the Lottery Commission. And that's why we 18 meet in the open, and that's why we notice up open 19 meetings. 20 There are some exceptions to that. One 21 is if you're attending a conference, for example, and 22 there is a quorum, as long as your discussions and 23 your attendance has to do with that conference. 24 There was a recent addition that 25 related to social gatherings. But once again, it has 0060 1 to do with making sure that your communications have 2 nothing to do with the Lottery Commission. 3 The other part of it is that there is 4 an opportunity to go into closed meetings, but those 5 have to be expressly authorized by statute. And 6 generally on each open meeting that we have here, this 7 Commission does go into executive session to either 8 deliberate those items that are authorized or to 9 receive legal advice under the Open Meetings Act. So 10 I'll leave those and certainly available to answer any 11 questions. 12 The last body of law that I wanted to 13 touch on is the Administrative Procedures Act, Texas 14 Administrative Procedures Act. These handbooks that 15 I'm holding up are publications of the Office of the 16 Attorney General and are really good guidelines and 17 have wonderful narratives. And they don't hit every 18 fact situation, but they're really a good guideline. 19 As a Texas state agency, in particular 20 what comes before you-all are the two main topics of 21 the administrative procedures law. One is 22 rulemaking -- that's how you create your policy -- and 23 the other one is taking up contested case proceedings. 24 And that's because this agency is regulatory in nature 25 in the sense that it does license people to conduct 0061 1 certain activities. And with that, we would like to 2 think that there is 100 percent compliance with those 3 laws. But as is the case, that is just not so. And 4 so in any Commission meeting, you will have before you 5 these items for your consideration in terms of 6 disciplinary action or enforcement action against 7 those. 8 The most important thing about 9 contested case proceedings is, because you sit as the 10 decisionmaker, you may not engage in ex parte 11 communications. And what that means is, you may not 12 talk to a party or an attorney for a party about the 13 laws or the facts of the case; that is, a contested 14 case. And that's designed to give everybody an 15 opportunity to participate in that communication 16 under -- the tenet of that is due process. 17 Rulemaking is not that. That's a 18 policy-making function of the agency and you are free 19 to discuss that with those that have an interest in 20 the rules that you are proposing and considering to 21 adopt. 22 I've gone through this, from my view, 23 fairly quickly, but I hope I've hit the high points. 24 And I'm open to any questions that any of y'all have. 25 COMMISSIONER REYES: No questions right 0062 1 now. 2 COMMISSIONER SCHENCK: Thank you. 3 CHAIRMAN COX: Thank you. 4 AGENDA ITEM NO. III 5 CHAIRMAN COX: Agenda Item No. III, 6 consideration of and possible discussion and/or 7 action, including adoption, on new rule 16 TAC 8 §402.500 relating to General Records Requirements. 9 Ms. Joseph. 10 MS. JOSEPH: Good morning, 11 Commissioners. For the record, my name is Sandra 12 Joseph, Assistant General Counsel. 13 CHAIRMAN COX: Now, Sandra, I notice 14 that III, IV and V look a bit alike. I didn't have an 15 opportunity to discuss this with you before. Do you 16 want to take them together or one at a time? 17 MS. JOSEPH: The three rules, III 18 through V? 19 CHAIRMAN COX: Yes. 20 MS. JOSEPH: Yes, generally. 21 CHAIRMAN COX: Okay. 22 MS. JOSEPH: I'll discuss each one 23 specifically, to some extent. Yes, but that would be 24 good if I could just go through them all. Thank you. 25 All right. Item III is a draft rule 0063 1 prepared for submission to the Texas Register in order 2 to adopt new bingo rule 16 TAC §402.500 regarding 3 general records requirements, with changes to the 4 proposed text as published in the November 9, 2000 5 issue of the Texas Register. The purpose of this 6 draft new rule is to clearly set forth certain general 7 records requirements in accordance with the Bingo 8 Enabling Act, which requires licensees to keep records 9 to substantiate each quarterly report. 10 Specifically this new rule addresses 11 the length of time that records must be maintained, 12 the forms for records that may be used, and the 13 requirement that licensees make records available upon 14 request of the Commission. 15 In response to comments received, staff 16 has made revisions to the draft that are detailed in 17 the preamble to the rule. For example, Subsection (a) 18 has been revised to provide that the information in 19 records required to be maintained are limited to those 20 required by the Bingo Enabling Act or the Bingo 21 Administrative Rules. 22 Staff recommends that the Commission 23 adopt new §16 TAC 402.500, as shown in the draft in 24 your notebook. 25 CHAIRMAN COX: Okay. Commissioner? 0064 1 COMMISSIONER SCHENCK: I have no 2 questions. 3 COMMISSIONER REYES: No questions. 4 COMMISSIONER SCHENCK: I move the 5 adoption. 6 COMMISSIONER REYES: Second. 7 CHAIRMAN COX: All in favor, say "Aye." 8 COMMISSIONER SCHENCK: Aye. 9 COMMISSIONER REYES: Aye. 10 CHAIRMAN COX: Aye. 11 Motion carries 3-0. 12 MS. JOSEPH: All right. 13 MS. KIPLIN: Commissioners, I have an 14 order. 15 COMMISSIONER SCHENCK: Do you have a 16 pen? 17 COMMISSIONER REYES: I do. 18 CHAIRMAN COX: Okay. Now, I have 19 public comment here from Mr. Fenoglio and Mr. Bresnen. 20 Are y'all just indicating you're for these or did you 21 want to talk about them? 22 MR. FENOGLIO: For the record, my name 23 is Stephen Fenoglio. We do not need to say anything. 24 We support the staff recommendations. 25 CHAIRMAN COX: Excellent. Thank you, 0065 1 Mr. Fenoglio. 2 MR. BRESNEN: I would like to be heard 3 on V, very briefly. 4 CHAIRMAN COX: Okay. When we get 5 there, we'll sure do that, Mr. Bresnen. Thank you. 6 AGENDA ITEM NO. IV 7 CHAIRMAN COX: Okay. Item No. IV, 8 consideration of and possible discussion and/or 9 action, including adoption, of new rule 16 TAC 10 §402.506 relating to Disbursement Records 11 Requirements. 12 Ms. Joseph. 13 MS. JOSEPH: Yes, Chairman. This draft 14 rule before you has been prepared once again for 15 submission to the Texas Register in order to adopt new 16 16 TAC §402.506 regarding disbursement record 17 requirements, with changes again to the proposed text, 18 as published in the November 9, 2007 issue of the 19 Texas Register. 20 The purpose of this new draft rule is 21 to set forth certain requirements for maintenance of 22 records relating to disbursements from a licensed 23 authorized organization's bingo account. In response 24 to comments, staff has made numerous revisions that 25 are described in detail in the preamble to the draft 0066 1 rule. 2 For example, on Subsection (a), 3 "licensee" is replaced with "licensed authorized 4 organization or unit." And the phrase "cancelled 5 check images" has been added. These changes were made 6 for clarification and simplification. 7 The staff recommends that the 8 Commission adopt new 16 TAC §402.506 relating to 9 disbursement records requirements. 10 COMMISSIONER SCHENCK: I have no 11 questions. 12 COMMISSIONER REYES: No questions. 13 COMMISSIONER SCHENCK: I move the 14 adoption. 15 COMMISSIONER REYES: I'll second. 16 CHAIRMAN COX: Motion made and 17 seconded. All in favor, say "Aye." 18 COMMISSIONER SCHENCK: Aye. 19 COMMISSIONER REYES: Aye. 20 CHAIRMAN COX: Aye. 21 Motion carries 3-0. 22 MS. KIPLIN: Commissioners, I have an 23 order for you. 24 25 0067 1 AGENDA ITEM NO. V 2 CHAIRMAN COX: And Item No. V, 3 consideration of and possible discussion and/or 4 action, including adoption, on new rule 16 TAC 5 §402.511 related to Required Inventory Records. 6 Ms. Joseph. 7 MS. JOSEPH: Item V is a draft rule in 8 order to adopt new 16 TAC §402.511 regarding the 9 required inventory records, with changes to the 10 proposed text as published in the November 9, 2007 11 issue of the Texas Register. 12 The purpose of this new draft rule is 13 to clearly set forth certain requirements for 14 maintenance of a licensed authorized organization's 15 inventory records. In response to comments, staff has 16 made numerous revisions that are described once again 17 in the preamble to the draft rule. For example, 18 Subsection (a) has been revised to clarify that the 19 perpetual inventory is the disposable card sales 20 summary. 21 In addition, Subsection (c) has been 22 revised so the determination of the appropriate remedy 23 for an organization's failure to account for all gross 24 receipts, prizes and prize fees will be based on 25 specific situations. As a result of staff 0068 1 conversation with representatives of bingo 2 organizations and lessors -- that is, Mr. Steve 3 Fenoglio and Mr. Steve Bresnen -- late yesterday 4 afternoon, the staff recommends an additional change 5 to Subsection (c) for further clarification. 6 On the first line of Page 7, you will 7 see Subsection (c) that states, "The licensed 8 authorized organization is responsible for the gross 9 receipts, prizes and prize fees associated with 10 missing or unaccounted for disposable bingo cards and 11 pull-tab . . . tickets." 12 CHAIRMAN COX: Ms. Joseph, I think I'm 13 finding that on Page 6, Line 22. 14 MS. JOSEPH: All right. You may be 15 looking -- there are two different versions of the 16 rule. And, yes, it does appear in the version you're 17 looking at on Page 6. 18 CHAIRMAN COX: Okay. 19 COMMISSIONER SCHENCK: What is the 20 change? 21 MS. JOSEPH: The change is to change 22 the word "is" to "may be held responsible." 23 COMMISSIONER SCHENCK: What's the 24 purpose of the change? Is that to reflect the 25 discretion with the agency? 0069 1 MS. JOSEPH: Yes, that's correct, just 2 to reflect that the agency will utilize its discretion 3 for specific circumstances in determining whether or 4 not to require an organization to put the money back 5 into the account. 6 COMMISSIONER SCHENCK: Review -- 7 MS. JOSEPH: And that was the intent 8 originally. This change further clarifies that. 9 COMMISSIONER SCHENCK: Okay. Thank 10 you. 11 MS. JOSEPH: The staff recommends that 12 the Commission adopt 16 TAC §402.511, as shown on the 13 draft in your notebook, with the change to Subsection 14 (c) that I've just described. 15 CHAIRMAN COX: Mr. Bresnen, did you 16 want to talk on this one? 17 MR. BRESNEN: Yes, sir. 18 MS. KIPLIN: I spoke with Mr. Bresnen 19 before the meeting this morning, and he indicated he 20 didn't want to talk. And this is where I generally 21 make my obligatory comment about the fact the comment 22 period is over, and so we would have issues if he 23 talked. But Mr. Bresnen has assured me that the 24 comments that he wishes to make are within the 25 comments that have previously been provided, and so it 0070 1 doesn't fall outside the comment record that we 2 already have. I just needed to put that on the 3 record. 4 CHAIRMAN COX: Thank you. 5 MR. BRESNEN: Thank you, Mr. Chairman. 6 My name is Steve Bresnen. I'm here on behalf of the 7 Bingo Interest Group. Welcome, Commissioner Reyes. 8 We look forward to working with you. And I will stay 9 within the comments that have previously been made. 10 I would like to call your attention to 11 a couple of things and just -- and be very brief. On 12 Page 3, at Line 4 in my document. It's probably a 13 little earlier than that in your document, based on 14 your previous comments -- you'll notice that this -- a 15 public hearing was held November 13th on this. 16 So this rule has undergone a lot of 17 scrutiny and a lot of work by a lot of people. I 18 heard the Auditor's Office talking about the 19 improvement in staff morale. There is a huge 20 improvement in consumer morale in dealing with this 21 agency, not the least of which is due to your 22 guidance, Mr. Chairman, and Commissioner Clowe's 23 guidance, Mr. Sadberry and Phil's work and all the 24 staff. There is a completely different atmosphere 25 around here from the regulated community's 0071 1 perspective. 2 As you can tell from the comments, we 3 don't always get what we want. But in many cases, the 4 staff is agreeing with the practical observations that 5 we're making about these rules. It took some time to 6 do that, and I appreciate you buying some time to do 7 that, by your comments earlier in the year. Thank you 8 very much. 9 Also if you look at Line 19, it's the 10 agency's response to -- I believe it's the second 11 comment -- staff acknowledges there's already some 12 reference to some of these concepts in other rules and 13 that there needs to be a look towards eliminating that 14 redundancy. I think with this rule, it's clear we 15 haven't created any conflicts. And confusion should 16 be minimal, if at all. So we would support going 17 ahead with this rule, despite some of my comments at 18 the last meeting that we ought to eliminate those 19 redundancies to avoid confusion. I don't think it 20 presents itself in the case of this rule. 21 The most important thing, though, I 22 would like to call your attention to -- Sandy, you may 23 have to help them with the -- it's the comment about 24 the subsection that you just amended or talked about 25 amending. On my document, it's on Page 4 at Line 8. 0072 1 And just briefly, it says -- the 2 comment says, "In regards to subsection (c), several 3 commenters stated that there should be some allowance 4 for nominal slippage due to human error such as 5 misplacement, cards sticking together, and 6 manufacturer error." 7 What this is referring to is, bingo 8 items such as instant bingo tickets or sheets come in 9 big boxes of stuff. When the charity receives that 10 and puts it into its inventory, unless it's going to 11 count thousands and thousands of sheets of paper, it 12 has to accept what the distributor says is in the box. 13 But we all know that there's slippage 14 in any retail environment. Everything that's supposed 15 to be in the box is not always in the box. That's one 16 place that slippage occurs. Sometimes bingo paper 17 gets dropped on the floor, in the case of selling it. 18 Somebody walks across it. It gets trampled and torn. 19 That's supposed to be accounted for. We would all be 20 lying if we said every sheet of paper was always 21 accounted for. 22 So I'm glad to see in particular -- and 23 I want y'all to take note of as you vote -- that the 24 agency agrees and has deleted some language so that 25 this discretion, the staff has discretion to treat 0073 1 these instances of slippage and try to make a 2 determination of whether this is really a problem or 3 it's the sort of thing that happens in a mass retail 4 operation like a bingo hall. 5 I really appreciate the staff for 6 taking that point of view. We know that -- and we 7 have not asked for any sort of percentage or anything, 8 because we all agree that the deviation will gravitate 9 right up to the percentage of tolerance if there was 10 to be one set. But we have requested that the staff 11 exercise discretion as these cases come up and tag the 12 bad guys and don't tag the folks that are being 13 diligent about their work out there. 14 And, Mr. Chairman, that's all the 15 comments I have today. 16 CHAIRMAN COX: Thank you, Mr. Bresnen. 17 COMMISSIONER SCHENCK: Thank you. 18 COMMISSIONER REYES: No questions. 19 COMMISSIONER SCHENCK: No questions. I 20 move the adoption of the staff recommendation. 21 COMMISSIONER REYES: I'll second. 22 CHAIRMAN COX: All in favor, say "Aye." 23 COMMISSIONER SCHENCK: Aye. 24 COMMISSIONER REYES: Aye. 25 CHAIRMAN COX: Aye. 0074 1 Motion carries 3-0. 2 MS. JOSEPH: And I have the order for 3 you. 4 CHAIRMAN COX: Great! Thank you, 5 Ms. Joseph. 6 AGENDA ITEM NO. VI 7 CHAIRMAN COX: Item No. VI, report by 8 the Charitable Bingo Operations Director and possible 9 discussion and/or action on the Charitable Bingo 10 Operations Division's activities. 11 Mr. Sanderson. 12 MR. SANDERSON: Good morning, 13 Commissioners. I would like to point out to you that 14 in the notebook is my report of the monthly activities 15 of the Bingo Operations Division. The things I would 16 like to highlight are that allocations were mailed out 17 to jurisdictions on February the 14th -- or 15th. 18 And then the Bingo Advisory Committee's 19 next meeting is scheduled for May the 7th, as well as 20 we're currently accepting nominations for three vacant 21 positions. The nomination period began March 1st and 22 will end April 30th. There has been an insert 23 included with the quarterly report that we have mailed 24 out to the organizations. We have included an article 25 and a copy of the form with the Bingo Bulletin that 0075 1 will soon be mailed out, as well as we have posted a 2 notification on our website, along with a copy of the 3 nomination form that they can print out and complete. 4 Additionally, we are working on an 5 operator training program to be web-enabled to where 6 organizations can take the training on-line. We're 7 developing it in modules of anywhere from 30 to -- 30 8 minutes to about an hour, to where they can sit down 9 at their computer and take certain modules and 10 complete their eight hours of required training. 11 One other item I would like to bring to 12 your attention. While we have not completed all of 13 the information for a full presentation, we do have 14 the financial information for 2007. Gross receipts 15 continue to increase over the previous year of 2006. 16 We just saw an increase in the pull-tab sales 17 continue, as well as charitable distributions have 18 increased to over $32 million, which I believe is the 19 highest in the last four or five years. And we'll 20 have a full presentation on those numbers at the next 21 Commission meeting. 22 COMMISSIONER SCHENCK: Phil, you and I 23 met recently. You helped me greatly with 24 understanding more of the bingo industry. And I have 25 not been able to attend the last, I believe, two 0076 1 meetings. And I think we discussed the possibility of 2 technological solutions. As you know, it requires a 3 flight for me to get down. 4 MR. SANDERSON: Yes, sir. 5 COMMISSIONER SCHENCK: I want to make 6 sure that either we get that resolved or I get down 7 for the next meeting. 8 MR. SANDERSON: Ms. Kiplin, I believe, 9 has been in contact with the Administration Director, 10 Mike Fernandez, to see what is available for us to 11 utilize for that activity. 12 COMMISSIONER SCHENCK: Thank you. I 13 would appreciate that. 14 CHAIRMAN COX: Thank you for your 15 interest, Commissioner. 16 COMMISSIONER REYES: I have no 17 questions. 18 CHAIRMAN COX: Phil, thank you very 19 much. 20 MR. SANDERSON: Thank you. 21 CHAIRMAN COX: Let's take about a 22 10-minute break. 23 (Recess) 24 CHAIRMAN COX: Let's come back to 25 order. 0077 1 AGENDA ITEM NO. VII 2 CHAIRMAN COX: Agenda Item No. VII, 3 report, possible discussion and/or action on lottery 4 sales and revenue, game performance, new game 5 opportunities, advertising, market research and 6 trends. 7 Ms. Pyka and Mr. Tirloni. 8 MS. PYKA: Thank you, Commissioners. 9 With me to my right this morning is Robert Tirloni, 10 our Products Manager. 11 And our first chart that we have for 12 you this morning reflects revenue from sales and net 13 revenue to the state through the week ending 14 March 15th of 2008. Total sales for this 29-week 15 period amounted to two billion 12 million dollars, 16 with prize expense of $1.28 billion and a sales 17 contribution of $732.1 million. 18 For purposes of calculating the 19 $490.5 million in net revenue to the state, our 20 retailer commissions represent five percent of sales, 21 or $100.8 million, followed by the fee paid to the 22 lottery operator vendor, which is calculated at 23 $2.6999 percent of sales, or $54.3 million, followed 24 by $86.5 million for administrative appropriation 25 expenses. 0078 1 Commissioner Reyes, I would like to 2 note that while the statute allows for 12 percent of 3 gross sales to be used for administrative expenses, 4 the amount is limited by the Commission's method of 5 finance and riders within the General Appropriations 6 Act. So while we have the 12 percent limitation, we 7 do not get appropriated that full 12 percent 8 limitation. 9 CHAIRMAN COX: Now, Kathy, why don't 10 you run through for Commissioner Reyes the big pieces 11 in that 86 and a half million. 12 MS. PYKA: Certainly. The big pieces 13 in the 86 and a half million, the way that we look at 14 that, by appropriation, would include our major 15 contracts. That includes the advertising contractual 16 relationship that we have. It includes expenses for 17 instant ticket printing. It includes expenses related 18 to the bonuses that we pay to our retailers if they 19 sell a winning prize. 20 In addition to that, we have all of the 21 expenses related to what we would consider to be the 22 administrative cost of the agency. It would be our 23 Lottery Operations Division, our Administration 24 Division, much of all of the staff working in the 25 lottery functions and all the support functions. It 0079 1 includes all of the facility expenses, the least costs 2 across the State of Texas for our field offices that 3 we have, as well as this location here in Austin. 4 Our other large contracts relate to the 5 drawing and broadcast services that we have, audit 6 services related to the drawings, audit services 7 related to the financial audit as well as the security 8 audit, just to kind of give you a high level of 9 listing of the different contracts that we have. 10 CHAIRMAN COX: So if I remember right, 11 Kathy -- and fill in the right number for me -- our 12 appropriation is something under $200 million. 13 MS. PYKA: It is. 14 CHAIRMAN COX: And of that, we spent 15 only about 25 or so on our staff and our facilities. 16 The rest of it is going to outside sources? 17 MS. PYKA: That is correct. When we 18 look at it by percentage-wise, 85 percent is direct 19 contractual relationship of the lottery-dedicated 20 dollars. And when we look at the 12 percent that's 21 allowed in statute, of that 12 percent, we're 22 appropriated approximately about 10 percent. And when 23 you look at the 10 percent, five percent is directly 24 related to the retailer commissions. 2.6999 percent 25 is going to GTECH. And then that balance of -- I 0080 1 think that's about 2.3 -- is what we spend on all 2 those other contracts and the administration of 3 staffing here for lottery. 4 Moving on to the next slide, this 5 summarizes the change in sales by game from Fiscal 6 Year 2007 to Fiscal Year 2008. The total decline from 7 Fiscal Year 2007 at this point in time is 1.4 percent, 8 or $28.8 million. The overall decline focusing on the 9 instant ticket product first, the top line, is an 10 $8 million decline through this week period, or 11 five-tenths of a percent. 12 Focusing next on our jackpot games -- 13 and those are noted in the white font -- we're 14 experiencing a $31.9 million decline, or 11.2 percent. 15 Commissioner Reyes, as we look at 16 these, you'll find that these are definitely driven by 17 jackpot levels. Right now when we look at our overall 18 jackpot levels that are advertised, Mega, which is 19 drawn on Tuesdays and Fridays, right now is advertised 20 at $95 million. Our Lotto Texas jackpot, which is 21 drawn on Wednesdays and Saturdays, is advertised 22 currently at $12 million. And then our Two Step 23 jackpot that is drawn on Mondays and Thursdays is 24 currently advertised at $250,000. 25 COMMISSIONER REYES: Do you feel that, 0081 1 based on the economy the way it is right now, that you 2 might see some larger drops? 3 MS. PYKA: What we're experiencing, 4 based on the state the economy is, each of these 5 games, with the exception of Two Step, both the Lotto 6 and Mega games, when we look at the funding of the 7 game, they're funded by Treasury STRIPS, which is tied 8 to the interest rate. And so we're experiencing some 9 extremely low interest factors on those jackpot games, 10 which then -- there definitely is a great 11 determination in our ability to roll the jackpot 12 levels faster. So we are certainly at -- 13 COMMISSIONER SCHENCK: You're talking 14 about low interest rates on what we earn, as opposed 15 to the interest of the players -- indirectly it ends 16 up being interest of the players, because the jackpot 17 rolls don't, when there is no winner, grow as quickly 18 as a result of the lower interest factor? 19 MS. PYKA: Thank you. I'm definitely 20 talking about that financial interest rate, which 21 definitely goes back to the interest of -- 22 COMMISSIONER SCHENCK: And if I might 23 ask one more question, for Commissioner Reyes. Was 24 Fiscal Year 2007 a particularly productive year in 25 terms of numbers, compared to, let's say, the rest of 0082 1 the years in the 21st Century? 2 MS. PYKA: Fiscal Year 2007 was not as 3 high as 2006, but it was still extremely high with 4 regard to overall sales. And we've experienced year- 5 over-year sales increases from 2000 to the present. 6 We experienced our highest level of sales back in the 7 mid-nineties. 8 COMMISSIONER SCHENCK: Thank you. 9 MS. PYKA: Then focusing on our daily 10 sales, the games there reflected with the green font, 11 we are noting an overall gain of $11.1 million as 12 compared to Fiscal Year 2007 sales. And I wanted to 13 note that while the Pick 3 game is experiencing a 14 $14.4 million decline, this decline is covered with 15 the addition of the new Pick 3 Sum It Up as well as 16 the new Daily 4 and the Daily 4 Sum It Up games that 17 were introduced during Fiscal Year 2008. So there is 18 definitely a very positive sales trend that we're 19 seeing there. 20 And the next slide includes our Fiscal 21 Year 2008 year-to-date sales by game. As noted on 22 this slide, looking at the green area of the pie 23 chart, 76.1 percent of our total sales are with the 24 instant ticket product, or it's actually 25 $1.53 billion, followed by 7.7 percent of sales, or 0083 1 $155.1 million from Pick 3, followed by 5.7 percent of 2 sales and $114.7 million from Lotto Texas, and 3 4.6 percent of sales and $92.9 million from Mega 4 Millions. 5 As we discussed earlier, our sales from 6 the Daily 4 game are $22.9 million and $5.4 million 7 from the Daily 4 Sum It Up. And then we've also 8 included -- this is the first 18 weeks of sales for 9 the Picks 3 Sum It Up product, amounting to 10 $3.3 million. 11 With that, Robert will now discuss 12 sales by price point. 13 MR. TIRLONI: Good morning, 14 Commissioners. For the record, my name is Robert 15 Tirloni. I am the Products Manager for the 16 Commission. 17 Commissioners, this next slide 18 represents the $1.5 billion in instant ticket sales, 19 broken down by price point, through the week ending 20 March 15th. The $5.00 price point continues to be our 21 better selling price point, followed by the two, the 22 10 and then the one. 23 I would like to note that there is a 24 pretty close difference between the one dollar price 25 point and the $3.00 price point. We've had some very 0084 1 successful $3.00 games out this year that have been 2 doing very well. And we continue to struggle at the 3 one and two dollar price points this fiscal year. So 4 we're seeing some big losses compared to the previous 5 fiscal year. The $3.00 price point is up compared to 6 the previous fiscal year. And it seems like if we 7 continue on this trend, the $3.00 may exceed the one 8 dollar. 9 CHAIRMAN COX: Robert, there was a 10 time, let's say 1970-1980 time frame, where you could 11 go into just about any place in Las Vegas and sit down 12 at a table and bet a dollar. I'm betting right now 13 you would have to look awful hard to find a place to 14 bet a dollar. Are we using our limited space well by 15 continuing to put significant numbers of one dollar 16 tickets out there, as opposed to higher denomination 17 tickets that could perhaps be selling in their place? 18 MR. TIRLONI: We're looking at that 19 right now, and we're talking to GTECH about that. 20 CHAIRMAN COX: Okay. 21 MR. TIRLONI: That's a concern for us 22 as well. We do believe that the lower price points do 23 appeal to the occasional or casual player or somebody 24 new to the games that may not have played in the past. 25 But we are looking at vend space. As you say, that is 0085 1 limited in retail locations, and we are looking at the 2 best use of that available space. And we're looking 3 at the product mix as a whole to try to address that. 4 CHAIRMAN COX: Thank you. One further 5 question. Kathy commented on the interest factor as 6 not driving large jackpots. Are you finding anything 7 that correlates with the economy as far as decline in 8 sales? 9 MR. TIRLONI: Anything that we're 10 hearing is anecdotal through the retailer base. In 11 our meetings that we go to once a month with the 12 retailers, they're talking about the price of gas is 13 hurting some of their sales and that your casual 14 players who may have come in and bought a two, three 15 or $5.00 ticket, they don't have those funds available 16 anymore, due to the price of gas. 17 MS. PYKA: And I would like to clarify 18 something. Commissioner Schenck, when I talked about 19 the comparison to Fiscal Year 2006 to Fiscal Year 20 1997, we were slightly ahead of the '96. The '07 -- 21 or excuse me. I need to get this straight. Fiscal 22 Year 2006 has been our highest sales year to date. 23 COMMISSIONER SCHENCK: Ever? 24 MS. PYKA: Ever. 25 COMMISSIONER SCHENCK: 2007 -- 0086 1 MS. PYKA: -- was $500,000 below '06. 2 COMMISSIONER SCHENCK: So if this were 3 a chart, the top of the pyramid would be 2006, with a 4 flat bump to 2007? 5 MS. PYKA: Right. 6 COMMISSIONER SCHENCK: So we're 7 comparing to pretty high? 8 MS. PYKA: Right. And 1997 was just 9 below 2007. 10 COMMISSIONER SCHENCK: Robert, I have a 11 question for you -- 12 MR. TIRLONI: Yes, sir. 13 COMMISSIONER SCHENCK: -- for 14 Commissioner Reyes' benefit. Recently you and Kathy 15 gave us a really interesting presentation on the 16 demographics of who were buying these tickets. And I 17 believe -- I have a handout of the materials. I don't 18 know if we've given to Commissioner Reyes the 19 demographic studies. 20 MR. TIRLONI: I believe that was the 21 demographic study performed by the University of 22 Houston? 23 COMMISSIONER SCHENCK: Yes. It's very 24 interesting in terms of who it is that are buying 25 these tickets, and somewhat surprising, at least to 0087 1 me. 2 COMMISSIONER REYES: They did provide 3 that for me. I did have a chance to look at it. 4 COMMISSIONER SCHENCK: Okay. 5 COMMISSIONER REYES: And then they did 6 it by region also. 7 COMMISSIONER SCHENCK: Thanks. 8 MR. TIRLONI: And Kathy talked about -- 9 you know, we talked about Mega Millions and Megaplier 10 earlier, and we also talked about the jackpot levels. 11 We did have a Mega jackpot roll that took us right to 12 I believe the end of January, and there was an out-of- 13 state winner. That was sold in the State of Georgia. 14 We were seeing positive numbers on Mega Millions and 15 Megaplier. 16 Then we had that hit, and now we're in 17 the negative, because at the same time last year, we 18 did have a Mega Millions jackpot that continued to run 19 up. So we're trying to catch up with that. As Kathy 20 said, we're at $95 million now. We hope if we can 21 continue to roll, we can try to catch up and be back 22 in the positive on Mega Millions and Megaplier. 23 We would like to provide you updates on 24 our in-state game Lotto Texas. Whenever we have a 25 jackpot ticket sold, and since the last meeting in 0088 1 February when we met in the middle of the month, there 2 were two jackpot tickets sold, both for the same 3 drawing. That was for the Saturday, February 23rd 4 drawing. The tickets were sold in Houston and 5 Addison. And we were advertising an estimated 6 annuitized jackpot of $28 million. 7 Both tickets were purchased as annuity 8 payment prizes. And over the annuity period, each 9 winner will receive a total of $14.3 million. Both of 10 those claimants have come forward. They've both 11 received their winnings. And now each retailer that 12 sold those tickets is eligible for a $143,000 bonus. 13 And we're working with both retailers on processing 14 those bonus payments. 15 CHAIRMAN COX: Robert, why don't you 16 take a minute and explain what "annuitized jackpot" 17 means and precisely how the lower interest rates are 18 affecting that. 19 MR. TIRLONI: I'll ask Kathy for help 20 on the second part. The first part, the annuitized 21 jackpot is the jackpot amount that we advertise on our 22 billboards and any of our advertisements. And that is 23 the amount that the winner would receive if they chose 24 the annuity payment option and they were to receive 25 those payments over the 25-year annuity period. That 0089 1 is the amount that they would receive over that time 2 period. 3 Players also have, when they make their 4 purchase, the ability to choose the cash value option. 5 And we typically say that that is estimated at half 6 the advertised jackpot amount, or half of the 7 estimated annuitized jackpot amount. 8 MS. PYKA: As Robert mentioned, on the 9 annuitized payment, they're paid 25 annual payments. 10 And what we do is, we provide them the first cash 11 payment and then we purchase 24 Treasury STRIPS to 12 fund the remaining 24 payments. And so as we 13 mentioned earlier, as interest rates are on the 14 decline, our interest factor that we use to purchase 15 those Treasury STRIPS, or that the state treasury uses 16 to purchase the Treasury STRIPS, greatly impacts the 17 value of those Treasury STRIPS on the purchase of the 18 out years. So that, obviously, impacts our ability to 19 roll those jackpots, since they are based on the 20 annuitized value. 21 CHAIRMAN COX: Excellent. 22 MR. TIRLONI: Both of these tickets 23 were Quick Pick tickets. That's interesting that they 24 were annuity. We typically see overwhelming players 25 choose the cash value, so this is a little bit 0090 1 different. Kathy's staff usually doesn't have to 2 process annuity payment winners. It's usually a 3 one-time payout of the cash. So, like I say -- 4 COMMISSIONER SCHENCK: If you know -- 5 MR. TIRLONI: -- we don't see these 6 this often. 7 COMMISSIONER SCHENCK: I'm sorry. 8 Robert or Kathy -- 9 MR. TIRLONI: That's okay. 10 COMMISSIONER SCHENCK: -- the reduction 11 to net present value, what the interest rate would be 12 over 25 years to result in a half value? It's got to 13 be -- 14 MS. PYKA: I don't have it off the top 15 of my head, but we could calculate it quickly. 16 COMMISSIONER SCHENCK: Well, I 17 understand money doubles in 10 years at 7 percent, and 18 7 years at 11 percent. 19 MS. PYKA: Ben looks like he has a 20 number on the top of his head -- behind me. 21 MR. NAVARRO: Oh, you're going to put 22 me on the spot. 23 MS. PYKA: I figured Ben would have it 24 just like that. 25 COMMISSIONER SCHENCK: I think that 0091 1 would explain why it isn't a rational -- well, why a 2 lot of our players are picking cash value. 3 MS. PYKA: Well, I mean, there's only 4 been -- what? -- three annuity payments in the last 5 how many years that we've processed. 6 COMMISSIONER SCHENCK: And two in one 7 week. 8 MS. PYKA: Yes. And at the point in 9 time that they have the option of cash value versus 10 annuity, and then we stop seeing any annuity payment. 11 MR. TIRLONI: What we typically hear is 12 that players like the option of getting the cash up 13 front and making their own investment decisions with 14 the cash, as opposed to receiving, you know, an 15 annuity from the state or from the Lottery. 16 CHAIRMAN COX: Locking in a two and a 17 half percent interest rate for 25 years is not a 18 rational decision. 19 MR. TIRLONI: You know, that being 20 said, you know, there are some players. We recently 21 had a winner on one of our annuity scratch-off games 22 who was very thrilled with the fact that he was not 23 going to have to make any investment decisions and was 24 going to wait for his check to arrive once a year. 25 And so, you know, both options are out there, and I 0092 1 guess there's appeal to both. 2 COMMISSIONER SCHENCK: Well, for the 3 smart player, he does realize there's federal income 4 tax implications of every year. There's incremental 5 rates, and they would get the benefit of spreading 6 that out each year, starting at whatever, 18 percent, 7 and working your way up through. 8 CHAIRMAN COX: Sure. There is that. 9 COMMISSIONER SCHENCK: There is some 10 aggregation on top of the two and a half percent, I 11 suspect, perhaps not enough. 12 MR. TIRLONI: And the last bit of 13 information I have for you on this is that the ticket 14 in Houston was sold at Fiesta Beverage. And the 15 ticket in Addison was sold at a Tom Thumb location. 16 It was actually sold at one of our self-service 17 terminals at the Tom Thumb location in Addison. 18 COMMISSIONER REYES: The retailer still 19 gets the bonus? 20 MR. TIRLONI: Yes, sir. Even if it's a 21 self-service terminal, they still receive the one 22 percent bonus, as long as they meet all of the 23 criteria that they need to meet in order to get that, 24 yes. 25 And that is our presentation for this 0093 1 month. We would be happy to answer any questions if 2 you have any. 3 CHAIRMAN COX: Commissioner? 4 COMMISSIONER SCHENCK: I have none. 5 Thank you. 6 COMMISSIONER REYES: I have none. 7 CHAIRMAN COX: Robert -- 8 MR. TIRLONI: Yes, sir? 9 CHAIRMAN COX: -- how are other states 10 looking? Are we doing better than other states, 11 holding our own or -- 12 MR. TIRLONI: We have not sat down and 13 looked at that recently. It's been a few months. I 14 think it was at the beginning of the year that we 15 looked at that. Some information that I've seen 16 recently from one of our vendors that does a state-of- 17 the-industry analysis showed -- they looked at it for 18 the last complete fiscal year in terms of our instant 19 sales. We are ranked third in the U.S. in terms of 20 dollars. I believe we are ranked 13th in terms of per 21 capita. 22 You know, I think our instant ticket 23 sales, even though we're slightly off this year 24 compared to last, are probably still keeping us up at 25 the top of that ranking, up towards the top three or 0094 1 top four. We can check on that, though, and get you 2 the ranking in terms of -- 3 CHAIRMAN COX: Well, I think next month 4 might be a good time to just have a nice, thorough 5 analysis of things of that nature, how we look 6 compared to other states, how our per capita looks 7 compared to other states, both gross and net. And 8 just give Commissioner Reyes and Commissioner Schenck 9 as well a better feel for where we stand nationally. 10 MR. TIRLONI: Absolutely. And we can 11 have that ready for next month. 12 MS. PYKA: That is all we have on that 13 item this morning, Commissioners. 14 CHAIRMAN COX: Thank you very much. 15 MR. TIRLONI: Thank you. 16 AGENDA ITEM NO. VIII 17 CHAIRMAN COX: Item No. VIII, report, 18 possible discussion and/or action on transfers to the 19 State. Ms. Pyka. 20 MS. PYKA: Thank you. For the record, 21 my name is Kathy Pyka, Controller for the Lottery 22 Commission. 23 Tab VIII includes information on the 24 agency's transfers to the state. Commissioner Reyes, 25 just for background purposes again, Section 466.355 of 0095 1 the Government Code outlines specific purposes of the 2 state lottery account, including a requirement that by 3 the 15th of each month, we make a transfer to the 4 Foundation School Fund of any balance remaining from 5 ticket sales following the payment of prizes and the 6 cost and the operation of the lottery. So that's one 7 portion of the transfer. 8 And the other portion of the transfer 9 relates to unclaimed prizes, and we make that transfer 10 on a quarterly basis. By statute, we're required to 11 transfer $10 million of unclaimed prizes first to the 12 State Department of Health Services, and then the 13 balance of any excess funds goes into general revenue, 14 unappropriated. 15 So moving to the first report in your 16 notebook, we include the transfers of allocations to 17 the Foundation School Fund and the allocation of 18 unclaimed prizes for the period ending February 29th 19 of 2008. Total cash transfers to the state amounted 20 to $496.8 million for the first six months of the 21 fiscal year. And this does represent a minimal 22 decline of where we were in Fiscal Year 2007. 23 The second page in your notebook 24 reflects the detailed information for the monthly 25 transfers. Of the $496.8 million transferred to the 0096 1 state, $466.4 million was the amount transferred to 2 the Foundation School Fund, with a balance of 3 $30.3 million transferred for unclaimed lottery 4 prizes. 5 And then the final document in your 6 notebook includes our report of lottery sales, 7 expenditures and transfer from Fiscal Year 1992 to 8 date. And total cumulative transfers to the 9 Foundation School Fund through February of this year 10 total $10.2 billion. 11 This concludes my presentation. I 12 would be happy to answer any questions. 13 CHAIRMAN COX: Do you have any 14 questions? 15 COMMISSIONER SCHENCK: No questions. 16 Thanks, guys. 17 COMMISSIONER REYES: Your fiscal year 18 is January through December? 19 MS. PYKA: September 1 through 20 August 31. And so we have just reached the six-month 21 period of our fiscal year. We are a little bit over 22 halfway through. 23 CHAIRMAN COX: Okay. Kathy, correct me 24 if I'm wrong. You can think of our operation as 25 generating about $3.7 billion in ticket sales and 0097 1 sending about a billion dollars to the school children 2 of Texas. 3 COMMISSIONER REYES: Okay. 4 AGENDA ITEM NO. IX 5 CHAIRMAN COX: Item No. IX, report, 6 possible discussion and/or action on Bingo indirect 7 expenses and administrative expenses. I would like to 8 pass that item. 9 AGENDA ITEM NO. X 10 CHAIRMAN COX: Item No. X, report, 11 possible discussion and/or action on the agency's 12 Strategic Plan for 2009-2013. 13 Ms. Pyka. 14 MS. PYKA: Thank you, Mr. Chairman. 15 For the record again, my name is Kathy Pyka, 16 Controller for the agency. 17 Commissioners, this morning I'm seeking 18 your approval to modify the Commission's Strategic 19 Plan budget structure for Fiscal Years 2010 through 20 2011. For background purposes, beginning in 1991, the 21 State of Texas embarked on a comprehensive strategic 22 planning process for all state agencies within the 23 executive branch of government. 24 In 1993, this process was codified 25 within Chapter 2056 of the Government Code. Included 0098 1 within the code is a requirement that agencies submit 2 a strategic plan every two years that includes a 3 planning period of the current fiscal year in addition 4 to the next two biennia. And I believe that a copy of 5 our current Strategic Plan which covers Fiscal Years 6 2007 through 2011 has been placed on your table this 7 morning just for reference purposes. 8 For additional background purposes, 9 there's nine tiers within the Texas Strategic Plan 10 template. The Governor and the Legislative Budget 11 Boad developed the first two tiers of the template. 12 These two tiers are considered to be the foundation of 13 the process, and that includes the statewide vision, 14 the mission, philosophy and goals and benchmarks. 15 Agencies then developed the remaining 16 seven tiers within their individual strategic plans 17 that are followed by each agency, and those tiers 18 include the agency mission, the agency philosophy, the 19 agency's external and internal assessment, as well as 20 Tier 6, which is the agency goal area; Tier 7, agency 21 objectives and outcome measures; Tier 8, the 22 strategies and output, efficiency and explanatory 23 measures; and then the 9th tier being an agency's 24 action plan. 25 As outlined in the 6th, 7th and 8th 0099 1 tiers, the Strategic Plan is to include a multi-year 2 view of objectives and strategies for the 3 accomplishment of agency goals. The budget structure 4 as outlined in these three tiers serves as the 5 starting point for developing our agency's biennial 6 budget request. And if an agency wishes to add, 7 modify or delete the budget structure elements -- 8 which would include the goals, strategies, measures, 9 measure definitions and other items of 10 appropriation -- it must submit a request to the 11 Governor's Office of Budget, Planning and Policy and 12 the Legislative Budget Boad. 13 The Commission's current strategy 14 budget structure and the proposed budget structure for 15 Fiscal Years 2010 through 2011 is included in your 16 notebook as Attachment A. And you'll note that within 17 this document, we have proposed the deletion of one 18 lottery strategy under Goal A. We would like to 19 delete Strategy A.1.9., Instant Ticket Vending 20 Machines Contract. This strategy is no longer 21 required in Fiscal Year 2010 or '11, as we have made 22 the final payment under the contract in Fiscal Year 23 2008. So there would not be any funding associated 24 with that strategy in future years. 25 The proposal for the Bingo goal 0100 1 reflects a reduction in the number of strategies, from 2 five current strategies to three strategies, and a 3 revision of the Bingo Licensing strategy. 4 We would like to revise budget strategy 5 B.1.1., Bingo Licensing, to reflect a new title of 6 Bingo Taxpayer Services. And then we would like to 7 move the activities currently funded under the 8 proposed deleted Strategies of B.1.2., Bingo Education 9 and Development, and B.1.4., Bingo Prize Fee 10 Collection and Accounting, to the newly defined 11 strategy of Bingo Taxpayer Services. 12 The remaining budget structure changes 13 as proposed by staff include new performance measures 14 as well as the deletion or revision to existing 15 performance measures. A summary of these changes are 16 reflected on Attachment B within your notebook, with 17 the appropriate reference to the detailed information 18 provided in Attachment C. 19 And I wanted to note, Commissioner, 20 that as we looked at the modification to these 21 existing performance measures, we utilized a guide to 22 performance measures that's been developed by the 23 State Auditor's Office in reviewing the existing 24 performance measures and determining whether or not 25 there should be a modification to the existing 0101 1 performance measures. 2 In summary, under Goal A, the Lottery 3 goal, the modifications include basically definition 4 modifications on 20 of the measures, as well as a 5 title or definition modification to five of the 6 measures. 7 With regard to the Bingo goal, we're 8 doing more modifications in that particular area. 9 We're asking to delete 11 current measures that we 10 believe at this time no longer provide useful 11 information to management in what they're measuring. 12 And we're asking to add three new measures as well as 13 the modification, to basically the balance of all the 14 other Bingo measures, with the exception of one. 15 If the budget structure elements are 16 approved, the modifications will be submitted to the 17 Governor's Office of Budget, Planning and Policy as 18 well as the Legislative Budget Boad, using the 19 prescribed format that they've developed. The 20 guidelines for the submission of the budget structure 21 changes were issued by the leadership offices late 22 last week. And we are required to make our request, 23 if we wish to make a request, no later than April 16th 24 of this year. 25 After receipt of the requested changes, 0102 1 the Governor's Office and the LBB will review any 2 changes submitted and either accept the changes or 3 propose alternatives to the agency. And the final 4 approved budget structure then is used in submission 5 of the biennial budget request or the Legislative 6 Appropriation Request that would be submitted by the 7 agency in August. 8 Commissioners, this concludes my 9 presentation. I would be happy to answer any 10 questions. 11 COMMISSIONER SCHENCK: I have no 12 questions. 13 COMMISSIONER REYES: I have no 14 questions either. 15 CHAIRMAN COX: What are you asking, 16 Kathy? 17 MS. PYKA: I am asking approval from 18 the Commission to submit the proposed budget structure 19 changes to the Legislative Budget Boad and the 20 Governor's Budget Office. That would include the 21 strategic structure changes as outlined on Attachment 22 A of this notebook, as well as the definition -- 23 performance measure definition changes outlined in 24 summary within Attachment B and in detail in 25 Attachment C of the notebook. 0103 1 COMMISSIONER SCHENCK: I understood 2 that. I met with -- in my meeting with Phil, we 3 discussed some of these restructuring items. And it 4 seemed to me that part of the issues we have with the 5 items we pass on is over parsing of how we're tracking 6 for various things. And I think simplification, to 7 the extent it's at all possible, is in everyone's 8 interest. And I think that we have achieved that to 9 the extent it's possible with respect to Bingo. And 10 it seems that to the extent we're capable of doing it, 11 we're moving in that direction with respect to 12 Lottery. So I'm comfortable with what you're 13 proposing, and I would move that we adopt the staff's 14 recommendation. 15 COMMISSIONER REYES: I'll second it. 16 CHAIRMAN COX: All in favor, say "Aye." 17 COMMISSIONER SCHENCK: Aye. 18 COMMISSIONER REYES: Aye. 19 CHAIRMAN COX: Aye. 20 Motion carries 3-0. 21 MS. PYKA: Thank you, Commissioners. 22 AGENDA ITEM NOS. XI and XII 23 CHAIRMAN COX: Okay. Item No. No XI, 24 consideration of and possible discussion and/or 25 action, including adoption, of repeal of 16 TAC 0104 1 §401.312 relating to Texas Two Step On-Line Game. 2 Who is going to do that one, Kim? 3 COMMISSIONER SCHENCK: I'm sorry. I 4 was asking if there was an order on that last item. 5 MS. KIPLIN: Mr. Chairman, I will take 6 this item up. If it's with the pleasure of the 7 Commission, could I take both these items, the next 8 one up that relates to the Texas Two Step? 9 CHAIRMAN COX: Also consideration of 10 Item XII, consideration of and possible discussion 11 and/or action, including adoption, on new rule 16 TAC 12 §401.312 relating to Texas Two Step On-Line Game. 13 So Item XI is the repeal of the old 14 rule and XII is adoption of the new rule. 15 MS. KIPLIN: And, Commissioners, before 16 we go to those items, Commissioner Schenck, I think 17 you were asking me if there was an order or some 18 document that reflected your approval. And I think 19 it's sufficient that there's the vote on the record. 20 And we can certainly get together a -- 21 MS. PYKA: Yes, a vote on the record, 22 on the transcript, is sufficient. We'll transmit this 23 now to the Legislative Budget Board and the Governor's 24 Budget Office. 25 COMMISSIONER SCHENCK: Thank you very 0105 1 much. 2 MS. PYKA: You're welcome. 3 MS. KIPLIN: Commissioners, thank you 4 for allowing me to take these two items up. At an 5 earlier Commission meeting, you-all voted -- certainly 6 not this complement -- but the Commission I should say 7 voted to propose two rulemaking matters: One, the 8 proposal of the repeal of an existing rule and then 9 the proposal of a new rule. 10 And the comment period for both of 11 these rulemakings has passed. Both of these items are 12 ripe for your consideration for adoption. I should 13 say that there were no comments that were received, 14 either in writing or at the rulemaking comment 15 hearings that were noticed up and convened. 16 The actual purpose of moving forward to 17 adopt this new rule is to eliminate the Texas Two Step 18 prize reserve fund from the rule, to make the language 19 in the rule simpler and easier to understand. 20 The separate prize reserve fund for 21 this game is not required by law, nor is it necessary 22 as a matter of practice; and, therefore, it will 23 result -- eliminating this prize reserve fund will 24 result in increased consistency in how the Commission 25 accounts -- how it accounts for the monies as it 0106 1 relates to these jackpot games. 2 I should say that there are two other 3 jackpot games. There's Lotto Texas and the Mega 4 Millions, and neither of those have a separate prize 5 reserve fund. And so this is bringing this game in 6 line with that. 7 If it gets more technical in terms of 8 accounting practices, I am way beyond my expertise and 9 I would have to draw on Ms. Pyka. But the staff does 10 recommend the adoption of both the repeal of the 11 existing rule and the adoption of the new Texas Two 12 Step rule. 13 COMMISSIONER SCHENCK: I recall debate 14 on this subject. I believe our Chair has clear and 15 well-founded views on the need for this measure, which 16 I totally agree with. The reserve fund I think was 17 just wasteful and unhelpful in every way. So I have 18 no further questions on it. But Commissioner Reyes 19 wasn't here, so I would yield to him if he has any 20 questions. 21 COMMISSIONER REYES: I don't have any 22 questions at this point. 23 CHAIRMAN COX: I have asked a number of 24 people, and I can't get anyone to claim ownership of 25 the original reserve, which actually served only to 0107 1 confuse the public, because it's only a bookkeeping 2 entry. And we were authorized to pay prizes out of 3 our appropriated money. But the public came to view 4 this as if the reserve gets low, they may not get paid 5 their prizes, which was never the case. So this is 6 removing an accounting artifice, and I welcome it. 7 COMMISSIONER SCHENCK: I move adoption 8 of the recommendation. 9 COMMISSIONER REYES: I'll second it. 10 CHAIRMAN COX: All in favor, say "Aye." 11 COMMISSIONER SCHENCK: Aye. 12 COMMISSIONER REYES: Aye. 13 CHAIRMAN COX: Aye. 14 Motion carries 3-0. 15 MS. KIPLIN: Thank you. And that's for 16 adoption of the repeal and then the adoption of the 17 new rule. 18 CHAIRMAN COX: Yes. 19 MS. KIPLIN: I should point out, just 20 so you know, the rule does contain an effective date, 21 that the rule will take effect May 26, 2008. Rules 22 either are effective 20 days after they're filed with 23 the Register or another date that is identified. And 24 this rule identifies that date. And that's for an 25 orderly transition. 0108 1 CHAIRMAN COX: Have we now killed all 2 the reserves? 3 MS. KIPLIN: The use of the word 4 "killed" is -- yes, I think so. But once again, I 5 would defer to Ms. Pyka as it relates to prize reserve 6 funds -- 7 MS. PYKA: Yes. 8 MS. KIPLIN: -- in individual rules. 9 MS. PYKA: You can tell -- for the 10 record, Kathy Pyka -- they're getting excited back 11 there. 12 We have eliminated all the 13 contributions to the prize reserve funds, but there 14 still is a balance that we are drawing down in Lotto 15 Texas. And there could be the potential for a 16 balance, obviously, in Two Step until we draw it down. 17 CHAIRMAN COX: Okay. So we are not 18 adding to anymore reserves. We are using them until 19 exhausted, and then they will be out of our lives? 20 MS. PYKA: That is correct. 21 CHAIRMAN COX: Thank you. 22 MS. PYKA: You're welcome. 23 AGENDA ITEM NO. XIII 24 CHAIRMAN COX: Item No. XIII, report, 25 possible discussion and/or action on the 80th 0109 1 Legislature. 2 Ms. Trevino. 3 MS. TREVINO: Good morning, 4 Commissioners. For the record, I'm Nelda Trevino. 5 I'm the Director of Governmental Affairs. 6 The agency started a practice about 10 7 years ago of conducting legislative briefings for 8 interested members and staff of the legislative and 9 executive branches. The purpose of these briefings is 10 to provide information on current events impacting the 11 agency and to provide updates on activities related to 12 the Lottery and to Charitable Bingo. 13 The agency's Executive Director, the 14 Director of Charitable Bingo, along with the agency's 15 Governmental Affairs staff, participate in these 16 briefings. The agency's last legislative briefing was 17 held last October, and we will be holding our next 18 briefing tomorrow, March the 26th, at the State 19 Capitol. We provided you this morning with the 20 presentation material and a final copy of the agenda 21 for tomorrow's briefing. 22 Lastly, at this time there are no 23 updates to provide related to House or Senate 24 committee interim charges. And this concludes my 25 report, and I'll be happy to answer any questions. 0110 1 COMMISSIONER SCHENCK: Nelda, I can't 2 seem to find the agenda in front of me. 3 Okay. 4 MS. TREVINO: And the agenda is the 5 first page, Commissioner Schenck. 6 COMMISSIONER SCHENCK: Can you just 7 refresh my recollection. We have been having some 8 conversations in the last few meetings about with 9 respect to Bingo, the role of 8-liners and the 10 existing regulations that affect them and whether, in 11 fact, they are of sufficient vigor to prohibit 12 unlawful activities. And I've had some briefings 13 concerning activities in various remote parts of the 14 states that would suggest that something needs to be 15 done in this regard. Are we going to be discussing 16 that with the members of the Legislature or will we 17 not? 18 MS. TREVINO: Commissioner Schenck, as 19 far as our briefing tomorrow, there's not anything 20 specific on the agenda that we're looking to address 21 that with any sort of specificity. But one of the 22 things that we'll be commenting on are some of the 23 interim charges that have been assigned by the 24 Lt. Governor and the Speaker. 25 And you may recall, at a past meeting I 0111 1 mentioned the interim charges that have been assigned 2 by the Lt. Governor. Not having them in front of me, 3 but there is -- I know one charge that was issued to 4 the Senate State Affairs Committee for that committee 5 to look at -- and again, I'm going on recall here -- 6 but it has to do with illegal gambling, and I think it 7 specifically mentions 8-liners. The House Licensing 8 Committee also has an interim charge where it mentions 9 also a review of illegal gaming in the state. 10 So as far as what the agency might be 11 doing, we will certainly serve as a resource to those 12 committees if we get asked, you know, requests for any 13 information regarding that particular interim charge. 14 And any information that the agency has, we'll 15 certainly be sharing that with them. 16 For tomorrow's briefing, one of the 17 things that we will be touching on is lottery sales 18 and providing an update on current sales trends. And 19 I believe one of the things that we'll be mentioning, 20 as Mr. Pyka just reviewed with the Board, is the 21 decline that we're currently experiencing. And one of 22 the things that we look to mention is that there's 23 several external factors, including illegal gaming, 24 that might be impacting our sales at this time. So we 25 look to mention that in that regard. 0112 1 COMMISSIONER SCHENCK: I think there's 2 a fairly -- pardon me if I'm wrong, Phil, but I think 3 there's a fairly clear view within the bingo industry 4 that illegal gaming, particularly 8-liners, are 5 affecting charitable revenues across the state. 6 MR. SANDERSON: There have been some 7 studies conducted that indicate that they do have an 8 impact on the bingo gross receipts and the revenue to 9 the charities, yes. 10 COMMISSIONER SCHENCK: Thanks. 11 CHAIRMAN COX: Is Michael Anger back 12 there? 13 MS. TREVINO: Yes. 14 CHAIRMAN COX: Michael, in that regard, 15 Mr. Heinlein gave me last month or the month before a 16 study that he had done of the effect of 8-liners in a 17 specific location on the nearby bingo halls. And I 18 gave that to Gary and asked him to get y'all to take a 19 look at that and see if you could tie it to any of our 20 retail locations and relative declines in sales 21 coincident with those dates. Did you get that 22 analysis? 23 MR. ANGER: I haven't reviewed that 24 analysis. It may have gone to the research team. 25 CHAIRMAN COX: Okay. 0113 1 MR. ANGER: And I also -- 2 CHAIRMAN COX: Okay. It looks like 3 somebody is stepping forward here. 4 MR. FERNANDEZ: Yes, someone is. For 5 the record, my name is Mike Fernandez, Administration 6 Director. 7 We did receive that, Mr. Chairman, from 8 Mr. Grief. And Dr. Sizemore and his accomplice have 9 been reviewing that. And, in fact, I have had 10 conversations with him as recently as yesterday about 11 it. We did read the study. And what that study is 12 talking about is a seizure that had taken place in a 13 specific area and that the result of that seizure -- 14 meaning local authorities had seized 8-liners -- and 15 the result of that had been an increase in bingo 16 activity and play. And we're looking into that with 17 all available data that we have available to us. 18 My discussion yesterday -- and we'll 19 come forward with a report; they will come forward 20 with a report -- what I'm hearing, it's not 21 conclusive, because we can -- and we're looking at 22 that over periods of time to ensure that sales in 23 local retail stores -- some impact occurs when these 24 local seizures are effected. 25 And as of yesterday, the researchers 0114 1 had no conclusive evidence of that, but I'm giving you 2 preliminary discussions. 3 CHAIRMAN COX: Yes. 4 MR. FERNANDEZ: And that work has not 5 been finalized. 6 CHAIRMAN COX: Well, what I would like 7 to ask you to do is expand that a little bit. Someone 8 told me that Victoria is planning to pass a city 9 ordinance or is looking at passing a city ordinance 10 that would place a heavy fine on these machines, that 11 Harris County is doing some -- is cracking down. We 12 read in our clipping service where somebody is 13 cracking down. Would you ask your people to look at 14 those on an ongoing basis -- 15 MR. FERNANDEZ: Yes, sir. 16 CHAIRMAN COX: -- and see if you can 17 identify any impact on lottery sales in nearby retail 18 locations. 19 MR. FERNANDEZ: Yes, sir, I will do 20 that. 21 CHAIRMAN COX: Excellent. 22 MS. KIPLIN: And so, Mr. Chairman, I'm 23 thinking that this discussion you've just had is 24 really focused on Agenda Item VII as it relates to 25 lottery sales. 0115 1 CHAIRMAN COX: No. Actually, I was 2 thinking of it in terms of Ms. Trevino's indication 3 that we would serve as a resource -- 4 MS. KIPLIN: Okay. 5 CHAIRMAN COX: -- should someone ask us 6 to, and this is the kind of information that I believe 7 could be very helpful to those people. 8 MS. KIPLIN: Great! So it's covered by 9 an agenda item? 10 CHAIRMAN COX: Yes. 11 MS. KIPLIN: Thank you. 12 CHAIRMAN COX: Did you have any 13 questions of Nelda? 14 COMMISSIONER SCHENCK: No. Thank you, 15 Nelda. 16 COMMISSIONER REYES: I have no 17 questions at this time. 18 CHAIRMAN COX: Okay. Thank you, Nelda. 19 MS. TREVINO: Thank you. 20 CHAIRMAN COX: And, Rob, you're wanting 21 to speak on -- 22 MR. KOHLER: I wrote down VII right 23 then, Mr. Chairman, after you said that. But if 24 it's -- whatever. I just want to make a couple of 25 comments on the discussion right here regarding 0116 1 8-liners. 2 CHAIRMAN COX: Oh! Is this 3 appropriate? 4 MS. KIPLIN: So it would be on Item 5 XIII. You're wanting to follow up on the discussion 6 on the 80th Legislature? 7 MR. KOHLER: Yes, with that discussion. 8 CHAIRMAN COX: Excellent. 9 MR. KOHLER: Hi, Commissioners. For 10 the record, my name is Rob Kohler, and I represent the 11 Christian Life Commission of the Baptist General 12 Convention of Texas. 13 I would like to encourage the 14 Commissioners to really look at -- last Commission 15 meeting, we learned about some of the numbers and some 16 of the concerns that have been talked about here at 17 the Commission about the effects of out-of-state games 18 to your games, as well as 8-liners to your games. We 19 received through open records a report that you 20 referenced, Chairman, regarding the amount of 8-liners 21 that are in the state. 22 We don't necessarily agree with that 23 report. I would encourage the Commission to delve 24 further in to get hard numbers so that we're really 25 talking about what's out there. And case in point: 0117 1 That report actually references the Baptist Standard, 2 which is a newspaper article, that we would just 3 encourage that the Commission look at other 4 references. 5 Case in point: Your sales reps go to 6 locations every two weeks. You can know by the next 7 Commission meeting exactly how many there are out 8 there. And we would encourage you to use those 9 resources to really identify how many of these 10 machines that are out there in the stores so that when 11 we're talking about the effect, we actually know, you 12 know, the good hard numbers. 13 We would also encourage you, when you 14 talk about 8-liners, 8-liners in the state are legal 15 right now, as long as they don't pay out cash, and 16 that there are business models that are allowing to be 17 paid out in store value, credits cards, which I know 18 you're aware of. We would encourage that when you 19 talk about 8-liners and talk about the different 20 things, just to really look at the questions and 21 8-liners versus maybe new possible business models 22 that are entering the state. 23 So that's all the comments I have. 24 COMMISSIONER SCHENCK: Can I ask a 25 question? I'm not sure I'm understanding. Is your 0118 1 concern that the report is overstating the impact or 2 understating the impact? 3 MR. KOHLER: We think the report, the 4 numbers are high. And the references in the report 5 are -- we believe they're high. When you have at your 6 hands -- you can know by the next Commission meeting 7 exactly how many there are by simply asking your sales 8 force, you know, when they're in that location, take a 9 count. And then you can know how many are in your 10 retailer locations. 11 CHAIRMAN COX: Well, Rob, let me 12 address a little bit of this for the historical 13 benefit of the Commissioners. 14 Back in 2003, a study was done by Prof. 15 Huff and Dr. Jarrett of The University of Texas 16 Graduate School of Business. And we asked them to try 17 to estimate what kind of revenue the illegal machines 18 out there might be generating in the state, not just 19 in lottery locations. 20 And they did some of the most 21 innovative work I've ever seen, using anecdotal 22 information, to try to estimate what's out there; and, 23 yet, the range that they estimated was very, very 24 broad. It was from under a billion to over 6 billion, 25 if I remember right. And you don't get a lot of use 0119 1 out of that kind of an estimate range. You did get a 2 lot -- I got a lot of value out of the anecdotal 3 information that they presented. 4 For instance, one of the data points 5 that they had -- and they just went through clipping 6 services and gathered data points from wherever they 7 could find them -- was that the Tax Accessor and the 8 sheriff of Harris County reported that there were 9 65,000 machines in Harris country. Well, I never 10 believed that. But that was still reported by a 11 reliable source, and they felt they should include 12 that kind of thing. 13 For your information, Rob, when I first 14 came on this Board, I asked GTECH to count the number 15 of machines in plain view in the 16,000 lottery retail 16 locations. There were some 7,700. But I didn't ask 17 them to look in the back room; I didn't ask them to 18 look around the corner; I didn't ask them to look next 19 door or across the street. 20 MR. KOHLER: Yes, sir. 21 CHAIRMAN COX: And so I don't know what 22 we -- 23 MR. KOHLER: I'm sorry, Chairman. You 24 said 7,700? 25 CHAIRMAN COX: 7,700 -- 0120 1 MR. KOHLER: Okay. 2 CHAIRMAN COX: -- at that time. 3 MR. KOHLER: Okay. 4 CHAIRMAN COX: So we know that there 5 are some out there. We know that they're taking money 6 out of the pockets of the school children of Texas. 7 We don't know how many and we don't know how to find 8 out how many. So any suggestions you may have as to 9 how we might be able to do that are fine. 10 But, yes, we can count the number in 11 the retail locations -- and I probably ought to ask 12 for an update on that -- but that's still going to 13 give us a very incomplete picture of what the illegal 14 gaming is, because some of them are in the back room; 15 some of them are next door -- intentionally next 16 door -- some of them are across the street; some of 17 them are down the way. 18 MR. KOHLER: And I recognize that, 19 Mr. Chairman. But in the same line, when we're 20 making -- when you're making public policy as far as a 21 reaction to something that might be or might not be 22 there or the amount of it, whether it be expand your 23 games or take steps, we think it's important that we 24 do -- or you do the best job that you can to quantify 25 what that is. And that's -- 0121 1 CHAIRMAN COX: And certainly we're 2 going to continue to do the very best we can to serve 3 as a resource for the Legislature. 4 MR. KOHLER: Okay. Thank y'all very 5 much. 6 COMMISSIONER SCHENCK: Thank you. 7 CHAIRMAN COX: Thank you, Mr. Kohler. 8 AGENDA ITEM NO. XIV 9 CHAIRMAN COX: Item No. XIV, report, 10 possible discussion and/or action on the agency's 11 contracts. 12 Mr. Jackson. 13 MR. JACKSON: Good morning, 14 Commissioners. For the record, my name is Tom 15 Jackson. I'm the Purchasing and Contracts Manager for 16 the Commission. 17 Commissioners, in your notebooks under 18 Tab No. XIV is a report on prime contracts that has 19 been updated for your view. At the February meeting, 20 we informed you of our intent to renew the current 21 contract with Maxwell Locke & Ritter for the annual 22 financial audit and Mega Millions procedures for one 23 additional year. The contract has been renewed, with 24 one one-year renewal option remaining. 25 Be happy to answer any questions. 0122 1 COMMISSIONER SCHENCK: No questions. 2 COMMISSIONER REYES: I have no 3 questions. 4 CHAIRMAN COX: Okay. Thank you, 5 Mr. Jackson. 6 AGENDA ITEM NO. XV 7 CHAIRMAN COX: Okay. Item XV is the 8 HUB report. Joyce is not here today, and Mike 9 Fernandez asked that we postpone that until the next 10 meeting. 11 Item XVI we've already covered. 12 AGENDA ITEM NO. XVII 13 CHAIRMAN COX: Item XVII, report, 14 possible discussion and/or action on the Mega Millions 15 game and/or contract. 16 Director Sadberry. 17 MR. SADBERRY: Chairman and 18 Commissioners, at this time I do not have any 19 additional information to provide to you on the Mega 20 Millions game and contract, but I would be happy to 21 answer any questions. 22 COMMISSIONER SCHENCK: None from me. 23 CHAIRMAN COX: Thank you, Director 24 Sadberry. 25 0123 1 AGENDA ITEM NO. XVIII 2 CHAIRMAN COX: Item XVIII, report, 3 possible discussion and/or action on GTECH 4 Corporation. 5 Director Sadberry. 6 MR. SADBERRY: Chairman and 7 Commissioners -- and, by the way, let me identify 8 myself for the record. Anthony Sadberry, Executive 9 Director. 10 There are general materials that 11 contain background information on GTECH as well as its 12 parent company, Lottomatica and De Agostini, located 13 in Italy, that we provide as a routine matter, to keep 14 you informed of activities, including consulting 15 agreements that you might be interested in. 16 And as deemed appropriate, this 17 information is also provided to the standing committee 18 that was created at the request of the Commissioners 19 to observe the activities of GTECH and its related 20 companies, which includes representation from the 21 Department of Public Safety, the State Office of 22 Attorney General and this agency. That information is 23 there for your review. 24 I do not have any specific matters to 25 discuss in that regard, and I do not have any 0124 1 additional information regarding this agenda item, 2 GTECH Corporation, at this time, except I would ask 3 that Michael Fernandez, in Gary Grief's absence, come 4 forward and report on a planned trip to the GTECH 5 Headquarters in Rhode Island that's being conducted in 6 response to an invitation. 7 MR. FERNANDEZ: Good morning, 8 Commissioners. My name is Mike Fernandez. I'm the 9 Director of Administration. 10 And in Mr. Grief's stead, I would like 11 to advise you of an invitation that we recently 12 received from Mr. Jaymin Patel who, as I think each of 13 you know, and for our new Commissioner, is the CEO of 14 GTECH. 15 Mr. Patel extended an invitation to our 16 staff management team to come up and meet with their 17 executive team in order to gain a better understanding 18 of their operations and the impact of those operations 19 on the Texas Lottery. I also at that time will have 20 the opportunity to tour their site and their plant, if 21 you will, and meet with their management team to 22 discuss new directions in technology and process and 23 procedures, which we believe will enable us to do a 24 better job. 25 So the trip is scheduled for next 0125 1 Monday. We leave next Monday, and we'll be returning 2 Tuesday evening. And those that are planning on 3 attending -- and it's my understanding, is our 4 Chairman with accompany members of the management 5 team, which will include Gary Grief, Michael Anger, 6 Kathy Pyka and myself. And we're anxiously 7 anticipating this trip. We believe it will be 8 beneficial to the operation of the lottery. 9 That's all I have. 10 CHAIRMAN COX: Anything? 11 COMMISSIONER SCHENCK: I have a 12 question. I'm not sure if it's addressed to Anthony 13 or Mike. But in the GTECH report, there is a 14 discussion of another acquisition by GTECH of Boss 15 Media. Can you explain to me where Boss Media was 16 operating or is operating? Is anyone familiar with 17 that? 18 MR. SADBERRY: If I may, I would like 19 to ask Jim Carney, the Director of Enforcement who 20 accumulates this information and keeps track of it, if 21 he could come forward and help the Commission with 22 providing that information. 23 MR. CARNEY: For the record, my name is 24 Jim Carney, Director of Enforcement for the Texas 25 Lottery Commission. 0126 1 Commissioner, off the top I'll have to 2 research it real quick, pull out the article on Boss 3 Media. There was quite a bit of activity with them 4 leading up to the actual purchase. 5 COMMISSIONER SCHENCK: My understanding 6 is, they're an on-line bingo provider. I was just 7 curious about where they're -- 8 MR. CARNEY: They're based out of -- is 9 that what you -- 10 COMMISSIONER SCHENCK: Where they're 11 operating. 12 MR. CARNEY: I don't have that off the 13 top of my head. I can get it for you. 14 COMMISSIONER SCHENCK: The reason I ask 15 is, we had Mr. Patel here recently, and I directed 16 some questions to him about the apparent lack of 17 vigorous competition in this industry segment and 18 posed some questions to him about how we might see 19 additional competition resulting from combination and 20 mergers of this company. And I was just curious what 21 this most recent acquisition will do in terms of his 22 market position and where this is taking place. It's 23 not a pressing question. I just was asking if anyone 24 knew. And perhaps we might look into that and report 25 in the next meeting. 0127 1 MR. SADBERRY: We'll do that, 2 Commissioner. 3 COMMISSIONER REYES: I have no 4 questions. 5 CHAIRMAN COX: Okay. I would like to 6 underscore what Mike said. I will be traveling to 7 Providence next week, at the invitation of Mr. Patel. 8 One of the things that affected my decision to make 9 this trip was the emphasis that the State Auditor put 10 on the importance of this contract. This is a 11 $750 million contract. 12 I have never been -- to my knowledge, 13 no member of this Commission has ever been to the 14 GTECH Headquarters. And I discussed it with former 15 Chairman Clowe. He felt it was a good idea. And I 16 think that our looking at them and seeing their people 17 firsthand, seeing their facilities, the resources 18 firsthand, is an important part of our monitoring that 19 contract. 20 COMMISSIONER REYES: Just one quick 21 question of information. Where is GTECH located? 22 CHAIRMAN COX: Providence, Rhode 23 Island. 24 COMMISSIONER SCHENCK: As a result of 25 another recent combination, they have connected to an 0128 1 Italian company known as Lottomatica, which controls 2 at least two of the national lotteries in Italy, and I 3 think most of the lottery business throughout Europe. 4 And we have in the United States basically two large 5 competitors, Scientific Games and GTECH, both of whom 6 are contractors of ours. And we look forward 7 hopefully to competitive bidding both with respect to 8 our scratch-off contract, our instant games, and the 9 on-line games that GTECH is operating for us. 10 CHAIRMAN COX: Thank you. 11 MR. FERNANDEZ: Thank you. 12 AGENDA ITEM NO. XIX 13 CHAIRMAN COX: Okay. Ms. Kiplin, how 14 would you like to take up the cases? 15 MS. KIPLIN: If it's the Commission's 16 pleasure, I would like to take Items C through K 17 together and then take Item A and B together. 18 CHAIRMAN COX: Okay. So C through K 19 are NSFs? 20 MS. KIPLIN: Yes, sir, they are. 21 CHAIRMAN COX: Would you like to -- 22 have you already explained to Commissioner Reyes how 23 these work? 24 MS. KIPLIN: I talked about what he can 25 anticipate generally from month-to-month on a 0129 1 Commission meeting. This month we do not have any 2 bingo cases. But if I can indulge the other two 3 Commissioners. 4 Commissioner Reyes, for your benefit, 5 what you have on Items C through K are what you will 6 typically see from month-to-month. And these are 7 proposals for decisions that come from the State 8 Office of Administrative Hearings, SOAH. SOAH is the 9 administrative agency that conducts, for the most 10 part, I would say probably 90 percent of all state 11 agencies' contested case hearings. 12 There are some that still have 13 Administrative Law Judge within their own agency. 14 Those Administrative Law Judges are actually the judge 15 that presides over a proceeding that's evidentiary in 16 trial on the merits and what you would typically see 17 in a non-jury setting. And so the parties come 18 forward, they present their cases, they present their 19 evidence. 20 What you'll see mostly on the Lottery 21 side as it relates to these insufficient funds are 22 cases that go there but there are no appearances. We 23 notice them up, properly notice them up, but it really 24 comes down to: "We have an automated system on what 25 you owe. We swept your account. The money wasn't 0130 1 there. And we're proceeding to revoke your license." 2 We do have two approaches to these 3 cases by Commission policy. There is actually a 4 Commission rule that was adopted many, many years ago 5 that's slang known as the "three-strikes-and-you're- 6 out" rule. And what that really stands for is, if a 7 retailer has insufficient funds available at the time 8 that the Lottery sweeps its account -- and we sweep 9 weekly for the funds that are owed us -- we will 10 summarily suspend your license. And at that point, 11 there is usually work that is occurring in the Lottery 12 Operations to collect those funds. And if that's the 13 case, then we'll proceed to reconnect the terminal and 14 the retailer goes on selling our tickets. 15 If that occurrence, that insufficient 16 fund occurs three times within a calendar year, then 17 that triggers the operation of this rule that says, 18 "We're moving forward to revoke your license, too much 19 administrative burden, and we've had to keep up with 20 you." That's what you'll see mostly. 21 Every once in a while there will be one 22 where it's just one NSF, and that's because that money 23 is still owing to the Commission, and the retailer 24 will not -- for whatever reason will not pay, has not 25 paid, and we move forward to revoke that license. 0131 1 In Items C through K, what you have are 2 those retailers that are NSF -- that's the colloquial, 3 insufficient funds available. The staff presents 4 their case. We actually do put on documents to 5 identify the amounts that are owed and then make the 6 recommendation that these licenses be revoked. In 7 each of these cases, the Administrative Law Judge, the 8 ALJ, has recommended revocation and the staff does 9 recommend and ask that the Commission vote to adopt 10 the Administrative Law Judge's recommendation to 11 revoke each of these licenses. 12 COMMISSIONER REYES: Once the license 13 is revoked, they can't come back and get another 14 license after a period of time? 15 MS. KIPLIN: Yes, they can. They can 16 re-apply. And then we'll take a look at their 17 eligibility at that point. 18 COMMISSIONER SCHENCK: But, Kim, just 19 to be clear, for the people that are not, in fact, 20 ever truing up with us, these are basically people who 21 are selling our product and pocketing the proceeds and 22 not turning it over, they're stealing -- 23 MS. KIPLIN: That's right. 24 COMMISSIONER SCHENCK: -- essentially 25 from the school children of Texas. And I've stated on 0132 1 the record before -- and if Nelda is still here, I'll 2 state it again -- I would think that a lot of these 3 vendors are also selling beer and cigarettes, and they 4 have licenses to do so. And I think it would serve us 5 well to consider proposing, to the extent someone 6 wants to hear it, that these people should not be 7 carrying forward in businesses that are discretionary 8 with the state and operating under state licenses when 9 they're, in fact, owing and defaulting on obligations 10 to the state and the state's School Foundation Fund. 11 And one last point I think that's 12 helpful is that I think there is a unique aspect to 13 these proceedings in that we typically -- and correct 14 me if I'm wrong, Kim -- have a personal guarantee for 15 the owners of these businesses that allows us to 16 essentially short-cut the process that you would 17 normally go through. In the business world, you're 18 familiar with the notion of a separate incorporation, 19 piercing a corporate veil. This is largely short- 20 cutted. 21 And I believe there's some litigation 22 ongoing? 23 MS. KIPLIN: Yes, sir, there is. And 24 we do have very strong language in the State Lottery 25 Act that indicates that if a retailer in a, for 0133 1 example, corporate entity owes us money, that there is 2 strict liability, personal liability on the officers 3 and directors and owners. And so it's not an alter 4 ego theory; it is strict personal liability. We are 5 litigating that at this moment. It was -- and I won't 6 belabor that. I will be glad to provide more legal 7 advice on that in executive session. 8 But just for the record, that's the 9 Jongebloed case. And the retailer that went NSF was 10 Petro Express. Petro Express' license was cancelled. 11 Money is still owing. We pursued collecting that 12 under the collection and enforcement powers that this 13 agency has. There is a challenge by Mr. Jongebloed 14 thinking that that's not correct, that he should not 15 owe that money, for a variety of different legal 16 theories. 17 That case on an opportunity for a 18 refund hearing went to the State Office of 19 Administrative Hearings. The ALJ found in favor of 20 the Texas Lottery Commission. And Mr. Jongebloed's 21 attorney did file a -- timely filed a motion for 22 rehearing and timely filed a petition for judicial 23 review. So that case went to district court, recently 24 was heard. The district court judge found in favor of 25 the state -- of the Texas Lottery Commission. And now 0134 1 Mr. Jongebloed has filed a Notice of Appeal to the 2 Third Court. 3 COMMISSIONER REYES: I agree with 4 Chairman Schenck about if they are violating one part 5 of state law, they shouldn't be operating on the other 6 part of the state law. That's a very good point. 7 MS. KIPLIN: And we will take that on 8 as an assignment, and we will explore that and we will 9 make a report back to you. 10 CHAIRMAN COX: Excellent. Okay. So 11 you are recommending approval of Items C through K? 12 MS. KIPLIN: Yes, sir, I am. 13 COMMISSIONER SCHENCK: I move that we 14 adopt the recommendation. 15 COMMISSIONER REYES: I second. 16 CHAIRMAN COX: All in favor, say "Aye." 17 COMMISSIONER SCHENCK: Aye. 18 COMMISSIONER REYES: Aye. 19 CHAIRMAN COX: Aye. 20 Motion carries 3-0. 21 Okay. Ms. Kiplin, are A and B separate 22 or you want to take them together? 23 MS. KIPLIN: Mr. Chairman, I would like 24 to take them together. They are two separate docketed 25 cases, but they involve the same party. 0135 1 And I'll be glad to wait. 2 COMMISSIONER SCHENCK: Go ahead. 3 CHAIRMAN COX: Go ahead. 4 MS. KIPLIN: Okay. Then I will. 5 Really what I would like to do, if I 6 could, is go to Item B first, because that's the most 7 recent case. I would like to give you a bit of 8 history. This is the Texas Lottery Commission versus 9 Mars Convenience and Sard Enterprises, popularly known 10 as the La Porte Shell case, now the La Porte Chevron 11 case. 12 In this particular docket, an 13 investigation was conducted by the Texas Lottery 14 Commission investigators. It was based on an 15 allegation of pin-pricking by the retailer. And what 16 that means, Commissioner, is that the retailer was 17 taking our scratch-off tickets and scrapping off what 18 latex he needed to, to be able to determine whether 19 that was a winning ticket or not. And when that was 20 not a winning ticket, he put that back into the bin to 21 sell to our customers, who never had a chance of 22 winning on that ticket, because he knew that was a 23 non-winning ticket. 24 At the time that this matter was 25 investigated -- now, this goes into the first 0136 1 docket -- the investigation was picked up by the 2 Police Department, and it hurriedly went to a 3 prosecutor. And a plea agreement was entered at that 4 time. And so our retailer, or individual, admitted -- 5 in our view admitted his guilty conduct and entered 6 into a plea agreement. We moved forward on the first 7 case, based on a disqualifying criminal conviction, 8 lottery fraud. The attorney for La Porte Shell was 9 able to get the conviction vacated ab initio. 10 COMMISSIONER SCHENCK: I'm sorry. A 11 conviction against the company or the conviction 12 against the individual? 13 MS. KIPLIN: The individual. And if 14 you're an owner, officer or director and you have a 15 disqualifying criminal conviction, then the licensee 16 is ineligible to hold a sales agent's license. And so 17 we moved forward to revoke the sales agent's license, 18 based on the disqualifying conviction of the principal 19 involved in La Porte Shell. 20 COMMISSIONER SCHENCK: But the 21 conviction has been vacated since we made a 22 recommendation? 23 MS. KIPLIN: The conviction was 24 vacated. We moved forward strategically on the first 25 docket on a disqualifying criminal conviction. We had 0137 1 the records and we moved forward. At I believe the 2 eve of that Commission meeting, or at the day of the 3 Commission meeting, the attorney processed or 4 provided, I should say, to the Administrative Law 5 Judge an indication of the conviction being vacated, 6 because what he pled to is a Class A misdemeanor, and 7 what he was sentenced to was more years than the range 8 for a Class A misdemeanor. 9 COMMISSIONER SCHENCK: So the 10 conviction was vacated? 11 MS. KIPLIN: Yes. 12 COMMISSIONER SCHENCK: He wasn't 13 re-sentenced? 14 MS. KIPLIN: Yes, the conviction was 15 vacated. 16 COMMISSIONER SCHENCK: What court -- 17 where was this? 18 MS. KIPLIN: This was in a criminal 19 court. I believe it was in Harris County. I may be 20 wrong on that, Harris County. Mr. White is nodding 21 his head. 22 COMMISSIONER SCHENCK: Well, then, is 23 the criminal case still pending, then? 24 MS. KIPLIN: No. The prosecutor 25 declined to re-prosecute based on that. 0138 1 COMMISSIONER SCHENCK: Okay. So the 2 second docket is a civil docket? 3 MS. KIPLIN: The second docket is the 4 underlying conduct. The Commission -- we did present 5 the first PFD to the Commission I would say about a 6 year and a half ago. And the Commission, and what we 7 wanted to do was try to eliminate some conclusions of 8 law that we thought were improper. 9 But the Commission at that time said, 10 "You know what? Let's hold. We're not going to do 11 anything on this. We understand that there is an 12 investigation now of the conduct by the agency. 13 Please proceed. If staff thinks that there is an 14 action to be taken as a result of that, then we will 15 hold this is abeyance." 16 Well, we did. The investigation, we 17 were able to recover video. It was a hotly contested 18 matter, both on issues of law and issues of fact. The 19 Administrative Law Judge in my view did a very 20 thorough job of covering both the issues of law and 21 issues of fact. 22 I believe the credibility of the 23 witnesses, this retailer's own employees, who said, "I 24 saw him pin-pricking and putting them back." And, as 25 a result, has recommended revocation of the license, 0139 1 not only of La Porte Shell but also of La Porte 2 Chevron, because it goes to the heart of the integrity 3 of the lottery. It's the same individual who is a 4 sole owner of both of these corporations. 5 COMMISSIONER SCHENCK: Kim, correct me 6 if I'm remembering this wrong -- 7 MS. KIPLIN: Yes, sir. 8 COMMISSIONER SCHENCK: -- but didn't we 9 depose the individual concerned and he invoked his 5th 10 Amendment privileges of self-incrimination? 11 MS. KIPLIN: That is correct; he did. 12 And while that may be okay in a criminal proceeding if 13 you invoke your 5th Amendment rights and that's not to 14 be counted against you, there can be a presumption. 15 COMMISSIONER SCHENCK: Oh, there is a 16 presumption I would think. 17 MS. KIPLIN: Yes; there is a 18 presumption in either a civil or administrative 19 proceeding. But setting aside even him invoking his 20 5th Amendment, there were eye witnesses, in my view 21 ample compelling evidence, as the Administrative Law 22 Judge has indicated, to conclude as a matter of 23 finding of fact that our individual, the sole owner 24 did, in fact, engage in conduct that goes to the heart 25 of the integrity of the lottery. 0140 1 And, as a result, the staff does 2 recommend that you adopt the order under Item B, which 3 is the ALJ's recommendation to revoke this license. 4 As to item A, we are recommending that 5 you just enter an order, dismissal without prejudice. 6 COMMISSIONER SCHENCK: Item A becomes 7 moot as a result of B, doesn't it? 8 MS. KIPLIN: We think it does. We also 9 do recognize that under Item B, notwithstanding the 10 fact that the opposing counsel has not filed 11 exceptions, upon service of an order, we may see a 12 motion for rehearing, and then we may see petition for 13 judicial review. 14 So we would recommend that you -- we 15 request that you would enter an order, dismissal 16 without prejudice. The live case in our view -- the 17 live case in our view is Item B. 18 COMMISSIONER SCHENCK: I have no 19 further questions. 20 CHAIRMAN COX: Questions? 21 COMMISSIONER REYES: I have no 22 questions either. 23 COMMISSIONER SCHENCK: I would move the 24 adoption of the staff recommendation to -- approve the 25 recommendation as to B and to dismiss without 0141 1 prejudice A. 2 COMMISSIONER REYES: I'll second that. 3 CHAIRMAN COX: All in favor, say "Aye." 4 COMMISSIONER SCHENCK: Aye. 5 COMMISSIONER REYES: Aye. 6 CHAIRMAN COX: Aye. 7 Motion carries 3-0. 8 MS. KIPLIN: Thank you. By the way, I 9 missed one on your -- and I apologize for that. 10 COMMISSIONER SCHENCK: C through K? 11 MS. KIPLIN: The NSFs, yes. 12 AGENDA ITEM NO. XX 13 CHAIRMAN COX: Okay. Item XX, report 14 by the Executive Director and/or possible discussion 15 and/or action on the agency's operational status, 16 activities relating to the Charitable Bingo Operations 17 Division, agency procedures and FTE status. 18 Director Sadberry. 19 MR. SADBERRY: Commissioners, Anthony 20 Sadberry, Executive Director. 21 In your notebooks you have the FTE 22 status, a document which is a general informational 23 document. It's provided to you on a monthly basis. 24 There is no particular significant items that I find 25 to discuss on that document. 0142 1 I do not have any additional report to 2 make to you, but I would be happy to answer any 3 questions. 4 CHAIRMAN COX: Any questions, 5 Commissioner? 6 COMMISSIONER SCHENCK: None for me, 7 Anthony. Thank you. 8 COMMISSIONER REYES: I have no 9 questions. 10 CHAIRMAN COX: Thank you very much, 11 Director Sadberry. 12 MS. KIPLIN: Mr. Chairman, before we go 13 on, I really should have taken this up on La Porte 14 Shell. But I would really be remiss if I did not 15 acknowledge Steve White, the administrative prosecutor 16 in La Porte Shell. This was a very hot, hard-fought 17 case. He did an excellent job in terms of the 18 discovery and developing I believe a very solid record 19 if, in fact, this matter goes up on appeal. So I 20 wanted to publicly acknowledge his efforts on this 21 case. 22 CHAIRMAN COX: It appears from the 23 paper that I saw that the fellow defended himself 24 pretty vigorously. 25 MS. KIPLIN: He sure did. 0143 1 COMMISSIONER SCHENCK: He did not have 2 counsel? 3 MS. KIPLIN: He sure had counsel. And 4 there was a lot of discovery, a lot of depositions, a 5 lot of briefing, both pre-trial and post-hearing. 6 COMMISSIONER SCHENCK: Thank you. 7 CHAIRMAN COX: Thank you, Mr. White. 8 AGENDA ITEM NO. XXI 9 CHAIRMAN COX: All right. Item XXI, is 10 there any public comment? 11 (No response) 12 AGENDA ITEM NO. XXII 13 CHAIRMAN COX: Okay. Item XXII. 14 Commissioners, with your permission, 15 I'm going to move that we go into executive session: 16 A. To deliberate the duties and 17 evaluation of the Executive Director, the Deputy 18 Executive Director, Internal Audit Director and 19 Charitable Bingo Operations Director and to deliberate 20 the duties of the General Counsel pursuant to Section 21 551.074 of the Texas Government Code. 22 B. To receive legal advice regarding 23 pending or contemplated litigation pursuant to Section 24 551.071(1)(A) and/or to receive legal advice regarding 25 settlement offers pursuant to Section 551.071(1)(B) of 0144 1 the Texas Government Code and/or to receive legal 2 advice pursuant to Section 551.071(2) of the Texas 3 Government Code, including but not limited to: 4 Shelton Charles vs. Texas Lottery and 5 Gary Grief; 6 First State Bank of DeQueen, et al., 7 vs. Texas Lottery Commission; 8 James T. Jongebloed vs. Texas Lottery 9 Commission; 10 The Lotter Ltd; 11 Employment law, personnel law, 12 procurement and contract law, evidentiary and 13 procedural law and general government law; 14 Lottery Operations and Service 15 contract; 16 Mega Millions game and/or contract. 17 Is there a second? 18 COMMISSIONER REYES: I'll second. 19 CHAIRMAN COX: All in favor, say "Aye." 20 COMMISSIONER SCHENCK: Aye. 21 COMMISSIONER REYES: Aye. 22 CHAIRMAN COX: Aye. 23 The vote is 3-0. The Texas Lottery 24 Commission will go into Executive Session. The time 25 is 12:15 p.m. Today is March 25, 2008. 0145 1 (Off the record for executive session: 2 12:15 p.m. to 2:02 p.m.) 3 AGENDA ITEM NO. XXIII 4 CHAIRMAN COX: The Texas Lottery 5 Commission is out of executive session. The time is 6 2:02 p.m. 7 Is there any action to be taken as a 8 result of executive session? 9 AGENDA ITEM NO. XXIV 10 CHAIRMAN COX: If not, the meeting is 11 adjourned. 12 (Meeting adjourned: 2:02 p.m.) 13 14 15 16 17 18 19 20 21 22 23 24 25 0146 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 8th day of April 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